Jeffrey Currie is a believer. A Goldman Sachs & Co. managing director, Currie believes the energy industry is only in the infancy of a new higher-commodity-price regime. "This is not going to end tomorrow," Currie says. Currie addressed E&P executives, financiers, investors and service-company decision-makers at the recent annual IPAA Oil & Gas Investment Symposium (OGIS) in New York that was attended by some 1,600 individuals interested in the energy sector. Break-out rooms were standing-room-only at times. Newcomers to OGIS announced their formation of hedge and private-equity funds, seeking upstream investment opportunities. Currie's succinct comments and substantial research supporting his thoughts were much talked about during the three-day event and at various industry events after. "The entire forward curve has shifted upwards, reflecting changing supply economics; these fundamentals, and not a risk premium, explain prices," he said. The industry needs some $2.5- to $3.0 trillion of new investment to supply current demand and meet future appetite, he says, and the industry is currently unable to suddenly absorb that much investment. After the 1972-82 era of overbuilding capacity, oil traded at an average of less than $20 per barrel and from 1985-99, "100% of world oil supply came out of that spare capacity generated in the 1970s." Cheap energy supported the fast-growing U.S. economy seen between 1985 and 1999. Then, "inadequate investment caused the market to run out of capacity across the energy complex," he said. Today, there is no spare capacity. He estimates that, without increases in imports, U.S. oil stocks will decline to below-minimum levels during the third quarter. The fruit of under-investment ripened in 2004, when the relationship between oil inventories and prices began to break down, running some $15 to $30 more than the past relationship would have had it. A bubble? "This is not the case...(This is) not a bubble generated by speculators." Instead, it is a shift in the demand/supply paradigm, he said. "Demand is always going to be the easier part of the system to adjust." Demand can be pushed down in months. However, supply does not react as quickly, taking years to ramp up. In the past, as demand ran lower than supply capacity, movements upward in demand could somewhat quickly be satiated. Today, energy infrastructure is running nearly all-out, so upward movements in demand are increasingly going unanswered: for example, a new refinery isn't built overnight or even in a couple of years. "Demand drove the market higher against exhausted production capacity as opposed to a supply shock like we have experienced in the past," he said. Also, supporting a floor on supply are higher operating costs, thus a new minimum level of profitability. "Rising tax rates, widening differentials and input cost inflation have all contributed to rising marginal costs." For nearly 20 years, producers could find and lift resources at as little as $15 a barrel (all-in) and be at least marginally profitable at $18 oil. Currie says the new cost floor is between $16 and $45 per barrel among producers worldwide. "We exhausted the supply of cheap energy," he said. "Unlike the energy-industry cycle of 1972-82 that was more the result of a poor regulatory policy and politically generated supply disruptions, the industry this time faces real capacity constraints in every part of the supply chain due to decades of underinvesment, which suggests the longevity and the potential upside of this cycle is much greater."
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