The Great Oil Deception: Part Two

"It is getting much more expensive to find Oil these days."

While it is true that it is getting more expensive to find oil, one has to examine whether that increase is of a permanent nature, as many argue. The reason that it is getting more expensive to find oil is mainly because service, drilling and other costs are sharply increasing. While this may seem like a circular argument at first, my intention is to demonstrate that the cost of finding oil is rising to a cyclical peak, and that it is not secular in nature.

All the data shows that the cost of finding Oil is rising sharply. Why? Very simply, because of a self reinforcing boom in exploration and production, which led to a capacity shortage in oil services and drilling as demand for rigs and services increased faster than supply. Other costs, such as for steel, or the acquisition of existing producing properties, has also increased for the same reason - a shortfall in capacity in various sectors, or an imbalance between supply and demand.

It is, therefore, a cyclical increase in the cost of finding oil, not a secular or systemic one. If the exploration and production sector cuts drilling significantly, say 30-40%, then extra capacity will flood the oil services and drilling market, leading to a plunge in prices and a decrease in the cost of finding and developing oil.

This argument is supported by data from many sources.

The Energy Information Administration [EIA] study entitled Oil and Gas Lease Equipment and Operating Costs has data from 1976 to 2006. The chart below demonstrates the cyclical nature of oil services.


Look at the green line back in the early 1980's when the cost index fell from 123.3 to 82.6 in just five years. This study does not include drilling and completion costs. If you included these, the cyclicality would be even more pronounced. Also, this data is only through 2006. The green line currently is significantly higher.

The same trend can be seen in the HS/Cambridge Energy Research Associates [CERA] Upstream Capital Costs Index. The latest monthly release from May 2008 shows that "the latest increase raised the index to 210 points from its previous high of 198. The values for the UCCI are indexed to the year 2000, meaning that a piece of equipment that cost $100 in 2000 would cost $210 today."


This index tracks "the construction of a geographically diversified portfolio of twenty eight onshore, offshore, pipeline and LNG projects."

As an example, five years ago, it may have cost $250,000 per day to lease a rig to explore deep offshore. Today, if you can find one, it may cost you $800,000 per day. According to Cambridge Energy Research Associates [CERA], day rates can be 30-40% of the cost of an offshore well.

So in a sense, it is getting more expensive to find oil, but people who say this are either ignorant of the reason why or being disingenuous to further their investment case. Bullish investors use this as an excuse to justify that oil prices have to stay higher because the cost to find oil is higher.

Please understand that I am not predicting that these various cost indices will turn down soon, rather am only stating for the record that they can turn down, and have turned down precipitously in the past, once capacity catches up to demand.

If you argue that the cost of finding Oil is permanently higher, you are accepting the argument that industries that have been intensely or even pathologically cyclical for 100 years are no longer subject to those conditions. This is a bold statement to make and you better be damn sure you are right.

Please read my earlier post of the fallacy of demand growth in emerging markets.

Comments

[EnoughWealth]

Even if the cost of production facilties, drill rigs etc. is largely cyclical, that doesn't mean the cost of finding oil isn't on an exponential upward trend. That's because the cost of finding oil depends on the ratio of wells dug to commercial oil fields found. I don't have the data available, but I've got the impression that the number of exploration wells dug per oil find has increased, and the average size of finds has been getting smaller and smaller. Also, although the cost of like infrastructure may return to previous real cost levels after the current speculative bubble in oil and commodities corrects, the nature of production equipment required has changed over time - these days there are few new large oil finds conveniently located on land, instead, new production is off-shore, and tending to be in deeper water (and therefore need more expensive production facilities).

If you have the data, it would be interesting to see a plot of number of exploration wells dug per GL of oil resource found, and also the average size of new production fields brought online over time.

[2008traveler]

The price of oil, drill rigs, steel, corn and just about anything that you buy in the grocery store has gone up. The real culprit. Printing of money by the Fed. Not speculation. Inflation. Do the math. Calculate how much these same items have increased in Euro, Yen, Swiss Franc, gold and I am sure it will be less. These are just symptoms of inflation not causes.

[Maximo]

Everything depends on the long term intersections of supply/demand. I agree that in the long run, whatever that is, reasonably priced alternatives to oil may be developed however it's difficult to see how significant pain can be avoided until then.

[gigem77]

China was a net exporter of oil 10 years ago and is now the 2nd largest importer. World spare capacity then was 12 million barrels per day. Now it's less than 1 million and in light sweet crudes it's negative. That is a paradigm shift. Energy stopped being "intensely" cyclical when world production peaked in 2005. Speculation has discovered the inability of producers to bring additional supply to market.

Your other article on emerging markets is so incomplete, it's worthless. You ignore rising internal demand and falling production in OPEC countries. Indonesia just dropped out of OPEC because they are now net importers. Mexico has cut exports to the U.S. every month this year. Their Cantarell production is falling fast. The only country promising increased production is Saudi and their spare capacity is sour/heavy crude that is less desirable.

World production of light, sweet crude is not growing, so even relatively small incremental increases in demand push prices higher.

[SailDog]

The other issue is that oil is becoming harder to find. Chevrons Jack find appaently cost $100m.

Brazil oil E&P will be extrordinarily expensive and the technology to drill it does not exist. New metals will need development and the cahllenge of lifting 100+ deg C oil through water at 4 deg C has not yet been addressed. I have no doubt all thes issues will be overcome, but it aint cheap.

So I accept the argumant that much of the cost is cyclical, but much is structural too. Brazil is a new oil province. Which is great, but it isn't Ghawar, that's for sure.

[pachanguero]

Wow.....you are really wrong and stuck in a way of thinking that seems outdated at best. No demand growth in Emg. markets? Dude I have lived there and it is real. Get a passport fool. Then get back to me. Just trash here.

[mixter]

As a newly graduated geologist it was almost impossible to find employment in the exploration field in 1958. Out of a graduating class of 136, two people were offered jobs, one as a field hand on a seismic crew. The world was awash in oil during that time frame.

I have a 1931 Amerada Oil Co. (now Hess) showing a loss of $1.8million on revenues of $8.9 million. The price of oil had declined from $1.24/bbl. to $0.60/ bbl., and they were lamenting the fact that government restrictions would not allow them to produce anywhere near their maximum production rate. One well in Kern County, CA. was capable of producing 20,000 bbls./day, but was only allowed to produce 2,000 bbls./day. They stated they hoped there would come a time when demand met production capabilities.

All I can do now, is laugh, laugh, laugh!

[FrankRichards]

So if it weren't for that pesky cycle, the new Brazilian oil could be produced for the same price as the North Sea? And ANWAR as cheaply as Odessa?

[marvingortler]

Deep sea rigs cost approx. 1 Billion to build. Rigs are built only when there are prior committments. Daily rates are 600K/day & all sold out.
There must be a very high degree of confidence that these huge
investments will bring huge returns. What is the evidence & source
material that would justify my investment?

[huangjin]

You may enjoy this report from AIER, Is There An Oil Glut In Our Future?
www.aier.org/research/...

One must be sure to separate the long-term from the short-term, but certainly if you believe in the market, high prices always serve to deliver more supply, either directly or indirectly through substitution. Unfortunately, the best substitution is electricity from nuclear generation. The U.S. Congress has restricted ALL forms of energy for the past 30 years. Once nuclear, coal, domestic drilling, solar, wind, etc. are within sight, the future price of oil will decline.

[lakeside]

I guess you must be correct. In Saudi Arabia where oil almost comes out of the ground is as expensive as drilling for oil under the ocean. No, that can't be right. Explain your thesis to me again. Was this published on April Fool's Day?

[Xenon]

Fig. 2 shows the index for the cost of oil and the cost of E & P being equal in 2003. For 2007 the cost of oil was double the cost of E & P. So, even if it is cyclical the spread is very large and E & P costs are not going to drop anytime soon.

[mpkirby]

Let's assume for a moment that the thesis is correct. That the cost of finding oil is in fact a short-term cyclical phenomena.

If we divide the oil in the world into two camps. Oil discovered before 1990, and oil discovered after, the decline in production from established fields isn't being made up from the discovery of new fields AT ANY COST.

In other words, in the past it took 1 single rig X weeks to find significant oil in off-shore drilling.

Now it takes multiple rigs much longer.

Perhaps we just need more rigs. But I suspect the horizon is receding into the distance. And we can't build rigs fast enough to offset decline.

There can still be made an arguement for above-ground reasons driving the problem.

Off-limits drilling in the U.S., combined with nationalized oil companies that under-invest in established fields.

But even if that were resolved today, the resultant increase in production would only stave off the issue for a few decades at most.

Think of it as an insurance policy. We need to invest in reducing our use of oil "just in case" there turns out to be a long-term decline in production. If we are wrong. Oh well. I'll go buy another SUV.

Mike

[Shaggieman]

Bush's first 4 years of a Republican controlled congress should have drilled ANWR but did NOTHING. It seems like the consumer is right where they want us, over a barrel.

That said, why should the U.S. E&P companies be finding oil for other countries and then we're kicked out after finding it? We're raising the price of our own domestic drilling and gaining very little crude oil. Keep the rigs home and working in our fields and bring down the E&P day rates.

[ari5000]

Jared Diamond's book "Collapse" covers this kind of phenomenon. Many civilizations -- on Easter Island, the Vikings in Greenland... and so forth faced complete collapse of their civilization due to destruction of key resources. The great Mesopotamian civilizations we read about in school were probably destroyed when nature ruined the rivers causing a decline in crops. Eastern Islanders cut down all the trees.

This world relies on oil more than any other natural resources other than perhaps clean water-- which is also running out in many places. The world will either circumvent collapse by harnessing new renewable resources: wind, solar, tide -- or it won't.

I am glad many people still think oil is in a "bubble". If everyone were aware of how close we are to catastrophe, I'm sure oil prices would triple. Unfortunately the U.S. has done almost nothing to promote new technologies --we've been stuck in a ridiculous war where our military burns insane amounts of fuel each day.

The clock is ticking. This article makes me happy since I know the energy stocks I own are still inexpensive.

[ari5000]

I hear about ANWR as if it's the answer to all our problems. How come all the people who blame Democrats for not drilling in ANWR never seem to mention the fact that ANWR would provide, at most, a 3% increase in production, dropping our reliance on foreign imports from around 66% to 63%.

Anyone who thinks drilling in ANWR will provide any kind of relief in oil prices is delusional.

[galewhitaker]

For those conservatives who think that drilling in ANWAR is the answer to our problems think about this. The only practical way to get the oil to market is to pipe the oil to the north slope area and send it to the port of Valdez via the existing pipe line. The Alaskan pipe line has a capacity of 1.4 million barrels/day. That amout of oil is trivial when compared to the 20 million barrels of oil currently consumed by the U.S. Another aspect is that the oil from ANWAR will not be owned by Americans. The oil will be owned by the company that does the drilling. These folks are going to sell the oil on the world market. If Japan is willing to pay more than the refiners in the U.S. it will all be shipped to Japan. Another reason not to drill in ANWAR is that when energy hoarding begins sometime in the future, it has already begun in Saudi Arabia, the oil in ANWAR could save our butts.

[truthinvesting]

we need to model Brazil

[jjason]

On June 3, 2008, testimony given by Professor Michael Greenberger to the US Senate Committee investigating the speculation in oil futures trading is now coming to light. There is not going to be an oil shortage tomorrow and soon we will see oil prices drop as the speculators drop like flies. Then I expect to see investigations into Goldman Sachs and Morgan Stanley and their analysts for "pumping" oil futures contracts and oil prices.

[CLH]

Its pretty hard to think of any rational reason for not drilling. Saving it? What stupidity. Who cares if people are cold. The myth of global warming is enough for them.

Going without is what socialism is all about.

[Georealist]

An article with serious flaws...sounds more like a CERA tract than an honest or invesible aricle on oil! Oil is expensive because it's hard to find..hard to develop and hard to bring to market. The costs of the associated infratstructure contributes to the incredible development costs because...the technical sophistication and supply hurdles are built into 7000 and 8000 foot oil!
Really...Eric Fox has laid a load of Alpha pumped nonsense on you...the real markets stopped paying attention to CERA a long time ago...this stuff is barely above the abiotic fantasy of Wm Engdahl...a shill for Arab oil interests and about as phony a pretender to the crown of analyst one can find.

[paulk8756]

Should the supply and demand for oil and gas return to some sort of equilibrium, your thesis is partly right. Supply and demand will lower the costs of labor and materials inputs over time accordingly.

But certain costs will continue to climb or maintain their current levels unabated. These include rig exploration contracts, which are set years ahead, the increasingly remote and challenging locations of these natural resources, the unknown pricetags of yet to be developed technologies required for mining oil shale and the various types of coal conversions, not to mention the expense of present and additional environmental regulations and litigation.

By way of example, the sales of the Japan-based sole supplier of prefabricated domes for nuclear reactors are booked through 2020. And Brazil has already contracted ALL the deepwater rigs available in the world capable of extracting oil from its newly discovered offshore resources.

Once again, while the charts and graphs and other tools utilized by "technicians"... are helpful, the "fundamentals&quo... of the supplies of oil and its related costs provide a somewhat different and more expensive picture.

[Gmel]

Just wanted to point out that it takes a lot of refined gasoline, jet fuel and diesel at current prices to "find oil". All those exploration companies are paying taxed refinery prices for the fuel that is running helicopters, powering oil rigs and heating arctic work camps. Presumably that is a big bump to their current operating costs.

[nakedjaybird]

Guess what. I have an energy source that will reduce your exploration costs to zero. Will put all the geologists out of work; even the drillers, and all you guys will have to find something else to do cause you won't be able to right about dinasours any longer: IT'S CALLED SOLAR.

Every one of you use it daily but are not aware of it because of where your heads are.

[paulk8756]

Various posters,

Your arguments for not developing our domestic oil reserves in ANWR are specious. This is just the type of thinking that got us into this pickle in the first place.

Since oil and gas reserves in any part of the of the U.S. are by their very nature limited, why utilize our resources in Texas or offshore Louisiana, either? None of those contribute more than a few percent to our daily oil production individually. Why explore in the Bakkens, where wells only produce a few hundred barrels a day, or develop our oil and gas reserves from the Barnett, Marcellus or Haynesville formations? Are all these "limited" sites somehow less environmentally worthy than the Alaskan frontier?

What you've unwittingly bought into in opposing ANWR is the poster child of the Green Menace, which, if left unabated, would curtail our private transport, raise prices and taxes, and restrict the freedoms of Americans beyond comprehension. Did you watch the so-called "cap and trade" debate the other week in the U. S. Senate? That's just the tip of the iceburg, if you will, of what they have in store for us.

Indeed, think about their latest arguments that oil companies are only exploring for oil and gas on a quarter of their present federal leases. Well, what they fail to mention it takes years to obtain the required operating permits, and they file multiple lawsuits to thwart any exploration at each step of the process.

The real "inconvenient truth" is that these people have a grand plan in mind for us designed to limit our future economic development, and enrich their own wealth and power in the process. When this occurs in other parts of the world we call it Socialism.
Whatever name you want to give it as it happens here, I'll pass on the privilege, than you.

[cato]

Get an editor!

This is one of the most incoherent, rambling articles I've read on SA. I think I agree with this guy. But what abominable writing.

[paulk8756]

P.S. to Various Posters,

Here's some final ANWR related (...and unrelated) info for you, then I'll get off my soapbox.

Polls show Alaskans would like the freedom to develop their oil and gas resources by a ratio of about 9 to 1. And it's a good thing they and our other neighbors to the North, the Canadians (...our number ONE supplier of oil and gas, incidentally), feel that way. If they didn't, we'd be walking already.

Indeed, we're the ONLY country in the world not trying to explore for more offshore oil and gas resources. If other nations took the same approach we do, the entire globe would be mired in a permanent economic Depression.

Interestingly, both Democrat Senators from North Dakota think exploring for oil in the Bakkens is terrific for THEIR state's economy. Why then do you suppose they both repeatedly OPPOSE exploring for oil in ANWR? Could it be that's just a touch HYPOCRITICAL.

When ANWR was proposed under President Eisenhower, we promised Alaskans, who were concerned over the prospects of federal control of their property, that they could develop the oil there at ANY TIME they wanted to. Gee, what happened to that promise? Guess they were pretty stupid not to get it in writing, weren't they...?

MONTANANS were obviously a lot smarter. When they joined the Union, they actually made the feds sign a CONTRACT stating that if their gun rights were ever abridged by the national government, they could opt out and become a self-governing territory once again. With the DC gun law before the Supreme Court, their state legislature has already adopted a Resolution reclaiming their independence from the U.S. if the DC law is held Constitutional.

Oh, and I know at least one person who will DEFINITELY become a resident of Montana if they're successful...!!! (By the way, Montana is self-sufficient with their oil, gas and coal resources. They'll be EXPORTING them to the rest of us without having to worry about all the increasingly onerous environmental regulations and related litigation.) Sounds perfect, doesn't it?

[paulk8756]

For those of you still unconvinced of the idiocy of our Congress to not further develop U.S. energy resources, I refer you to today's Seeking Alpha Energy post concerning Russian oil and gas production. It seems the Russians are busy in their quest to outdo the Saudis and become the world's largest oil and gas producer.

So, those of you who don't like sending your paychecks to the Middle East to import the energy we require to maintain American jobs and our economic well being will now be able to forward them to Russia, instead. Wouldn't it just be cheaper to get rid of the Green "Know Nothings" and their Democrat minions in Washington?
You know, some REAL "Change we can believe in," at long last.

[dizzyB]

Sheer garbage. The author simply has no knowledge or understanding of the complexity of the equipment or the problem of drilling in 25,000 feet of water or horizontal drilling and fracturing shale formations.

[paulk8756]

This bears repeating, NO ONE testifies before Congress without being invited by a Committee chairman, who is obviously a Liberal Democrat. That's where this all this "conspiracy" nonsense is emanating from.

The real conspiracy that needs investigation is how the Green Menace got and maintains control of the Democrats in Congress and federal regulators, which has caused oil prices to quadruple in recent years.

Laugh if you want to. And you can keep on laughing everytime you fill up your vehicle at the pump. Oh, you think four bucks a gallon is too high? Well, I'm sorry, just wait until it's six or eight!

The only ones still laughing then at us nitwit Americans will be the nationalized oil producers, who pump about 80% of the world's oil.
And here's another even more laughable idea now posed by the Liberals, "How about suing them?

[gashousegorilla]

Too bad the Republicans, during 6 years of absolute rule, didn't pass legislation to drill ANWR. At this point, they're hypocrites if they complain about anyone else not doing it.

Personally, I would like to drill it...as well as migrate to solar.

I don't think the enviro impact is nearly as bad as burning the equivalent in coal -- which generates more CO2. Also, piping oil around isn't nearly as dangerous as shipping it. So, I encourage environmentalists/ecol... to support drilling in ANWR and building a pipeline.

[paulk8756]

The Republicans actually did pass ANWR once when Newt was running the House, and they managed to get the 60 votes necessary at the same time in the Senate. Unfortunately, Bill Clinton VETOED it. We'd be producing that MILLION barrels of oil a day right now, and prices at the pump would be less. But that's moot now... both Presidential candidates say they're opposed to it.

They're both also opposed to all other forms of energy that produce CO2, which takes in about everything except nuclear. And they won't do that, either, which will stunt the growth of plug-in hybrids, not to mention causing future BLACKOUTS on the electric grid.

Just wait, if you like the limited access to energy we have now, it's going to get alot better!

[gashousegorilla]

>> The real "inconvenient truth" is that these people have a grand plan in mind for us designed to limit our future economic development, and enrich their own wealth and power in the process.

There you go again.... You paranoid nuts believe there is always an "agenda" behind preserving enough of the planet so that future generations may continue to enjoy it.

The "agenda" is simple and right in front of your face: create a sustainable economy. That's it! That's the agenda. Take off the tinfoil hat and start looking at the facts and arguments anew.

Who will profit from this? Anyone can. Companies with green tech are in the market. You can go long or short. If you had a usable skill, you could work for them.

[gashousegorilla]

>> The Republicans actually did pass ANWR once when Newt was running the House, and they managed to get the 60 votes necessary at the same time in the Senate.

Republicans had a supermajority back then. What happened? And what happened in the 2000-2006 timeframe when anything could've been done?

[gashousegorilla]

>> The Republicans actually did pass ANWR once when Newt was running the House, and they managed to get the 60 votes necessary at the same time in the Senate.

Republicans had a supermajority back then. What happened? And what happened in the 2000-2006 timeframe when anything could've been done?

[barnburner]

Today's headline news:"UN chief says Saudi Arabia plans to increase oil production by 200,000 barrels a day". Anyone want to speculate on the reaction of tomorrows oil and oil-stock prices to that headline?

[Soylent]

"Guess what. I have an energy source that will reduce your exploration costs to zero. Will put all the geologists out of work; even the drillers, and all you guys will have to find something else to do cause you won't be able to right about dinasours any longer: IT'S CALLED SOLAR."

If you had the mental faculties to examine your claim about solar you'd realise it was just another name for natural gas.

You might have also discovered that liquid fuels are more expensive than just about any form of energy(except solar of course) and this simply could not be true if electricity was a good substitute for oil.

[stonemad]

yes , you need a passport. I have been to Asia numerous times in recent years and you need to see what is going on there. the U.S is a sideline show.

[SIMPLE d]

well, the energy required to produce the equipment is at least partially based in oil. So... in the late seventies to early eighties there was an oil crisis, this influenced the cost of operations and equipment.

Who produced the equipment and ran operations??? I bet that if you looked at oil rich nations during that time frame that probably you would find their operation and equipment costs were average if not lower.

Note also this time period is after the 1970s US oil peak.

The current trend may very well be due to the world known oil peak (post 2005)...although some more wells may be drilled yet to slow decline...

[starkoski]

CERA is bunch of phonies & charlatans. Yergin stated about a year ago that crude would be in long term plateau of 60 - 70 dollars a barrell. This guy should be laughed off the court & is in the process. For some reason you cannot and willnot grasp the concept of flow rate of oil and not available resource. I am very glad because it makes our long positions much more powerful. See you at crude $300/barrell in 2010 - that was easy.

[Mmarrkk]

Okay Mr Fox, you are baasically saying that the only reason it cost more to find/produce oil these days is hyper inflation in the oil/gas service/supply/etc. businesses. Well, you might want to go back to school and do some research. In case you haven't noticed, the new oil we are finding is in areas a bit harder to get to that the old ones. In West Texas it cost us about $5/BO to find, develop the oil and another $3-5 to produce or a total of $10. Now getting a barrel of oil out of the oil sands and into a state to refine it costs $30/BO. And the oil shales will cost about $60/bo, before any inflation. The oil in Saudi costs about $5. So even if prices were hyper inflated, the location of the oil is driving costs. Wait until you see the cost to develop and produce the oil from Jack and the new Brazillian discovery. I'm gonna guess it will be at least $60/bo. Drilling and developing oil from 25,000 feet, the first 10,000 of which is water/ocean isn't the same as drilling a 5000' well in West Texas bud. Get a clue.

[nakedjaybird]

Hey soylent: for the sake of my time i'll copy for ease of your education; there may be a nugget or two here relevant to your push to use our hydrocarbons, which I'd just as soon leave in the ground. That's my basis for most energy arguments, since we do have alternatives.

nakedjaybirdJun 14 02:05 PM

You're right Dickus, but we should not let that stop us from fully developing wind as an alternative energy to oil, gas and coal.

First, it's free energy.

Second, we need to use every technically and economically feasible (standalone, or even if using redirected oil, gas, coal, etc., subsidies and tax breaks) free-energy source (tidal, geothermal and maybe even biofuel, etc.). Especially, the friendly and simplistic ones like solar has and is becoming (what I mean by simplistic regards damage control, spiderweb complexities w.r.t. associated requirements [regulation], demands [multiple industry involvement], resources, etc.

For instance, solar requires sun and sand (simplisticly speaking). Silicon and glass (maybe: or equivalents) processing are the significant complexities.

I'd really like to see some solar sites producing solar energy to make or process the silicon (talk about reproduction: nearest thing to perpetual motion: well,........).

The Dutch and the early farmers in the US were not wrong in putting up windmills; and water-wheels came very early to human existence as well. As long as they are free and near simplistic, use them.

Oil, gas, coal and wood were fine to use (as was animal fat, bees wax, etc.) when they were on the surface; free-for-the-taking, more or less. But those energy sources have become far from free at the surface, not to mention or discuss their replenishment, and more so their complexities. Proof of that is all the media discussion and industry failure fear.

And as for any basis for qualification to state an opinion on energy, try this the next copy!

[nakedjaybird]

nakedjaybirdJun 15 01:34 AM

Well rw mac, I'm not sure you're deserving of a response, but let me give you a small spoonful.

Some of us were trying to get more nuclear plants put in place since the 70's, but greenies et.al who wouldn't ever get the message until they threw the lightswithch on some night and found there was no power, got in the way.

Even more selfish ilk for big cars and lots of horsepower and lot's of freedom would not ever swing for the small car, much less the new batteries and electric vehicles with hockey-puck power semi-conductors as advanced controllers went at the time during the 60's and early 70's. Of course, we concluded at the time that commuters were not going to swing with a power limited, range limited fully electric vehicle. It was going to take a hybrid. Which 40 years later we now have. We can blame Detroit and Houston for big gas hogs - they deserve some of it, as do their lobbiests, and most of all the poor leadership that bought into the con and power grab, of many sorts. We forget of course, that Europe went for steel rails and small cars and electric cars. Smart.

However, folks here at home wouldn't give up their freedom for steel-wheeled rail transit again, or now, even rubber-wheeled electrified trolleys within the major congested cities. They couldn't, wouldn't, go for the proof of the like of Toronto's transit system which went nowhere at the time, but soon showed that if you build it, they will come. Many transit systmems proved this. We were, are, a selfish folk; not unlike dumb sheep. And hopeless without good LEADERSHIP.

We could have gone for amohphous metal transformers eliminating the losses of those on the poles, but replacement would be a program much beyond the changing out of the mercury-vapor whites, to the yellow sodium vapor, to the low pressure yellow you now which you probably don't recognize. You have no clue how many advancements could have been implemented. The ones we get at the consumer level are efficient lighting provided by utilities because of subsidies, energy efficient refrigerators for the poor, etc., by utility subsidized programs, not to mention the latest screw-in fluroencent bulbs. You ain's seen nothing yet baby, if you'd just get out of the way.

We were growing silicon ribbon in the 70's and making PV cells - a little behind where we are today. So, I suggest again, that we make all we can of the solar today and move on, aggressively. Overriding whatever resistance confronted. Just like the Manhattan Project or the Moon Program. It takes Leadership and ignoring folks like you.

[nakedjaybird]

And finally soylent and the rest of you hydrocarbon guys:

My oh my oh my, Jack......even you???

Nuclear will be a remaining player. The waste from reprocessed "spent" fuel can and will be handled. As for all the "spent" fuel in storage, it is not "spent"; it's like easy-to-get-to fresh uranium when reprocessed - a real resource.

Hydro is not cheap to construct. And if you take into account all the industries supporting drilling, mining, processing, transporting, converting, etc., oil, gas and coal they are no way simple and cheap - in total, just as complex if not more so than nuclear. So they are all players. And, wind and solar should and will be much simpler players. Their fuel is free. Just convert it to electricity. As for fusion, let it continue on the Sun, far away, and just convert it's output here on earth (around the clock 24/7 somewhere) for free as solar power of one sort or another; free and forever; at whatever effeciency. And let some sun thru to grow biofuels or some sort.

So, emphasize the wind and solar to eliminate the coal and gas for production of electricity AND also to produce much, much more electric so we can electrify existing plus addditional railroads, new electrified transit systems in/around/between major cities and along the US seaboards, and install electrified rail ferries amongst the existing interstate hiway right-of-ways; push hybrids; move fuel oil to solar or electric in all homes: DO ALL THIS TO REDUCE THE GASOLINE AND DIESEL WHICH IS 70% OF CRUDE OIL DEPENDENCY. Sorry big oil. But either become part of the solution or a buggy whip.

[kildonan]

You have to be more of a big picture guy! You can't just look at the cost indices of various factors such as steel, rig day-rates, etc. You can't look at the cost to drill a well, but you have to look at the cost per barrel of production. Ghawar, with cost of a few dollars per barrel and billions of barrels, are no more to be found.

Same as your earlier article - you can't just look at one year over year change, but look at the past 5- years and the next five - ten years of consumption from China. Where oh where will the production come from to satisfy this growth profile.

Steel's inputs such as iron ore and coking coal - where will be the future production come from to drop the price back down to yesteryear's levels.

OECD demand for oil may not grow, but will it decrease? Will the decrease be more or less than the growth from China, India, Brazil? When will Americans stop driving? When will the US politicians have the stomach to increase taxes on gasoline or reduce oil consumption?

Eric - see the big picture!

[kildonan]

jeez.... i thought he was getting off his soapbox for the last time....

[Sophisse]

"It is getting much more expensive to find Oil these days."

Are you really just talking about "finding"? Most people, saying that, would think you meant the total cost per barrel of a new find.

Don't you think that it is a bit more expensive to get oil out from under thousands of feet of ocean, than it is in the fields of Texas, the deserts of the Middle East, or the tar sands of Canada? Regardless of what else you think about the price of oil, the role of speculators, etc., it is pretty darn obvious that it costs more to get additional supply, now that the easiest fields are declining.

If all you meant was "finding", well, I don't think that qualifies as a Great Deception.

[h20polo66]

Explain to me why the Oil companies are pouring money into buying back their own stock? Why are they not drilling on the 10,000 leases that they have in the US? Explain to me why in Pres. Carters 1979 inaugration he made very clear that by 2000 he wanted the US to have 20% of US energy in solar or alternative energy and when Reagan became Pres. he removed all the solar panels off the White House. Explain to me why when asked over 1 year ago in a Congressional Hearing the 5 major Oil Companies said they didn't want to bid on leases in Anwar. You think Nuclear is the answer? I've worked on both of the plants in Calif, 1). What is the time lag from approval to start of construction, min. 3 years. 2). What contractor is willing to bid WITHOUT a guarantee profit? None, just ask Beckel. 3). Who insures these plants, NO ONE, it will be the public who pays if a accident should occur.4) Do your research and find out who builds the domes, what is the time frame, 6-7year backlog. 5).How much water does it take to operate a plant? 6). Lastly where does the depleted uranium go, should we do what the Soviets do and dump it in 50 gallon drums and drop it in the Artic/North Sea? For the cost of 3-4 Nuclear plants how many geo-thermal,solar,tide or a multitude of alternative sources of energy be constructed?

[xander]

look up continental shelf-it is shallow water-no more than 600 feet in the usual case. usa has scores of thousands of square miles of continental shelf off the east coast and the florida straits. the govt says there are 80 billion barrels of recoverable oil there. the socialists in congress [read democrats] have repeatably voted to block this relatively inexpensive oil development while voting to permit extremely expensive drilling hundreds of miles offshore louisiana in 8000 feet of water. so if you want cheaper oil vote out your economic enemies.

[nakedjaybird]

waterpolo66 - nuclear will remain a player, and should. The pushing and resistance began in the 70's, if not from the beginning; I am familiar with the complete fuel cycle, the maintenace, the regs, etc., and reiterate, nuclear will remain a player.

However, today, we should push solar as if it were a new Manhattan Project, for all the reasons you listed as negative for nuclear which do not exist for solar, lest the interferer's interfer.

[gigem77]

6-16-08 1:44 AM EDT

SINGAPORE -(Dow Jones)- China's diesel imports for the January-May period totaled 2.89 million metric tons, up 916.5% from a year earlier, preliminary data from the General Administration of Customs showed Monday.

China's diesel imports for May reached 700,000 tons, around 34 times higher compared with a year ago.

In May, China imported 338,572 tons of gasoline, compared with none a year earlier. Its gasoline exports for May fell 67.4% on year to 160,000 tons.

The country imported 530,000 tons of kerosene in May, up 27.4% on year, while fuel oil imports for May rose 17.1% on year to 2.86 million tons.

tinyurl.com/67mgp8

[nukldrager]

ari5000 ..."and close to catastrophe" is pdc to what is ahead. The oil based economy is in a bleed out condition.

[RWB]

As someone who works in the E&P business, I can tell you that while scarcity of exploration resources (and thus pricing power on the part of the Halliburtons and Schlumbergers of the world) is part of the increase in cost, and inflation, it is simply a fact that easy-to-find-and-produ... oil has been found and produced. We come up with extremely clever (but very expensive) new technologies to make the harder to find and recover oil accessible. But even factoring out inflation and oil tools pricing power, it costs more. Look, it's easy to understand. A vertical well that required no stimulation and was not very deep was cheaper to drill than the kind of super-deep, directional, fractured wells of today. Period.

[mlambert890]

It is in a "bleed out condition" because the current state of human discourse is agenda driven extremists screaming to each other on the internet and supporting each other with annecdotal "evidence"

So easy to manipulate this environment with simple inflammatory posts.

The reality is that science simply does not support the notion that we have suddenly fast forwarded 1 century and oil is now nearly run out.

The problem is that:

1) doomsayers, the scourge of all humanity really, WANT this to be true and so scream about it 24x7

2) greens/alternative energy idealists/et al (note, I said idealists and not realists - alternative energy is great as long as you're not delusional in your expectations) WANT this to be true and so also scream about it 24x7

3) greed powered speculators having destroyed the credit markets with their artificial inflation of real estate value are now moving to commodities - with all of the bullshit on this forum, no one mentions that SPECULATORS consume MORE OIL than CHINA daily - eat that for breakfast. These speculators WANT badly for the "doom" to be "true" so they can keep making money on futures.

4) politicians fall solidly into the pockets of either 2 or 3, so they will make sure that people keep thinking the DOOM is true

This is the reality of our current situation. Historian WILL look back on this in 200 years (contrary to what the idiots who fall into camp 1 believe) and say "wow, what a back of selfish, reactionary, idiots there were polluting the chance for real progress back then"

I think what will ultimately get us out of this is some common sense and the average person deciding to finally just start ignoring every idiot that has a loud voice and a soap box.

Alternative energy should be encouraged (tax incentive) and utilized where possible, but wind and solar are no panacea and never will be - anyone who understand the science will know this.

Exotic alternative energy is something we have to hope we discover in the next century before oil REALLY starts to run out. We ease the slope by using alternatives where we can (and relatively clean nuclear and relatively clean coal MUST be part of this - the greens MUST be ignored here) in the meantime

Oil must be treated with the respect it deserves as the ABSOLUTE foundation commodity for human civilization and speculation must be DISALLOWED. No swaps bullshit exception for JUST OIL the ONE commodity that SHOULDNT have a swaps clause!

All of this noise and the 800lb elephant in the room gets ignored conveniently in favor of more black helicopter and armegedon bullshit. But of course it IS seeking alpha I suppose - maybe lots of oil futures folks here playing a part and stirring the pot!

[Rabbito]

I have never seen a post where the author was so proven wrong by the commentors.

Eric Fox, do you first have an opinion and then try to back it up with facts?

It seems you are trying to fit a square peg in a round hole

[nakedjaybird]

Wisdom dictates oil, gas and coal should be left in the ground. It will run out. Solar, wind and the like will not: guaranteed!! And they're easy to find and cheap to harness.

During the past 30 years we could have done what we will have to and must do during this next 30 (or hopefully less). The past actions of poor LEADERSHIP from DC and Houston to Detroit plus the selfish desires in most homes and businesses must change.

We have certainly reduced exploration/production in the US (wisely) and have not built any more refineries (wisely)......now we need to stop unwisely using 70% of the oil, gas and coal we consume.

Electrifying rails and hiways for movement of goods and people will pretty much do that. Seems simple and straigtforward. And, it's been proven elsewhere.
So, get with it.

And by then, we'll have new ways to eliminate most of the remainder of the 30% of OUR hydrocarbon use.

[nakedjaybird]

And the other best example available as to why we are unable to simply harness solar or do away with wasting hydrocarbons because of POOR LEADERSHIP and SELFISHNESS OF THE PEOPLE is:

WE CAN'T EVEN BUILD A FREAKIN' FENCE AT THE BORDER. That's us. That's our ilk. Sad. Real sad. And you guys want to keep arguing numbers and complicated concepts. Do something real, instead of writing about it (I have - well, and maybe some of you have also. Thanks, where deserving).

[Eric Fox]

Wow...I don't think I've seen so many angry people in my life. It's hard to respond to every individual comment but I will post my response shortly.

[Eric Fox]

I made a very narrow point in my article. I wasn’t making a judgment as to the validity of Peak Oil, or whether we are finding giant oil fields, or the depletion rate, etc.

And I certainly DID NOT SAY that it is easier to find oil. Obviously, after 125 years of exploration, the easiest reserves are depleted. So I agree it is harder to find oil reserves.

What I said was that the cost of finding oil is cyclical. If you examined one well in an offshore field in the GOM and priced it in 1982 and 1985, you would find that it costs less to drill it in 1985 than in 1982. If you took a well in an offshore field in the GOM and priced it in 2004 and 2008, you would find it costs more to drill in 2008. Why? Because the costs are cyclical. No one can argue against this because it is true and backed by historical data.

Why is this important? Oil bulls argue that because it costs more to find oil, that this somehow that put a magical safety net below the price of oil.

What you can argue is that you don’t feel that the cost of finding oil is cyclical any longer because of the other reasons that were stated. You certainly have a right to your opinion, and I will not call you names or a bad writer if I happen to disagree with you.

If you ever run into someone who works in oil services or drilling, tell them that you think that the business is no longer cyclical. Make sure this person is over 50 and that you are looking directly at their face when you say it. Chances are their face will freeze up, and they will be unable to speak. After a few moments, they will stare off into the distance remembering those days back in the mid 1980’s when hundreds of service and drilling companies filed bankruptcy, and when it took as decade to work capacity off in some segments.

[Loup-Garou]

Today the Saudis promised to increase their production. This seems to make us ever more dependent on foreign oil. At some OPEC meetings the members have laughed at the USA, because we have the oil here, but refuse to drill it.

At some point, the insanity of not having a workable national energy policy will have to be confronted. The people who are certain cow flatulence causes "global warming" must be overcome by the normals.

[starkoski]

I would like to clarify my last comment of yesterday. I take back the comment that CERA is bunch of phonies & charlatans. I think that they are professional energy analysts and try to do good and accurate forecasting and research and are very respectable. I do however find that some of their predictions & insights of the future price & availability of oil was not all that accurate. A article questioning their accuracy (where I get some of my information) can be found on the web site - The Oil Drum in an article named - Getting to Know Daniel Yergin. By the way, Daniel Yergin is Chairman at CERA.

[Mmarrkk]

Eric, good response. However, while I may agree with you on the cyclical nature of the business as it regards to the cost per unit, I strongly disagree with the summary premise that the total cost is cyclical. Yes, drilling day rates are cyclical and they do come up and go down, a lot. However, a large amount of the new oil being found takes a lot more days to drill. So even if dayrates went down, the overall cost would be up because of the complexity of the operation. We are no longer taking out the appendix or stitching up a cut; we are operating on the brain stem or putting back together a crushed hand. The operation is more difficult, takes more time and more technology. This is something I saw missing in your post.

And I'd highly recommend not approaching anyone above the age of 50 in the oil biz and even getting close to saying the biz is not cyclical. Since we laid off over 500,000 workers over the last twenty years in those cycles, those would be fighting words!

[gashousegorilla]

Xander,

>> read democrats] have repeatably voted to block this relatively inexpensive oil development while voting to permit extremely expensive drilling hundreds of miles offshore louisiana in 8000 feet of water. so if you want cheaper oil vote out your economic enemies.

I'm *completely* in favor of drilling off the coasts. That being said, look in the mirror, Xander.

First, look at 2000-2006: the Republicans did NOTHING despite absolute rule. THAT was the time to act! It takes YEARS to explore and then build the infrastructure to handle it. (We don't even have enough rigs available to even start, because the existing rigs are pretty fully booked.) That was the time to do it. But, the Republicans failed to act.

Second, the Republicans blocked every Democratic effort to raise EPA standards for TWENTY YEARS. How much more supply would we have right now if mileage standards were double? (Remember Ben Franklin's "a penny saved is a penny earned"?)

So, go look in the mirror, Xander. If there's an objective bone in your body, you should be blaming yourself and your fellow Republicans who dared not question and complain ENOUGH about what your leaders both did and did not do. (AFTER you do that, go ahead and blame others. But, start with yourself.)

[User 151885]

Who Knows?
We don't know what we don't know and we don't know that we don't know it!
The actual information... that is the "TRUTH" is hidden because it is valuable. I'm just going to follow the money. It will go where it serves the wisest.
It always does.
But good exchanges all around!

[Eric Fox]

Mmarrkk...what company do you work for?

[Ozarker]

What?

[fireball]

paul8756 your first post is on target. i hope that you do not find socialist party A anymore innocent than socialist party B. maybe we will be neighbors in montana one day. i may be wrong but i think texas had an agreement about the right to secede. however about 1866 they realized those federali rascals lied.

[fireball]

ozarker if the hose aint quite dead enough we got to hit it some more.

[RichardWhitney]

Eric...You have incited a riot. You even have the Jared Diamond lunatics ranting here!
Good job. You might be interested in this:
peakoildebunked.blogsp.../

[ddtuttle]

I don't have time read all these comments, so someone may have already made these points.
First, all the easy oil has already been found. Big fields are easy to find becasue they are big. Shallow fields are easy to find because they are shallow. They are both require simple technology, and can be developed quickly so they are very profitable.

Second, oil was too cheap fro too long and we now face a huge defficit of petroleum engineers and technicians. The guys we have are expensive and don't want to work in the owrst palces in the world.

We are now routinely going down 10,000 to 15,000 ft for relatively small amount of resource (gas or oil). Its harder to find, and it takes longer to drill the hole and requires better equipment and more time from technicians. The Saduis have just developed the last part of Gahwar. It has 32 platforms with mutliple horizontal wells on each platform. From day one they are injecting this new field with huge number of sea-water injection wells. In addition they have processing plants to remove gas products. The scale of this dwarfs their earlier projects. Again, all this is for less oil than the old easy fields.

Chevron's Jack is under 7,000 ft of water and 20,000 ft of rock! That is a time consuming and very expensive process regardless of the equipment costs. Plus you have to live 100s of miles offshore.
Again mutliple horizontal wells in all directions off each platform.

All this equipment is expensive because it has to be much more sophiticated. Of course equipment is in short supply, but they aren't building the old dumb stuff anymore. Don't forget the environmental aspects. These new rigs don't spill oil the way they did in the past, they are very safe (and more expensive and take longer to build)

One of the new Saudi finds is in one of the hottest part their deserts. Do you want to work out there? How about Prudhoe Bay? The labor costs rise exponentially in these hostile locations. What about getting kidnapped in Nigeria? How much would they have to pay you to go out there for a couple of years? How much do the security forces cost?

At home the Bakken has a lot of oil but it's in non-porous shale. The wells go down 10,000 ft, then horizontally another 10,000 ft. Then the entire horizontal part is frac'd. The technology and equpiment for this didn't even exist a few years ago. These wells only produce a modest flow of oil compared to a similar investement 10 years ago.

Brazil's latest finds are in deep water and will take upto 10 years to develop. Again they will need very sophisticated rigs to tap that oil.

Is the equipment expensive? Yeah! Is there a shortage of rigs? Yeah! Is this going to change? hell no!


I agree that supply constraints are driving up the costs of drilling equipment,