Summit's Smith: Oil Price Downside Limited
September 21, 2012
Page 2 of 2
Murphy: Do you expect U.S. oil production to continue to rise?
Smith: Yes. Just as we have seen production ramp up for natural gas, the same will likely happen for oil, especially as it is more profitable. With shale plays such as Bakken outperforming estimates each month and other shale plays just getting started, the supply side looks bright for the U.S.
Murphy: About natural gas, what do you make of the recent price action there?
Smith: Despite the low price environment, it has been fascinating. The fact that production remains at near-record highs despite such low prices for so long indicates that prices should not go crazy anytime soon.
Murphy: At what price does natural gas become too expensive for electric generators to switch back to coal?
Smith: We see gas-to-coal switching being considered around the $3 level; as soon as prices breach this level, demand starts to wane, and prices swiftly sell off back down to closer to $2.50, where we see the opposite happening—coal-to-gas switching.
Murphy: We just saw several coal mines shut down in the East Coast, many miners lost their jobs. But coal shipments to Europe are up. Should we expect coal prices to remain pressured? Why?
Smith: Coal prices will remain under pressure in the U.S. as natural gas captures more of its share of power generation (they are both at approximately 33.5 percent of total production, while only last year this was 42 percent for coal and 25 percent for natural gas—an incredible turnaround). Coal prices will remain under pressure globally as long as China shows signs of economic slowing—it is the largest global consumer of coal after all. Europe is receiving U.S. shipments because not only are natural gas prices higher in Europe, but coal is needed to replace nuclear power that has been taken offline in response to the Tohoku disaster in Japan last year.
Murphy: Does alternative energy such as solar or wind power go away when subsidies go away?
Smith: Potentially; advancement in technology to drive down prices is needed to make alternatives a truly competitive alternative.