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The Resurrection of Peak Oil
It has been a long wait for “peak oilers,” whose passionate belief is that the world will run out of oil in coming years, sending prices through the roof.
This splinter religion came into being in 1956 when M. King Hubbert produced some simply supply/demand charts showing that US reserves of Texas tea would dry up by 1965-70, forcing a heavy reliance on imports with which we have become all too familiar. This was later expanded globally, implying that Western civilization would come to a grinding halt.
It all seemed very prescient, when in 1973 OPEC raised prices from $3/barrel to $12 in the wake of the Yom Kippur war, and the resulting boycott caused enormous lines at American gas stations. It happened again in 1979 with the fall of the Shah of Iran, taking crude from $12 to $40. Then Saudi overproduction kicked in big time, bring 20 years of falling prices, all the way down to $8. At the 1998 low, oil was selling for less than the barrel that contained it.
Then came China and the commodities boom, which suddenly sent the value of all things “hard” skyward. Virtually overnight, the Middle Kingdom became the world’s largest marginal consumer of not only oil, but all energy sources. By 2008, peak oilers had the second coming in sight, with prices soaring to $150/barrel.
Enter the Great Recession. The real damage this caused was not the temporary collapse of prices down to $28/barrel and the wiping out of many industry participants. It was the two year freeze on the financing of new exploration and development, a byproduct of the Wall Street crash. BP’s Gulf oil spill didn’t help matters either. These events have combined to create a bubble in the energy pipeline, the implications of which we may only just now be seeing.
Now the Middle East is blowing up. With populations exploding, per capita incomes plunging, and a religion that mires them in the 14th century, this sort of viral, grass roots revolution could have, and should have happened any time over the last 40 years. It took cell phones, social media, and the Internet to provide the spark. At first, the world didn’t care, as Egypt and Tunisia produce little oil, and are non-factors in the global economy.
Now it’s Libya’s turn, and it’s a different kettle of fish. Having dealt with the Libyan government myself since 1968—Muammar Khadafi overthrew the government just before I was about to cross the border —I can only say this couldn’t happen to a nicer guy. I missed the Pan Am flight he blew up over Lockerbie, Scotland by a week and lost a few friends. The sooner he is found hanging by his heels from a lamp post, the better.
The revolution there raises broader, far more concerning questions. If it can happen in Libya, why not in Saudi Arabia, where the government is still essentially tribal in nature and will not be winning any prizes for their human rights record anytime soon. Women are still not allowed to drive. Take their 12 million barrels/day off the market, even for a few days, and the geopolitical implications are large.
Which brings me back to peak oil. After a quiet, long term downsizing, the US now only imports 2 million barrels a day from the Middle East. Canada is now our largest foreign supplier, followed by Mexico and Venezuela. But oil is a globally traded commodity, and if you prick the supply line in one place we all have to pay. Remove Saudi Arabia from the picture, and the results could be catastrophic, for China first, but for ourselves as well.
Now it’s Libya’s turn, and it’s a different kettle of fish World oil production today is 82-83 million barrels/day. There is probably another 5 million barrels/day in reserve. By 2015, an additional 3 million barrels/ day in will come on stream that was financed prior to the Wall Street melt down. After that, new supplies become very problematic.
Even if the US can keep its own demand relatively flat through modest economic growth, conservation, new efficiencies, alternatives, and switching to natural gas, China promises to eat up all of this increase. That’s when the sushi hits the fan. I think oil could hit $300/barrel by 2020, or $225 in today’s prices. If you are wondering why I have become so cautious about investing lately, this is a major reason why.
Which leads us all to the bigger question of how do we make a buck out of all of this? Brent crude, which trades in Europe, is already at $104.40/barrel, a $12/barrel premium to our own West Texas intermediate. Prices here have stayed low because of a shortage of storage facilities. My buddies in the field also tell me there is some elaborate conspiracy to keep West Texas artificially low, because the prices for Middle Eastern imports are priced off of that highly manipulated benchmark. It is far more likely that West Texas trades up to Brent than the other way around.
I missed the window to get in last week at $85/barrel. But if you believe it’s going substantially higher, it is not too late to get involved. For a start, do not buy the oil ETF (USO). The tracking error caused by the contango will kill you, assuring that you will take all of the risk but get few of the benefits.
Individual oil major stocks that I have been recommending, like ExxonMobil (XOM), BP (BP), and ConocoPhillips (COP) are great vehicles. A simple alternative is to pick up the double long oil majors ETF (DIG). These guys have massive supplies in the pipeline that are about to be revalued by higher prices. So are independents like Occidental Petroleum (OXY). You can throw oil service companies into the mix as well through the ETF (OIH). Higher oil prices almost make alternative energy producers like First Solar (FSLR) much more profitable.
As (OXY) founder, Dr. Armand Hammer, told me when I was a kid, “Keep your eye on oil, because everything stems from that.” Some 40 years later, and I think the old man is still right.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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It's not a belief or a religion but a physical science. That's why oil production in the U.S. peaked in 1971.
And oil production has remained relatively flat since 2005.
Madhedgefundtrader hasn't put out one good article, ever.
I actively avoid clicking on links to his ZH posts (my RSS Reader forewarns me), in the hopes that ZH eventually stops carrying his shit.
But today I read this sentence:
Suck a fart out of my asshole, you stupid sheep-herding prick.
"Passionate belief..."
Lol, Guy Fawkes, your powder is dry, and its the 5th of November! Give the guy a break. He just writes like an amateur novelist instead of being a reasonable rationalist. Poetic licence!
Yeah... you're right... I'll give him a break.
But still:
Peak oil is fact, not belief.
And he is like "passionate belief" like it's some special breed of belief.
I still should relax though, so I don't wind up proving myself wrong.
PS: I still never treat his posts as anything but commercials, in between content.
Oil prices going lower. Egypt, Libya, Iran, these countries have the resources. They will have to develop the fields to get their economies going. No centrally managed regimes to manipulate production.
Look up Egyptian oil production and exports and also realize the Apache is major player there.
Haven't we had peak oil since 1973? How many times are we going to have "peak oil"
If by "we" you mean only the continental United States, then yes, oil production peaked in the 1970s. The reason Carter was so freaked about it was that he understood that we would be dependent on foreign oil going forward. He assumed we'd rise to the challenge and address the problem rather than sell our economic future to the Arabs so we wouldn't be bothered with little real world problems like energy supplies.
Surprise!
Actually even counting Alaska, off shore etc.... the peak was 1970 and we have not come close since.
No we didn't... Why don't you go to Wiki and type in Peak Oil, it is not a bad place to start.
http://www.youtube.com/watch?v=wYuLjGQQ-jg
Fucking Quote me Bitchez!!!!
Thanks, JW. Great link. I think he did that whole speech without notes.
"JW n FL" - Ja$on LucaS, HB Gary and MacDill may not agree!
Peak oil, from a quantitative standpoint, is inevitable and may have already occurred.
As others have pointed out, it's not a conspiracy, unless you consider mathematics a conspiracy.
The world uses 30 billion barrels of oil a year. The USA accounts for about 7 or 8 billion of those barrels, depending on what sort of year we're having. To put this in perspective, a find of 100 billion recoverable barrels like the one found off the coast of Brazil extends the world's supply by 3 years or so at current consumption rates.
Quantitatively, we have about 30-40 years of "conventional" oil left. That said, all oil is simply not fungible in terms of price or energy return, even if it looks that way to the market. You can't equate Texas light sweet crude with its low production costs with Orinoco basin sulpher laden hydrocarbons, even though both are in some sense, "oil." Discovery, extraction and refining costs are wildly different, and herein lies our immediate problem. Oil is going to get more expensive as time goes on. A lot more expensive, regardless of whether we still have any or not, because the cheap, easy stuff with a high energy return will very soon be very much gone. What's left will be... what's left. Hard to find, hard to extract, expensive to refine with a lower energy return.
At a certain point, probably well before we run out when oil price becomes inelastic, price feedback starts to set in. That's when the high price of oil itself increases the price of locating, extracting and refining oil. When oil prices start to feed on themselves, expect a distinctly nonlinear leap. At that point, I expect, the supply chains worldwide will start breaking. Not everywhere immediately, but it'll happen.
For what it would take to replace oil, I'd refer everyone to this page: http://en.wikipedia.org/wiki/Cubic_mile_of_oil
Cheers!
"The world uses 30 billion barrels of oil a year. The USA accounts for about 7 or 8 billion of those barrels, depending on what sort of year we're having. To put this in perspective, a find of 100 billion recoverable barrels like the one found off the coast of Brazil extends the world's supply by 3 years or so at current consumption rates."
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and how many offshore rigs do they have pumping? how much capacity to refine? how about moving the stuff around?
and if you think floating offshore drilling on $300m dollar rigs is the same as drilling down 50 feet in the desert with a McDonalds straw.. well its not.
Re: Cubic mile... when you think of it, it is mindblowing that everything runs off of such a small volume..
Read "The Long Emergency" By Jim Kunstler and make up your own mind about what "peak oil" is all about. You may not agree with everything he says, but you will at least have cracked open the subject.
That's a decent book, but I prefer the similar but more in-depth "The Long Descent" by John Michael Greer. Although Kunstler's book would be easier to lend to people with average reading skills or limited scientific knowledge.
Yeah, a "fun" read.... He does have a style though, doesn't he?
Peak Oil is really Peak Utility. You need utility infrastructure to build the foundation for growth. You can apply this theory to any kind of utility; water, roads, sewer, energy distribution, etc. A nation needs capital to build the utility infrastructure, credit won't do it as the credit cost exponentially exceeds the return from the utility. Only capital can form the foundation for utilities necessary for growth.
Peak Utility is everywhere, probably suggests Peak Civilization.
No doubt the daily production of oil is now increasing at a slower pace than the increase of the demand for oil.
In other words, demand is increasing in a faster pace than supply. And things will become worse year after year, because oil is a finite resource, and there's no such thing as "abiogenic oil".
It's the time for alternative energy.
Alternative energy can only make a tiny fraction of the energy that we get from fossil fuels. Also, there is the huge problem of the physical products that are made from fossil fuels, such as plastics, tires, fertilizers, pesticides, etc. We live in the Age of Petroleum.
Human population has increased 5x since 1900. I believe that would have been impossible without oil. And this is why all of our incremental solutions to oil depletion are ineffective: the amounts of energy and physical products required by a population of 7-9 billion are simply too great to be satisfied by alternative methods. Checkmate.
Also, with huge population growth, there is huge pressure on politicians to provide jobs, which means economic growth must not slow down, which means resource consumption must not slow down. So it is politically impossible to engineer a soft landing. As we approach the cliff, it becomes more and more difficult to avoid the wreck, and the means at our disposal become less and less attractive. So, starvation and war. Perhaps human intelligence is over-rated.
On the bright side, fossil fuel depletion will solve the problem of excess carbon emissions.
ummm... the daily production of oil is not increasing, therein lies the problem.
I put the graph in the post, but it was stripped out ... oh well.
Got to post the link...
Reading this stuff is very sobering. It's clear that humanity is collectively incapable of understanding its own plight. We have people watching out for our future, but by the time the confusions and paranoia finally gives way to comprehension and adult discussions ... it's too late. People are just too quarrelsome to make intelligent collective decisions.
I learned how add and subtract in the first grade, and peak oil is about very simple subtraction: How much we are discovering minus how much we are using. We use a GARGANTUAN amount of oil everyday. And we have China and India coming to the party very late in the game. The Hubbert (Peak Oil) curve is useful, but this one tells the real story ....
This graph shows the rate of oil discovery. You can see that the big discoveries around the world all came before 1980. The last big one was Cantarell in Mexico in the 1970s. Since then the price of oil has gone from $3/bbl to $100/bbl so finding an oil field is still a very profitable endeavor. Not surprisingly we have found thousands of oil fields, and brought them online with the latest technology. But they are all smaller and harder to get to. The result is that the rate of discovery is falling more-or-less exponentially. This graph indicates (add up all the discoveries) that the world's total amount of recoverable oil is about 2.1 Trillion bbl. We have used about 1 Trillion bbl since 1859. It's half gone, which in Hubbert's theory, is approximately when the peak occurs (now).
It takes about 40 years to develop and exploit a giant oil field. In 2005 Cantarelle was the second largest field in the world after Gahwar in Saudi Arabia. Production from Cantarelle peaked at 2.5 Mbbl/d, and right on schedule, about 34 years later, it suddenly began producing less oil despite heroic efforts to repressurize the field with Nitrogen gas. It now produces about 500,000 bbl/d. This same story can be told all over the world including Saudi Arabia. We still get half our oil from these aging super giant oil fields. We cannot replace this declining production with the puny amount of oil we are discovering. We hit peak oil in 2005, and have been producing less ever since.
This is NOT a conspiracy or tin-foil hat dellusion, it's first grade math. Get with the program.
I love teh way Gray goes wild on commodity spec while saying nothing about stk mkt speculators particularly the internet bubble again thx to you know who...Liberals are ok when the speculation goes there way
Looks like a sequence out of 'Giant' !
Here is another to chew on:
http://www.glgroup.com/News/What-statistics-can-tell-us-about-future-world-crude-oil-production-rates-51871.html
An excerpt (note only C+C is considered, i.e. liquid oil)
Year Wells Production (bbl/day) bbl/day/well
2005 807,172 72.361 million bbl/day 89.64
2006 867,750 72.647 " " 83.72
2007 867,853 72.160 " " 83.15
2008 883,691 72.822 " " 82.41
2009 913,978 70.908 " " 77.58
Lets see 106,000 more wells, 1.4 mm bpd less production....
Our glorious future!
http://tomclarkblog.blogspot.com/2011/01/edward-burtynsky-oil-extraction...
(see 19b, especially)
JNM : Your scenario anticipates a general asset devaluation by 2012. We need a melt down thats true of the financial sector worldwide. But once the picture becomes clearer, the shadow banking toxic crap, the derivative interest indexed commodity/real estate bubbles get netted out, the dollar-yuan-euro equation finally balances out through this painful adjustment process, the world will be back in 'business as usual' scenario. Then all the above issues will become relevant. What screws up the current picture is that the powers to be currently aren't prepared to take their medicine and clean out their stinking cupboards.
If we don't resolve this situation fast either the market will or a world war will. But that is all we can say about the current madness.
Well put in practical terms the world population, faced essentially with the same material, existential issues common to all men, you and I, we have two alternatives :
a) corporate rule. Feudal free for all with surrogate 'political' leaders. This has been the past scenario for thirty years. With the US admin. as Top political dogs, bowing to corporate rule. Look where it's got us!
b) Some responsible government by truly representative politicians. With clear guidelines WORLD WIDE to curtail corporate greed. If we can't achieve this, then we've betrayed Jefferson, GW, Lincoln, FDR, MLK, JFK and all those who sincerely or otherwise chose general good as their mantra over private good, all the while leaving a sufficient scope of freedom for individual growth and innovation, pursuit of... and spiritual diversity.
How we achieve this second situation is debatable and part of the democratic process in the republican framework. Opting out is just a green light that we are all a bunch of headless chickens running around to achieve our small personal goals outside the framework of a level field. Sitting targets for the ruling oligarchies. Then it'll be George Orwell time, animal farm, and Machiavelli's prince will always reign supreme in each political confine of the world. Can't you see that in today's world the real political model is Khaddafi. We've left this guy and hundreds like him rule the impoverished masses, in spite their mega riches sub soil, all funneled to the corporates, paying lip service to 'free world and democracy'.
What a sham. Even if you don't play your part, your children will be forced to. In more dire conditions and we'll be remembered as a cynical generation of back-tards. Unacceptable all round.
"For a start, do not buy the oil ETF (USO). The tracking error caused by the contango will kill you, assuring that you will take all of the risk but get few of the benefits."
I'm 26 years old and even I know...this statement is below amateurish status.
1. It's not called "Tracking Error".
2. The oil contango has collapsed with this latest move higher, to only about 3% over the next year. WAY less than it has averaged since 2008. Might be a record low, since then. After about January 2012, the market is actually in backwardation out until at least 2014.
If people are dumb enough to believe they can hold front-month oil indefinately without taking delivery or paying for storage than god help them...I suppose those are the people reading MHFT frequently, so, it's good MHFT is warning them.
I remember trips with Hammer to the then USSR when he was involved in trading phosphates for fertilizer. Beyond oil, fertilizers will be in demand as well as chemicals, and better than gold. Iam obviously older then madhedgefundtrader but not neccesarily wiser but do share outlook on peak oil. Also add CVX to list--not involved in Libya and reaching recent highs everyday
falek
You've made your own argument for NOT having "world government".
There would only be one group of political whores for the corporate monopolies to control.
Trav7777 in 3, 2, 1...
This is right up his alley no?
ya think?
MHFT is an idiot...the US already peaked...forty fucking years ago.
WTF is he Rip Van Winkle x2?
Why does ZH allow bullcrap like this posted on their site?
I can understand bringing a "balanced perspective" but in this case MHFT is not even adequately informed on peak oil issues.
Waste of fucking time reading this guy's stuff.
With respect taraxias, what do you quarrel with ?
All public information is from Oil company data or Government data. Both parties have in interest in marketing scarcity. The oil companies for profit, and governments for taxes.
Regards.
Still waiting for your rebuttal.... It is time to put up or shut up.
BTW, don't play the liberal political slur game. You will find that the "peak oilers" here are a politically diverse crowd that only shares an understanding of basic math and science...
...and instinct for survival
yeah, the government just loves this instability, loves the collapse of a debt economy built upon a never ending resource premise
They have not. On the contrary.
No wrong. The article points to the upward priced energy curve for non renewable fossil fuels, albeit where liquid, 'easily accessible conventional reservoirs of mid-east reserves', will be complemented by others more difficult to attain or highly polluting alternatives, like schist gas, with high pollution alleviation costs on infrastructure. This is the green light to alternative energies in a massive way. Not saying that its part will be substantial early on but it will be upward and constant. USA needs to rethink : conventional fossil fuel imports/production/ new fossil fuel exploration-production/ nuclear/ alternative energies in a concerted way. Not let the corporates dictate their rules in an opaque environment of distorted statistics basis. But this is like asking the pot to stop calling the kettle black. Government is where the most corrupt and greedy are today. Sitting targets for corporate rule to continue...It's about 'real turn around America'...Unfortunately, for you isolationists in ZH who don't like world intergovernmental cooperation, this is in the cards from now on. No economic 'top dog' world wide, a good thing, but we're all in the same ecological/commodity/raw materials downturn scenario. The word 'economia' is becoming very relevant today...The corporates have the upper hand world wide. They're already global. Not the people...So, the only way to control the REAL ENEMY, is to go global in terms of world government. At least for the essential, like world resource allocations and fighting ecological damage and famine and starvation scenarios. I know this is like talking a foreign language to red blooded americans. But I believe in FDR and Eleanor Roosevelt's legacy to the world. Can't be clearer than that.
Only when the really smart people in control of everything will we find a solution.
Calling Obama, Gheitner, Bernake. World government needs you NOW.
More total crap from MHFT. What a tool.
Oil peaked five years ago. It's documented by the IEA and various others. It's not in the future and it's not speculative. Would you like to debate the existence of gravity? Or, perhaps, whether special relativity has any potential practical applications?
I'd like to debate peak coal.
Good...let's start. It is your serve.
Go to www.theoildrum.com
use the "google search" box on the top left, type in "peak coal".
Read to your heart's content.
I comment there from time to time. A LOT of folks there like the idea of preemtively killing off the excess population in order to make what little is left last longer. Those boys are really smart. To stave of disaster many of them think we should start killing off other people ASAP. I propose killing them first. If people have to die I'm going to be last.