Friday, December 04, 2009

Cheap Oil is Here to Stay; Forget "Peak Oil," We Now Have "Peak Demand," We'll Never Run Out



CNN Money -- A growing number of experts are saying that oil prices will remain well below $100 a barrel as the economy remains fragile and efficiency measures kick in.

"The world will never run out of oil," Deutsche Bank analysts wrote in a recent research note, echoing the old logic that the Stone Age didn't end because the world ran out of stone. "If the oil age does end, it likely will be because we become more efficient and simply use less petroleum." It's this "becoming more efficient" idea that the Deutsche Bank analysts use to predict even lower oil prices in 2010 than now - an average of $65 a barrel next year compared to nearly $80 currently.

To get there, they employ a metric known as energy intensity, which basically measures the amount of oil used in relation to the size of the economy. The energy intensity of the U.S. economy has actually dropped by about 2% a year every year since the early 1980s (see updated chart above). In the next couple of years Deutsche Bank expects it to decline by around 3% as people buy more fuel efficient cars and respond in other ways to the high prices of 2004-2008 and as government conservation measures kick in.

"US oil demand may have already peaked," the note said. "There's so much spare capacity right now," said one analyst, noting that oil prices in the $70 range are still high enough to insure new supplies are being brought online. "It's very difficult to see prices much higher."

24 Comments:

At 12/04/2009 10:44 PM, Anonymous gettingrational said...

The mantra of a lot of oil companies is no longer "drill baby drill" but instead "simulate bay simulate". The SEC no longer requires drilling to prove oil reserves! Instead a distribution of possible hydrocarbons are run through a Monte Carlo Simulation.

The result is that oil companies can claim oil reserves by a probability distribution. Is it that simulations can give colorful graphics as proof of huge pools of oil? I won't give an opinion but will confess my confusion on the subject.

 
At 12/04/2009 10:54 PM, Blogger PeakTrader said...

Many assume the 1995-00 superbubble (more of a production than consumption boom) was not good for the economy in the long-run, and unaware there was another superbubble (more of a consumption than production boom) from 2002-07. However, both bubbles benefited the U.S. tremendously.

A third superbubble, from 2009-14, would've been more of a production boom, to correct global imbalances, e.g. through the market power of U.S. exports and rising real U.S. wages. However, the collapse of credit after Lehman and Obama's economic policies will likely create a "Lost Decade" instead.

 
At 12/04/2009 11:52 PM, Blogger Benjamin said...

This is an excellent post.
Also, thanks to some very smart guys in the natural gas industry, we now have a 100 years supply of NG in the USA, due to shale gas (and we just started on that--could find lots more). BTW, absolutely huge strikes of NG are being made globally, including the biggest well of all time in New Guinea.
Recent advancement in lithium batteries are astonishing. Between compressed natural gas vehicles (already common globally) and battery cars--who needs oil?
The world is generating new technologies at wondrous rates today--there are solid R&D tanks globally, and investment capital is in near permanent glut. Information girdles the globe in an instant, thanks to the web.
Asia will boom, Europe will do fin.
The USA may lag, sucked down by our extensive collection of rural subsidies (w/o federal subsidies, rural America would seriously depopulate), our gigantic military-parasite complex, and deficit spending galore.
Maybe Obama can start reducing the federal debt as a fraction of GDP. We will see. Not for several years at any rate.
Still, the global economy looks fine. Consider migrating to Asia. The future is there.

 
At 12/05/2009 1:01 AM, Blogger OA said...

"Cheap" is relative. It was in the $30's 12 months ago. $140 was clearly a ridiculous overshoot, but there's nothing really being done about demand. Solar and wind aren't going to displace oil.

People in the US can cut down from an SUV to a better mileage car, but in most of the developing world, they're going up from nothing to motorcycles or small cars. Doesn't matter that they're using more efficient vehicles, the demand jumps anyway.

China has a trillion more people than the US, so it doesn't take a big percentage of them going from the farm to the city to sustain demand.

Brazil and much of Asia are ahead in using alternatives, but those really work best for small cars and fleet vehicles like taxis.

Lower prices from here? Very possible. Fundamental change in demand? Not for a while.

 
At 12/05/2009 1:14 AM, Blogger montestruc said...

Minor problem with this statement. If they said energy, I would endorse it.

Oil has uses other than energy that are in some ways more important in the long run than energy. We can switch over to other sources of energy gradually as the cost of oil extraction gets higher. The gloom and doom crowd will be wrong as usual.

However, I expect that we will still be drilling for oil in 100-200 years or more, but not for burning, lubricants, chemical feedstock and the like will be the end use.

 
At 12/05/2009 3:48 AM, Blogger PeakTrader said...

OA, I agree with much of your statement. However, if "$140 was clearly a ridiculous overshoot," why isn't $30, in the depths of a deep recession, clearly a ridiculous undershoot? Global oil production over the past five years suggests we've reached peak oil. Yet, the population explosion and growth of developing economies will continue.

The efficiency gains on the U.S. production side were utilized on the consumption side. U.S. production became lighter, while U.S. consumption became larger. Of course, Obama's slow growth policies, shifting to smaller and fewer assets and goods, raising taxes, switching to expensive alternative energy, conservation, etc. will lower demand.

It should be noted, oil is concentrated in a few small regions, e.g the Middle East, Venezuela, the Gulf of Mexico (where hurricanes take place), etc. Also, even at $140 a barrel, oil is still a relatively cheap form of energy.

 
At 12/05/2009 5:23 AM, Blogger OA said...

PeakTrader said...
OA, I agree with much of your statement. However, if "$140 was clearly a ridiculous overshoot," why isn't $30, in the depths of a deep recession, clearly a ridiculous undershoot?


I omitted a few words. I meant to say $65 or $70 may be "cheap" but it was in the 30's a year ago. I do think $30's was a ridiculous undershoot. It hasn't seemed to be a deep recession as far as oil demand is concerned. I don't have good sources, but near as i can tell, global oil demand dropped mid year but was right back up into the end of last year. Not in the US of course, but we're not talking 10% down, closer to flat.

Production increased through the $100 prices so that there was a big glut when things hit the wall. But that was temporary as global demand came back up.

So I'm totally comfortable with the oil related holdings in my retirement accounts. Oil might dip a bit and even stay within a range, but long term, the demographics of the developing world are hard to overcome though efficiency.

 
At 12/05/2009 7:29 AM, Anonymous Lyle said...

The graph in a way raises the question of what the effects of a carbon tax would really be. One sees some of the effect of the price increase from $2.50/bbl in 1970 in the graph. Raise the price of energy more and more efficiency will appear. For one example of efficiency changes consider continuous casting of steel. It used to be steel came out of the furnace, and went into an ingot, that was then re-heated to roll. Today molten steel from the furnace goes into the caster, and then to the hot rolling plant with no re-heat. This reduces the energy intensity of steel making.

 
At 12/05/2009 11:31 AM, Blogger VangelV said...

This is just another example of delusional thinking. While there is little doubt that mankind will figure out a way to come up with viable alternatives (and no, wind, solar, ethanol are not viable) we will have a major problem between here and there as the implications of peak oil become evident.

I also would not be jumping up and down about shale gas yet. For that to be truly economic we need prices to be substantially higher than they are today and we need a better return on the total energy invested. We also have to examine the effect of shale production on water quality because if some of the chemicals that are used in the frac process make it into the drinking water supply we will have major economic damage that do a great deal of damage to human health and could render an entire area substantially poorer.

Then there is the issue of depletion of shale fields. Production declines for shale wells is extremely rapid and areas will lose ability to produce extremely quickly. This is the same problem that the operators of shallow gas had. While fields looked promising reality intervened and many companies found production levels and investment returns to be substantially less than what had been planned.

I would be very careful with any assumptions of peak demand unless you are willing to accept the idea of a major economic contraction that will be responsible for that fall in demand. But if one is willing to assume that the current economic malaise will eventually end you can't possibly believe that that energy picture is positive.

 
At 12/05/2009 1:15 PM, Anonymous Anonymous said...

Please note that the graph plots BTUs and that implies all sources of energy. Therefore, is the graph somewhat misleading in terms of the comments about oil in the article?

As already pointed out, it will cost more and more to produce and refine "new" oil given the depths where new fields have been found and given the quality of oil to be refined.

 
At 12/05/2009 2:59 PM, Blogger Mark J. Perry said...

Anonymous:

I have the data for just "Petroleum and Natural Gas per Dollar of Real GDP" and will update the chart later today. But the downward trend of energy per dollar of GDP won't change, and in fact the line will be even steeper I think with just petroleum and nat gas. In any case, look for an updated chart later.

 
At 12/05/2009 4:10 PM, Anonymous Dr Wonderland said...

It's amazing, I can find graphs to define everything and the graphs can never be wrong, I love this blog !!!!!!

 
At 12/05/2009 5:58 PM, Blogger PeakTrader said...

The article states "We now have peak demand." However, the EIA projects:

International Energy Outlook 2009

Release Date: May 27, 2009
Next Release Date: May 2010
World Energy Demand and Economic Outlook

"In the IEO2009 projections, total world consumption of marketed energy is projected to increase by 44 percent from 2006 to 2030. The largest projected increase in energy demand is for the non-OECD economies.

In the IEO2009 reference case, world energy consumption increases from 472 quadrillion Btu in 2006 to 552 quadrillion Btu in 2015 and 678 quadrillion Btu in 2030."

My comment: U.S. spending on expensive alternative energy makes oil cheaper for developing countries.

 
At 12/05/2009 9:18 PM, Anonymous Anonymous said...

No, we will never run out of oil, but the phase of cheap oil has already passed us. When you consider that the IEA says we will need to bring online the equivalent of 4 Saudi Arabias by 2030 just to maintain current production, or Exxon's recent $100 a barrel bid to the Ghana government to gain a quarter access to the Jubilee Oil Field (which doesn’t even cover the cost to develop the field), I think you get a good idea of where things are likely to head.

The other dilemma the US oil industry faces in the upcoming years will be the exodus of skilled workers. It’s estimated that at least 70% of US petroleum geologists will be retiring in the next ten years. There were only 1,700 students studying to become petroleum geologists in 2004 (in contrast, the US adds 40,000 new lawyers each year).

When one considers these issues, it’s not hard to see we have a problem.

- Daniel

 
At 12/06/2009 2:43 AM, Blogger PeakTrader said...

I believe, the comments about price is an excellent point. Much of the peak demand of BTUs in the U.S. is the result of higher prices and conservation, although Dr Perry's data also reflect enormous efficiency gains. It seems, there will be a combination of higher prices and further efficiency gains, in the future, including for oil, which is a depletable resource (much more than rocks).

 
At 12/06/2009 6:12 AM, Blogger PeakTrader said...

Historical Crude Oil Prices by InflationData.com shows oil fell to an average of $11.91 a barrel in 1998, which helps explain the U.S. production boom. Also, the "Peace Dividend" was another significant factor.

 
At 12/06/2009 12:23 PM, Blogger Bloggin' Brewskie said...

gettingrational,

To help answer your question, oil reserves typically get revised over years as oil companies gain a better understanding of geological formations, thus gain a better understanding of true oil reserves, or are able to unlock additional petroleum through better technology.

One good example is the US. Proven US oil reserves were 27.585 bb in 1982. From 1982 to 2006, we managed to produce 56.9 bb, but our listed reserves were only drawn down by roughly 6 bb.

Modern technology typically allows companies to extract roughly 30% of oil that's in place; in 1980 that would have been fifteen or twenty percent.

 
At 12/06/2009 12:24 PM, Blogger Bloggin' Brewskie said...

Ben "Pass the Beano" Cole,

Good to see you're still around, good to see you're still causing trouble. Sorry I haven't been updating my blog - I've been swamped (but in a good way)!

Don't lost your enthusiasm.

 
At 12/06/2009 12:25 PM, Blogger Bloggin' Brewskie said...

Sorry, "lose."

 
At 12/06/2009 4:29 PM, Anonymous Oilman/Farmer said...

As a 35 year oilwell drilling/servicing veteran and a western Canadian farmer I would have to say most comments are dreams. Baker Hughes keeps a running total of the rigs drilling and servicing, 2/5 ths of the rigs on earth are down, the Canadian oilfeild is in very bad shape. Yes production is increasing from current wells out of desperation, the effect is to "cone" the wells quicker and turn them in to water wells. Oil companies must make their bank payments just like anyone else. Talisman Energy cut 200 jobs last week. The long and short of the above is that production will drop until the price goes up. The lag time from shutting the drilling down to a change in production is 1 to 2 years. Electric cars pose many problems which the dreamers overlook. When the car is 5 years old and needs new batteries to the tune of $10,000 the car will not seem so good, as a farmer I spend at least $1000/year on batteries just to start equipment! In cold climate there is no way to keep the windows defogged unless you can hold your breath while driving, turning electricity into heat will quickly kill the batteries, especially in cold weather. The US must fix its balance of trade problem which will get worse as the oil price inceases. The US exports alot of subsidized agricultural products, in other words buy high and sell low. Now as a Western Canadian farmer I can tell you that I can produce Canola oil for the same price as the Western Canadian oil industry can produce petroleum oil. The cost of producing Canola oil is decreasing, while the cost of producing petroleum oil is increasing. In the year 1900 most energy came from a farmers feild, this will again be the case by the year 2100.

 
At 12/06/2009 5:27 PM, Anonymous Lyle said...

An interesting point is that most oil found is not produced there is a figure called original oil in place that describes what was there. You do good in general if you get 20-30% of the original oil in place. A lot of research has gone into enhanced oil recovery and this is why the reservoir engineer starts at 100k a year. Having spent a career in Oil if you can wring a 10-15% increased recovery it prolongs the production a long time.
I agree that economics affect how much this can be done, but if oil gets short the price rises, Goldman Sacks permitting, and more effort can be expending on Enhanced recovery.
Note the first comment is a misrepresentation of the facts in this case see http://www.bracewellgiuliani.com/index.cfm/fa/news.advisory/item/10deefde-4eb8-40ff-8dac-74aaee88ebed/SEC_Adopts_Modernized_Oil_and_Gas_Reporting_Requirements.cfm for details. You can report probable reserves now, and also may use any reliable technology to estimate them. The new rules are essentially those suggested by the Society of Petroleum Engineers who are the experts in this matter.

 
At 12/06/2009 8:42 PM, Blogger juandos said...

Billions Worth Of Untapped Gas Under Northeastern States (UNG)

Devon Energy’s Asset Sale May Draw China’s Interest

The sale, which the company estimates could generate after-tax proceeds of $4.5 billion to $7.5 billion, would be one of the largest sales in the Gulf of Mexico in recent history and could draw some major bidders with deep pockets, ranging from the major oil companies to foreign competitors, including the Chinese...

 
At 12/06/2009 10:00 PM, Blogger VangelV said...

Modern technology typically allows companies to extract roughly 30% of oil that's in place; in 1980 that would have been fifteen or twenty percent.

The problem is that we have already used technology to squeeze out most of the oil that could be gotten out of the old reservoirs around the world. That presents us with a huge problem; massive depletion rates like what we saw in Yibal and are now seeing in Cantarell and the North Sea fields.

 
At 12/07/2009 2:17 PM, Blogger Bloggin' Brewskie said...

VangeIV,

Nice to see you've rolled around again. Sorry, I'm not interested in having anymore lengthy debates with you, so you're going to have to find a new sparring partner.

 

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