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I run a model fund at Ken Kam's Marketocracy, where they do capital management using the best member mutual fund track records with extensive tabulations of alpha, beta, R-squared, and many other fund management evaluations. Marketocracy Capital Management offers SMA (Separately Managed... More
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  • The Coming Mystery Of The Missing Barrels Of Oil 10 comments
    Jun 26, 2009 12:41 AM | about stocks: USO, OIL

    We have been conditioned throughout the oil age to count our supply of energy by the barrel.  And over the first half of oil's production curve that's been a fair and accurate way of doing it.  But as we go through the topping of the curve, things are going to change drastically.  There are two big factors that will be doing this and both are little appreciated.

    The first is net exports.  You have to consider that, post peak, the global production decline rate must be modified by the rising internal consumption rate by the growing economies of the oil producing nations.  A rising oil price enriches the producing economies and creates growing oil demand, cutting the amount of oil they put on the market for the importing nations.  This has been modeled by Jeffrey Brown, a geologist, and is known as the ELM (Export Land Model).  You can read a detailed description of it at" but the upshot of it is that we, that is the importing nations,  will be coming up short on our barrels of energy if we're just counting barrels produced as this ELM chart shows:

    Post peak, this graph assumes a global production decline rate of 5% per year with a growing oil consumption rate among the producing nations of 2.5% per year (very close to what these two rates are estimated at).  It also assumes that at peak, about half of oil produced is exported (again very close to the current global figures).  If you do the math, you wind up with the red line being the amount of oil exported and see the shocking result that it goes to zero just 9 years after global peak production is reached!  If we are at or near peak now, this is not good.  For the importing nations, the barrels produced will become a more and more distorted measure of energy available.

    The other big factor that will distort our traditional barrel counting is net energy.  For this, I refer you to my Instablog post "The Alternative Energy No One Is Thinking About".  If you attempt to draw up a quantified projection of how the makeup of our barrels is changing as we approach the net energy cliff, you could draw something like this:

    The green line is the physical barrel count and the blue line is a tabulation of what the actual energy contribution of those barrels is for the assumptions shown (BOE or Barrels of Oil Equivalent).  It considers a base production decline rate going from 0% in 2002 to the standard 4.5% in 2008 (in a linear progression).  It also considers the EROEI decline as shown both from the gradual addition of the low EROEI components such as deepwater, etc. and a new conventional EROEI of 9 replacing an old field average of 12.  The estimates for the base production decline rate range from a traditional 4.5% figure to some more recent estimates of up to about 7%. So I drew two curves to encompass the range between these two figures and also a range on the average EROEI of the added unconventional liquids of between 4 and 5, sort of a best and worst case scenario with these estimate ranges.  Both curves consider the new projects additions as shown.

    This curve along with the ELM may help explain how, even as we continued to ramp up world production by barrel count about as fast as world demand, the pricing of oil started to go crazy after about 2005.  It started as real supply/demand imbalance that attracted a lot of investor heat.  It took the end of the civilized world and a collosal fund catastrophe and recession in 2008 to halt it.  But one has to wonder just how severely it is going to reheat. 

    The 6% or so base production decline rate may prove to be overly optimistic.  So many of the elephant oil fields have been produced with high water injection, fishbone drilling, and other volume enhancing methods, which induce sharp production falls when the peak is reached,  that the older model 4.5% figure may not be realistic when many of the elephants go into decline. This was discussed at Jim Kingsdale's Energy Investment Strategies site (Sept. 1, 2008) where he stated, "When Ghawar declines it may well follow the example of another giant old field that had extremely high artificial pressurization efforts, Cantarell.  This Mexican field has been in decline for a couple of years and it is now declining at the alarming rate of 36% per year.  The current estimated global decline rate - whether 4.5% or 5.2% - assumes flat production at Ghawar...".  I somehow suspect that when Ghawar, and the other elephants, water out, the production will definitely not be flat.


    Stocks: USO, OIL
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  • Voice_du_More
    , contributor
    Comment (1) | Send Message
    I think you guys are right on about this. There are people in Washington who know about it too. Somehow as we have approached the cliff they seem to have gotten quieter and not louder. The only way the US survives this, in my opinion, is a massive investment in wind and solar and a new grid to get the energy to the people, then run the cars on natural gas and upgrade mass transit bigtime and improve CAFE standards by significant percentages every year for at least the next decade. Unfortunately Americans have still not suffered enough from our way of life to make those insightful decisions feel very necessary. Based on what you have shown here such painful incentives will not be far off, but by then most of the actions will have proven too little and too late. To make a difference we need the money that went into TARP (to almost no effect btw) to be diverted into Boone's plan and subsidies for local and regional mass transit with campaigns encouraging their use, we need the Tata Nano, we need 35 mpg average and that was yesterday.


    'till we meet in that ash covered world of the future.


    26 Jun 2009, 04:51 PM Reply Like
  • Bruce Pile
    , contributor
    Comments (374) | Send Message
    Author’s reply » Another Pickens Plan fan! They're so hard to find. Actually, they are not so hard to find, just not many of them in Congress, where they need to be.


    Boone's plan would redirect nat gas from the electric grid to car and truck fuel, where it's much better suited, and focus wind and solar farms on the grid, where it could replace nat gas and coal. But I'm afraid the phantom barrels of oil the planners are counting on to do any kind of massive infra transition are going to start showing up missing before we get rolling with any effective plan.
    27 Jun 2009, 12:47 PM Reply Like
  • JeffDB
    , contributor
    Comments (1460) | Send Message
    Thanks for the interesting article. I have recently become quite a bit more interested in the "Peak Oil" debate/theory and the more I read the more it appears that those who think Peak Oil is already upon us and that it could get pretty ugly have the better arguments. I've been reading up on a few websites such as Matthew Simmon's pages: , The Oil Drum: and ASPO: but have not come across the ELM you mentioned here, so thanks for that also.


    I've also tried to keep an open mind by checking out those with opposing views, such as "Peak Oil Debunked": peakoildebunked.blogsp... and Trendlines: But as I said, to this point the Peak Oilers seem to have the better arguments from what I can tell.


    As a side note, I've posted the following excerpt on Seeking Alpha a few times, so please forgive me if it is redundant here, but I thought it was relevant to the discussion at hand:


    EDITORIAL: Peak oil, not speculation


    Let's re-wind the clock and recall the events of the time.


    After many years of solid growth, oil production plateaued in October 2004. Regardless of the price level, the oil supply simply stopped responding, and from then on, the world had to make do with broadly flat supplies. Ordinarily, the expansion of the world's economy would be accompanied by increased energy consumption and an inelastic oil supply might have been expected to hinder economic development. It didn't. In the four years to mid-2008, the world economy expanded by 18 percent. The global economy boomed, even without new oil.


    However, this came at a price. In the absence of oil supply growth, demand accommodation was required. This was achieved by secular prices rises averaging 25 percent per annum from 2003 to the end of 2007. In other words, the price of oil went up, and this constrained consumption by causing the marginal consumer to drop out of the market. This proved a workable solution for a time, but the global economy could not sustain 25 percent annual price increases indefinitely, and by the second half 2007, the situation was becoming critical. Consumption was being maintained by continuing draws on inventories averaging 1.4 mbpd, and virtually every producer, with the possible exception of the Saudis, was running flat out. By early 2008, even the Saudis were throwing the kitchen sink at the market - all to no avail. On paper, it looked like a peak oil nightmare.


    Of course, consumers were responding. From 2005, the EU and Japan began to shed consumption and, from late 2007, US consumption also began to decline as the US consumer sought to escape high oil prices. Notwithstanding, developed economy consumers were not abandoning the market as fast as Chinese consumers were entering it, and prices continued to rise. In early 2008, prices took off and some argue that speculation took over. Still, as inventories continued to fall until May 2008 and all the oil producers were running at full output, the case for market manipulation at that time is hard to make. Indeed, the market was in backwardation most of this time. In backwardation, futures prices are lower than spot prices, the equivalent of the market saying, "Well, prices are high now, but they'll be lower later." The market - those very speculators - believed that oil was over-priced but was continually surprised as demand kept pushing up prices.


    Prices did ultimately fall, but not because the supply situation eased, nor because speculators fled the market, and not because inventories were released. Prices fell because the global economy collapsed.


    I think a lot of people dismiss that big spike in prices in 2008, and perhaps there was an element of the market being in an overheated mode &/or of speculators & hoarding, but I think it should be considered a very significant warning shot across the bow and we ignore it at our peril.


    I agree that we ought to be moving to build a lot more vehicles than just the Honda with natural gas capabilities, but that is probably pretty much a stop gap measure as well. I think we'll need to move towards hydrogen or more likely, electric vehicles and probably sooner rather than later. It would seem to me that we'll probably also need to go with some of the new generation Breeder Nuclear Reactors like Felix Salmon posted on here recently: particularly if we're going to meet the carbon reduction targets that have been set for us.


    Anyway, thanks again for the article.
    3 Jul 2009, 09:33 PM Reply Like
  • Bruce Pile
    , contributor
    Comments (374) | Send Message
    Author’s reply » I agree with about all the points of the editorial except that I think the Saudis were out of very much light sweet spare capacity from about 2005 on (along with everybody else). What helpful spare barrels they had were mostly sour and not usable by most refineries. They did a news release as far back as 2003, when faced with the Gulf War, that they were not going to be able to make up much damaged production because their once plentiful spare capacity was mostly gone.


    I think there was some element of fund mayhem in the oil price collapse last year. A very real shortage and price run had put so much oil, along with all commodities, into over-levered funds that a credit/delevering debacle had to trash the prices of everything these funds held - even gold.


    Have you read Ken Deffeyes' books? They explain peak oil's theory about as well as anything. His first book came out in 2003, The Impending Oil Shortage, when oil was $20. He was a co-worker with Hubbert at Shell and projected a global conventional crude peak in 2005, which has happened. Hubbert in the 1960s was projecting conventional crude peaking around 2000, no later than 2006.
    4 Jul 2009, 12:01 AM Reply Like
  • Bruce Pile
    , contributor
    Comments (374) | Send Message
    Author’s reply » PS: Deffeyes' book "Hubbert's Peak: The Impending World Oil Shortage" came out in 2001, not 2003. He, along with Hubbert in 1956, were thought of as lunatics predicting that we would run out of oil so soon when it was so plentiful and cheap at the time.
    4 Jul 2009, 12:24 AM Reply Like
  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3689) | Send Message
    Underlying Decline has plagued oil producers since 1970 ... not 2002, and has averaged 2.8% over that time span. The phenomenon appears to surge every eight year. Bruce Pile's post highlights the current wave, one that should peak in 2010 @ 3.3%.


    This annual loss has been extinquished by an average 3-mbd new capacity program over the past four decades. 2-mbd were applied to Underlying Decline and 1-mbd met new Demand. 4.1-mbd of new flow is being commissioned in 2009.


    A tracking of this annual challenge can be seen in chart#3 at my website:
    1 Aug 2009, 02:54 PM Reply Like
  • Bruce Pile
    , contributor
    Comments (374) | Send Message
    Author’s reply » Interesting chart. It seems to agree well with Deffeyes on conventional oil - URR of 2.1 Tb with peak at 2005, 50% extraction reached at April 2008. In his books, he seems to almost totally dismiss all liquids other than conventional, but your chart shows them being massive delaying the all liquids peak to 2050! I can see the NGL being very helpful, but the other crude add-ons currently have such low net energy compared to crude that you have to wonder if they will delay the actual global energy supply that long. They are going to have to come up with some big EROEI breakthoughs for that to happen - something like the frac thing is doing with natural gas. Let's hope that happens.
    2 Aug 2009, 09:31 PM Reply Like
  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3689) | Send Message
    Regular Conventional Crude extraction is only 73% of All Liquids Supply in 2009. That will be down to 52% of production in 2030.


    Early pundits like Deffeyes based their estimates of ultimate recoverable resource (URR) on the economics of $20/barrel. At $60, 4000-Gb (billion barrels) is feasible URR, of which we've consumed 1200-Gb. At $80, URR doubles to 8000-Gb.


    EROEI is not a determinant factor 'til after the whole of that greater resource is exhausted. Since annual global production is only 30-Gb, and proved Reserves have doubled since 1982, it is more probable that technologic obsolesence will reduce Demand before any type of resource constraints come into play.
    3 Aug 2009, 06:24 AM Reply Like
  • Bruce Pile
    , contributor
    Comments (374) | Send Message
    Author’s reply » Ah, you've touched on a big area of debate - how much oil supply can be increased with added price and technology. This mystifies even the most knowledgeable experts. I would just refer to the opinion of Matt Simmons in Twilight in the Desert where he comments on the recent analyst trend of projecting that the mature fields would experience very low decline rates due to technology advance:


    "This supply expansion euphoria slowly subsided as the technology bloom withered. In its place came a grim and growing recognition that technology driven, field-model production estimates were unreliable and declines rates in mature fields were accelerating. A new reality is now taking hold. The industry is beginning to appreciate that advanced technologies, particularly extended reach, multi-lateral horizontal wells and hydraulic fracturing, are essentially turbo-charged super-straws designed to suck out the recoverable oil faster - not miracle drugs that prolong field life and reserves appreciation resulting from technological advances may not be a myth, but it would seem to have narrower application than the industry has assumed."


    The high flow rate, primary recovery can be speeded up with the "super straws" but it may add just a limited amount of primary recovery - still around half of the original oil in place. The rest still has to be done by very slow flow rate secondary, non-pressurized recovery. The giant mature fields like Cantarell are experiencing faster decline rates than in the past because of the speed-up, then crash effect of modern drilling.


    The U.S. peak and decline profile happened back in 1971 going right into the biggest technology boom in all of recorded history. It's worth noting that nearly 40 years of this tech boom has not altered the original production curve of the lower 48 as drawn by Hubbert back in 1956! Only the addition of Alaskan oil post peak added a small bump to Hubbert's curve.


    But who knows what may happen with the new shale fields and the progress they are making with that. That may turn out to be a lot of oil, but it's hard to imagine it could ever match the high flow rates of pressurized reservoirs. And it's the flow rate of oil that sets supply/demand economics, not how much is there.
    4 Aug 2009, 11:19 PM Reply Like
  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3689) | Send Message
    We agree on your analysis of Regular Conventional crude deterioration. It peaked at 68mbd in 2005. It's down to 61 today and wil be only 46mbd by 2030. Where we seem to disagree is the rapid ramp-up of NGLs & the non-conventionals.


    So long as annual new capacity exceeds the loss factor due to Underlying Decline Observed (UDO), there will be rising annual global Supply. Nothing in the Industry sector data that i monitor suggests that this trend will change for at least 15 years.


    But when the intersection occurs, terminal production decline is evitable...
    6 Aug 2009, 03:43 PM Reply Like
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