Was 'Peak Oil' a Multi-Billion Dollar Hoax? 34 comments
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Crude oil prices started their astonishing price rise in January of 2007 right on cue for a normal seasonal rise into the summer. By August, prices were accelerating and continued higher going into the end of 2007. The usual seasonal year-end decline was hardly noticeable.
As 2008 began, crude prices seemed to be a one-direction trade as prices accelerated even faster. Something unusual was taking place in this market. OPEC and the Saudis claimed there was plenty of supply on the market but prices were being bid up regardless. Many analysts revived earlier predictions about peak oil and the impending decline in production as the justification for higher prices in anticipation of supply shortages in the future. Then in the middle of the summer the selling began. Was peak oil just a multi-billion dollar hoax?
In Volatility Trading Digest™ Volume 8, Issue 25, Saudi Oil Summit, dated June 23, 2008 we wrote:
A number of recent events suggest that there may be a coordinated effort underway to lower crude oil prices and the Saudi Summit may mark the beginning of more coordinated actions designed to curb prices.
After the meeting, we were surprised by the lack of coverage by the financial press. There were hardly any mentions of the event and no details were provided about any agreements that were made.
Crude Oil basis December 2008 (NYMEX) (CLZ8) 72.13.
Shortly after the Saudi Oil Summit crude oil peaked on July 11, 2008 at 148.60 per barrel. No doubt there are many factors contributing to the subsequent decline including the claim made by OPEC and the Saudis of excessive speculation in the futures market. If excessive speculation played a part in the price rise we would expect to see declining open interest in the futures market as long positions are liquidated. In November of last year, open interest was 1.6 million contracts, by the middle of May when crude prices were still rising it had declined to 1.5 million. At the price peak on July 11, 2008 the reading was 1.4 million and by this week they have declined to 1.1 million. So in the last 11 months open interest has declined about 31% with half of the decline in open interest occurring in the last 3 months since the peak in prices. We are seeing long liquidation in the futures market and with hedge funds under redemption pressure we think there could be more to come.
We are not claiming the entire price increase that began on January 15, 2007 at 57 and accelerated in August of ’07 from 67 was futures related. Nevertheless it must now be obvious to most everybody that it accounted for a substantial portion just as OPEC and the Saudis claimed throughout the entire episode.
Here is what Abdallah S. Jum’ah, Saudi Aramco’s president and CEO, during his address at the 11th Congress of the World’s Energy Council in Rome last November, as the price of oil was accelerating:
We have grossly underestimated mankind’s ability to find new reserves of petroleum, as well as our capacity to raise recovery rates and tap fields once thought inaccessible or impossible to produce....we still have almost a century’s worth of oil under the conservative scenario…and nearly 200 years’ worth under the target scenario. As a result I do not believe the world has to worry about ‘peak oil’ for a very long time.
Apparently nobody was listening to the Saudis, as everybody was focused on making the case for peak oil production as a justification for higher prices.
While we do not have the analytical resources of the Wall Street investment bank that first produced the $150 per barrel price forecast and then the $200 per barrel forecast, we do think OPEC has regained credibility for knowing something about their market. Perhaps in the future we should be paying more attention to OPEC and less to Wall Street analysts. If so, then here is the current OPEC outlook:
Even if governments are successful in calming equity markets and unfreezing credit markets in the near future, the fallout on the real economy from financial market headwinds is expected to be considerable.
The rapid crude oil price rise was like an alarm bell ringing and it was heard. In a democracy is seems we are only capable of focusing on the crisis of the moment. There is no doubt the credit market crisis needs attention, but hopefully the US will not allow this opportunity for greater energy independence to be lost even if crude oil prices continue to decline in the near term.
Disclosure: No positions in the sector
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This article has 34 comments:
Have we learned nothing, with the events of the last year? 'Apparently not.'
“Expansion becomes impossible without abundant cheap energy. So I think that the debt of the world is going bad. That speaks of a financial crisis, unseen, probably equalling the Great Depression of 1930; it’s probable we face the Second Great Depression. It would be a chain reaction, one bank would fail, and another one would fail, industries will close…”
So “Peakists” are not surprised at all by current events, and it does not contradict their explanations. In addition, I would instinctively not trust corrupt and autocratic regimes of the OPEC (such as Saudi-Arabia) as you do. This quote from Sadad al-Huseini, the former Head of Exploration and Production at Saudi Aramco tells a lot about the situation and the flawed official message from the KSA:
“The evidence is that in spite of the increases - very large increases - in oil prices over the last four years, we haven't been able to match that with increasing capacity. So, essentially, we are on a plateau.” (www.davidstrahan.com/b...)
The following comment from Dr. Chalabi, the former OPEC Secretary-General, gives additional information about how the cartel really works:
“OPEC countries do not care about what might happen 20 years from now. They care about what they get today. Because, these are politicians, they want more money, to spend rationally or not. What may happen 20 years from now… by that time they are dead, they don’t care!” (video.google.fr/videop...)
And finally if we look at the official numbers from the EIA (available in their webpage), we see that global oil production reached a maximum in 2005 (84.58 Million Barrels Per Day), then declined in 2006 (84.54) and 2007 (84.44), while oil prices were skyrocketing (18dollars in 1998 to 147 in July 2008, 800%).
So yes Peak Oil may have already happened, we will have to wait a few more years to be sure. However, during my interview with Dr. Campbell, he added on this issue, “a debate rages as to the date and height of peak, which I think rather misses the point when what matters - and matters greatly - is the vision of the long decline that comes into sight on the other side of it”. I can only agree with him.
> jack
peakoildebunked.blogsp.../
As long as the Saudi's had excess production that they could turn off and on at the wellhead, crude oil behaved like an elastic market. Now there's a limit to the upside, so the market has become an semi-inelastic market. Get prepared for more erratic price moves in the future.
...also contribute to the higher future costs of fossil fuels.
Sorry for the mistaken early hit on "Publish".
Why do people fall for it, every single time? There is a sucker born every minute, I guess. It is so obvious that chasing headline bubbles is always a recipe for loss and disaster, but people still do it, over and over and over.
So if thats what it takes to push Peak Oil off the table, then you can have it.
I prefer a growing economy with increased employment vs low oil. The Oil Sector is in the process of shutting down more expensive projects like Haynesville and other deep Sea projects where the seabed is 7,000 feet deep to preserve cash for mundane things like ongoing operational expenses: salaries, maintenance, you know keeping alive. I'm not talking about the big boys, I'm talking about the independents.
Just Like small companies are the lifeblood for employment in the US, which Obama wants to bleed, so the small oil companies provide the vast majority of incremental discoveries for which they need infusions of capital( which they aren't going to get at these price levels).
Definitely, No Peak Oil as long as the world stops growing or contracts.
The real question is how realistic 100 years really is, and at what price level we can expect. At $200 a barrel, it is very much more likely we have 100 years supply, as this will allow many now marginal operations to be profitable. The current price decline will definitely affect oil company future planning for the next few years, likely producing yet another traumatic upward cycle in prices as demand destruction abates and drilling activity slows to match current price levels.
I've attended a number of presentations like this from the Saudis for several years. This is not news. They have contended they can keep growing production slightly for several more decades. Yet only recently it looked as is they too had reached a current maximum capacity. They too rely on higher prices to be able to apply cutting edge technology and saying that they can keep producing 10 or more million bbls a day doesn't mean they will if oil hits $50. That also does not mean they can keep up with world demand when it grows faster than they can drill.
There are two things that are certain here. Oil is finite. Prices will change. Meanwhile, hang on because we are on a roller coaster ride that likely will see faster cycles than it has in the past. Oil prices have not decoupled from the world's economic growth rate (consumption patterns still match GDP), but still merely reflect it. That may be the nuance that those who came late to the "peak oil" picture did not understand. When demand outstrips production, and it will happen again, we can expect to see new record levels of high prices for oil, followed by increased production from new sources and demand destruction. Rinse and repeat. It isn't going to be a smooth curve.
King Abdullah of Saudi Arabia is quoted as saying: "When there were new finds, I told them, 'no, leave it in the ground, with grace from God, our children need it'."
But now we stand at a cross road: do we fall back into old patterns and say "yup, no peak oil, let's consume" or do we seize the opportunity of a recession to revisit our collective consumption patterns, and buy ourselves a few years respite to accellerate the technologies that will reduce our oil consumption total, and thereby change the fundamentals of the collision course between flattening oil output and increasing oil demand which we have been on?
Peak Oil is real, it just has been granted a temporary reprieve by a crippled world economy.
If Peak Oil is a conspiracy, then why are the following desperate measures still being used to recover non-conventional oil ?
1) Brazil has invested hundreds of billions to recover deep sea oil that is below 2km of sea water, 2 km of hard rock and another 2km of salt.
2) A trillion dollar economy has been created in Alberta to recover oil from the oil sands (a close relative of road asphalt).
3) Saudi Arabia has spent untold billions to construct a huge pipeline from the sea to pump millions of gallons of filtered seawater daily into its dying wells to recover low grade oil (i.e. sour heavy oil).
Conventional oil (sweet light crude) has peaked many years ago.
75% of the oil we pump of the ground today is non-conventional sour heavy crude.
Some other thigns to consider:
1. Reserves by themselves do not preclude the peak oil theory. In fact, quite the contrary; if certain countries are effectively 'leaving oil in the ground' for prosperity or contingency that is a real price factor (a real supply factor).
2. The geo-political cost of oil is also a very real one that factors into price. The fact that there may be 200 year supply in the ground is vague. Is it accessible? At what cost? Environmental, political, etc.
3. Speculation and uncertainty are also very real price/supply factors. If our primary energy source was solar we would be tracking weather, clouds, etc. and speculating the minutia and exigencies of available sunlight.
1. The head of the Saudi Aramco should know what he is talking about and at some level I'm sure he does. However, public statements must be taken with a grain of salt. If the public in Saudi Arabia ever finds out that the kingdom really doesn't have 100 years of reserves, it will be Aramco and the king's head on a platter. Saudi Arabia gets 2/3 of its oil from one oil field "Ghawar" and it is over 60 years old. Elephant oil fields live about as long as people and this one is a senior citizen! The Kingdom doesn't have any other fields that can take place of this one.
2. Peak oil doesn't mean that there will be NO more oil after a certain date. It merely means that production will peak and will slowly decline. At the top this is a slow process with decline of 1 or 2 percent overall. It is hard to clearly see these small declines and most people will 'miss' Peak Oil. It will only be visible in a 'rear view' mirror.
3. Peak Oil doesn't mean that oil prices will always rise forever and ever. Economic variables will play a role too. Peak oil does not repeal the law of supply and demand (many of the left leaning, socialistic commentators like to ignore supply and demand). Demand destruction due to a severe recession will cause the price of oil to decline (temporarily).
4. At some level Peak Oil will produce Peak Oil prices. At this level of production and this time, $140/bbl was the peak price. In the future, it might be higher or lower.
Take Haynesville, the CEO of Devon Energy came on CNBC on OCT.17th and said that you can toss out previous expectations of an increase from that area. It is no longer cost effective to extract NG with prices at these levels. He expected production of NG to decrease by 1/3rd in 2009.
The talk about the "highest levels and new records of" will cease abruptly unless prices rise to exceed the costs of extraction.
Meanwhile, the Middle East is in the midst of a crisis of their own making. Trillions of dollars in spending on construction projects of all sorts, from refineries to aluminum smelters, to steel making plants. The Following Oil prices are what they need from an Economic Breakeven Basis: Iran and Venezeula $95, Russia $70, Saudi Arabia $55.
You can find these estimates on Jim Kingsdales site:
Energy Investment Strategies.
I once saw an estimate that because of all of the Infrastructure buildup, Iraq needed $110 to breakeven.
I doubt very much that they are going to allow oil prices to fall low enough to put themselves into our shoes.
oil supply = limited resource with new discoveries decreasing.
demand = increasing
the debate is still on the table on whether its happened or not, I give you that, but if you are in a house with a limited pantry and you keep having kids, are you going to deny Peak Food, too?
Peak oil is about flows (current production) not resources (oil in the ground that can be develped for production under current economic conditions) and ELM is about flows available (from "export land") to be imported (by "import land"). The model says that, typically, exporting countries continue to increase their internal consumption even while they reduce their exports. Look at the very large increase in car sales in Russia and the substantial ongoing investments in KSA on both refineries and petrochemicals. Internal consumption means less for export.
The WSJ recently reported that world oil exports have declined in 2006 and 2007, and look to do so in 2008 (the Saudi oil production burst this summer notwithstanding).
This happened in the US even before the US peaked in 1970. The North Sea peaked in 1999 and UK exports then declined to -0- (happening about now). Mexico peaked in 2004 and their exports are now crashing. It looks like this is just beginning to happen for Russia.
So for all you investors out there, look to ELM as your leading indicator on what is to come... It's oil available to buy, not oil being produced.
As for statements of the Saudis, always keep in mind that they keep oil and gas data as state secrets... more closely held than those in the USSR before collapse. The CIA was able to predict in 1977 that the Soviets would hit peak production in the mid to late 1980s (to date, Russia and the other FSU countries have not exceeded that level since). Does the CIA have a view of KSA's oil and gas profile? Probably, but we aren't going to know that for years.
They may say they're saving it for their grandkids, but that's just words. They have consistently refused to let anyone look at their data or inspect their fields. You want to trust your future on that, go ahead...
Recent oil price drops seems to be a result of lower demand because of the global economic crisis. In other words, people are conserving oil in unforeseen numbers after being forced to initially by higher prices. The surge we saw in 2008 may have been the leading edge of global peak oil, with a spike caused by futures speculation this summer. But people are sticking with conservation (for the most part) and economic uncertainty is keeping them thrifty.
To assume that these new behaviors and prices mean the "end" of Peak Oil is absurd. How short can one's attention span be? Do you sell off your stock just because they dip for a few months?
The physically finite nature of petroleum is not in dispute, except for crackpots who promote abiotic oil theories.
The big problem is that many people see the world only in terms of money. They reduce physical scarcity to an abstraction that can be deleted from a spreadsheet when inconvenient to their agenda. In the real world, things get scarce and substitutes are never guaranteed.
enough_already.tripod..../
When oil production peaked in North America it was because it became cheaper to drill abroad.
As global oil production becomes more expensive and solar and the like drop in price we'll end up driving plug in hybrids and be happier for it!
Myth: The World is Running Out of Oil
www.youtube.com/watch?...