Understanding Energy: Professional Money Management and Peak Oil 36 comments
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Over the past two weeks I’ve taken the time to read over a new, 68 page Peak Oil report from Paul Sankey at Deutsche Bank (DB), entitled, The Peak Oil Market. What’s notable about this report is its holistic, comprehensive treatment of the global oil system as a moving and dynamic interplay between supply, demand, and technological mitigation.
With the exception of some work done over the years at Goldman Sachs (GS), I don’t believe I’ve seen such an aggressive confrontation of this difficult subject from any of the other major investment houses. Indeed, most of the comprehensive work done in this area tends to still come from the scholarly community. What’s eye-opening is that Sankey appears to accept that the peak of Non-OPEC production is now in place, that a final peak of global production will arrive sometime in the 2015 period, and, he is offering this viewpoint to the mainstream investment community. Generally, this is a community that remains ignorant of–if not dispositionally hostile to–oil and energy depletion issues.
To this point I was unsurprised to read Jeremy Grantham’s passing lament in his latest Quarterly Letter, that, his previous remarks on resource depletion went almost completely unnoticed, as though his words “had disappeared down a black hole” (see page 5). This is amusing to me personally, because, on the day that particular letter was released from Grantham’s GMO this summer, I hurriedly sent it around to my fellow energy and economics gurus with the brief tag-line, “Grantham gets it.” Later in July I noted this event in my Gregor.us monthly newsletter, The Burden of Transition, as I immediately regarded Grantham’s discussion of net energy and net resource decline as a signal that these ideas, much discussed in the energy community this decade, were now moving into the broader world of investment.
Of course, the investment world has always been interested in energy equities. But that is a much smaller domain than the whole-system problem of diminishing energy resources–not only in nominal, but in real terms. This larger system approach was addressed both at the ASPO Denver Conference which I attend 10-13 October, and, at the SUNY-ESF 2nd Annual Biophysical Economics Conference later the same week in Syracuse, NY.
I would suggest as others have, to those like Mr. Grantham who have attempted to proffer these ideas, that the audience at this point in history is still very much steeped in an economic paradigm that unknowingly derives its assumptions from the era of energy abundance. The modern economist is not likely to understand or even care, therefore, about the power density of oil–and that this makes his theories possible.
Generally, however, it is only those in the investment community who evidence broad intellectual interests–those like Jeremy Grantham, Peter Thiel, Eric Janszen and a few others–that have opened up to the larger issues surrounding energy transition. Mostly, American money management remains quite stuck in a bunch of antiquated, regressive viewpoints about the world, most of which are American-centric and offer cheerleading in the place of science, and the hard work involved in understanding these subjects.
Just today for example I was surprised (and not surprised) to see one well known money manager include the following hoary, head-banger phrase to partially explain the state of our oil supply in the United States: As my friend likes to say in his speeches, “All the oil in America is in four states: Texas, Louisiana, Mississippi and Alabama, and the dipsticks are in Washington.” When you read dumb stuff like that it reminds that maybe it’s time you asked your money manager: do you understand energy, or do you even care to do the work to understand energy? In the years ahead, the answer to that question will likely be crucial to a money manager’s performance, regardless of which asset class is their specialty.
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This article has 36 comments:
2. Oil will "peak" when demand for oil is put in a cage by the combination of major increases in global natural gas supply and nuclear energy.
3. The planetary endowment of natural resources, especially hydrocarbon resources, is unknown and unknowable. Geo-strategic developments that impede or facilitate resource developments cannot be forecast with any consistency(otherwise there would not be constant "surprises") and transforming technological and business process innovation cannot, by definition, be anticipated. Resource base, geo-politics, technology, risk capital all combine to shape and determine oil, or natural gas or coal or uranium or thorium supply. Anyone who can correctly and consistently forecast all these variables and their interaction 5 to 10 years from now, should have no difficulty at all in providing investors with very specific trajectories for oil, natural gas, electricity etc price, supply and demand in the US and worldwide over the next 2 to 3 quarters. Yet no one does, because no one can.
It's not that the supply is becoming exhausted; it's that remaining supply is in increasingly hard-to-get places: deep water, Antarctica, tar sands. This slows the rate of production while demand continues to increase. It also raises the energy cost of retrieving the fuel, so the net energy gain declines even more rapidly than the gross production.
Sure there's new technology—otherwise we'd already be fighting for the last accessible pools of goo. But the new technology is fighting increasing barriers to access, not growing the supply at the rate of demand.
Demand is down now, keeping the price relatively stable (but still double what it was just a few years ago). Assuming the world economy will generate more activity and demand in the next year or two, we will see the price go up radically as production cannot keep up.
In the US, we have built too much of our culture, housing, infrastructure around oil-based transportation. As the cost of oil inevitably climbs on the world market, we are in danger of being squeezed out by more efficient countries. Get ready for the paradigm shift.
There are no new sources of Oil, which will now prove sufficient in size to overcome the depletion of the existing, but decaying old super fields.
If we were just treading water, with no growth, we would need 1 new Saudi Arabia every 3 years!
If Production were to keep up with inflation, Demand & Population growth, then another 2 Saudi Arabia's would need to be found & put into production every 3 years.
New unconventional sources such as Canadian Tar Sands & Shale and the newer deep water fields are simply not sigificant enough to offset the depletion rates at the old super fields, such as Ghawar.
I suspect the current Production plateau may continue, for a short period, but production will fall behind Demand. However, as Demand outsrips Supply and Prices rise, those very Price rises will trigger the cost ratio to run ahead too much, thus triggering the next Economic & Share Market pullback.
The old rules are changing, the return on Money & Energy are being irreversibly delevered. The EROEI (Energy Return O Enrgy Invested) was 100/1 in the early days of Oil, it is now less than 10/1 and falling. New Oil is going to be much more costly to find & Produce and the Investment return is not going to be anywhere near what it used to be.
When perceptions finally accept that Oil has Peaked, then the rush away from Oil, into the search for something that may not be there, will also severely dilute the capital needed for Oil Exploration, as the EROEI will be decimated!
In fact, even though Demand and Price has been rising, the investment in new Exploration has already been falling!
There are no guarantees in life, but the likely outcomes suggest that 5-10 years from now, the Global Economic outlook, will be significantly different to today and I am not talking of upsides!
On Oct 27 06:46 AM User 353732 wrote:
> 1. The easiest prediction to make about oil is a statement regarding
> what will happen in 5 years. No one can possibly know...... and no
> will remember even a year from now who said what and when in the
> Fall of 2009. It would be far more credible and impressive if we
> could have actionable predictions about oil production, storage and
> prices for 2010.
>
> 2. Oil will "peak" when demand for oil is put in a cage by the combination
> of major increases in global natural gas supply and nuclear energy.
>
>
> 3. The planetary endowment of natural resources, especially hydrocarbon
> resources, is unknown and unknowable. Geo-strategic developments
> that impede or facilitate resource developments cannot be forecast
> with any consistency(otherwise there would not be constant "surprises")
> and transforming technological and business process innovation cannot,
> by definition, be anticipated. Resource base, geo-politics, technology,
> risk capital all combine to shape and determine oil, or natural gas
> or coal or uranium or thorium supply. Anyone who can correctly and
> consistently forecast all these variables and their interaction 5
> to 10 years from now, should have no difficulty at all in providing
> investors with very specific trajectories for oil, natural gas, electricity
> etc price, supply and demand in the US and worldwide over the next
> 2 to 3 quarters. Yet no one does, because no one can.
Your article's point is well taken, even if partially tongue in cheek: Money managers do not understand oil. Someone(s) with deep pockets not really knowing the details about how an investment works is usually how fools and money.... One might also conclude that trading in energy and energy prices right now may be shaped as much by money supply as resource constraints.
I just gave a great lecture in which I explained that the climate meeting in December was fruitcake. It looks like I'll have to give another in which I and a psychiatrist I once knew try to explain why even smart people who know that a peak is coming, merely twiddle their fingers.
On Oct 27 06:46 AM User 353732 wrote:
> 1. The easiest prediction to make about oil is a statement regarding
> what will happen in 5 years. No one can possibly know...... and no
> will remember even a year from now who said what and when in the
> Fall of 2009. It would be far more credible and impressive if we
> could have actionable predictions about oil production, storage and
> prices for 2010.
>
> 2. Oil will "peak" when demand for oil is put in a cage by the combination
> of major increases in global natural gas supply and nuclear energy.
>
>
> 3. The planetary endowment of natural resources, especially hydrocarbon
> resources, is unknown and unknowable. Geo-strategic developments
> that impede or facilitate resource developments cannot be forecast
> with any consistency(otherwise there would not be constant "surprises")
> and transforming technological and business process innovation cannot,
> by definition, be anticipated. Resource base, geo-politics, technology,
> risk capital all combine to shape and determine oil, or natural gas
> or coal or uranium or thorium supply. Anyone who can correctly and
> consistently forecast all these variables and their interaction 5
> to 10 years from now, should have no difficulty at all in providing
> investors with very specific trajectories for oil, natural gas, electricity
> etc price, supply and demand in the US and worldwide over the next
> 2 to 3 quarters. Yet no one does, because no one can.
Europe has had nat. gas stations and auxiliary tanks on vehicles for three decades. Even Argentina has had that tech since the mid '90s. That Fedzilla continues to block widespread nat. gas stations and retrofitting all cars with auxiliary, switchable nat. gas tanks with byzantine regs and hoops to jump through is telling.
On Oct 27 09:49 AM koolsool wrote:
> How would the peak oil story change if we switched transportation
> fuel from gasoline to natural gas??
It does not follow that oil production will fall off precipitately so that massive and chronic price shocks occur. As with nat. gas, and nuclear energy, viable alternatives will absorb demand. Other technology already makes coal-to-oil economically attractive at oil prices of $80/bbl, and that number continues to decrease. Oil "production" [read: extraction from the crust] may diminish, but the thesis of Peak Oil, which is essentially a Chicken Little view of energy availability, is poppycock.
The world is not going to become the Acidified Oven that Profit Gore demagogues, nor will Peak Oil ever be more than an academic exercise in too-narrow thinking.
On Oct 27 09:49 AM koolsool wrote:
> How would the peak oil story change if we switched transportation
> fuel from gasoline to natural gas??
As evidenced by what Gregor said in the article about money managers and what commenters (typical investors) such as Thomas Lacour and User 353732 said, most people still "don't get it" and they won't get until they are "forced" to accept the facts when oil is much higher in price.
This leaves fantastic investing opportunities for the people that "do get it".
Have a good day
On Oct 27 09:49 AM koolsool wrote:
> How would the peak oil story change if we switched transportation
> fuel from gasoline to natural gas??
books.google.com/books...
On Oct 27 05:18 PM che wrote:
> i wonder if they used a term "peak timber" in the middle ages
Peak Oil is part of natural constraints which are ALWAYS imposed on the global population, due to Darwinism and Malthusian Theory, two absolutely CORRECT derivatives of basic logic and mathematics.
Had the population been 100 million, instead of 6.5 billion, the global oil consumption would be 1/65 of current level so the remaining oil can easily lasts 2000 years. Alternatively if the remaining oil is 65 times higher than we thought, it could also easily last 2000 years. But in reality. Even if that is true, the population simply will quickly grow up by 60 fold, and hence consume the remaining oil in a few short decades.
Do you ever wonder why global population has been flat or see little growth throughout millions of years, but grows exponentially in recent centuries? Is it going to last?
Nature has a way of always cap the global population to within the limit that available and accessible resources can support. Beyond the limit, a portion of the population will be lost due to wars, famine, decease, mal-nutrition and infertility, and reluctance and extreme difficulty in raise offsprings. That has been true for millions of years and will continue to be true, no matter how advanced our technology grows.
Read my past articles on investing in a world of depleting natural resources:
seekingalpha.com/autho...
The only salvation from the Peak Oil crisis, is a science called Cold Fusion, and a critical precious metal called palladium.
Arguably the real issue is not the date on which oil will peak or the meaning of ‘peak’ in this context. Alternative technologies, substitution of other hydrocarbon sources, new finds, better utilization and substitution for oil as a power and raw material for plastics and fertilizers etc coupled with higher prices making existing sources of oil economically attractive for exploitation may well stretch out the time and redefine the meaning of ‘peak’ for this purpose. The real point is that, in the near to middle term, the stuff will become increasingly valuable and expensive and, in the longer (but foreseeable) term, we will need in a big way to come to terms with the fact that oil will no longer be enjoyed on anything like current terms.
It is human to deny awkward facts or to sound premature alarm. What is needed instead here is clear and calm thought about how best as investors and as a society we should work our way through the transition away from the current reliance on oil, both domestic and foreign, but make this transition in a measured and orderly way that avoids undue disruption.
It is the bridge to Cold Fusion.
I have to advise anyone investing based on cold fusion to wake up and smell the coffee. The science just isn't there.
As for this article, it's clear that hydrocarbon production will peak. It's not a question of if, it's a question of when. The real issue here is figuring out the timing and the price at which it will be economical to switch to alternative energy. I personally think that the price would be quite high, and the timing would be soon. You can pull out all sorts of statistics to support any case from the next year to the next two hundred years though. So, to each his own.
On Oct 27 06:01 PM Mark Anthony wrote:
>
>
> The only salvation from the Peak Oil crisis, is a science called
> Cold Fusion, and a critical precious metal called palladium.
The answers I suspect are either NO or Sweet F All
On Oct 27 05:36 PM balois wrote:
> ...or electricity (from a multitude of non-hydrocarbon sources, nuke,
> hydro and so on)? Have these peak oil scare mongers been to a car
> show latley?
>
> Have a good day
Perceptions,
Well said. And this is another reason to put money on China. We may all be leery of the techno-fascist government of the country, but they are following exactly the correct path for an oil-constrained future.
In ten years they have opened as many kilometers of HSR as exist in Europe. They have stated a national goal that 20% of cars sold in the country will be electrically powered by 2015. Yes they're building coal plants too rapidly, but they're also dumping gigayuan into solar energy production and use.
On Oct 27 08:55 AM perceptions_now wrote:
> Regrettably, I am of the opinion that Oil Production has already
> effectively Peaked in 2005, in that it has subsequently failed to
> keep up with inflation, Demand or Population growth.
>
> There are no new sources of Oil, which will now prove sufficient
> in size to overcome the depletion of the existing, but decaying old
> super fields.
>
> If we were just treading water, with no growth, we would need 1 new
> Saudi Arabia every 3 years!
>
> If Production were to keep up with inflation, Demand & Population
> growth, then another 2 Saudi Arabia's would need to be found &
> put into production every 3 years.
>
> New unconventional sources such as Canadian Tar Sands & Shale
> and the newer deep water fields are simply not sigificant enough
> to offset the depletion rates at the old super fields, such as Ghawar.
>
>
> I suspect the current Production plateau may continue, for a short
> period, but production will fall behind Demand. However, as Demand
> outsrips Supply and Prices rise, those very Price rises will trigger
> the cost ratio to run ahead too much, thus triggering the next Economic
> & Share Market pullback.
>
> The old rules are changing, the return on Money & Energy are
> being irreversibly delevered. The EROEI (Energy Return O Enrgy Invested)
> was 100/1 in the early days of Oil, it is now less than 10/1 and
> falling. New Oil is going to be much more costly to find & Produce
> and the Investment return is not going to be anywhere near what it
> used to be.
>
> When perceptions finally accept that Oil has Peaked, then the rush
> away from Oil, into the search for something that may not be there,
> will also severely dilute the capital needed for Oil Exploration,
> as the EROEI will be decimated!
>
> In fact, even though Demand and Price has been rising, the investment
> in new Exploration has already been falling!
>
> There are no guarantees in life, but the likely outcomes suggest
> that 5-10 years from now, the Global Economic outlook, will be significantly
> different to today and I am not talking of upsides!
Finc 101,
I worked for ten years as an I/T person in the geosciences departments of Sohio, Amoco, and Shell. I've seen the large-scale deposit maps. There are over 2.5 million ten-digit API base numbers (the well head identifier) in the continental United States.
They are <b>everywhere<... that igneous or metamorphic rocks are absent at depths of less than 15,000 feet. The cheap glory holes you are imagining have all been drilled. The only significant hydrocarbon accumulations in onshore North America are trapped in thin strata between impermeable shales, like the Bakken deposits underneath the upper great plains.
Many have been known about for a long time, but the thin "pay" made them uneconomical to exploit with vertical drilling techniques. Now that we have horizontal drilling and fully steerable bits we can exploit them, but the thin pay is still a limitation to the total deposit. There are no more supergiants in North America, expect perhaps offshore in the Gulf.
Anything else is a gnat bite compared to America's voracious appetite for liquid hydrocarbon fuels.
On Oct 27 11:51 PM Finc101 wrote:
> The reason why oil is so expensive is because drilling is so expensive.
> In the early days of oil almost all discoveries were made by the
> inexpensive cable tool method. This is a slower drilling process,
> but requires only 2 men crews and can drill thousands of feet deep.
> It is very simple and requires no mud pits, pumps or other capital
> intensive equipment. In fact, almost all of the great Texas oil fields
> were discovered this way. If we wanted more domestic oil production
> and more domestic oil discoveries, the US must allow wildcatters
> to utilize this cheap drilling method and find more oil. Currently,
> this method is made impractical by regulations require anti blowout
> equipment and other devices designed to elimiate waste and damage
> to the environment. If drilling is cheaper, then the well exploration
> process can be riskier (producer or dry hole) and dont have to produce
> as many barrels per day to be profitable. It changes the whole economic
> picture of drilling from one of hiring expensive contractors to a
> DIY proposition potentially. There is no way that the fields in
> P.A. or Texas would have been discovered by using todays expensive
> methods, no one would have taken the risk to drill. We need wildcatters
> again to discover new fields on the cheap.
Does anybody out there know how effective CO2 sequestration as a source of oil renewal can be?
I know that methane (a basic hydro) is made when water contacts hot coal.
Is there any reason to believe that pumping CO2 back into the ground (where there is plenty of water, heat, and pressure) won't produce ultimately some amount of hydrocarbon by-product?
Anyone have any studies or links on that?
If you care to ever, you know, listen to the companies who spend tens of billions of dollars finding and producing hydrocarbons each year (i.e. XOM, BP, CVX, etc.), you will find that the proved and probable global resource base continues to grow each year--4 trillion BOE in conventional resources; another 6 trillion in unconventional resources (e.g. tar sands, and shale oil) [source. XOM investor presentations].
Gating factors include humanity's willingness to recover these resources. With existing technology and an $80-$100 oil price, it is achievable to create attractive returns by producing these reserves; with technological improvements, superior returns from development and production activities will come. Another factor is that 90% of the global conventional resource is in the hands of National Oil Companies to which finding and producing oil is only a secondary concern--the first is milking the cash cow to preserve their hold on political power. Finally, the current hot gating factor is environmental politics. The U.S. has untold billions of barrels in conventional resource a few miles off our shores in the outer continental shelf. The Feds and the adjacent states could go a long way in filling their fiscal holes by auctioning offshore leases in these areas, but find it politically more attractive to starve our economy of a vital and strategic resource to serve the environmental religious zealots.
If you have something to say, make declarative statements and be prepared to back up your assertions with facts. If you are looking for unsubstantiated adulation or affection, get a dog!
> i wonder if they used a term "peak timber" in the middle ages
As a matter of fact, yes. The shortage of firewood in England prompted exploration, mining, and retail distribution of coal.
On Oct 28 04:17 AM Anandakos wrote:
>
> Finc 101,
>
> I worked for ten years as an I/T person in the geosciences departments
> of Sohio, Amoco, and Shell. I've seen the large-scale deposit maps.
> There are over 2.5 million ten-digit API base numbers (the well head
> identifier) in the continental United States.
>
> They are <b>everywhere<... that igneous or metamorphic rocks are
> absent at depths of less than 15,000 feet. The cheap glory holes
> you are imagining have all been drilled. The only significant hydrocarbon
> accumulations in onshore North America are trapped in thin strata
> between impermeable shales, like the Bakken deposits underneath the
> upper great plains.
>
> Many have been known about for a long time, but the thin "pay" made
> them uneconomical to exploit with vertical drilling techniques. Now
> that we have horizontal drilling and fully steerable bits we can
> exploit them, but the thin pay is still a limitation to the total
> deposit. There are no more supergiants in North America, expect perhaps
> offshore in the Gulf.
>
> Anything else is a gnat bite compared to America's voracious appetite
> for liquid hydrocarbon fuels.
>
> On Oct 27 11:51 PM Finc101 wrote: