Monday, February 06, 2012

Canadian Oil Renaissance From High Prices and New Technology, or Why Peak Oil is Peak Idiocy

From an article by energy economist Peter Tertzakian in the Calgary Herald:

"We are happy to report that the fundamental principles of economics are working well in the Canadian oil and gas industry, and the results are remarkable. We are witnessing an event that will change the way we think about oil, with many weighty consequences for corporate leaders, investors, policy makers, and purveyors of competitive energy sources. 

After 20 years of steady decline, light and medium oil production is now conclusively trending upward in Alberta. Take a look at the chart above, which could heighten the blood pressure of a few peak oil theorists.

The grey, dashed trend line shows how Alberta’s light and medium oil production was declining by an almost perfectly linear rate of 16,000 B/d every year up until late 2009. This predictable line extends back to the early-1990s, and more generally as far back as the peak of production in the 1970s. Extending the trend line past the recent turning point, I infer that production should have been 284,000 B/d in October 2011, the time of the most recent data point available. However, rather than declining, actual production has jumped up to 375,000 B/d, an increase of 91,000 B/d off the 20-year status quo.

In early 2011, common wisdom among industry veterans was that light and medium quality oil production would rise gently, reaching 375,000 B/d by 2017. The latest data shows the target was achieved six years early. High levels of capital expenditures targeting plays like the Viking and Cardium, along with innovation in drilling and completion techniques, suggest that Alberta’s light oil surge will continue.

I could stop this discussion right here and just file the chart above as an important factoid. Yet a broader interpretation is in order, because the ability to rejuvenate the tired oil-bearing rocks of a 100-year-old basin – a renaissance event that has long been assumed unthinkable by many industry veterans – is a terse validation of basic economic theory that goes back 120 years to Alfred Marshall.

For at least 20 years, highly coveted light oil had been written off as a declining resource in North America, as if the fundamental principles of economics had been violated. They have not. Abruptly rising light oil production in Alberta is a microcosmic event, also occurring in other continental locales, that is likely to have far reaching implications to the energy complex, those who invest in it, and even society at large."

Conclusion: "Human ingenuity in resource development has a long history of exerting "power over nature," just when we think the limits have been reached. New technology in tandem with a high commodity price has historically been a compelling recipe for disruptive changes in supply development. Today’s oil renaissance is no exception."

MP: As Julian Simon taught us, the ultimate resource is human ingenuity and the human imagination coupled to the human spirit, which is infinite and will therefore never reach a finite peak.  Or in the words of Mike Munger "Peak oil is peak idiocy."

HT: Christopher Jones

63 Comments:

At 2/06/2012 8:21 PM, Blogger VangelV said...

The use of enhanced recovery techniques is not new. And neither is the knowledge that if you throw a lot of money into something you can get more of it. But this does not mean that the previous production levels will ever be reached again. Scavenging for some of the oil that was left behind is great on the margin but does not change the math.

 
At 2/06/2012 8:25 PM, Blogger Mark J. Perry said...

But it also doesn't change the reality that "peak oil" is "peak idiocy."

 
At 2/06/2012 9:35 PM, Blogger Benjamin said...

Man gets ever better at extracting resources from the planet.

At $100 a barrel, we see gluts. We see Peak Demand while supply gushes. Almost any kind of oil makes sense to develop at $100 a barrel. Indeed, most development takes place assuming $60 a barrel.

And this is with the best oilfields in the hands of monkey thug-nations, such as Saudi Arabia, Venezuela, Nigeria, Libya, Russia, Mexico, Iraq, Iran etc etc etc.

If just a few oil-thug nations join civilization, we see gluts to the moon. There may be 15 mbd of new production in Iraq alone, or about 20 percent of current global production. Same for Venezuela.

And demand for oil keeps falling in the USA, Japan and Europe.

China? What if they mandate PHEVs, just as they have mandated E-bikes? What if they go to CNG?

The Sniveling Weenies of Peal Oil need to figure out the price mechanism. You see, when prices go up, demand goes down while supply improves.

 
At 2/06/2012 10:18 PM, Blogger Hydra said...

At a high enough price there will be oil. I don't think that means the peak oil theory is wrong, if you consider it to mean peak productive oil.

The more we have to spend to get it, the less useful it becomes.

 
At 2/06/2012 10:37 PM, Blogger Justin Blackman said...

Hydrocarbon resources *are* physically limited. The point is not how much oil and gas is left, but whether or not humans are free to develop the energy resources that make the most sense to develop. Free markets are the answer to any "peak resource" doomsday scenario, and as long as we are free, we never need to worry about running out of solutions to any kind of problem.

 
At 2/07/2012 1:37 AM, Blogger Rufus II said...

Global C+C Production has remained flat since 2005, while the Price of a barrel of oil has doubled.

That's Peak Oil.

 
At 2/07/2012 1:46 AM, Blogger kmg said...

A comprehensive demolition of 'peak oil' cultism, and data on how long before oil ceases to have the power to cause significant economic shocks.

A must-read :

http://www.singularity2050.com/2011/07/the-end-of-petrotyranny.html

 
At 2/07/2012 1:46 AM, Blogger kmg said...

Hyperlinked URL for 'The End of Petrotyranny'.

 
At 2/07/2012 3:00 AM, Blogger Les Johnson said...

One thing that jumps out from that chart, but is ummentioned, is that the inflection on the curve occurs after Alberta REDUCED royalties on oil (and gas).

The government, in the run up on commodities, became greedy, and jacked up royalties. The result? The government took LESS royalty money in the first full year of the new regime, than in the previous year with lower royalties.

Let me repeat this: The government REDUCED revenue by increasing royalties.

When the royalties were relaxed, in 2010, production increased, and so did goverenment income.

This shows on that chart. The oil started to increase in the year royalties were reduced. Granted, there are factors as well.

As every government needs to learn the hard way, if you want less of something, tax it. If you want more, reduce the taxes.

 
At 2/07/2012 3:37 AM, Blogger PeakTrader said...

Warning: Oil supplies are running out fast
03 August 2009

Higher oil prices brought on by a rapid increase in demand and a stagnation, or even decline, in supply could blow any recovery off course, said Dr Fatih Birol, the chief economist at the respected International Energy Agency (IEA).

Dr Birol said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted.

But the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago.

The IEA estimates that the decline in oil production in existing fields is now running at 6.7 per cent a year compared to the 3.7 per cent decline it had estimated in 2007, which it now acknowledges to be wrong.

Oil production has already peaked in non-Opec countries and the era of cheap oil has come to an end, it warned.

Even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production, and six Saudi Arabias if it is to keep up with the expected increase in demand between now and 2030, Dr Birol said.

"It will be especially important because the global economy will still be very fragile, very vulnerable. Many people think there will be a recovery in a few years' time but it will be a slow recovery and a fragile recovery and we will have the risk that the recovery will be strangled with higher oil prices," he told The Independent.

 
At 2/07/2012 5:27 AM, Blogger rjs said...

good to see canada is producing more, cause mexico is running out & will be importing before the decade is out...

 
At 2/07/2012 9:33 AM, Blogger VangelV said...


But it also doesn't change the reality that "peak oil" is "peak idiocy."


Actually Mark I consider the use of the term 'peak oil' without knowing what it means to be idiocy. It may have escaped your notice but even though we spent hundreds of billions on new exploration the global supply of light sweet is not higher today than it was in 2005.

There is little doubt that the math is very clear about peak production. We are either very close to it or it is a few years behind us. Trying to produce shale oil, where the actual returns on the energy invested are less than 2 will not increase the amount of oil available for use. And seeing the population in exporting country get rich enough to increase its own use will not allow for exports to countries like the US to go up.

The key to all this is Ghawar. Once it is clearly on the back end of Hubbert's Peak and there is no hope of return to the days of glory there will be too much pressure on the Kingdom to optimize returns. At that point the taps are turned down and the global economy will have to contract by a sufficient amount to balance the new supply reality.

You also forget that we have seen these little bumps before. While they helped create a small counter-trend the secular production trend was unaffected. Since you don't understand the history please use your knowledge as an economist to tell us how you can keep production increasing for long when the price of your product is below the total cost of producing it.

And let me remind you what some of us have been trying to explain to you and the naive optimists. We did see a peak of whale oil. That did not mean that we ran out of whales. We will not run out of oil. We have simply run out of cheap oil and are near or past Hubbert's Peak. There are some serious people looking for alternatives. Frankly, I am interested in conventional gas in places like Mexico, Iran, and Saudi Arabia, as well as methane hydrates. But as long as charlatans and naive fools keep hyping up dead end approaches attention and investment will be diverted away from the very projects that are needed to make the transition as smoothly as possible.

 
At 2/07/2012 9:48 AM, Blogger VangelV said...

At $100 a barrel, we see gluts. We see Peak Demand while supply gushes. Almost any kind of oil makes sense to develop at $100 a barrel. Indeed, most development takes place assuming $60 a barrel.

Really? The going price for a barrel of oil has been over $100 for more than a year. Do you see a global 'glut'? And how many of the unconventional producers are showing positive cash flows? What do you expect happens to them when your 'glut' leaves them with massive amounts of debt, negative cash flows, and an extremely low return on the energy invested?

It seems to me that you don't like to do your own research and like to hear nice stories from con men and optimists. The shale bubble is great if you are trying to sell a property in North Dakota for a hefty profit or want a job and know how to save most of what you earn. But it isn't great if you are actually producing the product because you have to go hat in hand to the banks or the equity market to raise money because you can't generate enough cash flow to keep going. Such bubbles are fun when the wind is blowing the right way but not so good when they burst.

Keep in mind that Mark was reporting all of the housing data without question and was not exactly calling the housing bubble a bubble. He was just cheering on the financial media and telling us that everything works out in the end. But in the end reality intervened and housing crashed. Some time in the next two years you will see most of the primary shale gas producers go bankrupt, merge, or get taken out by conventional players with a depletion problem. Most investors will not do very well. Eventually, the drill rigs will not be required because the decisions to drill will be made by using economic reasons, not lease contracts. At that point depletion will take over and the production of unconventional gas and oil will drop. And that will break the economy because it can't handle $200 oil. Demand will fall and we are going to go through another cycle.

And I suspect that on the way down Mark will tell everyone just how wonderful $50 oil will be for some future growth even as $50 oil destroys most of the unconventional producers, including some that should have been viable in the absence of a hype driven boom/bust cycle.

Most of the people commenting on this thread have no clue about the sector. They get giddy about a sector that depends on easy financing and investors looking the wrong way while they ignore lean coal and uranium producers who can generate cash and know how to operate during lean periods. In the end everyone gets what they deserve because we have to face the consequences of our decisions. Remember that the next time the markets run you over and you look to blame someone else rather than your own laziness.

 
At 2/07/2012 9:57 AM, Blogger VangelV said...

Hydrocarbon resources *are* physically limited. The point is not how much oil and gas is left, but whether or not humans are free to develop the energy resources that make the most sense to develop. Free markets are the answer to any "peak resource" doomsday scenario, and as long as we are free, we never need to worry about running out of solutions to any kind of problem.

While I agree in general things are not as simple as is being suggested. A free market would not be good for shale producers because without huge injections of liquidity there would be little financing for shale players. The only ones that would do very well are those that have positions in core areas of productive formations and could be self financing. The other 95% would never get the funding to drill.

And a free market would not mean that crude oil production would not peak. It would only mean that viable alternatives would cover the shortfalls and make the transition much easier. I still think that there are massive amounts of conventional gas in most OPEC countries. Previous exploration ignored this potential because there was no market for the natural gas. There certainly is a market now. I also think that methane hydrates should be viable in several locations around the globe. While it would be hard and would require a lot of capital I see the problem as one of engineering and that should be possible to solve. If the miners can get to black smokers at the sea bottom I don't see why the can't find a way to get to the crystals deposits that contain the methane that we need.

There is also plenty of power that we can generate by using nuclear reactors and powdered coal. If we let the markets work they can determine the right mix and peak oil would not be the serious issue that it appears to be today.

 
At 2/07/2012 10:10 AM, Blogger VangelV said...

The IEA estimates that the decline in oil production in existing fields is now running at 6.7 per cent a year compared to the 3.7 per cent decline it had estimated in 2007, which it now acknowledges to be wrong.

The IEA knew about the problem but was pushed by the EIA to keep the depletion estimates low. CERA, which Mark loves to quote as an expert source, was also pushing the low depletion number. Well, after finally agreeing to a review they found that the skeptics were right. Depletion was a huge problem and their estimates had to be revised lower.

There is another problem that was buried along with Mat Simmons. Mr Simmons used to talk about the 'rust' problem as he pointed out that pipelines designed to have 25 year lives were now five years past their design life and how some refinery cores were 70 years old. All of these issues require serious investment but that investment is not happening fast enough due to depletion and life cycle problems. Eventually, failing pipelines in North America, Russia, and Central Asia will cause production disruptions. As more refineries are taken out of service to be repaired some markets will be hit by shortages. These issues will cause disruptions to the complex system that depends on a continual flow of product and the disruptions will have large economic costs.

From what I can tell, all this is being ignored because people want to find something positive to believe even when the narrative they are being told is not the exact truth. It seems that we can't chalk up bubbles to a lack of information. Clearly everyone has enough information to understand. The problem is that they don't want to understand because it is more comforting to believe charlatans and fools than to look at the reality.

 
At 2/07/2012 10:55 AM, Blogger bart said...

Nice job V - "peak oil" is in no way, shape or form "peak idiocy".

I'd rather hear it called "peak cheap oil" since that term is much closer to the reality ahead per the various issues like depletion. Some if it is ironically due to more advanced recovery techniques -- which also speed up depletion rates like at Cantarell.

Many other issues like the absolute fact that light sweet *has* peaked - many years ago - as predicted by you and I and many others.
TANSTAAFL.

 
At 2/07/2012 11:14 AM, Blogger morganovich said...

"At $100 a barrel, we see gluts"

do you even think before you write this drivel bunny?

if there were a "glut" price would drop until marginal producers were driven out and the glut would cease.

i know you claim to have an econ degree, but comments like this make it seem utterly implausible.

you'd get laughed out of an econ 101 class from saying somehting this foolish.

i have no idea what you get out of contributing your moronic ejaculations to this blog, but it amazes me that after years of doing so, you have not absorbed even the very basics of economics.

such tiny lingering hopes i had that you could ever be able to understand even a shred of economics have been dispelled.

you really are hopeless.

 
At 2/07/2012 11:34 AM, Blogger morganovich said...

mark-

i think you should take a hard look at les's post.

the fact that royalty rates were dropped right before production started to jump is likely a key factor here.

this data may simply be a response to that as opposed to an indicator of the trend you cite. the region certainly showed little response to the high prices of 2006-8 which makes your narrative look suspect, particularly in light of such a clear alternative explanation.

drop the cost to produce and investment will spike without any new technology or ingenuity.

 
At 2/07/2012 11:58 AM, Blogger VangelV said...

i know you claim to have an econ degree, but comments like this make it seem utterly implausible.

Not at all. Most people with economics degrees have no clue about how an economy works and believe what they want to believe. (Look to Krugman as a perfect example.)

 
At 2/07/2012 12:38 PM, Blogger morganovich said...

v-

"Not at all. Most people with economics degrees have no clue about how an economy works and believe what they want to believe. (Look to Krugman as a perfect example.)"

i'm not talking about a whole economy, i'm talking about the absolute first principles most basic tenet of economics that oversupply (a glut) will cause a drop in price until suppliers exit and an equilibrium is found.

it's literally impossible to not understand that and claim an economics education.

krugamn may once have been an economist, but it's clear he gave that up a long time ago to become a populist political activist.

i certainly agree that some of the econ that is taught (like keynsianism) is utter bunk, but this is not some complex multi variate stimulus issue in a whole economy where variables and case studies are not easy to isolate, it's the very basic fundaments of ordering economic thought.

in a free market, you cannot durably have a glut and high prices at the same time.

this is just more benji-blather masquerading as thought.

 
At 2/07/2012 1:01 PM, Blogger NormanB said...

Just another example of the reason not to confuse extrapolation with analysis.

 
At 2/07/2012 1:13 PM, Blogger MaggotAtBroad&Wall said...

Then there's this professor who published a paper a couple of years ago suggesting that if only half the minerals that are deposited on the ocean floor are mined, it will be enough to last humanity for at least 5000 years while living at the averae European-level standard of living. And he even says it could be more environmentally friendly to extract them from the ocean than it is from land.

http://www.news.cornell.edu/stories/Oct10/CathlesMinerals.html

 
At 2/07/2012 1:19 PM, Blogger MaggotAtBroad&Wall said...

This comment has been removed by the author.

 
At 2/07/2012 1:44 PM, Blogger Hydra said...

Let me repeat this: The government REDUCED revenue by increasing royalties.

================================

Such a situation is possible, as you have demonstrated, but that does not make that situation universal. If they reduce the royalties enough, they will have zero revenue.

Sometimes raising taxes increases revenue, and sometimes it doesn't.

 
At 2/07/2012 1:45 PM, Blogger Hydra said...

if only half the minerals that are deposited on the ocean floor are mined, it will be enough to last humanity for at least 5000 years

=================================

He doesn't say at what price.

 
At 2/07/2012 1:50 PM, Blogger Che is dead said...

If we have, in fact, reached "peak cheap oil" as "bart" likes to phrase it, then why aren't we hearing more about it from those best positioned to benefit? Why aren't the oil producing nations, in an effort to squeeze every last dollar out of their dwindling resources, screaming about the coming apocalypse? What we see just the opposite - concerns about increased supply from competing resources. Not only are producing nations quick to assure that they can meet future demand, but they are funding environmentalists efforts to undermine the exploitation of oil sands and "tight oil". Why are the oil companies silent? Wouldn't a higher price for the "tight oil" that they are now producing put and end to the nonsense that "Vange" and others continually promote? And why aren't they desperately investing in alternatives in a struggle for self-preservation? And where are the commodities traders? If everything that the "peak oil" theorists have said is true, why is oil only at $100 a barrel?

If, as some argue, oil is already expensive, then why are consumers translating the increased efficiency realized in internal-combustion engines into larger vehicles? Why aren't they buying smaller cars, carpooling and making greater use of public transportation?

Long before we reach "peak oil, or "peak cheap oil", technological changes in transportation will have rendered the event mute.

What's being missed in this discussion is not the impact of lower royalty rates on Alberta producers, but the central and undeniable fact underlying Dr. Perry's argument: "... the ultimate resource is human ingenuity and the human imagination coupled to the human spirit, which is infinite and will therefore never reach a finite peak."

 
At 2/07/2012 1:52 PM, Blogger Hydra said...

If we let the markets work they can determine the right mix and peak oil would not be the serious issue that it appears to be today.

==================================

Why is it that you exclude renewables form the mix? surely if we let the markets work, they will be used in places that they make sense.

 
At 2/07/2012 1:55 PM, Blogger Hydra said...

"... the ultimate resource is human ingenuity and the human imagination coupled to the human spirit, ........

=================================

Please let me know when I can put it in my tank, and what the cost per energy content is.

 
At 2/07/2012 2:00 PM, Blogger Che is dead said...

"Please let me know when I can put it in my tank, and what the cost per energy content is." -- Hydra

You're putting it your tank right now, genius, you're just too stupid to realize it.

 
At 2/07/2012 2:03 PM, Blogger morganovich said...

"Why is it that you exclude renewables form the mix? surely if we let the markets work, they will be used in places that they make sense."

because without subsidies, they are way off the current curve and it makes more sense to look at numerous other sources first.

renewables that can stand on their own, unsubsidized feet are great, and when they start to exist, will spread like wildfire.

but they do not exist today and some (especially wind) never will.

solar is going to be difficult without a major improvement in electricity storage.

you can't just turn off big coal and nuclear plants in the daytime and fire them up at night. they take days to bring up to temperature.

this leaves you with the same baseline power problem you had pre solar unless you can figure out how to store the power. and please, no ludicrous ideas about pumping water up to reservoirs and using hydro at night. you'd lose 80%+ of you energy that way between the motors, friction, evaporation, the hydro turbines, and all the wire loss in transit.

i totally agree that sources of energy should all be allowed to compete in the market which is why i oppose ALL subsidies for them.

 
At 2/07/2012 2:07 PM, Blogger morganovich said...

"only half the minerals that are deposited on the ocean floor are mined, it will be enough to last humanity for at least 5000 years while living at the averae European-level standard of living."

this has so many holes in it it's difficult to know where to start.

as hydra said "at what price?" is one.

another is just how does our esteemed professor know what's at the bottom of the sea?

and 5000 years? where did that come from? you'd need to know a vast number of things that no one does, again, not least of which is "what's at the bottom of the sea? and what good does it do us if it's 3 miles down?"

 
At 2/07/2012 2:29 PM, Blogger VangelV said...

i'm not talking about a whole economy, i'm talking about the absolute first principles most basic tenet of economics that oversupply (a glut) will cause a drop in price until suppliers exit and an equilibrium is found.

Sadly, so am I. I have found that many people who received a Keynesian education have a tendency to ignore basic first principles and prefer narrative to basic logic. If you actually received an economic education at a Keynesian institution would you really believe that economics was a valid discipline? I know that I would have a hard time accepting what I was being taught. And if you begin to have doubts even the basic fundamentals would become irrelevant.

krugamn may once have been an economist, but it's clear he gave that up a long time ago to become a populist political activist.

Correct. That is why he blamed the UK problems on 'austerity' even as it was one of the biggest spenders of all nations. He chose to ignore the facts and basic definitions in order to push an agenda. Why couldn't our friend be the same.

 
At 2/07/2012 2:44 PM, Blogger morganovich said...

"Why couldn't our friend be the same."

because not even krugamn would make so basic an error. that's not a school of econ issue, it's the very notion of econ itself.

that said, given benji's demonstrated inability to absorb information here, it could well be he was the same in school, but that does lead to the tricky issue of "how the hell did he get a degree?"

i do not know any economist, however bent and misguided, that would grant a degree based on bunny's understanding.

 
At 2/07/2012 2:52 PM, Blogger VangelV said...

If we have, in fact, reached "peak cheap oil" as "bart" likes to phrase it, then why aren't we hearing more about it from those best positioned to benefit?

Who would that be?

Why aren't the oil producing nations, in an effort to squeeze every last dollar out of their dwindling resources, screaming about the coming apocalypse?

Because you would see the ruling elite fall. Do you really think that Chavez survives if everyone knows that he will not be able to use oil money to pay enough bribes that he is allowed to stay in power? How about the Saudi Royal family? You really think it survives the disclosure that its oil potential is much more limited and that it can no longer be able to subsidize fuel or food or keep paying massive amounts for its security?

What we see just the opposite - concerns about increased supply from competing resources.

No you have not. The Saudis talked about increasing their production. But talk is cheap. Their actions tell us something else. They have been unable to produce the oil that they have been promising to. PEMEX has been talking about replacing Cantarell production. But where is the new oil?

Not only are producing nations quick to assure that they can meet future demand, but they are funding environmentalists efforts to undermine the exploitation of oil sands and "tight oil".

LOL...Look to their actions, not their assurances. Is Burgan producing as much oil as it used to? How about Daqing? Samotlor? What about the North Sea production?

Let me point out a few facts that you may not know.

Look at the giant oil fields around the world. There are around 20 of them. They average more than 500,000 barrels per day of production even though their average age is around 65 years. I don't know about you, but when I look around I do not see any fields currently being developed that are expected to have daily production that surpasses 250,000 barrels per day.

This means that when a giant field like Daqing, Ghawar, Cantarell, Burgan, Prudhoe Bay, or the North Sea go into decline it has a large impact on global oil production. Not only are current levels of discovery relatively small, the depletion from these smaller discoveries runs much faster than in the giants.

That puts the math against your optimistic argument and I do not believe that it makes sense to argue against the mathematics.

Why are the oil companies silent?

They are not. Many CEOs have made it very clear that there is a problem. But they do not want to see their stock price collapse by having investors figure out the extent of their depletion problem. This is why they buy shale reserves that lead to losses but inflate reserve estimates.

Wouldn't a higher price for the "tight oil" that they are now producing put and end to the nonsense that "Vange" and others continually promote?

No. You have to forget price and look at the energy return. Most tight oil is a net loser. As such it will destroy capital. The shale game is continuing because there is a lot of free money financing malinvestment, not because shale producers have been making money drilling gas and oil.

And why aren't they desperately investing in alternatives in a struggle for self-preservation?

Because alternatives are not economic. Unlike most of you optimists, most people in the energy industry are not naive. You can't get enough energy out of solar to justify the energy used to create the system.

And where are the commodities traders? If everything that the "peak oil" theorists have said is true, why is oil only at $100 a barrel?

Ask Bart. Traders don't care about fundamentals. They want trends and are happy to make money on both sides when the opportunity is there.

 
At 2/07/2012 3:02 PM, Blogger Ron H. said...

"Why is it that you exclude renewables form the mix? surely if we let the markets work, they will be used in places that they make sense."

The market has already worked, and unsubsidized renewables are already being used where they make sense. That's the whole point.

 
At 2/07/2012 3:13 PM, Blogger VangelV said...

If, as some argue, oil is already expensive, then why are consumers translating the increased efficiency realized in internal-combustion engines into larger vehicles? Why aren't they buying smaller cars, carpooling and making greater use of public transportation?

Cost. Regulations. Optimism. Stupidity. Pick one.

It is expensive to switch fuels. It is expensive and inefficient to switch to public transit. (If it wasn't you would already be using it.)

Long before we reach "peak oil, or "peak cheap oil", technological changes in transportation will have rendered the event mute.

How naive. The entire world depends on access to oil. In a post-peak world many people will not be able to get it. That means more expense and more difficulty before the transition finally takes place. You really think that we can stop producing 80 million internal combustion vehicles per year and go to electric? Where the hell would the power come from? How about the material needed for the batteries? The energy to make each vehicle?

The transition needs time. Fortunately fools and charlatans divert attention by getting people to believe in fairy tales as they encourage yet another bubble. Well, any idiot who invested his own money of wind, solar, ethanol, or shale gas deserves what he gets. After the bubble bursts he is likely to find out that the big winners were the traders and the charlatans who created the bubble. The losers will be consumers that have fewer alternatives capable of actually solving our problems.

What's being missed in this discussion is not the impact of lower royalty rates on Alberta producers, but the central and undeniable fact underlying Dr. Perry's argument: "... the ultimate resource is human ingenuity and the human imagination coupled to the human spirit, which is infinite and will therefore never reach a finite peak."

What is missed is the fact that the Alberta government gave in after it made its very big error in 2007. The party got fed up with Ed Stelmach's stupidity as its members went on strike and wandered away. It backtracked on the royalty issue and all the companies that had reduced their activity in Alberta came back once the uncertainty was lifted.

But none of this will change the main trend. Alberta will increase its production of tar sands oil but will keep losing conventional production. Conventional producers with large cash positions will certainly reduce gas production and will begin hunting for smaller players to gobble up. Some of the small independents like Enerplus, ARC are going to look to buy cheap reserves just as they have for decades each time times looked tough and prices fell. They won't care if prices stay down for a while because they have played this game before. And if prices get out of hand they have no trouble selling off some of their marginal properties to the charlatans looking for a property around which to spin a story.

Before you try to reach a conclusion it helps to understand the situation, the history, the players, and previous outcomes.

 
At 2/07/2012 3:15 PM, Blogger VangelV said...

because not even krugamn would make so basic an error. that's not a school of econ issue, it's the very notion of econ itself.

But Krugman does that all the time. He never lets facts or logic get in the way of telling a good story.

 
At 2/07/2012 3:18 PM, Blogger VangelV said...

i do not know any economist, however bent and misguided, that would grant a degree based on bunny's understanding.

Sometimes my kids and I switch on Kudlow. They laugh at many of the stupid things that economists say and ask me how both can be said to be knowledgeable when they oppose each other on the fundamentals. They are right. Many people got economic degrees even though what they 'know' is pure bunk. If you read Taleb he will point out that most of the Nobels handed out in the field were given for work known to be total crap before the award was handed out.

 
At 2/07/2012 3:50 PM, Blogger Che is dead said...

This comment has been removed by the author.

 
At 2/07/2012 3:54 PM, Blogger Che is dead said...

"Because you would see the ruling elite fall. Do you really think that Chavez survives if everyone knows that he will not be able to use oil money to pay enough bribes that he is allowed to stay in power?" -- "Vange"

You mean like Kim Jong Un, Castro and the military junta in Myanmar? Oh, that's right, they've managed to hang on to power even without oil resources. Go figure.

"This means that when a giant field like Daqing, Ghawar, Cantarell, Burgan, Prudhoe Bay, or the North Sea go into decline it has a large impact on global oil production." -- "Vange"

Really? The Burgan started production in 1946, Ghawar in 1951, Daqing in 1960, the North Sea in the 1960s and 70s, Cantarell in 1976 and Prudhoe Bay in 1977. Now we have the Canadian and Venezuelan oil sands (over 2 trillion barrels equivalent), the Bakken and the Barnett and the Green River Basin with estimates exceeding 1.5 trillion barrels of economically recoverable oil. Sounds like a long unbroken line of major oil discoveries to me. When do we get the "large impact on global oil production" ?

 
At 2/07/2012 4:04 PM, Blogger Che is dead said...

"Before you try to reach a conclusion it helps to understand the situation, the history, the players, and previous outcomes." -- "Vange"

It was you who wrote - "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."

Of course, that was wrong wasn't it? 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

And let's not forget places like Iraq: West Qurna with 21 billion barrels. Majnoon, 13 billion barrels. Rumaila with 17 billion barrels. None of these are currently producing at maximum capacity.

All we get from you are a lot of unsupported assertions. Meanwhile, gas and oil production continues apace.

 
At 2/07/2012 4:12 PM, Blogger MaggotAtBroad&Wall said...

@morganovich 2:07

What I linked to was simply a story about the scientific paper. I'm sure the professor lays out his assumptions and the methodology he used to arrive at his conclusions in the actual scientific paper that he published. I suspect it is way over my head, so I did not bother.

But when you think about the breathtaking rate of scientific advances that man has made in the past 200 years, is it really too difficult to imagine that man will someday eventually figure out ways to economically mine minerals from the floor of the sea?

I'd be willing to bet that it really wasn't that long ago that smart people thought drilling for oil a mile below the ocean's surface was a science fiction fantasy. Now it's done regularly.

 
At 2/07/2012 4:18 PM, Blogger VangelV said...

Really? The Burgan started production in 1946, Ghawar in 1951, Daqing in 1960, the North Sea in the 1960s and 70s, Cantarell in 1976 and Prudhoe Bay in 1977. Now we have the Canadian and Venezuelan oil sands (over 2 trillion barrels equivalent), the Bakken and the Barnett and the Green River Basin with estimates exceeding 1.5 trillion barrels of economically recoverable oil. Sounds like a long unbroken line of major oil discoveries to me. When do we get the "large impact on global oil production" ?

Not at all. The shale discoveries are hardly new. Ayn Rand had one of her characters figure out a way to get large volumes of economic oil out of shale more than 50 years ago. It still has not happened.

And production from the tar sands will be limited to 5 mbpd, a level that won't be reached for another decade or so. That is one year of depletion. And there is no way to get enough shale oil out to replace depletion, particularly when shale wells are losing more than 70% of their production in the first year.

Keep in mind that even the IEA is telling us that depletion is running around 5 mbpd. Where is the new production coming from?

 
At 2/07/2012 4:31 PM, Blogger Che is dead said...

"How naive. The entire world depends on access to oil. In a post-peak world many people will not be able to get it. That means more expense and more difficulty before the transition finally takes place. You really think that we can stop producing 80 million internal combustion vehicles per year and go to electric? Where the hell would the power come from? How about the material needed for the batteries? The energy to make each vehicle?" -- "Vange"

Who said anything abandoning the internal combustion engine?

The Rebirth of the Internal Combustion Engine

Start-Ups Work to Reinvent the Combustion Engine

And increases in fuel efficiency will not be limited to automobiles:

MIT redesigns the Boeing 737 for 70% greater fuel efficiency

And speaking understanding the history, the experience of the 1980s is instructive. During the 80s Japan and Europe grew substantially yet oil consumption remained essentially flat through that decade as both regions strived to achieve better fuel efficiency. Emerging economies like those of China and India will also find ways to increase energy efficiency going forward.‏

 
At 2/07/2012 4:36 PM, Blogger VangelV said...

It was you who wrote - "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."

They are done. Their claims of reaching 12 mbpd turned out to be a lot of wishful thinking, just as I said. They are cranking up pressure to keep Ghawar production from declining but all that means is that the eventual decline will be much steeper. Anyone who is in the field knows what happens when secondary and tertiary recovery techniques are no longer effective. The decline curves look like a cliff.

Of course, that was wrong wasn't it? 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."


Really? These are the idiots who were telling you that depletion was 3.5% and you believed them. The Ghawar story is well known. The Saudis are injecting 7 million barrels of sea water per day to keep pressures high enough. But that injection comes at a price. Some of the oil is bypassed by the water front and is trapped behind. It is a lot like using two straws to drink instead of one. You might get the milkshake out faster but you will not get any more of it.

"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

LOL. A water cut of 28% is nothing to worry about? Go and take a look at what happened in previous fields when water cuts started to rise. We are not talking about vertical wells here. Ghawar uses horizontal wells. Once the water rises to the level of the pipe the game is over from that particular well. The problem is that you can only go so far until you drill into the gas cap and the field dies.

It is funny how the words you cite in support of your position would be causing the alarm bells to go on for anyone knowledgeable of the industry.

And let's not forget places like Iraq: West Qurna with 21 billion barrels. Majnoon, 13 billion barrels. Rumaila with 17 billion barrels. None of these are currently producing at maximum capacity.

This is a lot of BS. First, capacity is not production. Second, much of the capacity was not proved by the drill bit but created by the stroke of the pen. Do you see the problem. How do you manage that Iraq could double its reserves as it was fighting a war with Iran? And how do you expect to be taken seriously when you are so naive as to accept statements without actually checking them?

You were probably one of those people who fell for the eyeball monetization story, the housing never goes down myth, and have invested your capital in alternative energy that requires subsidies. Try thinking on your own and doing some research.

 
At 2/07/2012 4:38 PM, Blogger OBloodyHell said...

>>> As Julian Simon taught us...

Julian Simon is an idiot, as Paul Ehrlich as so amply demonstrated time and time again with prediction after prediction....

:oD

 
At 2/07/2012 4:41 PM, Blogger OBloodyHell said...

This comment has been removed by the author.

 
At 2/07/2012 4:46 PM, Blogger OBloodyHell said...

>>> Hydrocarbon resources *are* physically limited.

Not precisely. Naturally-produced ones MIGHT BE§, but there is always artificial means of production, and, for all any of us knows, there's a technique in development right now that can take sugar cane offal and turn it into high-grade petrofuels. No, I have no idea how that might work (if I did, I'd be richer than Bill Gates), but it's the whole point of Julian Simon. Ingenuity is never factored into the whole End-of-Days scenarios.

==========
§I say "might be" because there are fields which were believed actually tapped out and defacto dried up which have shown new oil. Where that's coming from is hotly debated, since no one knows at the moment, or at least, hadn't last I heard. It might be that our whole concept of how these things are produced is actually wrong, and that it's an on-going natural process. Not likely, but the point is -- we aren't at all as certain now that we understand all there is to know as we were two-three decades ago.

 
At 2/07/2012 4:51 PM, Blogger Che is dead said...

“We don’t share the tenets of the peak oil theory. We feel that they underestimate technological developments. For many decades to come there is no geological problem.” -- Claude Mandil, head of the International Energy Agency

... reserve growth and new discoveries have been outpacing oil consumption. From 1995 and 2003 the world consumed 236 billion barrels of oil. It also saw reserve growth of 175 billion barrels, combined with 138 billion barrels from new discoveries, added a total of 313 billion barrels to the world’s proven oil reserves. In the U.S., oil field reserves typically turn out to be four to nine times as high as the original estimates. The increase in production is a result of improved recovery technologies, further discoveries in the field, and improved field management.

Consider the Kern River field in California, which was discovered in 1899. In 1942 it was estimated that only 54 million barrels remained to be produced there. During the next 44 years the field produced 736 million barrels and had another 970 million barrels remaining. For geological reasons, petroleum engineers cannot pump every drop of oil out of a reservoir. But by 2004 technological advances enabled them to recover 35 percent of a conventional reservoir’s oil, up from an average of 22 percent in 1980. If this recovery factor can be increased by another five percentage points, that would boost worldwide recoverable reserves by more than all of Saudi Arabia’s current proven reserves. Economides points out that in 1976 the U.S. was estimated to have 23 billion barrels of reserves remaining. In 2005 it still had 23 billion barrels of oil reserves, even though American oil fields produced almost 40 billion barrels of oil between 1976 and 2005. -- Reason

 
At 2/07/2012 4:54 PM, Blogger OBloodyHell said...

>>> Do you see a global 'glut'?

As usual, Vangel ignores the incredibly bleeding obvious in the pursuit of an agenda point, figuring he can blow past it and no one will notice...\

Well, if no one beat me to it, here's the incredibly bleeding obvious... not because Vangel will listen but because he might fool someone who isn't as good at critical thinking yet to smell a pig in a poke before he opens it.

Demand has been rising in a number of places -- india, china, to name the obvious -- for most of the last decade (and longer) which is what drives it up without producing a "glut".

QED and "Duh".

That prices haven't changed substantially for a long time -- decades -- after adjusting for PPP/inflation metrics should be saying a lot more about "peak oil" than anything Vangel blathers about.

 
At 2/07/2012 4:59 PM, Blogger OBloodyHell said...

>>> that investment is not happening fast enough due to depletion and life cycle problems.

Yeah, nothing to do with the EPA mandates, thousands of pages of new regs added to thousands more of old regs, conflicting regulations, and lots of NIMBY lawsuits that should never be allowed to happen in the first place if private property rights were adeqately respected.

You sound reasonable until a casual perusal shows your sources to be libtard cranks.

 
At 2/07/2012 5:04 PM, Blogger Che is dead said...

"Do you see the problem." -- "Vange"

Oh, I see the problem alright. You are an ignorant douche bag who spends his time trolling "peak oil" websites, as evidenced by the ONLY link you've provided to support any of your arguments.

Here's a clue. Reading "peak oil", 9/11 truther and other conspiracy sites is not "research".

 
At 2/07/2012 5:05 PM, Blogger OBloodyHell said...

>>> Because you would see the ruling elite fall. Do you really think that Chavez ... Saudi....

And again, all it takes is a little reasoning to see the flaw in Vangel's case.

These people have powerful enemies, who could position themselves to take advantage of the downfall of those of whom you speak -- and THOSE people would have a vested interest in exposing this as a major problem.

There's no giant eeeevil cabal out there who all conspire together to do 'x'. It just doesn't happen, it's like the pressures against monopoly, there's always a huge advantage to cheat.

 
At 2/07/2012 5:13 PM, Blogger OBloodyHell said...

>>> How do you manage that Iraq could double its reserves as it was fighting a war with Iran?

Are you just a loon, or what?

It takes a few dozen geologists to find new reserves, and a few hundred technologists to find new ways to increase the recoverability of known reserves and "currently empty of recoverable oil" reserves.

While certainly warfare can affect it, even substantially -- are you under the rather imbecilic impression that all economic development ceases during a war? Particularly when the resources in question are either or both of a source of funding the war and/or a vital part of production of war materials?

Again. DUH.

 
At 2/07/2012 5:49 PM, Blogger Rufus II said...

Unsubsidized Ethanol was selling on the CBOT, today, for $2.21/gal.

Gasoline was selling for $2.93/gal.

 
At 2/07/2012 9:48 PM, Blogger VangelV said...

Who said anything abandoning the internal combustion engine?

I never said 'abandon.' I expect to have internal combustion engines continue very far into the future. But you can't transition away from gasoline and diesel very easily to other liquid fuel sources and as we all know the electrics are a dead end.

My point is that we will have to use a lot less gasoline in the future because when the enhanced recovery methods fail to stem the decline the production curve falls off a cliff.

http://imageshack.us/photo/my-images/104/yiballn7.jpg/

The Rebirth of the Internal Combustion Engine

These are some very nice ideas that have been floating around in one form or another for a number of years. But most of them are still not all that much better than the plain old combination of a small diesel engine in combination with a lightweight chassis. The problem is that in the case of the US consumers, they choose large, heavy vehicles and in much of the developing world they already have very light vehicles that are getting heavier as the standard of living toes up. Anyone who has taken rides in China, Thailand, Vietnam, Cambodia, and other places in Southeast Asia knows exactly what I mean.

If a motorbike is replaced with an efficient car the demand won't decrease. And if Americans were so badly hurt by the recession that they could not replace their older vehicles with newer ones that were more efficient where will they get the money to pay a premium for these newer vehicles that are supposed to be so much more efficient?

Start-Ups Work to Reinvent the Combustion Engine

While this was the same story as above, I split the two because I found an interesting comment that needs to be highlighted. The author writes about the Volt and the Tesla Roadster but both are failures. Why are we expecting that these engine designs will work out any better? After all, I have been reading about this for decades. When I was in university the big idea was ceramic engines that would burn so hot that they would ensure complete combustion and cut weight significantly. When some of us questioned the presenters about how they solved some of the friction and fracture toughness problems we got a lot of generalities but little detail. I have yet to see that design work.

Now I am sure that someone will develop a much better engine that will increase efficiency by 50% or more. But that will not help in a post-peak world as much as you think because of the very slow fleet turnover and the lack of capital to finance the new purchases. I have a feeling that the most likely reaction will be to stop driving as much and to run vehicles into the ground. Vehicle fleets will shrink substantially. And people will abandon the suburbs for more crowded accommodations in high density urban settings where subways and mass transport makes sense.

 
At 2/07/2012 9:49 PM, Blogger VangelV said...

And increases in fuel efficiency will not be limited to automobiles:

MIT redesigns the Boeing 737 for 70% greater fuel efficiency


This is not all that new. I used to build the even less efficient MD-80s and MD-90s and was always being told how new designs will make planes more efficient. The problem is that a radical redesign will require some serious capital costs and a more complex production process. That will increase costs substantially at a time when the market for airplanes may be shrinking. Given the huge risks that Boeing took with the 787 its board may not be ready to approve any major new design changes for several years. By that time new planes will not change the demand side by enough to offset the supply problem.

And speaking understanding the history, the experience of the 1980s is instructive. During the 80s Japan and Europe grew substantially yet oil consumption remained essentially flat through that decade as both regions strived to achieve better fuel efficiency. Emerging economies like those of China and India will also find ways to increase energy efficiency going forward.‏

In the 1970s oil was so cheap that it was used to make electricity. In the 1980s most of the decline in demand came from a change to coal instead. We are at a point where most of the efficiency increase that made sense because they were easy have already taken place. There is no low hanging fruit to repeat the actions of the 1980s.

 
At 2/08/2012 11:17 AM, Blogger bart said...

If we have, in fact, reached "peak cheap oil" as "bart" likes to phrase it, then why aren't we hearing more about it from those best positioned to benefit?

Yikes... listen to the voices of shale gas & oil, tar sands, solar, etc. - as well as what V said etc.

Also keep in mind that "peak cheap oil" is about *oil*, not all petroleum products or substitutes.



Long before we reach "peak oil, or "peak cheap oil", technological changes in transportation will have rendered the event mute.

That remains to be determined, and I hope you and others are right.








And where are the commodities traders? If everything that the "peak oil" theorists have said is true, why is oil only at $100 a barrel?

VANGEL: Ask Bart. Traders don't care about fundamentals. They want trends and are happy to make money on both sides when the opportunity is there.


Vangel is correct - and oil *has* moved up from about $10 to $100, with a high of almost $150. There's the fundamentals in action, and many have made good profits on that move based on fundamentals, including Vangel.

And fundamentals are far from the only short or intermediate term effect on virtually anything, the Fed's control/manipulation effects on interest rates being a good example.

I expect sweet light crude to hit at least $250-300 at a minimum before it peaks, much like my minimum target for gold is $3200 - both predictions from well over 5 years ago.

 
At 2/08/2012 11:22 AM, Blogger bart said...

There's no giant eeeevil cabal out there who all conspire together to do 'x'. It just doesn't happen...


I urge you to read this about "unconscious conspiracies":

http://viridia.org/2007/08/16/unconscious-conspiracies/


Also consider things like the Manhattan Project or the Pueblo incident. Conspiracies and secret projects happen, as a simple review of history will show.

 
At 2/10/2012 11:44 PM, Blogger Hydra said...

as both regions strived to achieve better fuel efficiency.

==================================

Except they did not get it. Their energy costs per unit of GDP are higher than the US.

They did get lower consumption, but the cost was a lower standard of living, and more human work per unit of GDP.

 
At 2/10/2012 11:48 PM, Blogger Hydra said...

as we all know the electrics are a dead end.

==================================

Oh brother.

Why would I invest in RADIO? Who would want to send a message to no one in particular?

 
At 2/10/2012 11:53 PM, Blogger Hydra said...

you can't just turn off big coal and nuclear plants in the daytime and fire them up at night. they take days to bring up to temperature.

=================================

I think big coal plants are actually banks of smaller boilers. While the whole thing takes along time to come on line, they acn increase or decrease production by quantums, fairly easily.

 
At 2/11/2012 8:43 AM, Blogger VangelV said...

I think big coal plants are actually banks of smaller boilers. While the whole thing takes along time to come on line, they acn increase or decrease production by quantums, fairly easily.

The reality is different from what you imagine. Coal and nuclear plants are limited to baseline generation because their output is so difficult to manage. Utilities use hydro and gas powered plants to deal with all of the variation in demand.

 

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