Energy at nexus of future, author says

Mines engineers in pivotal position, Yergin tells grads

By Janet Forgrieve, Special to the Rocky

Friday, May 9, 2008

Darcy Souta didn't have to search long for a job in her field of petroleum engineering. Souta was among 512 seniors awarded bachelor's degrees from the Colorado School of Mines on Friday - the same day oil hit a record $126 a barrel.

This fall, Souta will head to Conoco Phillips in Houston for a job in an industry that's clamoring for new engineers and offers an average annual starting salary of more than $80,000.

Souta and the other graduates listened raptly during the ceremony as keynote speaker and honorary Ph.D. recipient Daniel Yergin told them about the great need for their skills at a time when the world energy situation is facing a crisis and more than half the qualified engineers in the field are slated to retire within the next decade.

"There's no question it's a time of high anxiety when it comes to energy," Yergin said. "A week ago when I was working on this speech, oil was $110 a barrel; now it's $126."

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“The Break Point scenario explores a future in which oil supply difficulties limit production growth, leading to sustained high prices and a significant market response toward alternative fuels and technologies.”

—from the CERA 2006 Multiclient Study Dawn of a New Age: Global Energy Scenarios for Strategic Decision Making--The Energy Future to 2030

James Burkhard, CERA Managing Director, presented this testimony to the US Senate Committee on Energy and Natural Resources on April 3, 2008.

“Globalization is not going to go away – the question is what kind of globalization do we have,” said Daniel Yergin, Chairman of Cambridge Energy Research Associates (CERA), at the World Economic Forum in Davos, Switzerland. He was joined on his panel by Tony Blair; the CEOs of Pepsico and JP Morgan; and Nobel laureate Elie Weisel. CERA is the "Energy Knowledge Partner" for Davos.

KEY IMPLICATIONS
Crude oil prices have risen to a historic $100 per barrel (West Texas Intermediate [WTI]), the culmination of a $25 price increase over several months, to reach a record that once seemed untouchable. Until now, the world has never experienced a triple-digit oil price. The all-time inflation-adjusted high was in April 1980, when, CERA calculates, crude oil hit $99.04 per barrel in terms of 2007 US dollars. The broader significance of a $90–$100 price range is that it highlights in dramatic fashion how different the oil market environment—and indeed the world economy—is today compared to the past two decades.

• The jump in price from $75 at the beginning of September to $100 in early January 2008 highlights the dominant sentiment driving the oil market-that oil supply will be unable to keep pace with rising demand. However, if oil demand growth hits the brakes because of an economic slowdown or an easing of supply anxiety, we could see a steep fall in price.
  
• Hundred dollar oil-give or take-is an exclamation point for two major trends: the rapid rise of Asia and the shift in economic power to exporting countries.
  
• Today's price levels bring us further into the range where the oil price can contribute to an economic slowdown. The effect on economic and oil demand growth depends on the duration of $90-$100 oil. Although this is overshadowed by news of the current record price, for 2007 the annual average for WTI was $72-not $100.
  
• Historical assumptions about the dynamics of oil prices, demand, supply, and the global economy have given way to a new, but still unfolding, paradigm. This new paradigm is not without risks and dangers. The world economy can withstand the headwinds of very high oil prices much better than in the past, but prices of $90 to $100-plus push geopolitics and the economy deeper into uncharted territory.
  
• The high prices of 1980 were at the beginning of the worst three-year period of economic growth of the past four decades. For the oil price to potentially play a similar role in a significant economic slowdown, prices would have to average from $100 to $120 per barrel for six months to a year.