Friday, April 08, 2011

Rising Supply, Advances in Drilling Technology and Conservation Will Counteract Rising Oil Prices

1. Basic economic theory tells us that one of the predictable consequences of resources becoming more expensive is that higher prices will stimulate discovery, exploration and greater production on the supply side. (Update: See "Peak Idiocy" here for a review of ECN 101 regarding energy prices.) And that's exactly what we're seeing now in Texas for oil and gas, according to today's WSJ article "Chevron Rekindles Old Texas Flame: High Oil Prices, New Technologies Once Again Make the Permian Basin a Popular Spot for Drilling," here's an excerpt:

"Climbing oil prices are making the aging oil fields of Texas's Permian Basin look attractive again to some big petroleum companies. Chevron Corp. has pumped oil from this well-plowed area of west Texas and New Mexico since 1925. But in recent decades, as production in the area declined, Chevron and other companies used it primarily as a lab for oil-extraction techniques that could be employed in larger projects elsewhere.

This year, Chevron, the second-largest U.S. oil company by market value after Exxon Mobil Corp., plans to boost investment to $600 million in the Permian Basin, 32% more than a year earlier, and drill twice as many wells as it did in 2010 in the area. Its goal is to squeeze more oil out of these aging fields at a time when commodity-oil prices have risen to over $100 a barrel—levels not seen since summer of 2008—and access to oil in the Gulf of Mexico and lucrative foreign fields has become more of a challenge. The company is also seeking to employ new technologies only recently available to unlock significant amounts of Permian crude that were hard to reach before.

The revival of the Permian Basin is also driven by the widespread use of relatively new technologies such as hydraulic fracturing (see diagram above), which involves injecting a mixture of water, sand and chemicals underground at high pressures to release oil from hydrocarbon deposits. In recent years, this and other technologies have unlocked shale oil and gas that wasn't previously accessible, leading to a boom of new wells across the country. Now they are being adapted and used to boost production from mature oil fields like the ones in the Permian Basin. Chevron and others are also planning to apply the techniques in previously unexplored shale areas of the basin."

2. And as the new hydraulic fracturing and horizontal drilling revolutionize the oil and gas industries, that new technology keeps getting better and better.  One example is the new QuikFRAC system, which is a "set of tools capable of simultaneously stimulating multiple stages with a single fracture treatment (batch fracturing)."  If you watch this video, you'll see that the main implication of this new QuickFRAC technology is that it can pump three times as much oil in a given time period compared to conventional fracking methods, and therefore reduces the time spent drilling by two-thirds. 

Bottom Line: Due to: a) increased oil production in the U.S. and around the world and b) advanced drilling technologies on the supply side, along with c) increased conservation on the demand side, will all counteract and put some limits to how high oil and gas prices will rise.

Update: Another factor that will moderate rising oil/gas prices is the substitution effect of switching to other currently available alternative energy sources like natural gas, along with the increased incentive to develop new, alternative energy sources.     

79 Comments:

At 4/08/2011 2:50 PM, Blogger Benjamin said...

Wonderful stuff.

This is why we need to decrease the size of our public and military sectors, and increase the size of our private sector.

The private sectpr creates jobs and wealth.

In large part, the public and military sectors are parasites.

 
At 4/08/2011 2:54 PM, Blogger morganovich said...

"will all counteract and put some limits to how high oil and gas prices will rise."

sure, but the real world differs from economic theory in a meaningful way:

there is no immediate, costless entry.

it's going to take years for those forces to have meaningful effect.

there is no question that high price will increase exploration and production eventually (at least in the US), but it's going to take a long time.

further, oil is a global commodity. much of its reserves and production are controlled by state owned enterprises. they do not respond as private ones do.

they are mostly being milked to fund welfare states. they chronically under-invest, which is why so many are seeing declining production.

that large part of the market that will not respond to higher prices with more production/exploration but rather with more government spending will attenuate the effect you describe.

 
At 4/08/2011 2:55 PM, Blogger Monkeesfan said...

Benjamin, the military sector does the one job government is supposed to do. It's the rest of the public sector that is parasitical.

 
At 4/08/2011 3:45 PM, Blogger Steve said...

@Monkeesfan: ah, yes, the ol' "Gov't spending on food stamps in a recession is bad, while gov't spending on advanced fighters and stealth destroyers during our wars against AK-47s is good." Makes sense to me.

 
At 4/08/2011 3:54 PM, Blogger Benjamin said...

As a fellow Monkees fan, I salute you.

But.

Classical economists (such as Milton Friedman) consider militaries to be the prime example of parasitic government.

If a government builds a bridge, rural phone system, a subsidzed dam for agriculture use, or keeps the Post Office servicing rural areas etc, there is waste in these functions--but some economic returns. They are not total losses.

Pouring money into militaries yields no economic returns. It is like hiring 2 million men to go into the Arizona desert for a year, build bridges to nowhere, and then blow them up. And do the same thing next year.

A military is a necessary expense, that must be kept to the bare minimum.

Some, such as Max Boot, the hawk at Foreign Affairs, have advocated an American Foreign Legion to hold down costs.

I prefer a new Navy of only submarines, and other radical reductions to eventually bring down military, VA, and military pensions to 1 percent of GDP, alongside total elimination of federal departments such as HUD, Education, USDA, and Commerce.

A military can be mobilized if we ever face bona fide military threats, and start fresh would wipe away the inevitable ossification that strangles all federal agencies.

But, after clear and present danger recedes, we must always aggressively demobilize, or we create a whole dependent class on the federal government.

 
At 4/08/2011 3:59 PM, Blogger Benjamin said...

Morgan Frank-

Not yet, but get ready to short oil somewhere along here. At $100 a barrel, all sorts of development, alternatives and conservation measures make huge sense.

I totally agree with you that thug states control the bulk of the world's crude oil. Venezuela, Saudi Arabia (George Bush's pals), Iran, Nigeria, Russia, Mexico--thug states all, where contract law or human rights is a joke.

The monkey-thug states are following a very bad business model: Scare your customers with repeated price spikes and shortages, and act thuggishly.

Soon, thug states will be relegated to the dustbin of history. We will pass them by with better technologies, developed by our private sector.

The US could eliminate imports within 10 years, while raising living standards and becoming cleaner. It's called unlimited supplies of natural gas.

And, in 10 years, lithium batteries will be very competitive, if current improvement rates hold.

 
At 4/08/2011 4:12 PM, Blogger juandos said...

"ah, yes, the ol' "Gov't spending on food stamps in a recession is bad, while gov't spending on advanced fighters and stealth destroyers during our wars against AK-47s is good." Makes sense to me"...

Well of course it does to a liberal...

Liberals are always willing and ready to waste extorted tax dollars on societal debris instead of wanting the country defended...

BTW where does it state in the Constitution that I should have some of what I earned stolen from me so loser can eat and not pay for it?

Trust me, its much better sense to shoot at an AK-47 weilding clown from a fast mover or a stealth destroyer than from the ground with just another rifle...

 
At 4/08/2011 4:15 PM, Blogger juandos said...

Thanks pseudo benny for your usual, factless, fecal filled, waste of bandwidth...

 
At 4/08/2011 4:36 PM, Blogger Che is dead said...

The QuickFRAC technology is incredible. Shhhh, no one tell "VangeIV", he's busy searching all of his "peak oil" sites for explanations as to how none of this will work and why all of these wells will be unprofitable and have to be abandoned.

 
At 4/08/2011 4:44 PM, Blogger AIG said...

Benjamin... seriously...is it so difficult for you to keep on topic for once? When you keep posting the same thing over and over in every unrelated topic, thats called trolling.

You allow extreme economic ignorance to seep through in such views. Not that I want to encourage the continuation of such a ridiculous and unrelated topic, but DO YOU realize that a modern submarine is about the most technically advanced and expensive piece of hardware in any nation's arsenal? You do realize that it is the culmination of decades of research and decades of experimentation funded through trillions of dollars...that results in a modern USN submarine of today?

How can a...submarine that costs 2 billion a pop...and which exists solely as the byproduct of a massive military complex and a massive military need...be an example of "minimum" military expenditures and scope? If this isn't economic ignorance, what is? And what will the defense fleet 50 years into the future be build off, if we eliminate the technical capacity and need, today?

It is as ignorant as Leftists saying, lets take all the rich people's money today to pay for our spending. And then what happens?

Now stop playing video games, and stop talking about this topic in EVERY post.

 
At 4/08/2011 4:46 PM, Blogger AIG said...

"Shhhh, no one tell "VangeIV","

Nonsense! He has talked to a Chinese analyst once while on a visit to Shanghai, and he said...oh nevermind!

 
At 4/08/2011 5:01 PM, Blogger Rufus II said...

Good Lord; The Waves are washing over the ship in the thousands of tons, and Chevron is baling with a teaspoon.

The pip has popped, kiddos.

Crude + Condensate Production has been declining since 2005, and China/India/Etc are increasing demand by a couple of million barrels/yr, now.

On top of that, the "exporting" countries are rapidly increasing their consumption.

Gasoline prices will continue to rise until we fall back into recession. December, at the latest.

 
At 4/08/2011 5:13 PM, Blogger rjs said...

that must explain saudi arabia's $100 billion investment in solar energy... http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=acLBCrDOVw4A

 
At 4/08/2011 5:50 PM, Blogger Ron H. said...

Benji

"Hey hey, we're the Monkees/You know we love to please/A manufactured image/With no philosophies."

You understand, don't you, that the Monkees were not originally a band, but individuals cast for a TV series. Sort of like that artificial creation, 'The Backstreet Boys'. Initially they didn't write their own material, or play all the instruments in their songs. They had a few catchy little tunes, but were easily forgettable in light of the abundance of actual musical talent around at that time.

 
At 4/08/2011 6:47 PM, Blogger aorod said...

Don't blame the Monkees...It was Don Kirchner's idea. They wanted to play, Kirchner did not want them to.

 
At 4/08/2011 6:47 PM, Blogger aorod said...

The EPA will shut down this oil drilling nonsense.

 
At 4/08/2011 7:31 PM, Blogger Benjamin said...

Yes, the Monkees were the Milli Vanilli of their era.

 
At 4/08/2011 8:39 PM, Blogger steve said...

Not a bad article, considering the trickle down baloney you usually spout.

How does the environmental damage of fracting enter into this equation? Here in PA people are lighting the water from their faucets on fire, in areas adjacent to fracking

I guess tuckus licking the Koch Bros. must be more profitable than teaching in Michigan, professor. Than again, I guess things are better in Washington DC than Michigan after the free mkt. policies you spout caused the financial crisis and turned Detroit into a ghost town.

Hopefully, the price of oil will come down.

 
At 4/08/2011 8:39 PM, Blogger Sean said...

Yes, but since the Monkees had songs written by Neil Diamond, some people *still* know their names. Not a bad gig if you can get it.

 
At 4/08/2011 10:01 PM, Blogger VangelV said...

What a bunch of crap this is.

First a bit of history. We have been drilling and finding oil for more than 100 years. The easy oil was developed very early and each subsequent increase in technology made more and more oil accessible to us. As some advances were adopted they allowed us to increase production but at a cost of leaving some oil behind water sweeps used to increase pressures. While some of the trapped oil can be developed it can only happen at very low production rates at a substantial marginal cost. With most of the easy to develop oil already having been discovered and brought into production what is left is more expensive and harder to bring to production. It will require huge increases in price to justify.

Next a bit of theory. First, basic economic theory does not tell us what is claimed above. If you have a limited resource seeing the price increase does not mean more production. In fact, it may mean a lot less as strained fields are allowed to produce at a lower pace in order to maximize ultimate recovery amounts. Why would anyone spend a huge amount on increasing reservoir pressures and trapping oil behind if pressures can be kept to manageable levels that will allow a lot more oil to be extracted? After all, when prices are rising the accounting works in the favour of those that see the market value of their reserves go up.

And while new technology can help us extract more out of old fields it cannot offset the depletion of more than 6% per year. We now need close to 5 million bpd of new production to offset the decline from older fields. Only someone ignorant of the energy sector and mathematically challenged can claim that the minor gains can do anything to offset depletion from aging fields for very long. The simple fact is that with Gulf oil production in rapid decline and no new drilling we should see the new production that is coming on-line over then next few months get offset by rapid declines in existing fields.

If someone wants to make some money it is better to avoid the very marginal plays and to concentrate on much cheaper, more promising alternatives elsewhere where real gains await patient investors who take a more realistic view of what can and can't happen over the short to medium term.

 
At 4/08/2011 10:03 PM, Blogger VangelV said...

it's going to take years for those forces to have meaningful effect.

But each year the existing fields experience a depletion of more than 6%. That means that we need 5 million bpd of new production just to keep even. Do you see any of that happening on the basis of the article that was referenced?

 
At 4/08/2011 10:04 PM, Blogger VangelV said...

Not yet, but get ready to short oil somewhere along here. At $100 a barrel, all sorts of development, alternatives and conservation measures make huge sense.

If you expect a decline it means that you are predicting a major contraction in demand. For that to happen you need an economic collapse of the type that we experienced in 2008. That does not fit with your prediction of a booming economy and stock markets.

 
At 4/08/2011 10:37 PM, Blogger StVIS said...

"Next a bit of theory. First, basic economic theory does not tell us what is claimed above. If you have a limited resource seeing the price increase does not mean more production."

I think Julian Simon remarked on this. He asserted higher prices on a commodity would result in one of two things: higher and suitable extraction of the commodity would pursue, or if extraction failed to generate desired supply, substitutes would be found.

I'm optimistic proper substitutes will be found/developed in the long run, perhaps after decades, but the years ahead look pessimistic. Even immediate workable substitutes look like band-aid treatments to cancer.

 
At 4/08/2011 11:05 PM, Blogger VangelV said...

I think Julian Simon remarked on this. He asserted higher prices on a commodity would result in one of two things: higher and suitable extraction of the commodity would pursue, or if extraction failed to generate desired supply, substitutes would be found.

A substitute will have to be found because we will hit peak production. But that is not what this thread is about. It claims that the solution will come from the supply side without offering any evidence that the changes can offset the known depletion rates. All I am saying is that there hasn't been a supply side response yet even though oil went from the $30s to over $100. (The short crash came because of a collapse in demand, not supply responses.)

Think of the whale oil shortage in the 19th century. The market did not create more oil. It found a substitute. That is what will have to happen but before it does we will see a lot of pain for a world that has no plan B at this point in time.

I'm optimistic proper substitutes will be found/developed in the long run, perhaps after decades, but the years ahead look pessimistic. Even immediate workable substitutes look like band-aid treatments to cancer.

I believe that there will be a short term problem as well. To get oil prices down you need an economic contraction and a destruction of demand. For those that trade, there could be a technical reason to see a pullback. But there is no fundamental reason to think that the problem has been solved.

 
At 4/08/2011 11:47 PM, Blogger StVIS said...

"A substitute will have to be found because we will hit peak production. But that is not what this thread is about. It claims that the solution will come from the supply side without offering any evidence that the changes can offset the known depletion rates."

Unfortunately, it seems, even so-called laissez-faire adherents interpret Julian's message in that high prices will generate desired production, from limited quantities of commodities, for lengths of periods bordering on fantasy.

But then again, maybe a nut like Sigmund Freud had this aspect of human nature nailed: People can only deal with so much reality .

 
At 4/09/2011 3:02 AM, Blogger Ron H. said...

"Yes, but since the Monkees had songs written by Neil Diamond, some people *still* know their names. Not a bad gig if you can get it."

You've convinced me. Now I'm a believer.

 
At 4/09/2011 4:49 AM, Blogger juandos said...

"Than again, I guess things are better in Washington DC than Michigan after the free mkt. policies you spout caused the financial crisis and turned Detroit into a ghost town"...

Yet another victim of a public education?

Are You Smarter Than a Fifth Grader? - Self-identified liberals and Democrats do badly on questions of basic economics

 
At 4/09/2011 10:49 AM, Blogger Che is dead said...

"If you expect a decline it means that you are predicting a major contraction in demand."

No, not necessarily. A moderate increase in interest rates and a corresponding increase in the value of the dollar could bring down prices.

 
At 4/09/2011 10:50 AM, Blogger Buddy R Pacifico said...

Oil companies have reserves that are proved, probable and possible. The chance of proved reserves being recoverable are 90% or better; probable, 50% or better and possible being less then 50%.

Many have wondered why Exxon has not increased its oil reserves much. Maybe it is because possible reserves are now becoming probable or even proven with new technology.

A very good primer on petroleum recovery is short paper.

 
At 4/09/2011 11:11 AM, Blogger Benjamin said...

Vange-

Read "Limits to Growth"--many of the arguments you cite were cited in that compelling book--a book so compelling I believed it, as a grad student in the late 1970s. We hit $45 a barrel back then, and $100 a barrel was imminent. I thought fervently. Commercially extractable oil would disappear by year 2000, I believed with all my heart and mind.

Of course, the next 20 years were marked by both economic growth and falling oil prices.

There are a ton of downsides for oil, technological, economic and political.

Politically, for all we know, both Venezuela and Iran could "flip" in the next five years, and become wonderful places to export oil from again. Iraq is a toss-up, but they forecast 12 mbd. You cannot believe anything Saudi Arabia says, but they said they would go to 12 mbd and they have. They have enormous deposits of heavy oil they have never even tapped--why bother?

Economically speaking, conservation measures easily allow growth and less oil use--Europe and Japan have been using less, not more, crude oil for decades (annual consumption falling every year) and have obtained higher, and much higher, living standards along the way.

Natural gas also easily substitutes for oil, and we have gobs of the stuff for generations. BTW, check out cngvehicles.net. Thus guy in Oklahoma will sell you a (used) CNG car or truck off his lot for $10k--today. Now. Not a fantasy, not a theory. In Los Angeles, I have seen three CNG filling stations, and I could commute today by CNG. All city busses are CNG here.

I concur with you that government is much of the problem; both foreign thug states that control oil fields, and parasitic public and military agencies of the West.

But, through history no government has been perfect, throughout history we only range from mediocre to piss-poor, and we are in a medicore phase now.

BTW, only 25 years in the USA ago phone rates and services were regulated, airline fares, passbook deposits (no money market funds), even stock trading commissions (Wall Street, btw, fought like tigers against free-market trading for stocks). Back the the FCC tightly controlled access to TV media broadcasting; now you have a million cable channels and the Internet. So, on a national level, we have de-regged several industries.

I expect a cleaner and more-prosperous future.

 
At 4/09/2011 11:21 AM, Blogger Che is dead said...

"With most of the easy to develop oil already having been discovered and brought into production what is left is more expensive and harder to bring to production. It will require huge increases in price to justify."

Or, a reduction in costs associated with extraction, like "QuickFRAC". So, either prices rise to justify the costs, or the costs associated with production come down.

" If you have a limited resource seeing the price increase does not mean more production."

You assume that the resource is limited, when, in fact, what is limited is the ability to access that resource.

"And while new technology can help us extract more out of old fields it cannot offset the depletion of more than 6% per year."

Again, you take a questionable current trend and extrapolate that into the future. Before Mitchell developed the "Fracing" process natural gas was "depleting" even faster. Now, we're up to our ass in it. Further, advances in engineering are making the combustion engine more efficient every day, so the "problem" is being addressed at both ends.

"The simple fact is that with Gulf oil production in rapid decline ..."

Perhaps, but production off the coast of Africa and Brazil are just starting and many experts think that both sides may be tapping into one giant field extending across the Atlantic.

"All I am saying is that there hasn't been a supply side response yet even though oil went from the $30s to over $100."

The increase in price is the result of the deliberate devaluation of the dollar. If prices stay here investment will increase and supply will follow. Increase in supply necessarily lags increase in price. It's also important to consider that most of the worlds existing supply is controlled by a cartel which manipulates production short circuiting to some degree the impact of market forces.

"Think of the whale oil shortage in the 19th century."

No, think of the "peak coal" scare of 1865. This "running out" bullshit has been around a very long time.

 
At 4/09/2011 12:37 PM, Blogger AIG said...

"Read "Limits to Growth"--many of the arguments you cite were cited in that compelling book--a book so compelling I believed it, as a grad student in the late 1970s."

You old fool! Vangel has spoken to a Chinese analyst once...He knows what he's talking about!

How many times do we have to hear this same old trash over and over and over? Seems every 5 years for the past 100 years, its the same old doomsday story.

(Hey Vangel! Remember that time you went on a little rant about how things in China cost 1/10 of those in the US even though they used the SAME MATERIALS AND STANDARDS! Oooppsss! Turns out they didn't, just like I said:
http://www.nytimes.com/2011/02/18/w
orld/asia/18rail.html

Now why don't you ever learn that 75% of the stuff you say is made-up?)

"Natural gas also easily substitutes for oil, and we have gobs of the stuff for generations. "

The substitute to "oil" is simple, and will be relatively quick and painless. Its electrification of transportation. Once you get a car that can plug into a grid, then you can power it with whatever you want; coal, gas, nuclear, dead hippies...whatever. Its 10-15 years into the future, but thats peanuts.

The markets will do this on their own, and are already doing so (in their infancy, but this is likely to behave like an S-curve)

I can foresee problems, however, coming in from government over-regulation of the power generation industry.

 
At 4/09/2011 12:58 PM, Blogger Che is dead said...

This comment has been removed by the author.

 
At 4/09/2011 2:47 PM, Blogger PeakTrader said...

The U.S. health care system needs a complete overhaul. So, we can afford to buy $200 oil.

If the electronics industry had over 130,000 pages of regulations, similar to health care, we'd be paying $3,000 for a TV and $1,000 for a microwave oven (and they'd be lower quality).

The government driving-up health care costs and then giving health care away is most harmful.

 
At 4/09/2011 5:05 PM, Blogger Rufus II said...

In Feb, 2006, Saudi Arabia pumped 9.6 Million barrels/day.

In June, July, and August of 2008 Saudi Arabia was able to pump/steal from storage/whatever 9.5 mbpd.

January they were doing 8.5 mbpd. It's thought they have added 0.3 mbpd in the last couple of months.

12 Million barrels/day? Not in a hundred gazillion eons.


Nat gas? This is a rib, right? There are 160,000 filling stations in the U.S. and it costs $500,000.00 to add nat gas fueling capabilities to one - and, I'm not sure you could fuel more than a couple of dozen cars/day from that size set-up.

Oh, and it costs about $3,500.00 to convert a car to nat gas. Lessee, 240 Million X $3,500.00 = $840 Billion, add in the minimum fueling infrastructure $80 Billion

Brings us to about $880 Billion plus other infrastructure - say at minimum A Trillion Bucks.

Did I mention we still import nat gas from Canada?

Silliness.

Buy a Flexfuel car. Beat the rush.

 
At 4/09/2011 5:52 PM, Blogger Ron H. said...

Rufus

"Buy a Flexfuel car. Beat the rush."

You were doing so well! Everything made good sense 'til the very end.

"Did I mention we still import nat gas from Canada?"

Thats OK, right?

 
At 4/09/2011 7:39 PM, Blogger VangelV said...

No, not necessarily. A moderate increase in interest rates and a corresponding increase in the value of the dollar could bring down prices.

Oil is going up in all currencies, not just the dollar. And I hardly think that an increase in interest rates is compatible with your past predictions of continued growth globally and much higher equity prices.

 
At 4/09/2011 7:41 PM, Blogger VangelV said...

Many have wondered why Exxon has not increased its oil reserves much. Maybe it is because possible reserves are now becoming probable or even proven with new technology.

Actually, Exxon bought XTO to bolster its reserves by taking advantage of the SEC rules. Its actions should be setting off the alarm bells among energy analysts. That they aren't tells us a lot about the state of the financial analysts in the US.

 
At 4/09/2011 7:50 PM, Blogger VangelV said...

Read "Limits to Growth"--many of the arguments you cite were cited in that compelling book--a book so compelling I believed it, as a grad student in the late 1970s. We hit $45 a barrel back then, and $100 a barrel was imminent. I thought fervently. Commercially extractable oil would disappear by year 2000, I believed with all my heart and mind.

At the time the book was written there was no data suggesting that a peak would come before the 1990s. I believe that using the available data the earliest date for a peak was projected around 1996 give or take a year or two. As the data improved a bit (it is still poor) that number went out to somewhere between 2006 and 2012. The peak for light crude was in 2005 when production hit a plateau until 2007. The interesting thing was that the period between 2003 and 2008 attracted hundreds of billions in new investment but production did not go up. The only way to squeeze demand was to have prices go up to $150 but once they got that high the economy collapsed and demand contracted sharply bringing down prices. We are now into a recovery but have yet to see the old production rates of conventional crude be exceeded. While extra liquids have come from the reclassification of NGLs, tar sands, biofuels, and other unconventional sources those cannot offset depletion for very long and we either get higher prices or another collapse in demand as the economy contracts again.

Of course, the next 20 years were marked by both economic growth and falling oil prices.

You mistook a supply disruption that was driven by politics for a supply side problem. But you never saw a supply side problem until the early 2000s.

 
At 4/09/2011 8:15 PM, Blogger Buddy R Pacifico said...

VangelV stated:

Actually, Exxon bought XTO to bolster its reserves by taking advantage of the SEC rules"

This thread is about oil reserves but XTO is a natural gas producer.

 
At 4/09/2011 8:31 PM, Blogger PeakTrader said...

Fatih Birol, IEA chief economist, said "The age of cheap oil is over." So, the question is how expensive will it get within the next 10 or 20 years:

Record gas prices blamed on peak oil
Mar 28, 2011

World oil supplies plateaued five years ago... worrisome information coming out of the International Energy Agency (IEA) lately.

In its landmark global study, called the World Energy Outlook 2008, the IEA published the average depletion rate of the 800 largest crude oil fields in the world, from Saudi Arabia to Texas.

The report concludes 73 per cent of those oil fields are past their peak and depleting rapidly at 5.1 per cent per year.

At that rate, two-thirds of today's crude oil production will simply be gone by 2030.

Today's active oil fields produce about 70 million barrels per day, but by 2035 "they will produce less than 20 million barrels per day of oil."

Compounding the problem, world oil demand is surging, especially from China. That country recently overtook the U.S. to become the world's top energy consumer.

 
At 4/09/2011 8:39 PM, Blogger VangelV said...

Politically, for all we know, both Venezuela and Iran could "flip" in the next five years, and become wonderful places to export oil from again. Iraq is a toss-up, but they forecast 12 mbd. You cannot believe anything Saudi Arabia says, but they said they would go to 12 mbd and they have. They have enormous deposits of heavy oil they have never even tapped--why bother?

The Saudis are done. Ghawar is in decline and they are resorting to cranking up reservoir pressures to try to rehabilitate old fields that were incapable of reliable production in the past. If the Saudis had as much oil as they said why would they be spending so much money on such low quality assets?

Iraq will not match Saudi Arabia unless Saudi production falls sharply. It makes no sense for Iraqi producers to crank up oil production because their reserves are becoming more and more valuable as production from other nations declines. I have investments in the Kurdish part and can tell you that things are not as easy as the naive optimists claim.

And even if Iran 'flips' there is no way to change the fact that its oil production is well past its peak and no way to argue that it can ever reach that peak again.

Economically speaking, conservation measures easily allow growth and less oil use--Europe and Japan have been using less, not more, crude oil for decades (annual consumption falling every year) and have obtained higher, and much higher, living standards along the way.

What matters is global oil use. That has been growing steadily and will continue to work against the naive optimists. And note that the argument has now changed from, "we can produce more," to, "we will learn how to do with less."

Natural gas also easily substitutes for oil, and we have gobs of the stuff for generations. BTW, check out cngvehicles.net. Thus guy in Oklahoma will sell you a (used) CNG car or truck off his lot for $10k--today. Now. Not a fantasy, not a theory. In Los Angeles, I have seen three CNG filling stations, and I could commute today by CNG. All city busses are CNG here.

CNG is nothing new and is already used around the world, including in the US. My brother-in-law works for a large producer of CNG in China where many vehicles use it as fuel. But you are assuming that there is as much natural gas in reserves as the EIA claims without asking how much energy is needed to extract the reserves. For most shale gas the net output is close to zero using current technology.

For the record, I am a huge fan of natural gas and expect a great deal of new production to come from conventional sources in places like Mexico, where potential sites were ignored by PEMEX because it had no market for the gas. But in a post peak world the natural gas production will not be enough to offset the rapid depletion from conventional oil fields.

I concur with you that government is much of the problem; both foreign thug states that control oil fields, and parasitic public and military agencies of the West.

But, through history no government has been perfect, throughout history we only range from mediocre to piss-poor, and we are in a medicore phase now.


Government is a lot worse now. Kings could not tax their citizens as much as governments do now and could not fund wars without asking bankers for loans. Their soldiers could not be everywhere and they had little in the way of regulations. Today you have governments telling you how much water your toilet tanks must hold and take 45% of the last dollar that you earn in taxes. And they have spies everywhere, often in the form of busybodies and citizen volunteers who have no idea just how evil their actions really are.

 
At 4/09/2011 8:39 PM, Blogger VangelV said...

BTW, only 25 years in the USA ago phone rates and services were regulated, airline fares, passbook deposits (no money market funds), even stock trading commissions (Wall Street, btw, fought like tigers against free-market trading for stocks). Back the the FCC tightly controlled access to TV media broadcasting; now you have a million cable channels and the Internet. So, on a national level, we have de-regged several industries.

Yet there are more regulations in the books than ever before and you have government telling you what kinds of light-bulbs you must put in your home or how much water has to flow through your shower head. For every good act of deregulating governments have taken two where they increased regulations.

I expect a cleaner and more-prosperous future.

Your country is broke and living beyond its means. Poorer means less clean because people will not be able to afford the luxury of worrying about their immediate environment.

 
At 4/09/2011 8:48 PM, Blogger VangelV said...

Or, a reduction in costs associated with extraction, like "QuickFRAC". So, either prices rise to justify the costs, or the costs associated with production come down.

Reduction in costs? Conventional wells were cheap. Horizontal wells are running ten times or more the price. That is not cheap. And no matter how you try to spin it, the natural gas players have been losing money. That is why Chesapeake is now hyping up shale liquids instead and why the early shale players are selling themselves off to large players looking to play accounting games with reserve booking.

You assume that the resource is limited, when, in fact, what is limited is the ability to access that resource.

It is a good assumption. The US saw its production peak in 1970 and has yet to exceed it no matter how much it spent on exploration and development. A very good well in the past used to produce 50,000 bpd or more. Today that would be the production from a decent field. Oil is not unlimited. And you have to spend energy to get it out of the ground.

Again, you take a questionable current trend and extrapolate that into the future. Before Mitchell developed the "Fracing" process natural gas was "depleting" even faster. Now, we're up to our ass in it. Further, advances in engineering are making the combustion engine more efficient every day, so the "problem" is being addressed at both ends.

First depletion rates with shale gas wells is even higher than conventional gas wells. Second, fracking is not new. The energy sector has used hydraulic fracture since the 1940s.

 
At 4/09/2011 8:54 PM, Blogger Rufus II said...

Ron, we can do it the "easy" way (very unlikely,) or we can do it the "Hard" way (almost a certainty," but we will end up doing it with biofuels. It's the only thing that will scale.

The point about nat gas, and Canada is: Fraccing shale for nat gas is expensive - more expensive, for example, than importing nat gas from Canada.

So, nat gas is not only "not renewable," it's not, necessarily, as "cheap" (in the longer run) as it's cracked up to be.

In fact, when you double demand by attempting to use it in your vehicles it very well might get very expensive.

In short, nat gas for transportation is just a "pump and dump pipe dream" to sell to the unsophisticated. It's not really a potential "big-time" player.

 
At 4/09/2011 8:58 PM, Blogger VangelV said...

Perhaps, but production off the coast of Africa and Brazil are just starting and many experts think that both sides may be tapping into one giant field extending across the Atlantic.

Which experts? The ones who were jumping up and down telling us that depletion was only running at 3% when it was actually greater than 6%? I prefer to ignore the words and look at the activities. I see no major Brazilian production from its deep sea finds. PETROBRAS is hoping to get TUPI up to 500K bpd by 2010 after it spends $150 billion or so on the field develpent but that will be only enough to offset 10% of depletion for that year. By that time Ghawar will be down by more than 500K bpd as will Daqing, Burgan, and Cantarell. You will need nine more TUPI fields to replace production that is lost from current fields. But by that time we are supposed to have an additional 5 million bpd of new demand that will have to come from many new fields yet to be developed.

 
At 4/09/2011 9:41 PM, Blogger Hydra said...

I worked on well fracturing techniques in the early eighties. We used multiple shaped charges to perforate the well casing and pressurized the cracking fluid into the earth adjacent using a gas generator to provide simultaneous and near intantaneous fracturing. The project was scrapped when oil prices fell below prices that would support the technique.

 
At 4/09/2011 9:51 PM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 4/09/2011 9:53 PM, Blogger PeakTrader said...

VangelV says: "Your country is broke and living beyond its means."

It's amazing how two or three years of poor economic policies can result in trillions of dollars of additional federal spending, trillions of dollars in lost output, $1 1/2 trillion federal budget deficits, many states on the verge of bankruptcy, health care reform driving-up prices even higher, an expensive energy policy, more costly regulations, etc..

This train wreck could've been avoided at many points, e.g. scaling-back the enormous unfunded social program of helping low income people buy houses, refunding the dollars flowing into government treasuries from trade deficits to consumers, implementing Reaganomics instead of Obamanomics, etc.

 
At 4/09/2011 9:57 PM, Blogger Hydra said...

ou assume that the resource is limited, when, in fact, what is limited is the ability to access that resource.

===>>=============>=

The resource is limited. The only question is the time frame in which it runs out.

 
At 4/09/2011 10:01 PM, Blogger Hydra said...

Liberals I know favor a strong defense. But when our navy equals the next five combined, one may wonder how strong is strong.

We were successfull in spending the soviet union into military bankruptcy. There is now no credible threat to cause us to follow suit.

 
At 4/09/2011 10:09 PM, Blogger Hydra said...

Recently saw a car torn to shreds in a horrific auto accident. About the only way to make it worse would have been a compressed gas fuel tank.

Natural gas buses, fine. Cars, not so much.

 
At 4/10/2011 2:54 AM, Blogger Ron H. said...

Rufus

"Ron, we can do it the "easy" way (very unlikely,) or we can do it the "Hard" way (almost a certainty," but we will end up doing it with biofuels. It's the only thing that will scale."

I agree with your earlier comments about the difficulties and expense involved in large scale conversion to natural gas. My complaint was and is about your advocacy of biofuels. As I see it, there are way too many problems with them as motor fuel.

Many of the same problems and expense you point out associated with distribution and dispensing of natural gas as motor fuel, also exist for ethanol and other biofuels.

First, consider this. Biofuels in general, and ethanol in particular, are not new, and if they are such good ideas, one has to wonder why they are not already in widespread use. Anything requiring the level of government mandate and subsidy required for ethanol, for example should tell you it's not such a great idea.

Then there is the problem of scale. There is no way to produce enough to replace a meaningful percentage of gasoline even if all corn grown is converted to fuel, with none going to food.

Then there's the dabate over how much net energy is actually available from biofuels when all costs of production and delivery are considered.

Switchgrass you say? There is no viable model, at this time, that shows any promise of scaling significantly.

What about land use? How much land should be converted from other uses, or from natural conditions to grow fuel? Also keep in mind that growing fuel instead of food affects food prices, and has serious consequences for poor people around the world.

Other crops? Well, what? Please don't say algae. I've read numerous optimistic articles, but none that actually show any large scale promise without unrealistic assumptions, and severe abuse of the math.

As for biodiesel, there are those same pesky problems with scalability, and problems at low temperature.

I don't know what the fuel of the future will be, but I'm pretty certain it won't be grown.

 
At 4/10/2011 7:58 AM, Blogger VangelV said...

This thread is about oil reserves but XTO is a natural gas producer.

So? The SEC allows companies to count natural gas reserves as oil equivalent reserves. The acquisition allowed Exxon to temporarily deal with its reserve problem and keep its share price higher. I suspect that we will see more companies try to do the same thing in the future and we will see some players taken out for their so-called reserves.

 
At 4/10/2011 8:08 AM, Blogger juandos said...

" but we will end up doing it with biofuels. It's the only thing that will scale"...

Well rufus putting one's food into fuel tanks is pretty much of a 'non-starter' except for its novelty affect...

 
At 4/10/2011 8:12 AM, Blogger juandos said...

"But when our navy equals the next five combined, one may wonder how strong is strong"...

Well hydra would you be wondering about that 'if you were in the American navy' facing off with some other navy on a one to one basis?

Making like an 'arm chair admiral' is all well and good if your ass isn't out there on the sharp end...

 
At 4/10/2011 9:50 AM, Blogger Che is dead said...

"The Saudis are done. Ghawar is in decline and they are resorting to cranking up reservoir pressures to try to rehabilitate old fields that were incapable of reliable production in the past."


The IEA did a thorough examination of Saudi oil assets in 2008 determining that the Ghawar field is not in decline:

"Ghawar is still at the plateau phase of production, the report underlined; taking steam out of the peak oil bogey. The IEA report specifies that Ghawar has been developed in distinct stages, which have progressively raised its capacity keeping the field at plateau."

"Amin Nasser, Saudi Aramco's senior vice-president for Exploration and Production in a recent meeting stressed: "Our strategy is based on a low depletion rate, which is 2 % a year." Arguing that Aramco replaces every barrel that was produced, Nasser underlined, "We have never failed to replace what we have produced so far, and our exploration programme is expanding year by year. We would not have put any increments into development if we did not have a minimum of a 30-year plateau," he added. Contrary to claims from peak oil theorists that water cut at the 5 mm bpd Ghawar field has fallen in recent years, Mr Nasser said. "Water cut in Ghawar is 28 %, whereas the industry norm for the water cut is 80 %."

IEA denies reports on depletion of Saudi Ghawar oil field

Time to put down the Noam Chomsky books and to stop trolling the "peak oil" websites. What's next, 9/11 conspiracy theories?

 
At 4/10/2011 2:03 PM, Blogger AIG said...

Vangel as usual you are so full of c***, its incredible. You take short-term tends, ignore any reasons behind momentary declines in production, ignore any other reasons why Iran peaked in the 70s or why the US peaked in the 70s etc etc...and then go off on a ridiculous extrapolation of trends.

Your most brilliant sentence, of course, was when you said that ALL PREVIOUS disruptions were due to political issues, while a true supply side problem didn't appear until the early 2000s. Of course, otherwise your myopic 2-feet ahead of your nose case would make no sense.

Well geeze...I wonder what happened in the early 2000s? Certainly no external factors there.

Man you are funny. I want more "Chinese analyst" stories, please!

 
At 4/10/2011 2:42 PM, Blogger VangelV said...

It's amazing how two or three years of poor economic policies can result in trillions of dollars of additional federal spending, trillions of dollars of lost output, $1 1/2 trillion federal budget deficits, many states on the verge of bankruptcy, health care reform driving-up prices even higher, an expensive energy policy, more costly regulations, etc..

Two or three years? If that is what you think is the cause you are not paying attention. The problem is not the current idiot in the White House or the one who preceded him. It is a structural problem that was created by decades of belief in the false economic teachings.

As Bill Bonner pointed out, the central bankers, politicians, and voters drank the Kool-Aid. When the monetarists argued that a contraction could be corrected by printing more money the central bankers believed it. They also believed the Keynesian view that a contraction can be solved by government spending. So instead of letting the economy correct naturally as it always did when politicians and bankers were powerless to intervene the fools at the Fed and Treasury turned on the monetary and fiscal spigots each time the economy slowed down. The series of interventions created a series of bubbles that eventually ensured that structural changes would be made to the economy. We are now at a point where the typical interventions (lower rates and money printing, along with more government spending) are not having the usual effects.

This train wreck could've been avoided at many points, e.g. scaling-back the enormous unfunded social program of helping low income people buy houses, refund the dollars flowing into government treasuries from trade deficits to consumers, implement Reaganomics instead of Obamanomics, etc.

Reaganomics was a rhetorical success but an economic failure. The government expanded rapidly and by adding an intellectual cover for lots of government spending it was ensured that there would be no way for the US to turn back to clock and head in a reasonable direction.

 
At 4/10/2011 3:21 PM, Blogger juandos said...

"The problem is not the current idiot in the White House or the one who preceded him. It is a structural problem that was created by decades of belief in the false economic teachings"...

Interesting point and I believe a valid one...

Note the following from Monsignor Ignacio Barreiro-Carámbula - Interim President, Human Life International: On both sides of the Atlantic the erroneous theories of John Maynard Keynes have been, and still are, being put into effect. He taught that in times of economic crisis consumer demand must be stimulated by government investment, and that an "attitude of saving" must be discouraged...

How long has that been a staple of not only the federal and many state governments but also pushed in college economics courses?

Hey! If that don't work then listen to Frank Sinatra sing...:-)

 
At 4/10/2011 4:56 PM, Blogger VangelV said...

The IEA did a thorough examination of Saudi oil assets in 2008 determining that the Ghawar field is not in decline:...

Is this the same IEA that had depletion rates at 4% before admitting that they were more than 6%? Is it the IEA that has kept wavered in its forecasts and been like a pendulum swinging from optimistic to pessimistic and back again? Is this the same IEA which has been steadily reducing its peak estimate and has finally admitted that the skeptics were right by lowering its peak from more than 120 mbpd to less than 100 mbpd? Or the IEA which has been pressured by the US to hide the true state of the energy sector?

The simple fact is that the IEA has been proven to be way too optimistic and has been forced to backtrack time after time. After all of the changes to its position, most of which it was forced to make by arguments and evidence presented by skeptics, the IEA is no longer a credible voice.

Time to put down the Noam Chomsky books and to stop trolling the "peak oil" websites. What's next, 9/11 conspiracy theories?

Sorry but that dog won't hunt. The arguments made for the Peak Oil position are very sound and have not been disproved. In fact, if you look at the credibility of the sources that you are quoting you are just like the conspiracy theorists that you are trying to link the skeptics with.

 
At 4/10/2011 5:04 PM, Blogger VangelV said...

Vangel as usual you are so full of c***, its incredible. You take short-term tends, ignore any reasons behind momentary declines in production, ignore any other reasons why Iran peaked in the 70s or why the US peaked in the 70s etc etc...and then go off on a ridiculous extrapolation of trends.

They peaked because their fields were very old and have seen their best days behind them. The same thing has happened to US fields. And there is nothing short term about this. Most oil producing nations are now well past their peak production rates.

Your most brilliant sentence, of course, was when you said that ALL PREVIOUS disruptions were due to political issues, while a true supply side problem didn't appear until the early 2000s. Of course, otherwise your myopic 2-feet ahead of your nose case would make no sense.

There are only two disruptions worthy of note and both were due to political reasons. And there was no supply side problem until the early 2000s. (Why do you think that there was a need for OPEC or the Texas Railroad Commission, on which OPEC was based, if there wasn't too much supply capacity?)

Well geeze...I wonder what happened in the early 2000s? Certainly no external factors there.

The excess supply capacity dropped to less than 2 mbpd and the alarm bells started going off. It attracted several hundred billion dollars of new investment and coincided to many projects coming on line at the same time. Yet, production couldn't rise by enough to keep prices from exploding.

 
At 4/10/2011 5:10 PM, Blogger VangelV said...

Note the following from Monsignor Ignacio Barreiro-Carámbula - Interim President, Human Life International: On both sides of the Atlantic the erroneous theories of John Maynard Keynes have been, and still are, being put into effect. He taught that in times of economic crisis consumer demand must be stimulated by government investment, and that an "attitude of saving" must be discouraged...

Keynes was one half of the problem. Another problem was created by Milton Friedman and Anna Schwartz who argued that depressions were caused by too little money in circulation and could be avoided if the Fed steps up and injects money into the system to offset credit deflation. We are at risk because CBs and governments accepted both theories.

 
At 4/10/2011 7:11 PM, Blogger PeakTrader said...

VangelV, it seems, you want people to go back to writing on stone tablets.

 
At 4/10/2011 9:12 PM, Blogger VangelV said...

VangelV, it seems, you want people to go back to writing on stone tablets.

I am the guy who is investing in the rare earths that you need to have a high tech society. I simply see no advantage in hoping and wishing as a strategy.

 
At 4/10/2011 11:14 PM, Blogger Hydra said...

Juandos:

I made no comment about how strong I thought the navy should be.

At what point would you suggest curtailing increases in Navy spending? 10x the power of pour closest rival? 5X the power of the next five rivals combined?

Really, at what point would you say enough was enough? When there are no other navies,at all?

 
At 4/11/2011 3:48 PM, Blogger juandos said...

"Really, at what point would you say enough was enough? When there are no other navies,at all?"...

Well of course if we were able to drive ALL of the other navies combined out of business if that were physically and financially possible would be best...

This isn't a game and super sonic, anti-ship, cruise missles don't care if they have the advantage on ship point defense systems...

There is no such thing as 'to much advantage' when it comes outright war...

Video: Navy Laser Sets Ship on Fire

 
At 4/11/2011 3:57 PM, Blogger VangelV said...

There is no such thing as 'to much advantage' when it comes outright war...

But you can go broke trying to get 'too much advantage' particularly when the other side has no interest in massive spending or going to war. When they are building factories, bridges, schools, and roads and you are borrowing from them to make a few military companies rich your taxpayers lose.

 
At 4/11/2011 5:38 PM, Blogger juandos said...

"But you can go broke trying to get 'too much advantage' particularly when the other side has no interest in massive spending or going to war"...

Well two things here vangeIV first you apparently ignored or didn't understand the following in my comment: 'if that were physically and financially possible'...

"other side has no interest..."?!?!

On what planet do you live on?

Military and Security Developments Involving the People’s Republic of China

 
At 4/11/2011 5:48 PM, Blogger Hydra said...

Thank you Vange.

Everything is a trade off. As you more or less said (I'm parapharasing here)

Total Cost = Production Cost + External Cost + Government Cost

In this case Juandos appears to believe that infinite defense costs are justified by infinite defense benefits.

This is more or less the same (faulty) argument that environmentalists make.

We do not know what the right amount to spend is, but as soon as we go over that amount we are wasting money, and wasting resources.

And war is a particularly perverse critter: history tells us that the more prepared you are for war, the more likely you are to have one.

 
At 4/11/2011 5:55 PM, Blogger juandos said...

"In this case Juandos appears to believe that infinite defense costs are justified by infinite defense benefits"...

Per his usual style hydra makes it up as he goes along...

"And war is a particularly perverse critter: history tells us that the more prepared you are for war, the more likely you are to have one"....

Again a statement made by one that is comfortably far from the sharp end...

 
At 4/12/2011 12:50 AM, Blogger Ron H. said...

juandos

"Video: Navy Laser Sets Ship on Fire"

Well...I don't know that I would call that a ship, but the point is well taken. The headline should read "Navy Laser Sets Small Boat On fire".

That would be useful against Somali pirates.

 
At 4/12/2011 7:49 AM, Blogger juandos said...

"Well...I don't know that I would call that a ship, but the point is well taken"...

Ahhh well Ron H, what do you expect from the 'weed sniffers' at Wired?

Still your point regarding the Somali pirates is on target if you'll pardon the pun...

Cheap laser pointers from eBay used to blind aircraft pilots

 
At 4/12/2011 11:55 AM, Blogger Ron H. said...

juandos

"Cheap laser pointers from eBay used to blind aircraft pilots"

This is an interesting subject. You may have more insight on this than I do, but in my opinion, this danger is overstated.

Are you aware of any instances where aircraft have actually been brought down by lasers blinding the pilots? While I know that there are lasers capable of serious damage - as in your example - I question the ability of low powered pointer devises to cause serious harm. I have no doubt that such lasers can paint dots on the aircraft, and cause bright flashes to appear to the operators, the idea of being able to aim a beam closely enough to blind both pilot and copilot, seems as difficult as shooting them in the head with a high powered rifle.

Consider the power involved also. The power of a laser is directly related to the power supplied to it, and the Navy test probably didn't involve a pair of AAA batteries - not even energizers.

I'd love to hear your thoughts on the subject..

 
At 4/12/2011 11:58 AM, Blogger Ron H. said...

juandos

I was also dismayed to see the Navy thoughtlessly destroying those 2 fine outboards. Perhaps we ARE overspending on the military.

 
At 4/13/2011 8:34 AM, Blogger VangelV said...

On what planet do you live on?

On this one. As I said, no country has any intention of attacking the US. As such, the US does not need to spend as much as it does. I do not see the Chinese or Indians staging military games off the East coast of the United States as the US does in their waters. I do not see the Japanese invading countries that were no direct threat to them as the US does.

 
At 4/13/2011 8:36 AM, Blogger VangelV said...

In this case Juandos appears to believe that infinite defense costs are justified by infinite defense benefits.

To be fair to his mistaken position, I do not believe that he said 'infinite'. He simply does not understand the implications of diverting so many resources to non-value-added uses.

 
At 4/13/2011 8:40 AM, Blogger VangelV said...

I liked this bit of information.

A day after the Department of Transportation urged pilots to report hazardous laser beams aimed at aircraft, the U.S. military said it is testing a system to beam red and green lasers at aircraft in the Washington area as a warning when they enter restricted airspace.

If these things were so dangerous, why the hell is the Department of Transportation testing them in such a way?

 
At 4/13/2011 6:54 PM, Blogger Ron H. said...

"If these things were so dangerous, why the hell is the Department of Transportation testing them in such a way?"

OOOPS! Sounds like a case of right hand not knowing what left hand etc.

Presumably they can expect a rash of reports in the Washington area.

 

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