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The oil 'peak' has been reached

by Luis de Sousa Wed Sep 29th, 2010 at 04:20:36 AM EST

Jorge Nascimento Rodrigues is about the only journalist in Portugal sensible to the issue of oil scarcity. During the past few years I had the opportunity of collaborating with him several times in order to bring Peak Oil to the greater audience on an almost regular basis. Last weekend the largest weekly newspaper in Portugal (and among the diaspora), Expresso, had another article in its Economy section penned by Jorge with a few thoughts on present events and trends. Samuel Foucher kindly provided an updated version of one of his graphs that illustrated the article.  

Below the fold goes a possible translation of this article to English.

frontpaged - Nomad


An improved version of this log has been posted at TheOilDrum.


The alarm has rang: the scarcity of oil will affect everyone and annalists alert for the risks.

'Peak' oil is no longer a fracturing theme. The projections for the year, quinquennium or decade when global oil production would start declining "are now part of history", underlines Luís de Sousa, member of ASPO-Portugal and collaborator of the blog "The Oil Drum", talking to the Expresso. "There is a generalized idea that such period of peak is already being lived. Predicting it is no longer relevant", he adds.

According to this specialist, the vast majority of the important mathematical and accounting models of oil production used by entities independent from the oil industry point to an interval of about a decade centred between 2008 and 2010, for a production interval between 78 and 85 million barrels daily.

Luís de Sousa underlines that "since 2005 world liquids production has been bound between 80 and 82 million barrels per day in clear consonance with those models", but this plateau "has been sustained by the increase of natural gas liquids, with pure crude [petroleum] in decline since that year".

Nonetheless the 'peak' has returned to the spotlight due to a secret report by the futurist studies group of the German Centre for the Armed Forces Transformation, a military think thank work for the Berlin Ministry of Defence. The study was published by "Der Spiegel" casting consternation on those less used to the issue and its geopolitical implications.

The diplomacy of Oil

The report has an alarming tone: "scarcity shall affect everyone" and "oil price increases pose a systemic risk, not only for transport systems, but also for all other sub-systems". And left a message: "It is vital to secure access to oil", for in an horizon up to 2040 we shall assist to "a change of the international security panorama with new risks - like that of fuel transport - and new actors in a possible conflict around the distribution of an increasingly scarce resource".

The german report concludes that "the free oil demand and supply market will shrink" and that oil diplomacy will sky-rocket relatively to its geo-politization.

The rising scarcity referred by the Germans is linked to "an almost rigidity of oil production, fixed within a band that formed since 2004" underlines Luís de Sousa. This variation "band" is called by many specialists, with some humour, "undulating plateau".  Meaning, in this plateau, production variations oscillate, like a wave, from year to year, independently of price variations. The present crisis, whose end continues a source of polemics, "will likely prolong this undulating period, flattening what otherwise would have been a prominent peak".

More important than the peak itself or the production plateau is the volume of oil available to the international market, or in other words, what is transacted beyond what is consumed by the producers. "The maximum was reached in 2005, with 44 million barrels daily (mbd), since then entering into a slow, but irreversible, decline", says the ASPO specialist. Presently it is 42 mbd and in 2020 it should be under 35 mbd. Luís de Sousa also adds that in the dispute for that oil available in the international markets it shall be felt "the transfer of consumption from the countries that form the OECD (developed countries) to those emerging - if in 1990 half of the oil produced was consumed by the OECD, today that fraction is down to 1/3".  The world market underwent an overturn.

This long term structural setting, deriving from the scarcity of this commodity and growing geopolitical risks (including those of navigation through strategic straits), has been aggravated, in recent years, by what was dubbed "financialization" of the crude futures market, with the entering of financial speculators nicknamed "Wall Street refiners" buying and selling "paper barrels", prompting an additional disturbance in the market, with sometimes "wild" oscillations.

PIIGS are the most affected

One of the groups in the OECD that will suffer most with the contraction of available oil is the one formed by those more dependent of this energy in their mix, underlines Luís de Sousa. "A detail must be noted - those countries in greater difficulties will precisely be those called the PIIGS, that have an oil dependence over 45%, highlighting Greece with 58%, Portugal and Ireland with 55%, Spain with 48% and Italy with 46%, contrasting with the European Union average of 37%. Adding the four countries with oil dependence above the european average, but below 45%, we get a complete map of the zone where the 'undulating plateau' will have the greater impact, adding to the PIIGS are Austria (44%), Holland (42%), Belgium (41%) and Denmark (39%)."

The weakest point of the five more vulnerable countries of the euro-zone (Portugal, Ireland, Italy, Greece and Spain) is the transport sector, particularly when road-based, "deriving from geographic location, inappropriate urban and national planning or both" says Luís de Sousa. The promotion of  maritime and railway modes is underlined by this specialist, not sufficing the modernization of the  electrical infrastructure or the promotion of other sources of energy.

Thanks to Jorge for keeping raising awareness to a subject that, as he writes, shall affect us all. Thanks to Samuel for the prompt collaboration.

Previous logs on Jorge's articles:

Have Oil prices bottomed out?

Unmissable interview with Franck Biancheri

The Month of the Psychological Shock (Over Oil) in America?

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Due to the financial crisis and the drop in demand for oil it caused, talk of oil scarcity has mostly disappeared from the news, but the issue will not go away just because of a few years of lower demand.

The question is whether the crisis was the way "nature" found to make us use less of the oil, given that there isn't more to consume, and thus whether we'll run into new constraints as soon as growth attempts to resume. Oil prices at $70+ for the past year and a half would tend to support that worry. And in the meantime, China has grabbed an ever larger slice of the (shrinking) pie...

Wind power

by Jerome a Paris (etg@eurotrib.com) on Tue Sep 28th, 2010 at 05:33:55 AM EST
My perspective is that this crisis is a purchasing power transfer from the OECD to the so called emergent economies.

If economic growth does not resume promptly in the OECD, it will be the increasing demand from the emergent economies to hit the supply wall this time.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Tue Sep 28th, 2010 at 05:57:54 AM EST
[ Parent ]
The developing economies will out-bid us for oil, because (as has been demonstrated in the last couple of years) we can actually reduce our oil use in a discretionary way. At over a euro a litre, people are actively strategising to reduce their fuel use (and this is a good thing).

In developing economies, the rising cost of fuel is easy to pass on, so easier to absorb, even though the cost relative to incomes is actually higher.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Tue Sep 28th, 2010 at 09:51:13 AM EST
[ Parent ]
It's sad that the reaction to the oil peak is "it is vital to secure access to oil" rather than "it is vital to change the energy technology we run on"...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Tue Sep 28th, 2010 at 05:57:33 AM EST
This long term structural setting, deriving from the scarcity of this commodity and growing geopolitical risks (including those of navigation through strategic straits), has been aggravated, in recent years, by what was dubbed "financialization" of the crude futures market, with the entering of financial speculators nicknamed "Wall Street refiners" buying and selling "paper barrels", prompting an additional disturbance in the market, with sometimes "wild" oscillations.
So these German defence futurists are not very imaginative about the present. The bogeyman du jour is the financial speculator and so that's where they pin the blame.

For an alternative view, see (none other than) Luis de Sousa's December 2008 diary Oil prices below 40 dollars per barrel

One of my first dives into the Peak Oil world was with Kenneth Deffeyes' book Beyond Oil. In it the Princeton Professor explains how resources' prices go through chaotic periods in face of scarce supply. Without knowing it, he derived an expression to explain movements like spot Natural Gas prices in the US after 2002, that was equivalent to the Queueing Theory. This made immediate sense to me, after studying this theory in my formative years at the University

...

The Queueing Theory shows also another important thing: if the load on the system goes above a certain threshold it becomes impossible to predict queue lengths or waiting times, the system goes into chaos. Going back to the supermarket, imagine that for some reason the flow of costumers increases severalfold over its normal rhythm (e.g. Black Friday in the US). At first, lengthy queues form at each POS, waiting periods then go beyond costumers' patience and they simply start quitting the queue and leaving the supermarket without shopping. The dissatisfaction is such that costumers quit entering the supermarket altogether and the manager is eventually forced to close down some POS. But this is Black Friday, the avalanche of costumers eventually returns and it starts all over again. During this chaotic period a random sample of queue length at any given POS can result in any possible number and becomes effectively impossible to predict.

...

Another important aspect to my understanding of this issue was presented by Carlos Cramez and Jean Laherrère in 2006 at the seminar that kicked off ASPO-Portugal. They showed a chart with oil prices as the number of working hours in the US and France and concluded that to return to 1980's levels, the last oil crisis, prices would have to reach something like 125$ per barrel (in 2006 dollars). This number stuck to my mind, and I assumed this would be about the level at which the "boom" would turn around into "bust".

...








My mental model of oil prices evolving with scarce supply and expanding monetary mass.
See also ATinNM's regular comments about Feigenbaum's period-doubling cascade to chaos in the logistic model...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Tue Sep 28th, 2010 at 06:15:35 AM EST
Migeru:
See also ATinNM's regular comments about Feigenbaum's period-doubling cascade to chaos in the logistic model...
For instance, here.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Tue Sep 28th, 2010 at 08:26:00 AM EST
[ Parent ]
Or just search the database for Verhulst.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Tue Sep 28th, 2010 at 08:42:51 AM EST
[ Parent ]
WATOR is the oldest computer simulation I know of to reproduce these results in laboratory (circa 1984):

http://www.leinweb.com/snackbar/wator/

The faster they reproduce the wilder it gets and you can even prompt total extinction.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Tue Sep 28th, 2010 at 10:10:21 AM EST
[ Parent ]
if the load on the system goes above a certain threshold it becomes impossible to predict queue lengths or waiting times, the system goes into chaos

Absolutely, and I can confirm this in my own field (software performance)

Nevertheless, the speculator is there. He is surfing on scarcity; he can't create scarcity, but he can sure as hell profit from it, and push prices up.

This is well-documented both for oil and for food. No doubt the smart money is currently taking positions on next year's wheat supply.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Tue Sep 28th, 2010 at 09:57:07 AM EST
[ Parent ]
:) Yeah that bit wasn't quoting me. I think speculators can have a short term impact on futures prices, but at the end of the day, when you need to trade real barrels at spot their impact is null.

luis_de_sousa@mastodon.social
by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Tue Sep 28th, 2010 at 09:57:21 AM EST
[ Parent ]
Speculators seek a transaction profit, usually short term. They are agnostic as to price level, and may make money by going short as well as long. They favour volatility.

The bulk of the money in the market is therefore not speculative by this definition. It consists of funds - ETFs - whose aim is not to make profit but rather to avoid loss.

These investors are 'hedging inflation' by are getting out of dollars (at the zero bound) and exchanging dollar risk for energy risk, which is the precise opposite of a producer hedging production (or simply monetising oil in the ground), and who is offloading energy risk in favour of dollar risk.

These funds are 'long only', hate volatility, and are routinely pillaged by the market professional intermediaries.

Producers are able to keep the price high - at the 'upper bound' of demand destruction, and therefore this is exactly what they are doing. Producers will ALWAYS do this when they can eg copper,tin, cocoa, coffee markets and so on.

The only solution is to reconfigure this completely dysfunctional market by cutting out the middlemen.


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

by ChrisCook (cojockathotmaildotcom) on Tue Sep 28th, 2010 at 03:55:10 PM EST
[ Parent ]
2010 Peak Oil Report | The Peak Oil Group
Having assessed the systemic changes caused by the global economic recession, coupled with the projected growth from non-OECD countries, ITPOES predicts Peak Oil will occur within the next decade, potentially by 2015 at less than 95 million barrels per day. (In 2008, production levels were 85 million barrels per day.) The study finds that the recession has delayed the oil crunch by two years. This provides invaluable time to plan for a future which will see structural increases in oil prices coupled with shortages and increased market volatility.
...
The next five years will see us face another crunch - the oil crunch.
This time, we do have the chance to prepare. The challenge is to use that time well.
As we reach maximum oil extraction rates, the era of cheap oil is behind us. We must plan for a world in which oil prices are likely to be both higher and more volatile and where oil price shocks have the potential to destabilise economic, political and social activity.

Sustainable Energy Security - Research and Reports - Lloyd's

This report, jointly produced by Lloyd's 360 Risk Insight programme and Chatham House, should cause all risk managers to pause. What it outlines, in stark detail, is that we have entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how much we will have to pay for it.

Is this any different from the normal volatility of the oil or gas markets? Yes, it is. Today, a number of pressures are combining: constraints on `easy to access' oil; the environmental and political urgency of reducing carbon
dioxide emissions; and a sharp rise in energy demand from the Asian economies, particularly China. All of this means that the current generation of business leaders - and their successors - are going to have to find a new energy paradigm. As the report makes clear, we can expect dramatic changes: prices are likely to rise, with some commentators suggesting oil may reach $200 a barrel; regulations on carbon emissions will intensify; and reputations will be won or lost as the public demands that businesses reduce their environmental footprint. The growing demand for energy will require an estimated $26trn in investment by 2030. Energy companies will face hard choices in deciding how to deploy these funds in an uncertain market with mixed policy messages. The recent Deepwater oil spill shows all too clearly the hazards of moving into ever more unpredictable terrain to extract energy resources. And the rapid deployment of cleaner energy technologies will radically alter the risk landscape.

At this precise point in time we are in a period akin to a phony war.

UK Energy Research Centre : Global Oil Depletion Report

Without sufficient investment in demand reduction and substitute sources of energy, a decline in the production of conventional oil could have a major impact on the global economy. In addition, the transition away from conventional oil will have important economic, environmental and security implications which need to be anticipated if the appropriate investments are to be made. While the timing of a future peak (or plateau) in conventional oil production has been a focus of debate, what appears equally important is the rate at which production may be expected to decline following the peak and hence the rate at which demand reduction and alternative sources of supply may be required. In addition, there are uncertainties over the extent to which the market may be relied upon to signal oil depletion in a sufficiently timely fashion.

United States Joint Forces Command - Joint Operating Environment 2010 (pdf)

Energy Summary
To generate the energy required worldwide by the 2030s would require us to find an additional 1.4 MBD every year until then... The discovery rate for new petroleum and gas fields over the past two decades (with the possible exception of Brazil) provides little reason for optimism that future efforts will find major new fields.

At present, investment in oil production is only beginning to pick up, with the result that production could reach a prolonged plateau. By 2030, the world will require production of 118 MBD, but energy producers may only be producing 100 MBD unless there are major changes in current investment and drilling capacity.

By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.
...
A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India. At best, it would lead to periods of harsh economic adjustment. To what extent conservation measures, investments in alternative energy production, and efforts to expand petroleum production from tar sands and shale would mitigate such a period of adjustment is difficult to predict. One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest.




"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Wed Sep 29th, 2010 at 05:21:31 AM EST


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