Business & Technology Nexus

Dave Stephens on technology and business trends

High Stakes Gamble – 2006 Energy Outlook

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Just last month the Department of Energy published it’s Annual Energy Outlook. Though quite lengthy, it’s an interesting read (ok, some of it interesting).

Predicting the future is a tricky business. The government’s 3 reference cases for world oil prices are:

1) it kind of goes down some then slowly goes back up to where it is now by 2030

2) it goes down more than we thought and pretty much stays pretty low until 2030 –and-

3) the thing just keeps on climbing to $100 by 2030.

Here, take a look:

AEO Oil 2006-2030

Oil prices are a great example of where Procurement meets the gambling hall. Depending on where you expect prices will be, you’d take radically different actions.

Consider a company like Air Products. They make liquefied oxygen and nitrogen by sucking air out of the sky, pressurizing it, and separating it. They don’t have any raw material costs – just massive energy costs. The price of energy directly impacts their margins, assuming they can’t pass the price through to their customers.

An aluminum producer like Alcoa is subject to swings in energy prices in the same way. It simply takes a lot of energy to make their product. And we’ve all seen how airline losses have amassed as jet fuel prices have stayed in the stratosphere while airline ticket prices have remained low.

The world’s biggest companies employ literally “teams” of economists to develop an informed view of where key commodity prices (such as oil) are heading. From that, they formulate a strategy – either locking in long-term contracts for 100% of expected demand, riding market prices, or hedging by locking in a % of expected demand while accepting market pricing for the rest.

It’s world class wagering – and the stakes are high. An airline like Qantas bet on high oil prices and locked in great prices early enough to sustain profitability. Some of their sister airlines here in the U.S. should have made the same bet.

So where are oil prices going now? The DOE primary scenario for 2006 says down – but with emerging markets continuing their rapid expansion, and with quasi-open markets in South America and Russia making it risky for foreign oil investment, it sure doesn’t feel like it.


Written by Dave Stephens

03/4/06 5:46 PM at 5:46 pm

Posted in Opinion

One Response

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  1. […] I talked you through the 2006 Energy Outlook from the Bush Administration in an earlier post. Turns out, they failed to imagine our current scenario – an inexorable upward climb. Look at the chart and try to put a point at $72 and 2006. Scary. […]

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