Thursday, April 16, 2009

Cheap Oil Forever: Why Prices Will Keep Falling

One idea still has the power to capture imaginations and markets: it is that commodities like oil, copper, grains and gold are all destined to rise over time. Lots of smart people believe that last year's swoon in commodities prices represented a short pause in a long-term bull market.

It's a view rooted in powerful and real trends, like the growth of China and India, the decline in global reserves (many of the world's biggest and best oilfields are tapped out), fears over resource nationalization (independent oil firms now control only 20 percent of global reserves) and long-term underinvestment in energy and agriculture, which hampers supply.

Yet the fact is that the world has faced all these issues before, and for the past 200 years, commodity prices have been trending downwards, thanks to new technologies, greater efficiency in extraction and the substitution of one commodity for another (which explains the high correlation between commodities prices).

Bank Credit Analyst, a research firm based in Montreal, has data showing major industrial commodity prices are 75% below where they were in the year 1800, after adjusting for inflation. Despite all the worries over "peak oil," the fact is that the major bear markets in oil have been demand, rather than supply led. And when demand eventually picks up, there's usually some new alternative (nuclear energy, natural gas, green technologies) waiting to pick up some of the slack.

The real price of oil today is now at the same level as in 1976 and, before that, in the 1870s, when oil was first put to mass use in the United States. This long-term price decline is due mainly to the constant discovery of new fields and greater energy efficiency, making nonsense of the idea that the world is rapidly running out of oil. The experience of the 1980s is instructive in the current context as well.

Japan and Europe continued to grow strongly in the 1980s, and yet oil consumption remained essentially flat through that decade as both the regions strived to achieve better fuel efficiency and switched to alternative sources of energy, such as nuclear power. Similarly, 90 percent of the growth in new oil capacity since 2004 has come from biofuels, synthetic oil and natural-gas liquids. As countries get richer, their per capita consumption of commodities declines. It's a myth, then, that the boom in China and India will inexorably drive up oil and other commodity prices.

At some point, of course, commodities will spike again, but only temporarily. To date, the centuries-old slide in prices has been marked by long bear markets and short bull runs. Data from CSFB shows that the average bull market in oil has lasted from four to nine years, and the average bear market from 11 to 27 years. The bull market that ended last summer saw prices rise tenfold over nine years, mirroring the duration and magnitude of the previous bull market, which ended in 1979 (see chart above). That was followed by a bear market that lasted 20 years. If history is any guide, we're only at the beginning of another long one.

~Newsweek article "If It's In the Ground, It Can Only Go Down"

45 Comments:

At 4/16/2009 4:02 PM, Blogger Patrick said...

As someone deeply involved in the mining business I have to disagree with at least part of the argument presented in the article. I have a difficult time seeing commodity prices going down in the long term. Unlike energy, alternatives to raw mined materials are difficult if not impossible to find for many applications. I think the only truly viable alternative to mining raw materials could be recycling, which has promise.

The problem is that such small quantities of metals (I'll focus on them) exist and in such low concentrations that extracting them is increasingly difficult and costly. There are only so many methods available for separating metals from the rock in which they are contained that I don't believe there are any great undiscovered processes waiting to be implemented.

The recovery issue is important, but there is another issue which we do have some control over that is impacting production of metals. That issue is environmental regulation. There are lots (relatively) of deposits that are off-limits to exploration and/or exploitation simply because people have decided that they are not going to allow them to be mined. Many of the low-cost and major metal-producing mines in the world today have been in production for decades. We are only beginning to see the impact that policy decisions are having on the mining industry. They won't fully manifest themselves for another 10 years or so. Bear in mind I am not advocating irresponsible mining practices. It seems that people believe mining is only done so that some greedy company will make a few bucks, but that isn't the case at all. It's a cornerstone of modern life and one that I think will only become more important and apparent in the next few decades.

 
At 4/16/2009 6:22 PM, Blogger 1 said...

"That issue is environmental regulation. There are lots (relatively) of deposits that are off-limits to exploration and/or exploitation simply because people have decided that they are not going to allow them to be mined"...

Now doesn't that sound terribly familiar?

 
At 4/16/2009 7:19 PM, Anonymous Anonymous said...

A 'Copper Standard' for the world's currency system?‏China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.


Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."


"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.


The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).


The Telegraph

 
At 4/16/2009 7:36 PM, Anonymous Anonymous said...

I would agree that extracting resources from the earth will not be getting cheaper. Environmentalists have legislated higher costs in almost all products -- and I'm convinced that is their agenda in order to force reduced consumption (and thereby environmental impact to the earth) on all.

It's a shame that in the short run, they're only forcing the extraction of resources to locations/countries that have less environmental regulations than the USA, thereby ensuring more destructive practices in those locales.

In the long run however, they force the price of production higher under the guise of protecting the earth.

As a mining engineer in Colorado during the 70s, there was a popular bumper-sticker that said "Let the bastards freeze in the dark..."

 
At 4/16/2009 9:28 PM, Blogger VangelV said...

"Yet the fact is that the world has faced all these issues before, and for the past 200 years, commodity prices have been trending downwards, thanks to new technologies, greater efficiency in extraction and the substitution of one commodity for another (which explains the high correlation between commodities prices)."Actually, the world has never faced this situation before because we are now out of cheap oil and have no way to produce a substitute that will provide us with as high a return on the energy invested.

We also need to keep in mind that many cheap commodities were only made possible by access to cheap energy. Many low-grade open pit copper deposits are not viable unless you have very cheap energy. Most agricultural operations depend on access to cheap energy to keep yields high.

The bottom line is that depletion of existing fields is running at around 6.5% per year and is in danger of moving much higher if new investment does not flow into the sector. While the price of oil is still vulnerable to a collapse right along with the economy the lack of new investment and the fact that for the first time in history we are running without sufficient spare capacity means that the real price of oil will be moving up sharply until the price is high enough to justify investment in alternative and unconventional sources.

 
At 4/17/2009 4:24 AM, Anonymous Dylan Grice said...

Hi Mark

On your faith in economic theory: why haven't higher prices and major technological advancement stopped US, Mexican, UK, Norwegian etc oil production from peaking? The reality is technological innovation cannot reverse geological reality.
When Saudi oil peaks the implications will presumably be unanticipated (of the few who predicted the peaks in the earlier examples, none were believed) and therefore painful.

Any commodity bull market is only ever a bottleneck issue and bottlenecks have always been resolved over time. Technology can't change the laws of geology, but it can find substitutes. We've gone from timber to coal to oil ... something will come next. So you're right to say that ultimately technological solutions will provide the answer. Life finds a way.

But instantaneous those technological solutions are not and the bumps along the way can be pretty big and painful. I think you're being complacent over the potential for dislocation.

DG

 
At 4/17/2009 6:38 AM, Blogger 1 said...

"The reality is technological innovation cannot reverse geological reality"...

Maybe you should consider taking another look at geological reality...

Another dose of geological reality maybe?

Then there is this possibility: Abiotic Oil

 
At 4/17/2009 7:11 AM, Anonymous Canucklehead said...

Everyone is expecting the way out of this current economic malaise will be more global trade. As the World population grows, increased trade will come with urbanization, infrastructure demand and energy demand.

The price of commodities will climb.

 
At 4/17/2009 9:11 AM, Blogger VangelV said...

"Maybe you should consider taking another look at geological reality..."

I think that you are entirely correct. We need to consider the geological reality objectively.

First, we need to understand that the shale oil/gas formations have been known for some time and there have been dreams of exploiting them since the 1930s. Readers of Rand's Atlas Shrugged know that she has Ellis Wyatt figure out a way to get oil out of shale in Colorado.

Second, many attempts have been made to get this oil out of the formations by a number of different companies and individuals. Their problem was always one of economics because of the very low energy density of shale rock and the extremely low returns on the energy invested.

It is very clear that the abundant oil and gas that are trapped in shale formations cannot be produced cheaply because the extremely low energy yield cannot offset all of the investments that are required to produce. If we look at the geological reality, as you suggested, we need to understand that shale is very tight rock and requires expensive horizontal wells along with hydraulic fracturing to get any oil or gas out. The process requires injections of propping agents to keep the formation from closing up again.

But even with all of that investment the depletion rates are extremely high and the wells have to be worked continually by the operators. That means that in order to produce oil and gas from shale you need very high prices.

"Another dose of geological reality maybe?"

By all means let us look at the Bakken formation realistically.

If you look at the actions rather than the rhetoric you will find that companies are not interested in making production investments at low price levels because they are losing money. A big player in this area last year was Chesapeake Energy. While what it did made sense at $130 a barrel oil price at $50 Chesapeake Energy has no choice but to reduce its activity sharply and wait for higher prices.

Reality shows us that the unconventional energy players have seen their stocks take a beating and many of the small service sector companies that sprung up to take advantage of the opportunities are now bankrupt or on the verge of bankruptcy.

"Then there is this possibility: Abiotic Oil"

Sorry but the abiotic story is even less credible than the old promises of cheap shale oil. There is no evidence to suggest that abiotic oil is being formed rapidly enough to offset field depletion. Old oil fields may be reworked and 'convinced' to yield more of their original resource that is still in place but they cannot come close to previous production levels.

That means that abiotic arguments have nothing to do with reality. If you were right and the story were credible we would know it immediately because producers of 'abiotic oil' would dominate the market. But they don't and we are still dependent on the national oil companies that control the bulk of production and reserves.

 
At 4/17/2009 9:45 AM, Blogger Patrick said...

Anon (talking about the Copper Standard),
China's involvement in securing natural resources abroad is one of the most startling developments I've seen in my short life. At the risk of sounding xenophobic, I am worried that China is playing our capitalist game all too well (playing with house money to boot) by "investing" in way undervalued natural resource companies and countries. They (the resource companies) are all cash-strapped right now and as your article pointed out China wants to get rid of its dollar holdings. I think they are very smart to use our money to buy the resources we used to control. We're just cruising along with the belief that commodities will either go down long term or follow market conditions. What if the Chinese decide they can use all of the resources they control internally? What if you suddenly take 40% of the supply away for a given metal because the Chinese decided it would be better used on Chinese projects? It seems like that could be a possible outcome to me. Maybe I'm just being alarmist, but I get a little spooked when I see state-run companies owning such large portions of major mining companies.

 
At 4/17/2009 5:02 PM, Blogger Bloggin' Brewskie said...

(Note: I apologize for any spelling or grammer errors that may occur, as I'm on vacation and wrote this in a hurry)

Man, I've been slacking during my vacation and nearly missed this post!

Before I jump into energy, I'm going to touch on metals first. Since I don't work in the mining industry, I can't voice as much authority on this topic. In terms of dealing with the prospect of a shortage of exotic metals... nanotechnology should lend some help in this area (if you can build on the minute scale, you need less of the metal), plus the ever-present effect of paradigm-busting, innovative research (such as developing hydrogen cars that don't require platinum catalysts)... There's also the prospect of mining the deep oceans, though this is years away. Beyond that, those who work in the mining industry carry more authority than my voice.

In terms of energy... what one needs to consider is the world is destined to move into other forms of energy besides oil, gas and coal: this is merely a natural progression in the technological climb of things, and should be welcomed; it should be greatly welcomed in the way Britain and America transferred from coal to oil for industrial purposes. For instance: this year we've witnessed breakthroughs in fast charging batteries, promising algae biofuel development, better and cheaper tar send production techniques, (Canadian tar sands requires a minimal $30 a barrel for development; some believe this can be potentially brought down below $10 a barrel, though this needs to be proven first), platinum-free fuel cells (this has been done repeatedly), shale oil development and more. I could write a great deal more on this, but that's for another time...

We were obliviously in the midst of an oil glut last year, and as I wrote on my fairly new blog, it could have been much bigger (warning: caustic tone and language). A recent IEA report predicts demand will slump 2.4 mbpd this year; OECD demand slid 4 mbpd from 2005-2008 (see page 5); OPEC's production was down from a high of 32.83 mbpd last summer, to just under 28 mbpd in March - and when you factor in Saudi Arabia's recent additions (see below), OPEC is sitting on a sizable cushion when demand returns.

In terms of the low price/sour economic situation... this has stifled exploration and production to some extent, but others - such as Exxon Mobil, Chevron and Petrobras - are actually increasing spending; and while gas rigs are down for this year because of the gas glut (the now present gas glut is something I wrote about month back, way before it actually kicked in, way before the mainstream press noticed), the Haynesville Shale is still being drilled for a profit.

And once again, I'll mention oil is being found in impressive quantities: Brazil is emerging as world class oil player (here, here and here - and that's just for this year), Iran recently hit an oil bonanza, Saudi Arabia is opening or is in the process of opening the spigot on some major plays, plus there's Iraq (if it doesn't fall into civil war), Eastern Siberia, and other deep sea finds. Some new finds will be costly to develop: Petrobras' jackpot, for instance, will require a minimum of $40 a barrel to develop (in contrast to Saudi Arabia’s $2-3 a barrel production costs), and some deep-water finds in the Gulf will require $60 a barrel; though if we learn our lesson from last year, $60-something oil won't kill us.

I could write a great deal more on oil, gas and energy, but that's for another time. 'Sides... gotta enjoy what little left of my vacation there's left.

Enjoy the weekend, people!

 
At 4/17/2009 10:50 PM, Anonymous Anonymous said...

You wrote that in a hurry?! Really?

 
At 4/18/2009 7:25 AM, Blogger jeppen said...

Were running out of conventional oil, that much is clear. Country after country is peaking, and new discoveries hasn't kept up with reserve depletion since early 80-ies.

The floor for liquids prices will, as soon as the world returns to growth, once again be determined by the cost of investing in new shale oil extraction and/or coal liquefaction.

Apparently, lots of projects in those areas are being put on hold due to $50 oil, so expect prices to go significantly higher.

If it is determined shale/sands and CTL projects should be abandoned due to AGW, then we are in uncharted territory, b/c currently there are no other large scale alternatives that could mitigate oil depletion. Prices would simply rise enough to destroy 2% demand per year or so.

To me, the quoted article is simply naive.

 
At 4/18/2009 10:05 AM, Blogger VangelV said...

This debate all comes down to simple mathematics. No matter how the debate is spun what matters are economic discoveries and reserves because that is the ultimate source of production.

On this front there is no debate about conventional sources. The bottom line is that the data shows that discoveries peaked quite some time ago and conventional production peaked in 2005.

The energy optimists argue that conventional sources do not matter because there is a lot of unconventional oil and gas in place. While that statement is true, the issue is one of economic returns. The energy companies will not be investing in unconventional production unless they can make a profit so the ultimate price will depend on the cost of producing at the margins. For new tar sands production and most shale oil the price required runs over $100 a barrel. That means that the current drop in demand will soon be offset by reduced supply as marginal production is taken off line. And in the absence of new investments and the Chinese actions to guarantee supply I suspect that we are looking at much higher real prices.

Please note that I used the term 'real prices' because the nominal price trend is inevitable. With the governments around the world on a spending binge and the central banks expansion of balance sheets the purchasing power of fiat currencies is steadily heading towards the abyss and hyperinflation is on its way.

 
At 4/18/2009 10:57 AM, Blogger Bloggin' Brewskie said...

According to the IEA (see page 3), 2008 saw record production of 88 mbpd.

 
At 4/18/2009 11:04 AM, Blogger VangelV said...

"According to the IEA (see page 3), 2008 saw record production of 88 mbpd."

The 88mbpd includes unconventional sources, refinery gains, NGLs, etc. The production of conventional crude peaked in 2005. Given that the easy to extract and cheap oil comes from conventional sources I think that there is a problem for the production of lower prices in the absence of a collapse in demand.

 
At 4/18/2009 11:53 AM, Blogger Bloggin' Brewskie said...

The EIA (page 2) states 2008 saw record production of conventional crude.

 
At 4/18/2009 1:45 PM, Blogger Bloggin' Brewskie said...

This comment has been removed by the author.

 
At 4/18/2009 4:17 PM, Blogger 1 said...

"Second, many attempts have been made to get this oil out of the formations by a number of different companies and individuals. Their problem was always one of economics because of the very low energy density of shale rock and the extremely low returns on the energy invested"...

ROFLMAO!Meanwhile back in the real world, real companies are making substantial investments in extracting crude products from shale...

"By all means let us look at the Bakken formation realistically.

If you look at the actions rather than the rhetoric you will find that companies are not interested in making production investments at low price levels because they are losing money
"...

Hmmm, on what planet is this supposedly happening?

Meanwhile on planet earth there lots of folks who aren't taking your advice regarding the Bakken Shale formation...

Apparently there are jobs to be had still in the shale oil business...

 
At 4/18/2009 7:53 PM, Blogger VangelV said...

"Bloggin' Brewskie said...

The EIA (page 2) states 2008 saw record production of conventional crude."

I saw that. Isn't it interesting how there is one month that somehow managed to beat the record of 74.3 mbpd reached during May 2005 but no subsequent month comes close? And that happens after Cantarell peaks and is in free fall and the North Sea, Daqing and Burgan are also in decline.

Sorry but even with the hundreds of billions in new investments the industry is still unable to beat the annual average for 2006. Conventional crude peaked in 2005 and is now on its way down in an irreversible trend. The only hope comes from unconventional sources but those are not profitable at today's prices so you will not be seeing much new investment until AFTER prices go up.

 
At 4/18/2009 8:05 PM, Blogger VangelV said...

"ROFLMAO!Meanwhile back in the real world, real companies are making substantial investments in extracting crude products from shale..."

Did you read the reference? Your link leads us to a 2007 article. At that time credit was freely available and there was some optimism about oil prices in the industry. Those days are long gone.

"Meanwhile on planet earth there lots of folks who aren't taking your advice regarding the Bakken Shale formation..."

If you read your own reference you would have noted the following. "Due to the current economic crisis, oil prices have dropped by 2/3 from the price during the summer of 2008. This economic recession has caused banks to tighten lending as well. Both of these factors are causing the companies below to scale back on their drilling operations. As the price of oil rises in the second half of 2009, companies will be back exploring the Bakken Shale like never before!" Your own reference is suggesting that we need high oil prices to get investment flowing into the shale oil sector. That is exactly the point that I was making.

"Apparently there are jobs to be had still in the shale oil business..."

Yes, there are some jobs available. Your link included one for a Coffee/Counter Attendant, an
Insurance Sales Agents, a mechanic, a field service technician, a trainmaster, a locomotive mechanic, a district manager and a truck driver. Doesn't seem like many jobs for what you are selling as a booming industry in a booming area. I suggest a reality check. For shale oil to be viable you will need much higher prices. Nothing that you have provided disputes that.

 
At 4/19/2009 1:12 AM, Blogger Bloggin' Brewskie said...

VangeIV,

It's indeed interesting to see production drop in those later months. I wrote about this in my blog (pardon the caustic tone and language) and explained why this happened; in fact, I revealed that not only was there a glut, it could have been much bigger.

Also, the peak oil community, after stubborn persistence, has recently abandoned the notion that oil peaked in 2005; they’re declaring 2008 as the new 2005.

 
At 4/19/2009 9:06 AM, Blogger VangelV said...

"
It's indeed interesting to see production drop in those later months. I wrote about this in my blog (pardon the caustic tone and language) and explained why this happened; in fact, I revealed that not only was there a glut, it could have been much bigger.

Also, the peak oil community, after stubborn persistence, has recently abandoned the notion that oil peaked in 2005; they’re declaring 2008 as the new 2005."

First, I do not believe that one data point is sufficient to declare 2008 as a peak year, particularly given the political nature of the reporting system.

But let us assume that the industry was somehow able to get production up to the previous peak. That meant that it required more than half a trillion dollars worth of new investment just to keep production level. Tell me again how that fact supports your optimism about the supply problem. From what I see and from what I hear on conference calls new spending is being cut off and the companies are telling shareholders that there will be no capital deployed on new projects until prices justify the investments. For the marginal oil, which is where the gains came from, that requires a price that is well above $80.

What this all means is that the price declines are driven by demand destruction and speculation about demand destruction. But what that does is kill the needed new investment that is required to offset the average 6.5% depletion in the sector. And without new supply capacity any disruption or any recovery in real activity will mean a price increase in real terms.

 
At 4/19/2009 10:37 PM, Blogger Bloggin' Brewskie said...

VangeIV,

The notion oil has peaked, therefore is in decline, is not a position I endorse. The idea oil peaked in 2008 is the latest trend of the peak oil community: the likes of Dr. Clifford Wirth and the Oil Drum, have, after three obdurate years, abandoned the concept it peaked in 2005, and have switched to 2008. I recently burned this myth (again... incendiary tone and language).

Switching peak picks is a long habit of the peak oil community: when it becomes blatantly obvious the consensus peak isn't panning out, one tosses it in the failed peak prophecy landfill, develops complete amnesia about it, refuse to learn anything from a single mistake, and yanks out another one. This is what happened with the previous peak picks of '93, 2000 and now 2005. It never ends.

The world is now in its 4th year since 2005. If oil had peaked that year, if global production is experiencing an irreversible 6.5% annual depletion rate, last year, crude production would have been below 70 mbpd.

 
At 4/20/2009 2:59 AM, Blogger OBloodyHell said...

> alternatives to raw mined materials are difficult if not impossible to find for many applications.

Copper, meet glass. He's taken over your old job in the telecom industry.

Patrick, you need to read up on Julian Simon.

 
At 4/20/2009 3:24 AM, Blogger OBloodyHell said...

> I would agree that extracting resources from the earth will not be getting cheaper.

And you would be wrong. And even if it does get expensive, then it becomes worthwhile to go after an asteroid and to the moon.

And out there -- it's raining soup.

'Course, that doesn't mean that the USA will be the ones with the buckets.

 
At 4/20/2009 3:29 AM, Blogger OBloodyHell said...

> they’re declaring 2008 as the new 2005."

That's ok, I'm counter-declaring that 1902 was the old 1935.

What?

It's got about as much attachment to reality as those bozos do:

2005: This Year!
2008: No, This Year!
2012: Wait, This Year!
2014: Definitely, This Year!
2018: Absolutely This Year!
2028: Positively, This Year!

Texas friggin' Sharpshooters, every one of 'em.

 
At 4/20/2009 8:31 AM, Blogger VangelV said...

"...The world is now in its 4th year since 2005. If oil had peaked that year, if global production is experiencing an irreversible 6.5% annual depletion rate, last year, crude production would have been below 70 mbpd."I think that you are very confused. First, no credible source has claimed that TOTAL petroleum and liquids production peaked in 2005. The claim is that the production of CONVENTIONAL OIL peaked in 2005. Today's production of conventional oil is lower than it was at the May 2005 peak and since then there has only been one month that has produced as much as the May 2005 figure.

Now you may want to claim that the single month proves that 2005 was not the peak but many people in the industry, who know the reporting system, do not buy that line of argument. They point out that the industry needed more than half a trillion dollars of new investment to try to keep production of conventional crude flat but could not manage it. That investment certainly did not prevent Daqing, Burgan, Cantarell or the North Sea fields from going into an irreversible decline. I mention these fields because Daqing, Burgan and Cantarell are among the world's biggest and most productive fields that have supplied quite a bit of the oil consumed over the past few decades.

The actual field by field data is staggering and is cause for alarm if you are worried about supply. Cantarell peaked at 2.1 million barrels per day in 2004 and is now down to less than 800K barrels. Burgan peaked in 2005 at around 2.2 mbpd and is now down to 1.7 mbpd of production and falling. The North Sea production is falling off a cliff and both Norway and the UK are looking at much less production over the next few years. And while there are smaller fields to be exploited there will be no investment until the price goes over the $80 per barrel price that is required for economic extraction.

Second, you are misrepresenting the oil drum's claim of a total peak in 2008 as a change in position. The oil analysts understand that there are unconventional sources of oil and that these were growing production. That means that there will be peaks at different time for each source category and that some categories will peak before the total peak.

That is exactly where we stand today. While additions from unconventional sources were making up for the lack of growth from conventional sources the low price environment has shut down the marginal unconventional projects. That means that we can take a look at the data and make the argument that 2008 was a peak for TOTAL crude production.

If you are a supply optimist, which you seem to be, you can argue that once prices head over $100 a barrel production might pick up again. While that might be possible it is doubtful. And even if it were possible, it destroys the claim that oil prices will stay in a nice manageable range.

Let me end this with a point that you also seem to have difficulty understanding. Every well has a decline rate. While field production increases in the early stages when new wells are drilled or enhanced recovery techniques are used once the field peaks the decline is irreversible and fighting it decreases the amount that can be ultimately pulled out of the ground. When people talk about depletion rates they are normally discussing the field depletion. And when the IEA reports a depletion rate it is discussing the average rate for existing fields. Usually the larger onshore fields have depletion rates that are lower than smaller onshore fields or offshore fields. The latest report shows production at existing fields is declining at a rate of around 6.5% per year. That means that to stay flat we need to invest in the developments of smaller fields and unconventional sources. As oil prices were rising investment was easy to justify but once the price of oil fell below the cost of production the projects were postponed, sold or cancelled.

That is where we stand now. The peak for conventional production is four years behind us and the data shows that the large conventional fields like Cantarell are in a very steep decline. Trillions of new investment will be needed to make up this lost production but the money will not be there as long as prices stay as low as they are. This means that the prudent investor has a great opportunity to dig around for bargains because the cash rich producers in safe areas will be able to pick up properties that will add to reserves and production at a much lower cost than relying on the drill bit. Of course, the demand destruction should keep prices weak until the supply curve falls a little more but that is an investment issue that has nothing to do with total supply. On that front you have clearly failed to convince and seem to be making up narratives to explain the price momentum that you are seeing. A smarter approach would be to simply look at the data and act rationally while you hedge your bets by holding assets taht should do very well in a total economic collapse.

 
At 4/20/2009 8:55 AM, Blogger Patrick said...

OBloodyHell,
Great analogy of a successful cheap substitute being found in copper wires being replaced by fiber optics (I'm assuming that's what you were talking about). However, that only eliminates copper used for telecom. It's still a huge component for power transmission and pretty much every type of generator/motor today. Yes, maybe we'll come up with some sort of Star Trek-like motor that doesn't use any copper at all. I honestly don't think anything like that is in the cards for the next 100 years if ever.

I wasn't trying to say that there are never substitutes, but for MANY things they probably won't be found in our lifetime. Also, I'll bet the glass used for making the fiber optic strands is made from high-purity silica which is a relatively difficult resource to find and also must be mined.

 
At 4/20/2009 9:15 AM, Blogger T Jaillet said...

Most of you are missing the point!

The reason oil will never hit $300+ prices for consistent periods of time is the fact that there are lots (yes, lots) of substitutes that exist today and will be invented in the future.

Diminishing reserves arguments assume a stagnant economy where no one invests in cheaper alternatives.

The same arguments hold true for metals. There is tons of research going on right now in ceramics and other technologies to substitute for many of the metals used today.

But, go on and scream the sky is falling if you like. We will NEVER run out of oil. It simply, won't be that important to our grandkids.

 
At 4/20/2009 10:24 AM, Blogger VangelV said...

"The reason oil will never hit $300+ prices for consistent periods of time is the fact that there are lots (yes, lots) of substitutes that exist today and will be invented in the future."

I assume that you are talking about real price rather than nominal. In nominal terms oil could very well hit $300 in the next year or two if the USD comes under pressure because of massive liquidity injections by the Fed.

But we should get to $300 in real terms because of the depletion problem. Not only would such a move be inevitable it would be necessary to stimulate the development of real substitutes and alternatives. Whether we like it or not our world depends on petroleum at this time and we will certainly be dependent on it for the next few decades. Fortunately, peak oil does not mean running out. It simply means rationing by price.

"Diminishing reserves arguments assume a stagnant economy where no one invests in cheaper alternatives."

No, it doesn't. The fact is that there aren't any cheaper alternatives than petroleum. Some oil can be produced for $3 a barrel. No alternative comes close to that level. The difficulty is that the marginal cost of oil is over $80 for most alternatives.

"The same arguments hold true for metals. There is tons of research going on right now in ceramics and other technologies to substitute for many of the metals used today."

Good luck on that dream. The issue again is cost. Ceramic engines may be great but not if you can only make them at $50,000 a pop.

For the record, I am not as worried about some base metals because I really believe that companies like Nautilus Minerals have a very good idea that has a great deal of promise.

"But, go on and scream the sky is falling if you like. We will NEVER run out of oil. It simply, won't be that important to our grandkids."

We won't run out of oil because prices will keep rising to limit demand. We will have to adjust to the new reality and figure out how to live in a world where oil costs more than the equivalent amount of milk, coffee or mineral water. That is not exactly a disaster.

 
At 4/20/2009 2:01 PM, Blogger Bloggin' Brewskie said...

"I think that you are very confused. First, no credible source has claimed that TOTAL petroleum and liquids production peaked in 2005. The claim is that the production of CONVENTIONAL OIL peaked in 2005. Today's production of conventional oil is lower than it was at the May 2005 peak and since then there has only been one month that has produced as much as the May 2005 figure."

If you paid attention to my previous comment, you'll see I WAS referring to crude. If crude production had peaked in 2005, and if it's in an irreversible annual decline-rate of 6.5% - like you say it is - crude production today would be sitting be sitting in the 60 mbpd range. When oil fields enter decline, it's a permanent descent, and no form of technology or investment can stop that - maybe slow decent, but never stop it. So, VangeIV, if global production has peaked, where’s the 6.5% annual decline-rate with crude?

The reason why crude production is lower today than in May of 2005 is because of cutbacks in production due to the slackened demand climate. OPEC has cut production from a record-high production of 32.83 mbpd last summer, to just under 28 mbpd in March. Also, if you read my previously mentioned blog post - the one where I indicate last year's oil glut and gave light on how much bigger it could have been - you'll see the reasons why production slacked off: drops in Non-OPEC production - due to coincidental drops by key members and hurricane IKE's influence - followed by OPEC cuts in response to falling oil prices. I also indicate non-OPEC production fully recovered by last December; therefore, if it wasn't for OPEC making its cuts, production levels would have resumed, and possibly have gone higher. Because oil prices fell, because we we're (and still are) in a glut, because of slackened demand, there's no reason to maintain that amount of production.

Again, when oil fields enter decline, it’s permanent; the fact oil production did go up last year is indicative we have not witnessed peak. If crude has been in a 6.5% annual decline-rate since 2005, the drop in production would have eaten through OPEC’s near 5 mbpd cuts.

"I assume that you are talking about real price rather than nominal. In nominal terms oil could very well hit $300 in the next year or two if the USD comes under pressure because of massive liquidity injections by the Fed."

I'm going to hold you to that.

"Second, you are misrepresenting the oil drum's claim of a total peak in 2008 as a change in position."

No, I'm wasn’t. Ace, the writer of the article, used incorrect production stats.: he obtained them from Wikipedia; mine were from the IEA and EIA. He listed his crude prodution at 72.75 when (it was over 74 mbpd according to the EIA); in fact, if you look at the graph, his 2005 peak is actually listed in the 2004 time-frame. Very typical of peakers: numbers have never been their strong suit.

"The actual field by field data is staggering and is cause for alarm if you are worried about supply. Cantarell peaked at 2.1 million barrels per day in 2004 and is now down to less than 800K barrels. Burgan peaked in 2005 at around 2.2 mbpd and is now down to 1.7 mbpd of production and falling."

If you recall from our last discussion, I listed a number of fields and oil-producing nations in decline, plus their respective peak year. What you mention isn't stuff I don't know already; this, however, is still not indicative of global decline. From this, I will make one mention: the U.S., despite being nearly 4 decades past peak, today produces 8 mbpd - only 1.5 mbpd less than its all-time peak of 1970. This makes it the world's 3rd largest producer, ahead of OPEC's 2nd largest producer, Iran, by 4 mbpd. That's credit to total liquids. Production isn't America's problem; it's consumption.

The majority of us in the debunker community accept the National Academy of Science’s stance on oil: it's a limited substance; therefore, it will someday peak. JD of Peak Oil Debunked - practically the king of debunkers - actually lists his peak prediction occurring late next decade.

What would be greatly appreciated, however, is if the peak oil community would cease using erroneous information to scare people with failed peak oil predictions - or at least learn from the mistakes they've made over the roughly past 100-years.

Again, oil field depletion is an irreversible process; the fact oil production went up last year is indicative we’re not in the midst of global peak. The past several years, many peakers have been predicting a descent of global production down to 60 mbpd by 2015. Until we see a steady and visible decline in global production, we can’t we we’ve witnessed peak.

 
At 4/20/2009 5:07 PM, Blogger VangelV said...

"If you paid attention to my previous comment, you'll see I WAS referring to crude."

You are missing the point again. Not all crude is equal and nobody credible has claimed that TOTAL reported petroleum liquid production peaked in 2005. The 2005 claim is only for crude produced from conventional sources. That is the cheap and easy to produce crude that we have relied on for most of our history. What you are confused about is the TOTAL crude production, which includes oil from unconventional sources, refinery gains and natural gas liquids.

"If crude production had peaked in 2005, and if it's in an irreversible annual decline-rate of 6.5% - like you say it is - crude production today would be sitting be sitting in the 60 mbpd range. When oil fields enter decline, it's a permanent descent, and no form of technology or investment can stop that - maybe slow decent, but never stop it. So, VangeIV, if global production has peaked, where’s the 6.5% annual decline-rate with crude?"

First of all, the 6.5% decline rate, which is the latest estimate from the IEA, is for existing fields. Obviously, when you invest hundreds of billions of dollars to develop new production you can offset some of this decline. The problem for your side is that all of that investment didn't increase the production of the most desirable form of crude and the increases came from unconventional sources.

The math on this is very simple and you will have no trouble following it. To produce oil you have to find it first and we have not found as much conventional oil as we have pulled out of the ground for more than two decades.

"The reason why crude production is lower today than in May of 2005 is because of cutbacks in production due to the slackened demand climate. OPEC has cut production from a record-high production of 32.83 mbpd last summer, to just under 28 mbpd in March. Also, if you read my previously mentioned blog post - the one where I indicate last year's oil glut and gave light on how much bigger it could have been - you'll see the reasons why production slacked off: drops in Non-OPEC production - due to coincidental drops by key members and hurricane IKE's influence - followed by OPEC cuts in response to falling oil prices. I also indicate non-OPEC production fully recovered by last December; therefore, if it wasn't for OPEC making its cuts, production levels would have resumed, and possibly have gone higher. Because oil prices fell, because we we're (and still are) in a glut, because of slackened demand, there's no reason to maintain that amount of production."

Your argument makes no sense because there was only one month since May 2005 that reached the production level that was reported then. While you can argue for lower demand today you certainly could not make that argument for most of 2006 or 2007. If there was so much supply capacity why wouldn't the producers pull more oil out of the ground and lose market share to unconventional sources?

I think that you are looking at the trend and making up a narrative to support what you see. But the data does not support your story.

******

"Again, when oil fields enter decline, it’s permanent; the fact oil production did go up last year is indicative we have not witnessed peak. If crude has been in a 6.5% annual decline-rate since 2005, the drop in production would have eaten through OPEC’s near 5 mbpd cuts."

Again, you are looking at apples thinking that they are oranges. You need to look at the breakdown of the data. When you do you find that NGLs, refinery gains and oil from unconventional sources has been responsible for the increased production. The simple and indisputible fact is that all of those hundreds of billions of dollars invested in conventional production did not yield a positive change in output. Of course, given that Burgan, Daqing and Cantarell are all in decline the peak is not a surprise. What is worse for you this time is that the much needed investment in Russia is not taking place and Russian production is about to decline very rapidly. If I lived in Europe I would certainly be worried about collapsing Russian natural gas production and about the fact that the North Sea production has fallen off a cliff.

""I assume that you are talking about real price rather than nominal. In nominal terms oil could very well hit $300 in the next year or two if the USD comes under pressure because of massive liquidity injections by the Fed."

I'm going to hold you to that."

I think that it is a very riskless statement. Mmy ten year old son asked my a while ago why things are so expensive. He noticed that (according to Johnny Cash) one could purchase a coke an burger for thirty thirty cents on the night that I Love Lucy debuted on TV.

"No, I'm wasn’t. Ace, the writer of the article, used incorrect production stats.: he obtained them from Wikipedia; mine were from the IEA and EIA. He listed his crude prodution at 72.75 when (it was over 74 mbpd according to the EIA); in fact, if you look at the graph, his 2005 peak is actually listed in the 2004 time-frame. Very typical of peakers: numbers have never been their strong suit."

The IEA monthly energy report showed the May 2005 production level at 74.3 mbpd. Even after hundreds of billions of investment and a big jump in demand production levels were stagnant and in December 2007 production stood at 73.5 mpbd. The fact that only one subsequent month has reported production at the May 2005 level or higher bodes ill for your argument.

I still think that you are confusing all of the different type of reporting methodologies and adding NGLs, refinery gains and unconventional production together with conventional production. If you do that and look at the total you are looking at a peak last year. The longer that this low price environment lasts the more likely that the peak in total production will never be surpassed. The reason is obvious. According to the IEA North Sea fields are declining at 13% per year. That is wonderful compared to Cantarell, the production in which declined by 18% in 2007. Add Daqing and Burgan and you are looking at a lot of barrels that have to be replaced but can't because discoveries peaked in the 1980s.

"If you recall from our last discussion, I listed a number of fields and oil-producing nations in decline, plus their respective peak year."

Correct. That is the argument for peak oil. When the major producers peak it is hard to keep production flat.

"What you mention isn't stuff I don't know already; this, however, is still not indicative of global decline."

But it is. When the producers of conventional oil, which is where the bulk of production comes from, peak the total peak is not far away, particularly when you have a low cost environment in which unconventional production is not economic.

"From this, I will make one mention: the U.S., despite being nearly 4 decades past peak, today produces 8 mbpd - only 1.5 mbpd less than its all-time peak of 1970."

First, you are comparing apples to oranges again. Alaska oil was not being produced in 1970 so you need to take that out of the picture. But even if you didn't and looked at a production curve you would see that the production curve falls nicely on Hubbert's curve just as it is predicted. But there is a big difference that you are conveniently ignoring. Most American fields did not use enhanced recovery techniques early in the game and have very receptive to the application of such methods. Sadly, many fields such as Cantarell have already used such methods. And many fields can't merely plug up the pipes when the water level gets to them because the wells are horizontal and when the water gets to them the entire flow is gone. That makes the decline much steeper as Yibil and Cantarell show.

"This makes it the world's 3rd largest producer, ahead of OPEC's 2nd largest producer, Iran, by 4 mbpd. That's credit to total liquids. Production isn't America's problem; it's consumption."

So? The US was blessed with the most oil of any nation and had producers which tried to optimize extraction by avoiding enhanced techniques until late in the game. If you look at the production curve it should be producing quite a bit of oil for some time. But it is still in decline and no amount of new investment can change that fact.

"The majority of us in the debunker community accept the National Academy of Science’s stance on oil: it's a limited substance; therefore, it will someday peak. JD of Peak Oil Debunked - practically the king of debunkers - actually lists his peak prediction occurring late next decade."

That is fine. You can live in your world of delusion where real data does not matter. But out here in the real world we realize that the big driver at this time isn't great supply fundamentals but collapsing demand.

"What would be greatly appreciated, however, is if the peak oil community would cease using erroneous information to scare people with failed peak oil predictions - or at least learn from the mistakes they've made over the roughly past 100-years"

There is nothing wrong with the information. You just have to learn the difference between conventional oil, natural gas liquids and refinery gains and don't confuse them with a total that includes all of them plus unconventional production.

"Again, oil field depletion is an irreversible process; the fact oil production went up last year is indicative we’re not in the midst of global peak. The past several years, many peakers have been predicting a descent of global production down to 60 mbpd by 2015. Until we see a steady and visible decline in global production, we can’t we we’ve witnessed peak."

You are missing the point again. Total production was going to go up until production from new fields and unconventional production could no longer offset the decline. We are already at that point and you will see supply declining. While it could rise a bit when demands picks up it is not likely to get much above last year's level if it can get there at all. Anyone with the data and grade 10 math can figure that out but only if s/he is objective.

 
At 4/20/2009 7:43 PM, Blogger Neil' said...

A few observations:
1. Some complain about environmental regs as if they were just a nuisance with no justification at all. Well, details are debatable but their whole point is, some result of doing X has an "undesirable" effect and that is worth dealing with in principle. If you're going to complain, you have to face it point-on-point and not just blow it off.
2. It is possible that we could find substitutes or more efficient ways to get X for ourselves. However, there is no logical reason to believe any such factors serve a perfectly compensatory function even if they exist. IOW, it isn't guaranteed that the offset process would keep the total cost the same for any given length of time. What if we went decades with much higher costs of X/equivalents, that could be disastrous. And "cost" should include all the true net effect on utility (including health effects, our valuation of open land, etc.)

Remember that economic theory can only genuinely predict things like prices given the supply and demand, it cannot prove that such and such amount of supply will have to appear.

The easy way to have a less-risky future is to keep population low and move to a low-consumption, relatively sustainable society.

 
At 4/20/2009 7:55 PM, Blogger VangelV said...

"1. Some complain about environmental regs as if they were just a nuisance with no justification at all. Well, details are debatable but their whole point is, some result of doing X has an "undesirable" effect and that is worth dealing with in principle. If you're going to complain, you have to face it point-on-point and not just blow it off."

In many cases the environmental regulations are not only a nuisance but a danger. We banned DDT on the basis of fake science and wound up with malaria epidemics and lots of dead people. We got rid of freon and wound up with more expensive and less efficient air conditioning and refrigeration without seeing a benefit. We banned benzene at a huge cost for no measurable benefit. We banned certain insecticides and have bedbug epidemics.

"2. It is possible that we could find substitutes or more efficient ways to get X for ourselves. However, there is no logical reason to believe any such factors serve a perfectly compensatory function even if they exist. IOW, it isn't guaranteed that the offset process would keep the total cost the same for any given length of time. What if we went decades with much higher costs of X/equivalents, that could be disastrous. And "cost" should include all the true net effect on utility (including health effects, our valuation of open land, etc.)"

I would not hold my breath waiting for a true accounting of the costs associated with alternative energies. From what I have seen the econuts have yet to admit what the data clearly shows; that in places like Germany and Denmark the massive investments in wind energy have not reduced CO2 and have not led to the closing of fossil fuel plants as promised.

"Remember that economic theory can only genuinely predict things like prices given the supply and demand, it cannot prove that such and such amount of supply will have to appear."

Well, the optimists can rightfully argue that price increases will stimulate the development of alternative sources but they can't do that and argue for low prices at the same time. The simple fact is that lower prices will only come from economic contraction and hardship, not from new supply.

"The easy way to have a less-risky future is to keep population low and move to a low-consumption, relatively sustainable society."

The trouble is that everyone wants the other guy to die off or not to have children. Haven't you noticed that some of the biggest proponents for sustainable living do not act as they tell others to? It is one thing for Gore to tell everyone else to have a low carbon footprint but another for him to walk the talk.

 
At 4/20/2009 8:22 PM, Blogger Bloggin' Brewskie said...

VangeIV,

"You are missing the point again. Not all crude is equal and nobody credible has claimed that TOTAL reported petroleum liquid production peaked in 2005. The 2005 claim is only for crude produced from conventional sources. That is the cheap and easy to produce crude that we have relied on for most of our history. What you are confused about is the TOTAL crude production, which includes oil from unconventional sources, refinery gains and natural gas liquids."

For the 2nd time, I was referring to crude, which hit nearly 75 mbpd last year. Oil from other sources, such as Canadian tar sands, natural gas condensates and such, are tossed into the "liquids" category. Crude+liquids, known as "total liquids," hit 88 mbpd. Check out the graphs from Oil Watch Monthly report (page 2 and 3).

Once more, if crude production did peak in 2005, the drop in production would have eaten through OPEC's recent production cuts (nearly 5 mbpd), and production today would be in the 60 mbpd (assuming a 6.5% annual decline-rate) - this would have eaten through the 12 mbpd cushion provided by "liquids."

Many peakers carry the belief that once the global economy recovers, demand will return along with the price pressures. While it's true demand will regain some strength, one needs to consider the near 5 mbpd production cuts by OPEC, spare capacity being added by Saudi Arabia, right now, we're sitting with a fairly sizable cushion. Let's consider the fall in demand: OECD appetite has fallen 4 mbpd between 2005-2008; I don't how much further it has fallen this year. Plus, the major finds I listed the last time, shale gas (the Hanesville shale is being drilled for a profit despite the cheap gas climate; the number of drilling rigs have fallen because of the low cost/gas glut environment, something I gave the heads up way before it occurred, way before the mainstream press caught on).

"First of all, the 6.5% decline rate, which is the latest estimate from the IEA, is for existing fields. Obviously, when you invest hundreds of billions of dollars to develop new production you can offset some of this decline."

Once oil fields begin passing out after secondary recovery methods (gas, steam, nitrogen, water injection), there's nothing that can be done to - at least with current technology - to cease the terminal decline. We can slow the descent a bit, but cannot stop it. We cannot make it go back up. Now if crude did peak in 2005 at a bit over 74 mbpd, a decline-rate of 6.5%, why was production not in the 60 mbpd range?

"Add Daqing and Burgan and you are looking at a lot of barrels that have to be replaced but can't because discoveries peaked in the 1980s."

Worldwide discoveries peaked in the 1960s. I'm giving you a free one.

"First, you are comparing apples to oranges again. Alaska oil was not being produced in 1970 so you need to take that out of the picture. But even if you didn't and looked at a production curve you would see that the production curve falls nicely on Hubbert's curve just as it is predicted."

Alaska production today stands under 700,000 bpd, offshore constitutes 1.2 mbpd of American production, natural gas condensates make up 3 mbpd. If you do the basic math, last year, lower 48 state production was around 3 mbpd.

"If there was so much supply capacity why wouldn't the producers pull more oil out of the ground and lose market share to unconventional sources?"

Why did they need to pull more oil out of the ground - so OPEC and Russia could hurt its finances even more? We’re oversupplied. The real question is: if crude is dropping 6.5% annually why hasn’t it shot threw the cushion other “liquids” provides. Anyway, the price of oil is set by other factors besides supply-and-demand fundamentals. As we discussed last time, manipulative speculation was the driving hand behind the $100+ oil. Also, if you read the blog post, if you follow my narrative of 2008 events using graphs, you'll see there was a glut and it could have been larger.

Another thing... read this bit of Russian oil exec wisdom.

"So? The US was blessed with the most oil of any nation and had producers which tried to optimize extraction by avoiding enhanced techniques until late in the game."

Both Saudi Arabia and Russia were blessed with more oil. America's oil production peaked in 1970 at 9.5 mbpd; Russia's peak was in the late '80s at 12.5 mbpd, Saudi Arabia hit a record production last year of 9.7 mbpd.

Still, in spite of the fact that America is nearly 4 decades past peak, that fact its only 1.5 mbpd off its all time production record isn't flabby. Too Americans won't give up SUVs and suburban living arrangements.

"Correct. That is the argument for peak oil. When the major producers peak it is hard to keep production flat."

No, it's a basic understanding of how things work: oil - like steel, gas, copper, etc. - is a limited substance, therefore, individual oil-producing wells and fields do eventually sputter out. Japan's oil production peaked in the 1930s, Germany's in the 1960s, Russia in the late 1980s, Britain in 1999Cantarell peaked in 2004.

I consider myself a realist. The difference between you and me is I carry a belief the human race will persist with its first-rate technological existence - unless, perhaps, WWIII breaks out.

"But it is. When the producers of conventional oil, which is where the bulk of production comes from, peak the total peak is not far away, particularly when you have a low cost environment in which unconventional production is not economic."

According to the production graphs - both crude and total liquids - production has not slipped down the 6.5% annual decline-rate slide. Once more, one knows peak in oil production occurs when production slides down an irreversible and OBVIOUS slope. Neither exist.

"According to the IEA North Sea fields are declining at 13% per year. That is wonderful compared to Cantarell, the production in which declined by 18% in 2007."

Both Cantarell and the North Sea are offshore oil producing regions - offshore fiels, when depleting, are much harder to maintain production than onshore.

"You are missing the point again. Total production was going to go up until production from new fields and unconventional production could no longer offset the decline. We are already at that point and you will see supply declining. While it could rise a bit when demands picks up it is not likely to get much above last year's level if it can get there at all. Anyone with the data and grade 10 math can figure that out but only if s/he is objective."

No, once oil production pasts peak, it doesn't go back up - we can, at best, slow the descent but we can't get it back up. Some fields may persist for decades past peak, but we can never reinvigorate production. The 2005 global peak argument has two flaws: first, production did go up; secondly, it doesn't fall down the irreversible and OBVIOUS slide. Anybody using 10th grade math can see we’re currently not in the midst of an irreversible decline with global oil production.

"There is nothing wrong with the information. You just have to learn the difference between conventional oil, natural gas liquids and refinery gains and don't confuse them with a total that includes all of them plus unconventional production."

I'm not confusing the information: conventional crude hit a record of near 75 mbpd last year, and total liquids production - conventional crude+liquids - coupled together at 88 mbpd.

"That is fine. You can live in your world of delusion where real data does not matter. But out here in the real world we realize that the big driver at this time isn't great supply fundamentals but collapsing demand."

According to a report by the IEA, production is expected to peak 2020. Yeah, you called it "garbage." Right now, it seems to be standing up better than the 2005 peak argument.

 
At 4/22/2009 10:11 PM, Blogger VangelV said...

"Once more, if crude production did peak in 2005, the drop in production would have eaten through OPEC's recent production cuts (nearly 5 mbpd), and production today would be in the 60 mbpd (assuming a 6.5% annual decline-rate) - this would have eaten through the 12 mbpd cushion provided by "liquids.""Only conventional crude peaked in 2005. Even with all of the massive investment in energy only one monthly report had conventional production surpassing May 2005. Given the nature of the reporting process that strongly suggests that the peak for conventional crude production came in 2005.

Total crude peaked last year as the price declines took out a great deal of marginal production and prevented investments to offset depletion.

"Many peakers carry the belief that once the global economy recovers, demand will return along with the price pressures."That is what economic recovery requires, more energy use.

"While it's true demand will regain some strength, one needs to consider the near 5 mbpd production cuts by OPEC, spare capacity being added by Saudi Arabia, right now, we're sitting with a fairly sizable cushion."The Saudis do not have 5 mbpd of spare capacity. Yes, they could pump up the pressure and get production higher but that won't happen as you think because the Saudis do not want to harm their fields. Their engineers have been advising that production be decreased for a number of years because they have technical issues that need to be resolved.

I think that you need to stop drinking the Saudi Kool-Aid. The Saudi fields are in big trouble already and their production will never get to the same level it reached in the 1980s when they weren't pumping millions of barrels of water to maintain pressure.

For the record, the Saudis had been promising to increase production to 12 mbpd by 2009 and could barely get over 10 mbpd even after spending billions. The bottom line is that the Saudi oil production has likely peaked and if they can develop 1 mbpd of spare capacity it would be a miracle.

"Let's consider the fall in demand: OECD appetite has fallen 4 mbpd between 2005-2008; I don't how much further it has fallen this year.LOL. The populations of many OPEC countries have exploded right along with demand. Some countries (Indonesia) are now importers and others (Mexico) will see exports collapse along with their production.

"Plus, the major finds I listed the last time, shale gas (the Hanesville shale is being drilled for a profit despite the cheap gas climate; the number of drilling rigs have fallen because of the low cost/gas glut environment, something I gave the heads up way before it occurred, way before the mainstream press caught on)."Chesapeake, which is the largest property owner and the most active driller in the Haynesville Shale play just announced that it will decrease activity because of the low prices. It can't make money at the current low price levels and neither can the other companies. Petrohawk Energy, which is a player in the region is losing money and has seen its shares fall by more than 50%. Goodrich Petroleum hs also seen its profits fall but made a small profit last quarter thanks to a derivative bet and $6+ price for its gas. The company is writing down reserves, reducing its capital spending and is looking at a loss going forward unless prices go up. If Haynesville Shale were profitable that would not be happening.

"Once oil fields begin passing out after secondary recovery methods (gas, steam, nitrogen, water injection), there's nothing that can be done to - at least with current technology - to cease the terminal decline. We can slow the descent a bit, but cannot stop it. We cannot make it go back up. Now if crude did peak in 2005 at a bit over 74 mbpd, a decline-rate of 6.5%, why was production not in the 60 mbpd range?"The decline rate is for existing fields. If you invest in new production and record drilling you can actually offset that decline for a while. Add refinery gains, NGLs and unconventional sources and you can actually increase total production for a while. What should worry people is the fact that the massive investment didn't produce a substantial increase in production and that the much needed investment to keep production from falling is not being made right now. (For an example look at how the shale and unconventional plays got killed.)

The unpleasant fact is that we have irreversible depletion for many of the world's prolific fields and there aren't others waiting in the wings to make up the lost production.

"Worldwide discoveries peaked in the 1960s. I'm giving you a free one."That is not what my data says. Look up some of the reports at Simmons and Company.

Alaska production today stands under 700,000 bpd, offshore constitutes 1.2 mbpd of American production, natural gas condensates make up 3 mbpd. If you do the basic math, last year, lower 48 state production was around 3 mbpd."Production in the lower 48 states is on the tail end of Hubbert's peak and still declining. So is Alaska for that matter. That supports my contention, not yours.

"Why did they need to pull more oil out of the ground - so OPEC and Russia could hurt its finances even more?

Because they were trying to take advantage of $100+ oil. The sad part was that they couldn't.

"We’re oversupplied."Only because demand has fallen. The supply capacity cannot satisfy the demand level reached last year.

"Anyway, the price of oil is set by other factors besides supply-and-demand fundamentals."

Only in the short term. Over time all that matters will be real supply and real demand.

"As we discussed last time, manipulative speculation was the driving hand behind the $100+ oil."

This is the popular opinion in some circles but it isn't supported by actual facts. Prices were rising for six years along with production increases. Speculation was the convenient explanation at $35, $50, $75, $90, $100, $125 and $140. If anything one can argue that speculation is actually responsible for the ridiculously low price that we see today. Oil is still cheaper than the equivalent volume of mineral water or coffee. But as long as there is deleveraging going on I expect the price to go down until physical reality takes over.

"Also, if you read the blog post, if you follow my narrative of 2008 events using graphs, you'll see there was a glut and it could have been larger."What really matters are reserves and supply capacity. Both suggest that energy is going to be a good bet forward. If or when energy will bottom is a question best left for the gamblers and speculators.

Both Saudi Arabia and Russia were blessed with more oil. America's oil production peaked in 1970 at 9.5 mbpd; Russia's peak was in the late '80s at 12.5 mbpd, Saudi Arabia hit a record production last year of 9.7 mbpd.The US has produced around 170 billion barrels in its history. Most of the oil was high quality light sweet crude. From what I recall Saudi Arabia and Russia have not produced as much from their own fields. The actual figure I remember for SA cumulative production was around 110 GB but I can't find my data so I may be off by 10 Gb or so.

As a Texan friend reminded me, people forget that the US used to be Saudi Arabia before there was a Saudi Arabia.

"Still, in spite of the fact that America is nearly 4 decades past peak, that fact its only 1.5 mbpd off its all time production record isn't flabby. Too Americans won't give up SUVs and suburban living arrangements."Texan oil production is down about 75% from its peak. The Lower 48 production is down around 50% from its peak. The Hubbert lineralization implies that there are only around 30 Gb in conventional reserves left to extract.

"No, it's a basic understanding of how things work: oil - like steel, gas, copper, etc. - is a limited substance, therefore, individual oil-producing wells and fields do eventually sputter out. Japan's oil production peaked in the 1930s, Germany's in the 1960s, Russia in the late 1980s, Britain in 1999 Cantarell peaked in 2004."It adds up. When enough producers peak so does global production. That has been the point that I have been making for quite some time now.

"I consider myself a realist. The difference between you and me is I carry a belief the human race will persist with its first-rate technological existence - unless, perhaps, WWIII breaks out."LOL. I have a great deal of confidence in human ingenuity. I just don't believe that we can get from here to where we need to be without a great deal of pain and a readjustment. (Which is the reason why I loaded up on gold and silver as a hedge.)

"According to the production graphs - both crude and total liquids - production has not slipped down the 6.5% annual decline-rate slide. Once more, one knows peak in oil production occurs when production slides down an irreversible and OBVIOUS slope. Neither exist."You misunderstand the IEA claim. The depletion is for existing fields. Obviously when we invest in new production, biodiesel and unconventional sources we can increase total production even when production in fields like Cantarell or the North Sea are collapsing.

"Both Cantarell and the North Sea are offshore oil producing regions - offshore fiels, when depleting, are much harder to maintain production than onshore."Not really. The North Sea fields are small and all small fields deplete more rapidly than larger ones. Cantarell has had a very effective nitrogen injection program that helped take out its oil faster. The same can happen on shore as well.

""You are missing the point again. Total production was going to go up until production from new fields and unconventional production could no longer offset the decline. We are already at that point and you will see supply declining. While it could rise a bit when demands picks up it is not likely to get much above last year's level if it can get there at all. Anyone with the data and grade 10 math can figure that out but only if s/he is objective

No, once oil production pasts peak, it doesn't go back up - we can, at best, slow the descent but we can't get it back up. Some fields may persist for decades past peak, but we can never reinvigorate production."
I am willing to accept the optimists argument that we can get some more production if we can use enhanced recovery methods to get a bit more oil and open up idled wells. But you are right to point out that such an approach will not yield much or that the possible increased production will not last. In case you missed it, that is my point.

"The 2005 global peak argument has two flaws: first, production did go up; secondly, it doesn't fall down the irreversible and OBVIOUS slide. Anybody using 10th grade math can see we’re currently not in the midst of an irreversible decline with global oil production."Once again you are missing the point. Nobody claimed that total production had peaked; only that conventional production peaked.

I'm not confusing the information: conventional crude hit a record of near 75 mbpd last year, and total liquids production - conventional crude+liquids - coupled together at 88 mbpd.Only one month after May 2005 reported conventional production that surpassed 74.3 mbpd and the next monthly number never came close. That suggest two things. One, the reported figure used bad data. Two, hundreds of billions of new investment were insufficient to permit sustained production above the May 2005 level even when oil prices were much higher and still rising.

According to a report by the IEA, production is expected to peak 2020."LOL. The IEA finally paid attention to Simmons and did a long overdue field by field analysis. When it did it increased the stated depletion rate by 50% over the previous one. And the 2020 guess depends on Saudi reserve claims being accurate. But the data shows that they probably aren't because SA increased its reported reserves without drilling at a time when production quotas were tied to reserves. All OPEC producers did and all have been reporting new discoveries that matched production exactly. You can choose to believe that nonsense but I won't.

"Yeah, you called it "garbage." Right now, it seems to be standing up better than the 2005 peak argument."There is no 2005 peak argument. You confuse the claim that conventional production peaked in 2005 with a peak in total production. I suggest reading more carefully instead of misinterpreting what is being written.

 
At 4/24/2009 1:59 PM, Blogger Bloggin' Brewskie said...

VangeIV,

I assumed you gave up. Hmmm... guess I can do another round.

"Only conventional crude peaked in 2005. Even with all of the massive investment in energy only one monthly report had conventional production surpassing May 2005. Given the nature of the reporting process that strongly suggests that the peak for conventional crude production came in 2005."

Once oil production peaks it can’t escape decline's gravity - no amount of investment can reverse this. The high oil prices of the late 1970s didn't increase lower-48 state production, even though the U.S. went on a drilling binge, and invested in better technology. Lower-48 state production has declined every year since peak. The fact global crude production went up last year is not indicative of global peak.

When you consider the events that happened last year, crude production could have been sustained. If you follow Oil Watch Monthly's graphs, you'll see the July's crude production, chart 3 (this EIA chart only lists 2008 crude production up to October; it says December 2008, but there's only 10 dots, and if you compare other EIA crude stats. - OPEC crude, # 10, and non-OPEC crude, #12 - you'll see the EIA only lists crude statistics up to October), you'll see the production drop stemmed from non-OPEC production as indicated on chart 12. Now I don't have non-OPEC crude stats. beyond October, but non-OPEC total liquids, which closely mimics crude production patterns, completely recovered to July levels by December.

OPEC crude production (chart 10) showed its best month in July. It trickled down slightly in August, a bit more in September when Saudi cut back on production, and completely bottomed out in response to oil prices in November (IEA stat.)

Examine total liquids in chart 7 (I'm not trying a sleight of hand with crude, its EIA listing only goes to October while liquids is listed to December. If you compare crude and total liquids production, you'll see liquids closely mimics crude production). You'll see production went from a high of 88 mbpd (IEA) in July to 86 mbpd in December. Examine OPEC crude production on chart 10 (no liquids). Production went from a high of near 33 mbpd in July to just under 31 mbpd in December - a close 2 mbpd shave.

So, by doing the math, you can see crude production could have been sustained at or (more likely) near the July high if OPEC hadn't cut out production, and if OPEC would have waited for Non-OPEC's December rival. Needless to say, it sounds confusing and I plan to do a post of this matter early next week on my blog - complete with the listed graphs I mentioned.

Oil Drum writer Robert Raiper - who I consider to be one of the better minds of the Drum, and a writer I do respect - was one of the earliest to comment, by using last year's production stats., that CRUDE did not peak in 2005. Dr. Clifford Wirth, who I consider an idiot, made the same argument in a December post - using CRUDE production stats., not total liquids.

The peak oil community is embracing 2008 as the new 2005, whether you like it or not. Yes, I understand your point that, if enough oil field production peaks, so will global production. The realization of oil as a finite substance is not a deep concept: anyone with at least a decent-double digit I.Q. can grasp this. My point has been that global oil production hasn't peaked. If had it, I wouldn't be arguing with you.

"The Saudis do not have 5 mbpd of spare capacity."

Here's the writing you quoted: "one needs to consider the near 5 mbpd production cuts by OPEC, spare capacity being added by Saudi Arabia." I didn't say Saudi Arabia had 5 mbpd spare capacity.

"I think that you need to stop drinking the Saudi Kool-Aid. The Saudi fields are in big trouble already and their production will never get to the same level it reached in the 1980s when they weren't pumping millions of barrels of water to maintain pressure."

Saudi Arabia hit record production last year. Water injection is standard operating procedure in the oil industry. Ghawar isn't young, but like Peyton Manning, it's not exactly old either - or to put it more correctly, it's aged gracefully.

"For the record, the Saudis had been promising to increase production to 12 mbpd by 2009 and could barely get over 10 mbpd even after spending billions. The bottom line is that the Saudi oil production has likely peaked and if they can develop 1 mbpd of spare capacity it would be a miracle."

By the END of 2009. It's adding Al Khurais this year; it's got two more giants on the way. These three monsters comprise the last of Saudi's giant oil fields; it's small fish after this.

"As a Texan friend reminded me, people forget that the US used to be Saudi Arabia before there was a Saudi Arabia... Texan oil production is down about 75% from its peak. The Lower 48 production is down around 50% from its peak. The Hubbert linearization implies that there are only around 30 Gb in conventional reserves left to extract."

On Saudi: of course, the U.S. led global oil production for more than a century. Pennsylvania alone was producing half the world's oil in the 1890s - and it was small change compared to CA and TX. On Texas and lower-48... as in the first spat: Texas production peaked in 1972 at 3.4 mbpd and was hitting over 900,000. Lower-48 crude was roughly 3 mbpd per last year - that's more than half. A couple of freebees.

"LOL. I have a great deal of confidence in human ingenuity. I just don't believe that we can get from here to where we need to be without a great deal of pain and a readjustment. (Which is the reason why I loaded up on gold and silver as a hedge.)"

I disagree the first part of this, but I'll say there's nothing wrong with loading up on gold and silver. I understand your desire to protect your family's security in today's economic weather. Nothing wrong with that.

"The North Sea fields are small and all small fields deplete more rapidly than larger ones."

The lower-48 states never had enormous fields, either; the largest field ever discovered was the East Texas Oil Field which consisted of 6 bb, followed by followed by the 3-something billion barrels of the Midway-Sunset Field. Alaska's Prudhoe Bay is the largest field in America's possession which consisted of 13 bb.

"Once again you are missing the point. Nobody claimed that total production had peaked; only that conventional production peaked."

Go back to the beginning of the spat: I mentioned last year saw record production, you said that was for liquids, I turned around with the crude figure. Again, crude's increase in production is indicative we're not in peak; if wasn't we wouldn't see production go up. There's no 6.5% decline.

Here's some of the words you used to bitch at me the first time around: "Where will the new oil that is needed to offset the 6.5% depletion rate going to come from... It seems to me that you are avoiding the issues again and just writing emotional narratives.Which fields will give us 5 mbpd this year? "How about next year? And the one after that? And so on, and so on...."

Well, I've used graphs to dispel the 6.5% notion and I've shown both crude and liquid production did not peak in 2005. The evidence is staring you in the face and you refuse to accept this fact as Robert Rapier and Clifford Wirth have.

"The IEA finally paid attention to Simmons and did a long overdue field by field analysis."

Matthew Simmons...hmmm. Har-har-har. Yeah, let's check out the track record on the "King of Peak..."

Predicted $120-$190 barrel of oil for 2005.

Predicted $10 gas for 2005.

A 2003 conversation he had with Mike Ruppert about the U.S. facing a natural gas crisis within "two-years."

And how 'bout some pearls of wisdom?

"There really is no roof on oil prices at this point... " - Sept. 22, 2008

"We don't have any evidences of glut, along with "No way did demand plunge." - Dec 19th, 2008

Or some of his most recent, where he states, "We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away -- it will be much sooner." He also adds that the "underlying rate of decline of the world's ageing oilfields is as much as 20 percent a year." WTF!? Cantarell's isn't croaking this fast!!

He continues to stick to his bet that oil will average $300 a barrel next year.

Now the IEA can be senile at staying up with current info., but compared to Matthew Simmons, it appears to be winning the contest of the uglies - meaning, it's the lesser ugly of the two contestants.

 
At 4/25/2009 11:01 AM, Blogger VangelV said...

So, by doing the math, you can see crude production could have been sustained at or (more likely) near the July high if OPEC hadn't cut out production, and if OPEC would have waited for Non-OPEC's December rival. Needless to say, it sounds confusing and I plan to do a post of this matter early next week on my blog - complete with the listed graphs I mentioned.No, conventional crude production can't be sustained without massive new investment and pumping up the pressure by injecting millions of barrels of sea water into ageing reservoirs that will lead to more of the oil to be left behind. Many producers will choose not to trade off higher production for less extraction later.

My comment stands. Even after seeing capital investments of several hundred billion only one month in the last forty was able to report a higher production level than May 2005. Subsequent months had lower production levels even though the price was still going up.

It is this point that destroys your argument. If we can't get production of conventional crude higher even though oil was over $100 a barrel there is no way to keep the decline from reversing. As I said, with Cantarell, Daqing and the North Sea fields in such steep decline you can't bring enough new oil production on line to get back to the previous level.

Your saviour has been unconventional production but that will only add supply if prices are high enough to justify investment. That means much higher prices once a recovery occurs.

I see your error as confusing demand destruction with a supply response. If you examine the data and think through the issue you will find that the data only supports one conclusion. Sadly that conclusion is that we are either very close to the peak or have passed it. Either way most people will lose.

 
At 4/26/2009 7:38 PM, Anonymous Cheap Cell Phone said...

it is apparent that the abundant gas and oil that are trapped in shale formations cannot be produced cheaply because the extremely low energy yield cannot offset all of the investments that are required to produce.

This says it all!

 
At 4/26/2009 9:54 PM, Blogger Bloggin' Brewskie said...

VangeIV,

The choice you make is your entitlement, your privilege and nobody else's - and nor should it be: just like life, it's a gift that solely belongs to you. The best of luck in the endeavor you choose.

And Mark… I’m surprised you didn’t tell either of us to act like adults (lol!).

 
At 4/27/2009 7:34 AM, Blogger VangelV said...

Cheap Cell Phone said...

it is apparent that the abundant gas and oil that are trapped in shale formations cannot be produced cheaply because the extremely low energy yield cannot offset all of the investments that are required to produce.

This says it all!
I am actually optimistic that some people will do very well from shale formations. But because you are correct about the low yield it will not help society if it wants more oil and gas than was previously available.

From what I see the issue right now is demand destruction. As long as demand falls off faster than the production downturn due to depletion prices will continue to decline. But when we see a recovery or see the fiat currencies under pressure because of the massive liquidity injections orchestrated by the CBs and governments the price of oil will go up substantially because there is no way to get production back up again to the previous levels.

 
At 4/28/2009 1:13 PM, Blogger VangelV said...

http://scurvon.blogspot.com/2009/04/mexican-oil.html

Mexico's oil production fell 7.8% in Q1 to 2.667 mln barrels per day (Reuters). Production was 2.891 mln bpd in Q1 of 2008. Cantarell produced 787k bpd in Q1, down 34% from 2008 when the field produced 1.195 mln bpd. Cantarell is no longer Mexico's largest producing field (!!!) having lost that title to the nearby Ku Maloob Zaap field which produced 797k bpd during Q1. The declines in production cut oil exports by 14.7% to 1.279 mln bpd.Cantarell was supposed to be a major oil field that was going to keep producing a great deal of oil years into the future. Its output is now collapsing and there is no hope of getting production levels to stabilize. What is killing the oil price is a combination of demand destruction and lots of activity on the short side of the paper markets. Any sign of recovery would cause prices to explode until the price increases by enough to squeeze out marginal users.

 
At 4/29/2009 2:17 PM, Blogger Bloggin' Brewskie said...

VangeIV,

Wow! You're still going at this? Man, I thought it was time to call a truce; good thing I checked up on things or you'd be left shouting at the wall...

Look, this has gone beyond reasonable proportions. Neither of us have been giving any ground, it’s become evident neither of us have anything to gain, we have better things to do and to be perfectly honest, we BOTH look completely ridiculous haggling this out. Besides... with Mark running nanny patrol with comments, I don't think he cares to baby-sit this discussion.

Hey... if it makes you feel any better, I'll say this: if you turn out right and your presumed reality comes to persist (I assume something comparable to the 19th century), I'll be confronted with a terrifying reality which I'll be woefully unprepared for - I'll be begging for potatoes with planting instructions etched into them!! On the other hand, if I’m right, I imagine you'll be very grateful. You may regret certain choices; but in regards to your family, I imagine you and - your wife, girlfriend, partner, ex, whatever… - will be very grateful that your offspring will not be confronted with a scary future predicted by many peakers (that, and you've stockpiled on gold which is win-win no matter what). So naturally, while I do presume I’m right, I’ll be the first to admit I have the most to lose if I’m not.

It’s fair to say time will be the ultimate arbitrator of who is right. God speed, Mr.

 
At 4/30/2009 1:20 PM, Blogger VangelV said...

Bloggin' Brewskie said...

VangeIV,

Wow! You're still going at this? Man, I thought it was time to call a truce; good thing I checked up on things or you'd be left shouting at the wall...

Look, this has gone beyond reasonable proportions. Neither of us have been giving any ground, it’s become evident neither of us have anything to gain, we have better things to do and to be perfectly honest, we BOTH look completely ridiculous haggling this out. Besides... with Mark running nanny patrol with comments, I don't think he cares to baby-sit this discussion.

Hey... if it makes you feel any better, I'll say this: if you turn out right and your presumed reality comes to persist (I assume something comparable to the 19th century), I'll be confronted with a terrifying reality which I'll be woefully unprepared for - I'll be begging for potatoes with planting instructions etched into them!! On the other hand, if I’m right, I imagine you'll be very grateful. You may regret certain choices; but in regards to your family, I imagine you and - your wife, girlfriend, partner, ex, whatever… - will be very grateful that your offspring will not be confronted with a scary future predicted by many peakers (that, and you've stockpiled on gold which is win-win no matter what). So naturally, while I do presume I’m right, I’ll be the first to admit I have the most to lose if I’m not.

It’s fair to say time will be the ultimate arbitrator of who is right. God speed, Mr.
This is not a personal argument. It is a disagreement about the facts. From what I see, you do not believe that peak production is a problem while I claim is that the only reason it isn't an issue is because the economic contraction has caused demand to fall.

What I can't get over is how people who keep worried about trivia (think about the panic caused by a 0.7C rise in temperatures since the Little Ice Age) ignore something as significant as the peak oil issue. Our way of life was built by access to very cheap fossil fuel energy and we are in no position to transition away from it without massive dislocations that will have dire consequences for many people.

The bottom line is that most energy producing countries have peaked and that it took about a trillion dollars of new investment just to keep production levels from 2005 to 2008 flat. No matter how the data is spun without massive new investment production levels will head down and that means that marginal demand has to be destroyed. That means massive price increases whenever there is a hint of real recovery. Sadly, that is a negative feedback loop that causes our standard of living to go down.

 

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