Sat Mar 7th, 2009 at 11:26:52 PM EST
The Oil Drum has a new post up with a link to a talk Matt Simmons, and oil investment banker, gave to the Australia American Chamber of Commerce in Houston on 29 January 2009.
The sound quality is the worst I have ever encountered on the internet, nevertheless, I believe I was able to pick up a number of interesting points. The theme of the talk is that oil prices are crazy, and the craziness is having bad effects on the stability of future oil production: Oil decline could substantually exceed the rate imposed by natural geological constraints.
(Unmentioned in this talk, the Oil Drum itself has posted articles looking at resource peaks such as Peak Whale Oil in the 1840s, and how price chaos has been the historical sequel to peaking production.)
He follows the recent history of the oil market, noting how prices rose from some $US 10- a barrel in the 1990s to over $US 140- per barrel in the summer of 2008, a factor of 15 times. He sees the price rise as mainly geological, in the sense that demand rose faster than supply could keep up, resulting in reduced on-hand reserves throughout the world and rising prices due to supply being short. Of course, his book Twilight in the Desert is famous for predicting the peaking of Saudi Arabia based on geological reports, and the world's production of light sweet crude did in fact peak in 2005, as indicated by production data that has become more detailed and certain in the three years since.
So the run-up in price makes geological sense. How much was due to speculation? Here Simmons more or less admits he does not know, but relates as anecdotal evidence that the speculators he knew were betting AGAINST a price rise, not for it. So he does not think speculation was significant.
Then he looks at the price collapse in September 2008. He finds only one co-temporaneous event that he thinks relevant: The margin calls that occurred with the exposure of problems with derivatives in that month's banking disaster. He believes that the rapid selling of oil investments and futures to raise cash to meet margin calls is what drove the market down. Ensuing collapse in other parts of the economy may be holding prices down now--although at some point they will climb again.
He views the low price as bad, stating bluntly that higher prices are needed.
Why are they needed? The oil we have been pumping since 2005 includes an increasing fraction of "crap crude" (aka "crud")--heavy sour crude, tar sands, you name it, and this all needs intensive and expensive capital investment, if it is to come near to maintaining current levels of supply. (Exceeding current supply is no longer possible). New and more expensive refining capacity is needed, not to mention more elaborate and costly methods of drilling and shipping. The expense will not be undertaken unless prices can be seen to support it.
A second reason is at least as disturbing: Most EXISTING oil infrastructure is well past its design-life, especially in the US, though not only. Repairs are keeping things going, but the time comes when repairs will not serve, and only replacement with new equipment will keep the industry functioning. Again, replacements will not happen unless prices are seen to support it.
Related to this second reason, young talent is not entering the oil industry. Frankly, as things stand, it doesn't make a good career choice. But this bodes poorly for the industry's future.
He then looks at natural gas, where the situation is far worse in all respects. The same problems as in the oil industry, only more so. One geological fact about gas is that wells tend to give out suddenly, rather than entering decline slowly as an oil well does. The US peaked in gas production long ago, and viewed from a physical standpoint gas is absurdly low in price--we are encouraging the preferential use of a resource that is near exhaustion, while providing no incentive to maintain nor develop infrastructure. Shale gas is a crap shoot--call it a long shot: It MIGHT pay off . . .
Now, most of this is not truly new--Simmons himself has been preaching the need for high prices for a while. But now, for me, a bit of a surprise:
Remember how the Saudis denied they had peaked--indeed, have never admitted it--and came up with a number of story-lines to cover up what geologists considered evident?
This is not about the Saudis.
Russian gas has peaked and is now entering a period of serious decline. The old fields are failing, and the truly massive capital to open up the new fields in northern Siberia is not there. The Ukraine gas-price crisis was manufactured to cover the fact that Gazprom can no longer deliver as much gas during peak periods (mid-winter) as customers want. The gas simply is not there. To cover this, political crises are created (or used--Gaianne) to cover the shortages.
(PS Simmons did not take up the impacts on climate change. Presumably collapse of the oil industry will ameliorate its impact on global warming.)