Shawn Carraher, CERA Senior Director, CERAView Group addresses five megatrends trends reshaping tomorrow’s energy climate in the July 2008 Private Equity International Special Supplement.

by Timothy Krysiek and Paulina Freedenberg of CERA and Matthew Clements of Jane's Defence

The explosion in the Turkish section of the 1 million barrel per day capacity Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the recent fighting between Russia and Georgia threatened to reduce exports of Azeri Light crude to international markets by as much as 850,000 barrels per day. On August 12 President Dmitry Medvedev ordered an end to Russia ’s military operations against Georgia, stating that Russia ’s aim of restoring security for civilians and peacekeepers in South Ossetia had been achieved. If the recent cease-fire between Russia and Georgia collapses and fighting resumes, it could have serious implications for Caspian oil exporters. Even if the conflict in Georgia does not directly affect world oil prices, it will add further complexity to thinking about energy security.

• Despite Medvedev’s cease-fire announcement, the conflict has expanded to Georgia ’s other separatist region, Abkhazia. Abkhaz authorities are attempting to force Georgian troops out of the region completely. Russian forces are not directly involved in this operation at this point.
• Renewed fighting in Georgia would make it difficult for South Caspian oil producers to reroute their exports because the major, non-Russian alternatives to BTC also run through Georgia. If Georgian ports and pipelines are closed for a prolonged period for security reasons, Caspian crude producers will be faced with three options which are less commercially attractive: cease production, export via Russia, or export via Iran. Conversely, if Georgian ports remain open and greater volumes of Caspian crude join the flow of Russian crude exports to the Black Sea, shipping congestion and delays in Turkish Straits will almost certainly increase.
• Developments in the South Caucasus have not had the effect on the world oil market that they might have had one or two months ago, owing to the spreading economic slowdown, including in China; shrinking demand in OECD countries; and a rising dollar. Markets are likely to discount the BTC shutdown and the situation in Georgia as long as oil production infrastructure in the South Caspian remains secure.

(Abridge version follows. For more information on Rusian and Caspian issues please see our Russian and Caspian Energy Advisory Service .)

On June 25, 2008, CERA Chairman Daniel Yergin testified before the US Congress Joint Economic Committee on high oil prices and their impact on the global economy. "The answer to the oil shock is not 'either-or'. We need an ecumenical approach—a combination of new supplies, renewables, and greater efficiency—all developed with appropriate environmental and climate change considerations in mind," said Dr. Yergin in his testimony.

Energy efficiency is at the leading edge of the debate on how to reduce and stabilize US greenhouse gas (GHG) emissions in the future.

Plug-in Hybrids: Can Power Make Inroads into the Oil Market?

"The current high oil price may be a demand shock triggered by what had been several years of excellent global economic growth, and thus more benign than supply shocks caused by 1970s-style disruptions," writes CERA Chairman Daniel Yergin in the May 28th issue of the Financial Times .

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.