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Countdown to $100 oil (44) - oil industry admits it cannot save us

by Jerome a Paris Tue Jul 17th, 2007 at 04:41:47 AM EST


Potential Energy Crunch May Bring Other Fuels to Fore (WSJ - front page news)

World oil and gas supplies from conventional sources are unlikely to keep up with rising global demand over the next 25 years, the U.S. petroleum industry says in a draft report of a study commissioned by the government.

In the draft report, oil-industry leaders acknowledge the world will need to develop all the supplemental sources of energy it can -- ranging from biofuels to nuclear power to oil extracted by unconventional means from the oil sands of Canada -- to meet soaring demand.

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"It is a hard truth that the global supply of oil and natural gas from the conventional sources relied upon historically is unlikely to meet projected 50% to 60% growth in demand over the next 25 years," says the draft report, titled "Facing the Hard Truths About Energy."

"In geoeconomic terms, the biggest impact will come from increasing demand for oil and natural gas from developing countries," said the draft report, a copy of which was reviewed by The Wall Street Journal. "This demand may outpace timely development of new supply sources, thereby pressuring prices to rise."

The study, which was requested by U.S. Energy Secretary Samuel Bodman in October 2005, was conducted by the National Petroleum Council, an industry group that advises the secretary.

The conclusions appear to be the first explicit concession by the petroleum industry that it alone can't meet burgeoning global demand for oil, which may rise to as much as 120 million barrels a day by 2030 from about 84 million barrels a day currently, according to some projections.

Coming on the same day that the price of oil, as quoted in London, reached the records set last year (with a barrel reaching $78.40, vs a all-time-high of $78.65) and that the International Agency published yet another worrying report stating that "[g]lobal oil consumption is forecast to reach 88.2m barrels a day, up 2.2m b/d [2.5%] from 2007", it is yet another sign that we are coming closer to the wall in our mad rush to burn ever more oil (see my previous "countdown" diaries, linked to at the bottom of this one).

Of course, the tone of that report is not quite that negative, in that they suggest that alternative sources of fuels will help us bridge the gap, but hey, you cannot expect the industry to encourage us loudly to reduce our demand for their products (they do mention it, en passant, as do all politicians, but it's, as always, done without bite or without putting it at the forefront of policy suggestions).

In fact, rather than a wake-up call, this report appears to be more of an encouragement to continue as if nothing were happening. Biofuels and nuclear will provide, prices will be high and markets forces will play out. Damn nice, too, that: high prices "for decades to come". Hey, it's not their fault, so stop blaming them and cough up.

And, in fact, they are right. They are functioning within the same paradigm we all have been living with forever (except for that silly scare under that dour, nasty,  President, Carter, thankfully quickly replaced by the smiling guy): the Western Way of Life is Not Negotiable, and we can burn as much of the stuff as we damn want. And the industry just has to provide. which, so far, they have done with great alacrity.

But as other countries start wanting to burn the stuff too (the Western Way of Life is Not Negotiable for them either), and the industry finds it increasingly difficult to provide, we're stuck. And, instead of admitting it, and trying to change our ways just a bit (which would be mostly easy, if we don't have to do it in a panic), we're going for broke, depleting or pillaging more resources, wreaking havoc on food commodity markets, ruining those third world countries that have no oil production or no wheat, and spewing more carbon in the air.

So let's have more drilling, more oil sands, more nuclear, and party on. And forget about the Cassandras, they have been wrong so often in the past.

:: ::

Earlier "Countdown" diaries:
Countdown to $100 oil (43) - IEA boss denies and confirms peak oil in same breath
Countdown to $100 oil (42) - IEA predicts shortages within 5 years
Countdown to $100 oil (41) - oil more expensive than it appears
Countdown to $100 oil (40) - Undulating plateau
Countdown to $100 oil (39) - BigOil running out of oil
Countdown to $100 oil (38) - Who gets Champagne edition
Countdown to $100 oil (37) - OPEC says peak oil (and $100 oil) is near
Countdown to $100 oil (36) - Free game! win champagne! no risk! (eurotrib)
Countdown to $100 oil (36) - Free game! win champagne! no risk! (DailyKos)
Countdown to $100 oil (35) - peak oil: the last skeptics capitulate (CERA)
Countdown to $100 oil (34) - Oil major CEO calls for demand reduction
Countdown to $100 oil (33) - Below zero
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
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:
http://www.dailykos.com/story/2007/7/16/11537/4078

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Jul 16th, 2007 at 12:59:42 PM EST
From http://www.venerosoassociates.net/

http://www.venerosoassociates.net/Part%20I%20II%20Worldbank%20Presentation%205607.pdf

Quite an original view. I don't find the oil part convincing and this casts a shadow on the rest which is, well, unconventional to say the least (on LME, hedge funds and metals).

Nice very long run commodity price curves.

by Laurent GUERBY on Mon Jul 16th, 2007 at 04:03:54 PM EST
I think the storage vs consumption relationship is very different as between oil and metals.

My case is that oil markets have been manipulated on a pretty cosmic scale, the beneficiaries being intermediaries making money from artificially created volatility.

I got into big trouble for blowing the whistle on that but it now seems

Date Rape

I was right all along.

Metal market manipulation is different, and, as the guy says, pretty much rife. The LME is a disaster zone.

I'm reminded of the tin crisis of 1985, except that then it was sovereign governments keeping prices artificially high.

When their money ran out, the price collapsed from about $800 to $400/tonne. Put not your trust in Princes.

But to enforce the $400 price would have ruined half the LME members so the LME set a "ring-out" price of $600 which was the highest price that the brokers "long" of the market at $800 were prepared to pay. (any lower and they would have walked away from their trading subsidiaries).

The litigation from the aggrieved "shorts" (who were missing $200 a tonne profit) rumbled on for years.

Prior to the tin crisis, the LME was a "principal to principal" market (ie no clearing house). As a result of the tin debacle, London Clearing House clearing was forced upon the LME.

My case is that in a sudden "rush for the exit" by hedge funds, the LCH would be in deep shit, because its risk models do not incorporate market meltdowns ("Black Swans").

In fact I see clearing houses as unappreciated "central points of failure".

But what do I know?

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

by ChrisCook (cojockathotmaildotcom) on Mon Jul 16th, 2007 at 08:24:11 PM EST
[ Parent ]
regularly manipulated for volatilities sake, but not by very far on any given day.  Hardly a "cosmic" scale.  And probably netting to not much if you average over time.  Your regulators under Maggie/Major were asleep at the wheel.
by HiD on Tue Jul 17th, 2007 at 05:57:39 AM EST
[ Parent ]
I doubt whether it's ever been purely intra day. IMHO the trading relationship between BP and Goldman over the last ten years would not withstand detailed examination and could be one of the biggest "bezzles" (as Galbraith had it) of recent years.

But there are - as you know better than most - many ways to skin that cat.

Granted these are "frictional" costs, but to me the billions made in the last few years are not chump change. Why else have investment banks been queuing up to enter the area: and where are their profits going to come from? (apart from prime brokerage and trading off their own clients that is - Chinese Walls are full of chinks)

They ARE relatively speaking, minor compared to the overall market.

It's a similar "relational" point to that re the whole oil in Euro's / Oil Bourse conspiracy nonsense: oil dollar traffic is significant, but a relatively small, but increasing, part of general dollar traffic.

How does one define "cosmic" in other words!

Re regulation, do you think current regulators are much better placed than Maggie's/Major's?

They still have very limited access to the trading data they need: even if they get it, they have very limited competence and resources to make sense of it(since the good people are, by and large, poached by the industry) and they have limited enforcement power.

Apart from that, things are better, yes.

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

by ChrisCook (cojockathotmaildotcom) on Tue Jul 17th, 2007 at 06:35:49 AM EST
[ Parent ]
In my day it was Phibro.  You really think GS is in bed with BP?  That shocks me a bit.  When the entire crude desk got wiped out in about 1993 over allegations (entirely backed up by the tapes) of fixing commission rate, people got pretty paranoid.

But I've been gone 10+ years now so what do I know.

by HiD on Fri Aug 17th, 2007 at 05:46:45 AM EST
[ Parent ]
I think all the printed government regulations would make a useful fuel source. They aren't being consulted (at least in the US) so no loss.

Reports from commissions also burn well I understand...

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Jul 16th, 2007 at 07:29:31 PM EST
Government regulations are pretty small and readable against ... private regulations in the form of patents which are much larger and unreadable by design.
by Laurent GUERBY on Tue Jul 17th, 2007 at 03:18:03 AM EST
[ Parent ]
The Guardian, today, has this story: Oil 'could hit $95 a barrel this year':

The key Middle Eastern members of oil cartel OPEC were tonight coming under pressure for an immediate increase in production after a warning from Goldman Sachs that prices could hit a peak of $95 a barrel by the end of the year.

With a new bout of speculative activity today driving Brent crude to within a few cents of the record $78.65 reached last summer, Goldman said shortages of supply were behind the steady rise in oil prices.

Of course, increased production means peak oil comes that much more sooner, if it hasn't already happened. And, of course, as your diary notes -- the oil producers "can't meet burgeoning global demand for oil". So, $100/barrel is looking to be on the cheap side anymore.

by Magnifico on Mon Jul 16th, 2007 at 07:48:15 PM EST
Hey Jerome, looks like you're not gonna have to pay for more bottles this year.

I think I "agree" with the WSJ. The market is really at work because the crunch is not an artificial situation as in the 70s. The scarcity is real and investments can be made with a reasonably good assessment of long term offer -not enough- and demand -darn too much- without fear of long term intervention by producing countries -no more capacity- or serious changes in energy policies by consumer countries. Good return predictability is always attractive to big money.

The problem is that the investments will probably be in tar sands and in that: about 2 or 3 worse than conventional crude oil for CO2 emissions.

Though, more nuclear is always a good thing :>

by Francois in Paris on Mon Jul 16th, 2007 at 09:24:46 PM EST
I really need some sort of oil fund or stock that doesn't get manipulated the way USO does. Any ideas?

you are the media you consume.

by MillMan (millguy at gmail) on Tue Jul 17th, 2007 at 02:00:10 AM EST
is EDF, the French (nuclear) power group.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jul 17th, 2007 at 05:41:34 AM EST
[ Parent ]
I'd rather buy Exelon, the American (nuclear) power group.

Because there you also have a natural gas crisis.

And hey, I have bought that one.

Big Oil should be great too. What does it matter if your production goes down 5 % a year if prices are up 10 % a year? Sooner or later I think we should also see an increase in p/e numbers from 8-13 to at least 15-20.

Prospecting, drilling, oil service should also be great, considering that the new oil we will find will be in nasty places requiring much expertise to extract it, that is if we don't just neutron-nuke the Mideast and drills it.

And, once again:



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

by Starvid on Thu Jul 19th, 2007 at 07:45:27 AM EST
[ Parent ]
you could set up a commodities account, but you'll be facing the same problem as USO and GSCI.  Contango is no fun if you are long the front and rolling each month.
by HiD on Tue Jul 17th, 2007 at 05:55:05 AM EST
[ Parent ]
Damn it all to hell. For once in my life I have what amounts to insider information and I manage to lose money anyway.

you are the media you consume.

by MillMan (millguy at gmail) on Tue Jul 17th, 2007 at 01:27:42 PM EST
[ Parent ]
In the last 6-8 weeks we've gone from WTI at $68 with RB at $2.4/gallon ($ 98/bbl ish) for a crack of $30/bbl.

Now, with front month WTI at $75 ish, RB is down to $2.14/gallon or roughly $89/bbl for a crack of $13.  Refining margin halved on that piece of the bbl.

Are we setting up for another puke like last year barring a hurricane whacking the USG?  I think OPEC is better positioned to keep prices firm this go around though.

by HiD on Tue Jul 17th, 2007 at 06:01:16 AM EST
ON my holidyas in germany.. I only have ttimfor a simple question.

Why is the price of oil so sharply correlated with the US dollar-euro ratio?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Jul 17th, 2007 at 09:44:27 AM EST
but just wanting to wish you a merry stay in Germany!! Enjoy the beer...
by Nomad on Tue Jul 17th, 2007 at 10:12:03 AM EST
[ Parent ]
...but hey, you cannot expect the industry to encourage us loudly to reduce our demand for their products (they do mention it, en passant, as do all politicians, but it's, as always, done without bite or without putting it at the forefront of policy suggestions).

Just before we left for Mexico last week, I heard the familiar gas and oil industry radio advert imploring citizens to contact their congressment and urge them not to raise taxes on consumer oil and gasoline or on oil company profits.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears

by Gringo (stargazing camel at aoldotcom) on Tue Jul 17th, 2007 at 11:25:17 AM EST


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