Marina and I arrived late last night in Dundee, Scotland.
While I'm here, I will be delivering a major public address at the British government's energy research center and reviewing production at offshore oil platforms.
For the past three days, I have been ensconced in the annual energy consultations at Windsor Castle outside London.
My primary responsibility there was to provide details on the hottest new topics in Europe—shale gas and shale oil.
The attending ambassadors from Middle Eastern countries had a decided interest in discussing how shale will affect the energy balance (and market prices) for conventional oil.
And the Windsor sessions are a great place to do it.
These meetings are governed by Chatham House Rules. These confidentiality rules, established in 1927, facilitate frank conversations on contentious issues, because the opinions presented don't carry the names of specific individuals in discussions outside the sessions.
Our Windsor consultations have been conducted this way for the past 10 years.
So without naming names, here is what we agreed upon this time.
The situation for the next several years will remain constrained and subject to intense volatility in oil prices.
(No surprise there. . .I have been telling you this for some time now.)
The resulting strategy we have constructed to confront these market developments provides significant upside to investors.
The further prospects, however, speak of an expanding base of new energy sources. Here, the first stage involves shale.
Comparing notes, we quickly concluded that the availability of unconventional oil and gas worldwide is much greater than forecasted even two years ago.
But these sources enable a potential oversupply in certain markets, pricing irregularities and environmental concerns.
All of these were subjects of lively conversation.
And they brought us to one very surprising conclusion. Rising prices of crude oil have once again provided a strong incentive to the major global producers not to diversify their economies.
If they are dependent upon hydrocarbons now, they will be even more so over the next decade.
In turn, this will translate into a further straining of budgets.
The aftermath of the Arab Spring has obliged Middle Eastern governments to boost social expenditures across the region, while renewed unrest has led to increases in military allocations and support of dissident groups (such as outside Arab support for the opposition in Syria).
Against these rising obligations, ramping up expenditures for the increased production of oil (upstream allocations) will require almost $4 trillion between now and 2035—on a sliding scale starting at $100 billion annually.
What does this mean?
Our conclusion here is disconcerting.
The Gulf countries whose production determines OPEC—Saudi Arabia, Kuwait, Iran and increasingly Iraq—will need an average crude price of $80/barrel (bbl) now, and more than $120/bbl within a few years.
This is due to increasing capital outlays to maintain the flow of oil.
There will be a rise and fall of oil prices moving forward. Nonetheless, the overall trajectory will continue upward.
The consultation consensus is even worse than my personal opinion presented here in OEI on what would happen should there be a disruption in the Strait of Hormuz.
More than $200/bbl of crude—a figure provided by the Gulf ambassadors—was considered low by several European representatives in attendance at Windsor.
Which brings me back to the primary issues I shall confront here in Scotland.
North Sea Production Is Running Out
For the past several centuries, England and Scotland may have both been a part of the same kingdom, but the difference between the two is marked. Aside from culture, history, and a general Scottish antipathy toward most things English, there is another overriding reason. . .
A terrible economic environment.
Unemployment and credit strains are increasing in the more populous and market central southeastern England around London. The protracted cuts in local services, education subsidies, and even childcare have created a rising backlash throughout the country.
But these conditions have been a way of life for some time further north, where 40% to 60% effective unemployment is not unusual.
It is once again creating a political divide and a renewed call for Scottish independence.
Now, Scotland will likely not spin off from the UK given its lack of genuine alternatives.
But tension is rising.
At the core of this rising divergence is North Sea oil. The discovery of vast reserves offshore in the 1970s transformed the northeastern Aberdeen coast from a depressed local economy into a world-leading oil services center.
But the "prosperity" never translated into an economic resurrection for most of Scotland.
And with this oil now beginning to run out, the unrest is once again growing.
Oil prices will continue to rise, and the negative effect here will heighten.
There are some prospects for shale gas in the UK and more on the continent.
These, combined with the rise in liquefied natural gas (LNG) imports from the U.S. beginning in 2014, and already moving in from Qatar and Algeria, will usher in the possibility of another shift in the energy balance.
But what is already happening here in Scotland is a harbinger of what rising energy prices will extract from the U.S. economy unless we bite the bullet and create a national energy policy with real teeth.
We have an excellent opportunity to do just that.
The Windsor assembly was unanimous on another very interesting point.
With the combination of shale gas and shale oil, everybody saw U.S. energy self-sufficiency as attainable within a decade. The only continued imports of crude still required would come from Canada.
The table is set.
Now all we need is for the circus to leave town, and make space for some serious policy discussions to begin inside the Beltway.
However, these days, the ideological hypocrisy that substitutes for "reason" in Washington will make that easier said than done.
Kent Moors, Money Morning