May we have more energy this year!

At the end of each year, pundits are likely to crow about “successes” of their predictions whether they’re about stock market prices, oil prices or weather patterns. At the same time, when they are way off target—which happens more often than not-- they simply keep quiet and hope nobody keeps a scorecard. We are tempted to do the same, but there is really nothing much to gain from chest-beating, except enlarging one’s ego—which is actually dangerous since a burst ego can no longer be inflated.

We prefer to offer some encouraging words of hope for the coming year in the energy arena as this is the reason for our being (the blog, not the person).

Let’s start with the big picture.

When oil prices peaked at $147/bbl, we suggested that prices would slide fast. We were completely wrong—at the rate of decline. Now that it is about $38/bbl, will the price snap back once economies recover?

Theoretically, yes, but historically, periods of economic slowdown take years to complete, and we are just starting to feel the financial crisis which started in the middle of 2008. So don’t expect oil prices to go back to $90 soon. Despite the announced OPEC production cutback. Despite Hugo Chavez. Even despite political pressures on oil-producing Iran.

The Somali pirates may unnerve some owners of oil tankers. But navies of the world would come to the rescue. Oil shippers would gladly fork over pennies for an armed escort than lose a $100 million oil cargo. Besides, if these buccaneers have the misfortune of seizing a British ship, then Her Majesty’s submarines would probably torpedo the rogue galleon ship to oblivion. Come to think of it, might be a swell idea to teach these bastards some good manners.

So, oil prices are likely to be around $25 to $30 per barrel rather than $90. This is because the world is now awash in oil. In fact, in many parts of the world, potable water is more expensive than oil.

The figures also represent more or less the cost of producing oil on the average worldwide. In the U.S., onshore production is about $20/barrel, but offshore and so-called enhanced oil production could cost up to $70/barrel. The effect of this on U.S. upstream oil producers is consolidation. Many of the lesser oil players would groan under low oil costs and difficulty in getting credit and finance; they would end up feast food for the majors like BP or Chevron.

Middle Eastern countries continue to produce at an average of $14/barrel, with Saudi Arabia getting oil at less than $10/barrel. But these countries can only cut back on production so much. They need cash to finance their lifestyles and keep their economies above water. Saudi Arabia has cut its production from 9.7 million bopd in summer to 8.9 million bopd by December 2008. Still, this is way above the target set by the kingdom.

Meanwhile, European and offshore African production costs hover near $30/barrel which could spell trouble to companies operating in these regions.

As an insurance against a repeat of $120/barrel scenario, car makers will continue to develop energy efficient cars, hybrids and even electric vehicles. They are at the same time as Kodak and Fuji—leaders in silver film technology—decided to go heavy on digital cameras.

Renewable energy would take a back seat—for a while. But development would continue, and governments around the world would offer more incentives for renewable energies. Maybe, not directly competitive with fossil fuels, but political pressures and environmental activism would keep the renewable flame lighted. Forget about Obama taxing the windfall profits of oil companies. He will be more focused on keeping American jobs and American soldiers alive in Iraq and Afghanistan.

In the local scene, the passage of the renewable energy law will not cause a flood of new investments. But this will not deter some bold souls to dip into the icy water of alternative energy development. Some who have already started their project in biomass for example, would be more hopeful with the new law.

It might even be a better strategy to start with the feasibility of that wind or solar project. By the time your project is ready to take off, the ground rules on feed-in tariffs or the renewable portfolio standard might be in place. Cross your fingers.

The government policymakers have probably now realized that government control on oil and resources is merely an illusion, fed by political expediency. The government will completely exit from Petron and oil retailing in an abject admission that it cannot control prices. It has gotten out of geothermal business completely after it has disposed of all its holdings in Energy Development Corporation.

For 2009, it will continue disposing its generation assets. But it would be fire sales rather than getting premium from competitive bidding.

The economic slowdown would unexpectedly give us some breathing space in terms of electricity supply. But the tight electricity generation and antiquated distribution would rear their ugly heads in the mid term. The new operator of the transmission grid would soon learn that the business is not easy with rundown equipment and lines.

This year, we would have energy to go by--but for the wrong reasons.

Happy New Year!