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Countdown to $100 oil (32) - peak oil is, like, so over. Not!

by Jerome a Paris Sun Oct 1st, 2006 at 10:20:14 AM EST


The end of oil's stunning ride

NEW YORK (CNNMoney.com) -- The energy crisis is over.

So says CNN on the basis of these graphs:

And maybe they're right - after all, the oil price is basically at the same level today as when I started by "Countdown to $100 oil" series in June last year.


My previous diary was already on this topic (Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back) and other observers have noted this as well:


Barry McKenna (Globe and Mail)(via EnergyBulletin)

The flavour of the month is to dump on the peak oil thesis -- that world oil production has maxed out and is condemned to fall.

As the price of crude climbed ever higher last year, peak oil was all the rage. The conventional thinking then was that we were condemned to paying high prices because the world isn't finding adequate new supplies of oil and gas to meet burgeoning demand -- in Asia, North America and elsewhere.

In the past few weeks, as the price of oil has plunged more than 20 per cent from July's record high of more than $78 (U.S.) a barrel, economists have begun to second-guess and even joke about what last year was considered sound analysis.

So the left moans about pre-election price manipulation; the right crows about market mechanisms working and the energy "crisis" being nothing but, and everybody else goes back to not caring about energy as it's no longer painful or scary.

It's become a non issue again. Right?

How does that trend look like to you?

In the past 3 years, the price has dropped from $55 to $42 (-24%) in late 2004, from $70 to $56 (-20%) in late 2005, and now from $78 to $60 (-23%). Of course, the absolute size of the drop ($18) is the biggest yet, but that's what you get when you start from higher - so that would seem to be a bit flimsy in terms of data to pronounce the great bull oil market dead...

So let's turn to CNN again:


The biggest reason [prices are not going to spike again soon] is that stockpiles are near record levels and fall is what experts call the "shoulder months" - the time between strong summer demand from driving and air conditioning and winter's heating needs. Basically, there's not much to move the market.

Come 2007, investments that have been made in production, thanks to the recent high prices, could start to come online and boost supply.

In the following years Canada's massive tar sands project and other new discoveries like Chevron's Jack field deep in the Gulf of Mexico should begin to yield oil, although prices need to remain above $50 for these ventures to be profitable.

Couple this with a possible economic slowdown, especially in the U.S., and it's hard to see another run towards $80 like we saw over the summer.

"It's pretty evident that supply is responding," said Pritchard Capital's Dingmann, adding prices will "stay pretty much range-bound."

Regarding stocks, the following graph from the ever indispensable Oil Drum (back in June) should put that argument to rest: stocks are increasing because our consumption is increasing, and both are moving pretty much as the same "speed".

Regarding new fields about to come on stream, I've already discussed the recent Gulf of Mexico discovery in my previous Countdown diary (link) and Canadian oil sands in older diaries (for instance Will Canadian oil sands save the USA?) and it should be noted that: (i) they'll take a while to come on stream and (ii) the volumes produced will be nowhere near what's needed. As I noted recently, Canada's production increase in the past 5 years (+600,000 b/d) was almost entirely eaten up by Canada's own consumption increase over the period (+400,000 b/d).

The argument that many new fields are coming on stream on the back of higher prices needs to be taken with a grain of salt. As discussed here on the Oil Drum, projects take many years to come onstream from discovery or even investment decision, and most big projects to come live before 2010 are already fully known today. Industry observers that have compiled extensive databases of these projects (like Chris Skrebowski's megaprojects database (pdf)) do not expect there to be significant volumes to go much beyond the decline in production in excisting fields.

And the news from the field, as it were, are rather negative all around. Beyond Shell's Sakhalin-2 project which has made a lot of headlines recently (because Russia is threatening to cancel a vital permit) and whose costs have doubled, there have been announcements of cost overruns at Sakhalin-1 as well (run by ExxonMobil, and nevertheless expected to cost $18bn instead of $12bn now), extensive delays at Shell's Thunderhorse platform in the Gulf of Mexico, and new delays at the largest field to have been discovered in the past 30 years, Kashagan in Kazakhstan. The delay from just these two project will take out 1mb/d that were expected initially in 2008-9 for at least 2 years. (See more details over here).

Quite simply, prices dropped this month because a number of people had bet on these prices going much higher this summer on the basis of various plausible scenarios (hurricanes in the Gulf of Mexico, tension with Iran, a longer war in Lebanon). None of these things happened, and those that had speculated had to unwind their positions and take their losses, which accelerated the fall.

That drop was a short-term, market-driven event that changes nothing to the long term perspective. Even a recession in the US will not be enough to curb worldwide demand growth: demand may stagnate in North America, and grow less quickly in emerging countries, but 5% growth in China, Russia or Saudia Arabia (instead of 10% growth) still means a lot of new oil demand each year.

So don't expect me to give up on my series yet.

In fact, the fierceness of the attacks on the peak oil theme, which was beginning to get traction in the media earlier this year, shows how unwilling our societies are to undertake any change in that respect. Which simply means that prices WILL have to go up much higher to force the inevitable changes on us. It'll just be more painful for us, is all. So we should not rejoice that energy gets off the radar screen for a while again.

::

Earlier "Countdown" Diaries:
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)

Display:
on dKos http://www.dailykos.com/storyonly/2006/10/1/10183/9102 for your kind support.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Oct 1st, 2006 at 10:26:53 AM EST
Nice post Jerome. I give it two to five years before the shit hits the fan.

And it is because Economic Growth is a NECESSITY in a deficit-based monetary system that this has to happen, unless something like cold fusion comes along in the meantime....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Oct 1st, 2006 at 11:51:34 AM EST
[ Parent ]
my call for the $100/bbl is 2009 barring a big political problem in the AG area.  No way to guess exactly when some idiot texan might bomb Iran or when some idiot Al Qada type might bomb Saudi.

Isn't economic growth a necessity in any monetary system as long as population is growing?

by HiD on Mon Oct 2nd, 2006 at 05:25:41 AM EST
[ Parent ]
Thanks for the explanation. I had seen the price drop and wondered what was up.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Sun Oct 1st, 2006 at 01:19:03 PM EST
Which simply means that prices WILL have to go up much higher to force the inevitable changes on us.
Well, yeah.  Economics 101.

Continuing with lessons from Economics 101: 1) the oil industry will find new sources of supply, (already happening); 2) other investors will see the inevitability long term of higher oil prices, and invest in alternative fuels, (already happening);  3) unforseen scientific breakthroughs that cause paradigm shifts can often happen when a need is so clearly seen (thus the saying that "necessity is the mother of invention")--it's happened many times before; and 4) consumers of a good or service that is increasing in price will change their behavior, note just one example of which there are hundreds more over the world.  In other words, they will use less oil, use it in a different way, and this will partially offset the increasing demands for oil from growing economies.  

(I've commented before on the uniqueness of energy and global oil due to the political dimensions--tendency of world dictators to own the oil, and won't go through that again here).

It is useful to identify and discuss obvious trends, and there are a number around energy.  Oil prices are going up over time is one.  Another is that more nuclear reactors will be built because it is a proven source of energy, and thus the price of Uranium will go up, at least over the course of the next 10 years (and last 5).  

But what are the impacts of these trends, and when will they occur?  Clearly the forecasted $100/barrel on 12/31/05, didn't occur.  It looks unlikely that for the second year running the$100/barrel will not occur on 12/31/06.  Actually in both years not even be close.  

Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Someone else got into trouble with that mission accomplished thing, if I recall correctly.  From that diary:
Before I take off to my much needed holidays, let me chart once more why many anlysts don't see oil prices go down in the foreseeable future - and why I personally believe they'll go up significantly.

And of course, go read ManfromMiddletown's diary on the same topic, with an excellent summary of how the Mexican election might have a major impact on oil prices: Jerome may get his $100 barrel... from Mexico

NOT

Is it enough to comment on the obvious that oil prices over time will go up?  Or does this countdown to $100 oil lose credibility due to forecasts being repeatedly so far off?  

by wchurchill on Sun Oct 1st, 2006 at 01:44:42 PM EST

1) the oil industry will find new sources of supply, (already happening);

No it isn't happening. Or not in the necessary volumes anyway.


 2) other investors will see the inevitability long term of higher oil prices, and invest in alternative fuels, (already happening);

What do you have in mind? Biofuels? They are creating more problems than they are solving and are just riding a big fat wave of subsidies.


3) unforseen scientific breakthroughs that cause paradigm shifts can often happen when a need is so clearly seen (thus the saying that "necessity is the mother of invention")--it's happened many times before;

True, but you cannot reliably rely on that


and 4) consumers of a good or service that is increasing in price will change their behavior, note just one example of which there are hundreds more over the world.

And yet demand is still growing in the USA, and barely stabilising in Europe...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 1st, 2006 at 02:58:26 PM EST
[ Parent ]
2) other investors will see the inevitability long term of higher oil prices, and invest in alternative fuels, (already happening);

What do you have in mind? Biofuels? They are creating more problems than they are solving and are just riding a big fat wave of subsidies.

According to Technopolitical
BTW, total world bio-power (measured by net primary production through photosynthesis) is only 75 TW -- less than 6 times what people now consume. Biofuel advocates, beware.


Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Sun Oct 1st, 2006 at 03:40:25 PM EST
[ Parent ]
coal, Canada's tar sands, diesel fuel--hybrid cars,,,etc.  I meant alternative fuels and more efficient ways of using oil.  hydrogen.  maybe biofuels, given the Brazilian experience,,,,but what I've read doesn't give much hope for this in the US and Europe.

but really it's the combination of the four above that will solve this over time.

by wchurchill on Sun Oct 1st, 2006 at 04:34:22 PM EST
[ Parent ]
or from the CNN article
But perhaps the most exciting thing about oil in the $55 to $65 range is that it opens up a whole slew of investment alternatives - from tar sands to wind power to fuel cell cars - that weren't feasible when fossil fuels were cheap.
by wchurchill on Sun Oct 1st, 2006 at 04:39:37 PM EST
[ Parent ]
...hydrogen...

Which is abundant in its elemental form and can readily be dug out of the ground.  Oh, no, wait... it can't.

by ustenzel on Sun Oct 1st, 2006 at 06:46:57 PM EST
[ Parent ]
by wchurchill on Sun Oct 1st, 2006 at 07:30:03 PM EST
[ Parent ]
h2 isn't a new source of energy.  merely a different way to store energy from some other source.  It might solve a storage and distribution problem, but that's about it.  I think we'll go to all battery vehicles before h2.  90%+ of daily personal transport needs fit within the 250 mile range of EVs.

Our best source of new energy is to cut consumption via technology.  there is essentially nothing but stubborness preventing the USA from getting fleet mileage up to 40 MPG from current 20ish.  Doing that alone knocks about 5 MMBD gasoline demand out.

by HiD on Mon Oct 2nd, 2006 at 04:50:38 AM EST
[ Parent ]
coal - presumably coal-to-liquids?
using coal to produce fuel will have massive environmental impact (count 100 Mt to get 1mb/d, plus absolutely staggering volumes of water) so this is unlikely to be more than a small niche/

tar sands
Similar issues. See the link in my diary.

diesel fuel-hybridµ
Now that's a real solution. But that's on the demand side, not the supply side.

*biofuels
Not sustainable, and not physically doable on a large scale. Again, it will be a niche for the smart money following subsidies, but it will create knowck on effects in other ag. commodity markets very quickly.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Oct 2nd, 2006 at 05:29:08 AM EST
[ Parent ]
I dont' think the environmental impacts of coal liquefaction will hamper its development in the US. There was crash program for mass liquefaction under Carter, it was cancelled because prices went down in the 80's and it was not feasible to increase coal production so fast. But it will come back, pushed by the OilCos (they own a good share of US coal mines since that time), the US DoD, and also "who cares about greenhouse gas ? China is dumping 10 times as much as us !"

Just like Europeans will liquefy russian gas to replace diesel... Something to watch: I once read that modern variants of FT process, require huge amounts of cobalt for catalysts, and already-planned gas liquefaction facilities around the world would account for 5% of cobalt production for about 10 years. So if it ramps up, we should see another commodity under pressure.

Pierre

by Pierre on Mon Oct 2nd, 2006 at 09:38:03 AM EST
[ Parent ]
I can't comment on my own credibility, but there is nothing obvious about oil prices going up overthe long run. The CNN article I quote states that oil prices will stabilise at current levels.

The point with the Countdown is that any unexpected event can trigger big price increases, and have indeed in previous occasions, in the context of an upwards trend (see graph above).

None of the crises predicted for this year have taken place yet, so the brutal spike that would accompany them is yet to be  seen, but the upwards trend is still with us.

So you may find the whole exercise silly, but we'll see.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 1st, 2006 at 03:02:16 PM EST
[ Parent ]
I think the CNN article is talking in the short to near term.
The bad news (or good, depending on your point of view) is it looks as though today's prices are here to stay, possibly through much of next year.
and
But don't expect $100 a barrel
But that doesn't mean prices are going to spike again soon.

The biggest reason not is that stockpiles are near record levels and fall is what experts call the "shoulder months" - the time between strong summer demand from driving and air conditioning and winter's heating needs. Basically, there's not much to move the market.

Come 2007, investments that have been made in production, thanks to the recent high prices, could start to come online and boost supply.

I think you have to talk about energy prices over decades, due to the development times for new innovation, and the development times for new sources, like oil fields.  But I imagine that you are right that oil will hit $100 in the long term, say by 2020--2030, and I would think most would agree.
by wchurchill on Sun Oct 1st, 2006 at 04:46:23 PM EST
[ Parent ]
I tend to agree, but it will happen long before 2020 just on the Chinese/Indian growth curve vs production growth curve.  $100 isn't really all that expensive.  Most Europeans are paying gasoline prices well above what $100 crude implies for the US(about $2.75/gallon mogas at the wholesale level or $3.50-75ish retail on US wide average)  

or 15 minutes after an al Qaeda attack on Ras Tanura.

whichever comes first.

by HiD on Mon Oct 2nd, 2006 at 04:55:07 AM EST
[ Parent ]
My guess is that we'll have to have 5-7 consecutive years of declining year over year production before the public broadly accepts the peak oil concept. The naysayers have too much ammunition - recessions will be able to mask it, oil companies can be blamed for anything, politicians from oil exporting countries can be blamed for anything, and the opaque nature and language of economics can be used to convince the public of concepts that they have no way to verify. I think the pervasive belief in conspiracy theories surrounding oil demonstrates that the public doesn't have the tools it needs to understand what is going on (with, admittedly, a fair amount of that being willful ignorance).

you are the media you consume.

by MillMan (millguy at gmail) on Mon Oct 2nd, 2006 at 12:04:55 AM EST
can't agree

2 years in a row of declining production will cause us to jump over the $100/bbl level.  The great unwashed will react to price jumps that don't abate.  then the education process will be able to drill through Survivor part 102 or whatever the soft porn of the day is on TV.

Won't take 5-7 years of brutal prices before folks get it.

by HiD on Mon Oct 2nd, 2006 at 04:57:42 AM EST
[ Parent ]
I'm more cynical that you - I agree that consumers will react to $100/bbl oil, and perhaps even in ways we want, but I think the disinformation (blaming oil companies and/or politics) will work for a long time when consumers are so addicted to oil and will do anything to get it.

you are the media you consume.

by MillMan (millguy at gmail) on Mon Oct 2nd, 2006 at 01:24:53 PM EST
[ Parent ]
Well I got my $5 handle but it didn't last long.  Looks like OPEC is happy to keep their basket about $55 which is about what $63 WTI/Brent amount to.

Our next move could be sharper down though barring political premiums rising.  The problem brewing is distillate stocks.  US distillate is now at 151 million bbls which is huge for this time of year.  If the longer term weather guys start saying dec will be warm then this stock level will cause heat to puke like gasoline just did.

with Nov WTI at 62.75/bbl

Nov gas (RB) at $1.59/gal  so crack of $4/bbl (low but respectable)
and Nov heat at $1.75 so crack of $10.75 (huge profit)

heat is carrying the refiners.  Hence no run cuts to speak of.  If heat pukes out, crude will be hit too as refiners cut runs.

http://tonto.eia.doe.gov/oog/info/twip/twip.asp

and

http://tonto.eia.doe.gov/dnav/pet/pet_pnp_wiup_dcu_nus_w.htm

by HiD on Mon Oct 2nd, 2006 at 05:55:47 AM EST
I am so happy oil is falling. I have been angry I missed investing in oil the last time, but now I have a second chance.

And I don't really care that much if oil continues to fall for a year or two (though I consider that unlikely) as I will invest for the long term.

Happy happy, joy joy. :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Oct 2nd, 2006 at 10:02:08 AM EST


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