Bruce Pile

Peak Oil: Caused by Geology, Politics or Infrastructure Issues?

What matters with oil supply has little to do with how much is left or to be found. It has everything to do with the net energy flow rate by which it hands us usable energy. That's why Hubbert is confounding the world with the accuracy of his predictions. As we get into the harder-to-recover oil, this effect becomes more acute. The dynamics change fast as the peak is encountered and are going to surprise the conventional analysts. See the posts at my blog goodstockinvesting.blo... and goodstockinvesting.blo... for a look at how the peak changes the projection game.

Peak Oil for Dummies

If you think that big new oilfield finds or the steady advance of technology will keep moving the Hubbert method peak far into the future, consider the U.S. lower 48 as a proxy for the world. This production curve peaked in 1971 just as Hubbert predicted. At the top of this peak what happened? We found a massive new discovery in Alaska and piped it right down into the lower 48 - Hubbert did not know about Alaska. We embarked on a technology boom unlike the world had ever known or Hubbert could have imagined. What was the effect of all this massive messing up of Hubbert's method on the peak? How many years did it move the peak? None. The Alaskan oil put a bump in the profile on the down slope, and despite nearly 40 years of a tech revolution, the U.S. production curve looks very nearly identical to the one Hubbert drew in 1956 ! We are too near the global peak to expect any massive new finds to make much difference in the peak time frame. That's just a geological and mathematical fact.

Keep in mind that all the figures quoted in the article are just barrel counting. It does not take into account the whole net energy thing, which comes heavily into play as we go past peak. See my post at goodstockinvesting.blo... where you can see how dramatically unequal barrels are going to become.

Commodities: A Wise Long Term Investment

The '73-'80 gold/stock market sequence of movement may be a model of our current situation. Stocks went into a severe bear market in '74 followed by one of the strongest rallies ever in '75 and '76. This stock rally was during a nearly two year slump in the gold bull market of the 70s. But gold turned in August of '76 at $105 and proceeded to $850 over the next three years while the stock rally mellowed into a mainly sideways path bridled by "stagflation".

Our present situation is a severe bear stock decline followed by the strong rally. The gold bull market of this decade has been in a slump since March '08. We've had a stock turn that, for all the leadership groups anyway, happened in November '08. We're beginning to see this lag effect between stocks and gold now with gold igniting into a big climb a year or so after a sharp bear/bull stock market turn.

In a downturn, stocks discount the economy's turn 6-9 months in advance, then the economy slowly begins placing physical demand on commodities, pushing prices up alongside the downturn's easy money inflation forces. Investor speculative demand usually shows up just in front of the change in physical demand for commodities, and we have a lot of that nowadays. So our lag time could reasonably be expected to be shorter than that of the 70s, which was from January of '75 to August '76. If we follow the 70s model, modified for much increased ETF and fund demand, and put a monster gold rally out 6-9 months from the stock turn of November '08, it would predict a strong gold move beginning in the July to October time frame. If you take March '09 as the stock market bottom and use the '70s lag of 1 year and 8 months, it delays the gold move to November '10.

Peak Oil as a Function of Earth's Volume

If you are thinking that we just need to look for new vistas of oil lying around in all that vast undrilled earth, you should read Ken Deffeyes' books The Impending World Oil Shortage (written in 2003 when nobody was concerned about oil) and Beyond Oil where the Princeton geologist explains the necessary conditions for the formation of oil. You don't have those prerequisites in the ocean floors beyond the shelf structures, which he says rules out some 70% of the earth's surface. The other places where you have these conditions have pretty much already been prodded except deep water. Here, however, as Simmons explains in his books, you have only relatively small fields that tend to play out fast, more like a gas field. But at least there are some out there that haven't been tapped yet.

But applying a ratio of the premium oil bearing strata to the whole earth and saying we need only apply the magic of technology and time to create oil where there is none is just plain silly.

Welcome to the Age of Bountiful Crude Oil - It Should Last About a Month

"Stock up while supplies last" is exactly the mindset of all the importing nations. The excess storage numbers are so typically viewed as bearish for the oil price. But have you ever studied a storage chart where "days of cover" import storage is charted alongside the oil price? You can see such a chart at wtrg.com, where it shows that, historically, storage goes up along with the price climbs and the episodes of supply concern (the Middle East wars, etc.). With the growing awareness of peak oil, the mother of all supply concerns is upon us. I wouldn't necessarily view the storage numbers as unwanted oil.

Gasoline's Short Supply

World oil production has gone into a steep dive since last July, even though OPEC has only effectively raised oil prices via cuts about 27% of the time over the last 4 years. The countries whose life depends on crude are going to match demand destruction at some point.

Market May Get Cheaper, But Tail Can't Wag the Dog Forever

If you were to superimpose on the chart above a graph of the total debt level from the mid '80s to now, it makes the neat cycles of sideline cash at '87, '90, and '02 less meaningful to the trip there now. The decades long global debt bubble build and present collapse is what's driving the markets, not the smaller scale cycles of those three previous years.

Bespoke's Commodity Snapshot (1/12/08)

Of what use is a Bollinger Band anyway? With stocks, you don't really want to go by selling when they are near the upper band because a stock typically rides the upper band all the way up a monster climb. The only time you should be trading in the center of the band is when the stock is wandering and doing nothing. Do you buy a stock to wander or to do a monster climb?

Slowdown in U.S. Natural Gas Drilling Hasn't Slowed Down Supply - Yet

North American gas drilling could be fast approaching a point of zero return energy-wise and business model-wise. The net energy return EROEI (Energy Returned On Energy Invested) may be soon getting to 1, meaning companies must buy and input as much energy into drilling and recovery of the gas as it gives us back in usable energy. The drillers have been running faster and faster just to keep in place. This problem coupled with the crippling effects on drilling inflicted by the credit crunch may create a supply destruction even greater than the demand destruction, which is mostly already in the market.

To look at this drilling problem, see my post www.theoildrum.com/nod...

Perfect Oil Storm Brewing in the U.S.

You should keep in mind that the comparison just released for miles traveled dropping 4.3% is between March '07 and now. Think back to March '07: oil had just come off a precipitous drop from $80 to $50 diffusing most drivers' fear of the gas pump. So you are comparing a 150% one year increase in the price of oil to a 4% pullback in motoring demand. This driving reduction probably came from fearless levels where every needless trip was gladly taken. The more reduction there is, the harder it is to accomplish.

The Crude Oil Price Disconnect

The new projects schedule puts about 20 mbpd online by 2010. That's a lot of oil and has led the ultra optimists like CERA to predict a wall of oil coming with as much as 7 mbpd supply over demand by 2010 and oil at $40 or less. But there are several facts of science and math that the CERA types don't consider.

For example, there is the math of net energy. Even much of the oil bear contingent accepts that we are at or near the global peak for the old fashion conventional oil from easy to extract fields. They say we are nowhere near an oil problem though because of the flood of new unconventional oil on the way. However, if you look at the new oil we are depending on over just say the next 3 years, you see that about half of it is the rampup in deepwater and tar sand oil. These two sources have EROEI (energy returned on energy invested) estimated at around 3-4 with the old declining conventional field production EROEI at about 10 or better. Comparing these two values on the EROEI oil displacement curve means that it is taking 3 barrels of this new production to offset each barrel of declining conventional production! This amounts to about 7 mbpd in 2010 production that will be missing from the physical barrel to barrel accounting of new replacing old - 7 mbpd missing in action from the globe's net energy supply. This one factor alone completely does away with CERAs wall of excess oil by 2010.

Also consider the ELM (Export Land Model), which tabulates the effects of internal oil consumption increases by the enriched oil exporting nations. In the model, if exports are half of total production and conventional production is near peak (roughly the global case) and assuming conservative figures for existing production decline rate, internal consumption increase rate (about half of what is actually occuring in many major exporters), the amount of oil exported post peak winds up being just 10% of the total exporter's post peak production! A full explanation of ELM is at theoildrum.com. This causes much of the forthcoming wall of oil in the future to fall somewhat flat.

4 Factors Fueling Oil Prices Higher

One reason for climbing oil prices that doen't get talked about is EROEI. That's Energy Returned On Energy Invested and it's one of the least understood and most important issues with oil. We tend to look at the massive reserve numbers and the massive flow rates of total liquids production and think we have more energy supply than what we actually have. A sharply increasing amount of our high EROEI conventional crude is being used to manufacture the unconventional oils that go into the total liquids number (tar sands, shale oil, deepwater, ethanol, and biofuels). But these oils are very low EROEI taking about as much "real" oil to make as they supposedly add to our supply.

When oil was extracted decades ago, it took about 1 barrel of oil energy to hand us each 80 barrels of net energy from shallow, naturally pressurized reservoirs. Now it's about 10 to 20, depending on location. This figure is dropping faster and faster as the "hanging fruit" has already been exploited. There is a simple math fact about EROEI that dictates a rapidly collapsing net energy supply to the economy as you go below an EROEI of around 3 to 4. If you go from an energy source with an EROEI of 20 to a source with an EROEI of 1.3 (the most agreed upon figure for corn ethanol), YOU MUST MAKE 60 TIMES THE AMOUNT OF THE LOWER EROEI SOURCE TO GAIN THE SAME NET ENERGY AS GIVEN BY THE HIGH EROEI SOURCE. That means to displace one barrel of oil, you must make 60 barrels of ethanol. Most all of the manufactured fuels have EROEI of less than 3 making them nearly useless in displacing foreign oil, but very usefull in causing catastrophic food inflation.

EROEI makes our true energy supply not the total liquids curve commonly accepted but something much closer to conventional crude plus condensate, which is falling behind the total liquids curve at a quickening pace (it peaked in 2005 and hasn't made a new high since, although it nearly did this past month).

What's left of the big reserve amounts of oil has big EROEI issues and a large amount of it is going to take more energy to extract than the oil will supply. The rapidly declining EROEI curve is going to make the energy world going forward much different than what we've been spoiled by in the past. For some charts on this and a good overview, see the current EROEI story by Robert Rapier at theoildrum.com

Ben Bernanke's Tightrope Act

Investor enthusiasm for commodities is nothing new. It didn't start with the current monetary stress over the housing problems. It is, in fact, a large scale bull market that began about 6 years ago (about the same time the housing bubble began). What's new is the added steam the commodities bull is receiving from the basic paper vs hard asset revolution that is taking place.

If you were to plot the relative valuation of the CRB and the S&P 500 over the last 15 years to look at this paper/real thing, you would have the chart shown recently in an article titled "Commodities Secular Bull Continues into 2008" (http:marketoracle.co.uk/Art...). This tell-tale chart shows that, even with the current runup, we have come way down in valuation of commodities relative to paper in general and stocks in particular over the last 15 years and that we probable aren't at the end of the commodities bull, but are entering a new phase of it (commodity bull markets historically run at leat 15 years and we are only about 6 years into this one). After a huge descent from the mid 90s, the chart shows a consolidation pattern over the last 6 years with 3 major runs at a resistance level. The first was in early '03 at the end of the last stock bear market. The second was in the middle of the stock bull market in May '06 when both stocks and commodities got clobbered together. Both of these runs failed to break the resistance. The third is happening now at what may be the beginning of a new stock bear market and this powerfull run has just now broken the resistance level and has a very long way to go before we approach the paper/real levels of the mid 90s. Think back to that time when stocks, intangible intellectual property rights, and complex debt leveraged deals were our preoccupation while we ran around in gas guzzling SUVs not giving a thought to real assets like oil and food. Now the preoccupation is what to do about oil and food and how to clean up the CDOs, CDSs, and other paper messes we have made.

The current "spike" in commodities can't really be compared to say the mid '06 run. There, the stock bull market was intact, the housing problem wasn't upon us yet, and the Fed was in the driver's seat. Now, it is a vastly different market condition. In addition to a strong investor turn away from paper in general and the Fed debased dollar in particular, we have emerging some very strong basic supply/demand forces coming to the aid of commodities like peak oil, peak food, and the combo of the two - the fuel crop frenzy.

Investor enthusiasm = sell is a concept that works well with individual stocks tied to an individual company story or even with a hot sector. But it's not so true of the more large scale, rare bull markets that tend to involve many sectors and have the legs to run well past initiating enthusiasm and attention. It is precisely this kind of more investable bull area that you want to find, not avoid.

Peak Oil: The Next 5 Years

The thing so many people don't understand about all the bounty of nonconventional oil (tar sand, deepwater, shale, coal-to-liquids, etc.) is the basic matter of energy flow rate. Conventional oil has been coming to us for all these decades from shallow, pressurized reservoirs handing out about 80 or more barrels of energy for each barrel spent in getting it. Now that figure is estimated to be about 10 and it's dropping fast. That's for conventional oil. For what is added to this to get the total liquids figure (what we normally call global "oil" production - the 85 million barrels/day) you add the shale, sand, NGL, bio-fuel, CTL, and a large array of very low EROEI (energy returned on energy invested) oil substitutes. Most of these EROEIs are running around 3 or less compared to the 80 of yesteryear's conventional oil and 10 of today's oil meaning that they actually displace very little oil. They take about as much oil to make as they replace. It's really difficult to match the energy flow rate of the past when you have to expend enormous amounts of energy digging up, grinding up, heating up, and manufacturing what was so freely taken before. So we have essentially the conventional oil production curve, which has already peaked by most informed experts, plus just the high EROEI add-ons like NGL trying to keep pace with the still growing demand curve. Add to this the fact that only about 46 million barrels/day of that 85 total is actually exported from the country producing it to be bid on by the big oil importers and models showing that post peak export decline rates always are significantly higher than total production decline rates, and you have more of an oil shortage than you may think.