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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 does however, mean bold changes to current farming methods. Changes, like all the others, that should have been in place by now.
What the fuck are you talking about? I think your dementia is kicking in?
? When did the world population start falling
Since we can hardly trust any official statistic in this area, who really knows?
I bet you Kissinger & Co. have physically suppressed the population down in quantity (greatly) from what it would otherwise be today.
Ok, time to play....
Even assuming flat demand for oil for the next three generations, where is the new supply coming?
Now, Please deal with the following facts:
1) Net Oil exports from producers peaked in 2005. There is simply less oil on the market. This chart is the tell:
http://www.theoildrum.com/node/7327#comment-756659
2) Sometime in 2008, the forward oil curve went into contango for the first time. They was a lot of debate about what this implied. My take is that the smart money figured out that demand would be outstripping supply into the foreseeable future. In essence, it now trades like a currency.
3) World oil dicoveries peaked in 1965... We have produced more oil than we have found on a yearly basis since ~1980. On shore production of C+C peaked in the 1980's. Energy usage per capita peaked in 1979. The USGS 2000 report on oil reserves had grossly overestimated the rate at which we are expected to find new oil, even with Tupi, we are ~50 billion barrels behind.
4) Breakdown what is called oil into its real components
C+C, NGL, Other liquids
Now, generously give an EROEI of 6 on “other liquids”, in other words from an energy perspective multiply by 0.85, otherwise you double count the oil to produce the liquids.
NGL is 65% of the energy density of crude
Ignore Refinery Gains, that is simply increasing the volume for the same energy content…
And fold in existing fields are declining at 4.5% (CERA, IHS etc..) per annum and that new fields are barely keeping up.
http://www.theoildrum.com/node/7385
The energy of Liquids production has been flat for 5 years. Demand has not resulted in increased supply.
5) Examine the first figure in the following link taken from the IEA 2010 outlook:
http://www.onlineopinion.com.au/view.asp?article=11610
The original report is here
http://www.iea.org/subjectqueries/keyresult.asp?KEYWORD_ID=4107
To maintain world production we have to find and develop the equivalent of a new Saudi Arabia every 7 years...
Care to dispute any of the above?
I've worked in this industry for twenty years :
1) In 1982 oil production in Saudi went up on ONE simple telephone call from Reagan to king Fahd. The whole of the oil industry knew that according to the oil majors, Shah of Iran's predictions in 1978 leading to second hike were not absurd. Based on Oil industry's figures on potential reserves, recoverable reserves ratio based on conventional drilling methods (non assisted yield : 20-25%), we were reaching a plateau. This is what fueled the Carter synfuels program in 1979 (coal to oil or gas, via coal oil mix, gasification plus shale oil in the bench mark project of Exxon in Colorado synfuels). A huge investment was programmed. Reagan shelved all that in 1981. Volcker's deflation struck back US oil consumption. Reagan's phone call under duress (Iran-Iraq war on, Saddam spear carrier for sunni Saudi Arabia + USA ally) meant that Fahd owed his friend/ally Reagan one. He opened wide the tap and it changed the supply-demand situation for 20 years. Saudi never regained their price position, as European en-con cut backs brought down its consumption by 30% since it's peak in 1972. It took the emergence of India + China to push world consumption beyond previous plateau. By that time both the lying oil majors and the Oil producers knew they had become victims of their own number manipulations. As a result the M.D of Shell oil, second world major, in the mid 90's, resigned as he was compromised in these corporate shenanigans. Then we hit the Iraq invasion in 2003 and the oil peak plateau was official soon after. That sums up twenty years of oil economic lies during Reaganomics, to help the post industrial FIRE assets bubble economy to take off and to also allow Reagan to squeeze soviet oil revenues in his cold war against enemy country USSR, concomitant to its increased military spending in Afghan war. It helped cave in the Soviet Empire from 1985 on. So Reagan won his main political goal at this price. But nobody set the book right for fifteen years after that! No wonder we are where we are!
Spot on.... you neglected to mention that Prudhoe Bay came on line along with Cantarell and that the North Sea became a factor. Got to love the Brits, they pumped their oil at rock bottom prices *and* sold all the gold at the bottom...
Obviously, as well, if I remember right, the international natural gas market took off, with big Siberian discoveries as well as North Field Qatar. A new emergent energy source surfaced as LNG from Algeria/Africa/ Mid-East/N.sea now captured USA/EU markets. All this changed the energy mix and kept oil 'soft' during the 1980-2000 period.
Another factor is that the primary western response to the '73 shock was the replacement of burning oil for electricity. We are now at the point where the exporters are burning their oil for ever increasing electricity demand.
Options do exist, but is there the will and stablity for the massive infrastucture investment? The quickest option is nuclear; that path is fraught with peril, especially in the hands of the current oil exporters. Call it a Catch 22...
France seems to have a good track record with nuclear. Is it not transferable. I do agree Nuclear plants even civil in third world countries require good supervision by skilled personnel. Gas cogeneration was a good alternative to burning liquid fuel for electricity. Especially in urban locations where the heat generated/captured could be used in urban housing. We haven't done enough down the co-generation route using NG, especially in the middle-east urban centers. Imagine Cairo or Jeddah nuclear powered...
Even assuming flat demand for oil for the next three generations, where is the new supply coming?
The US is the Saudi Arabia of shale oil. Extraction costs are declining. There is currently a glut of natural gas due to new extraction methods.
What we are seeing is another bullsh*t peak (they happen in cycles). Oil? Still plenty in the ground.
and who is the saudi arabia of fresh water?
Hahaha! Shale oil? Want to find an energy source with a substantial, or hell, a positive EROI please?
http://lettersfrommrsunshine.blogspot.com/2011/02/shale-oil-contains-no-...
Moog find fire rocks.. Moog like pretty flames... Oh, no, Moog burn fingers
LOL! ;-)
So simple, even a caveman can understand.
Please elaborate, pay attention to OOIP, anticipated flow rates and recovery factors and exactly what deposits you are referring to. I like numbers and facts, then can then have good discussion; no slurs, no bullshit.
your assumtions are statically correct. Dynamically not so much. Oil from 100 ft wells peaked long ago. And now we are back on the whale oil standard. Aren't we? Where is captan Ahab when you need him? Off chasing Dick. I blame it on long ocean voyages on sailing ships.
Bad rebuttal....non sequitars, and red herrings. We can discuss things, but please come up with facts.
BTW, do you know what depth the Super K zones are in Ghawar? Or do you even understand the question?
Flak, buddy, I tried all this shit months before you were here.
They didn't listen, so I just tell them to STFU idiot.
I figured that playing good cop bad cop would be the best... Also, I must admit that I lack your acumen in flat out flaming...
"World oil discoveries peaked in 1965." and, curious enough, there tends to be a forty year lag between discovery peak and production peak. See: US
good post
This has been observed and commented on extensively. You can derive the relationship heuristically from basically first principles and observed growth rates.
HOOO HAAA, I like the way you play!!!!!!!!!!! Good job!
i take it you are still waiting for easily extracted oil here in the US to peak also?
Yeah good thing more people doesn't = more demand or we would have a real problem!
oh you mean as in that fool from the seventies who wrote about running out of "everything" from food to water to iron to air to endless nonsense on and on and on. maybe you mean that we have production problems and bottlenecks from time to time that will take prices higher...could that be it? maybe you mean these problems are man made, like oil embargos or revolts caused by shit leaders? still is no reason for the speculators to be allowed to run lose making prices worse, the hedge funds are not in the oil business nor do they buy oil products to produce items like tires. they have no reason to hedge their costs whatsoever...none.
LOL so now water is plentiful too? Try pulling your head out of your ass at leastonce a year
Well, peak agricultural output is questionable because of possible reclamation, improved techniques, etc. However, with minerals like oil, copper, uranium, etc. there is a certain amount on the planet and that's the fact jack. You can debate whether or not we are near a peak currently, but it is a fact that there will be a peak at some point. Take a look at ore grades coming out of the ground, they have dropped MASSIVELY in the last several decades. I wouldn't be betting on supply-driven drops in real prices for any minerals just now...And considering that modern agriculture is more dependent on minerals than land...wouldn't be betting on supply-driven real price drops in food either.
The irony of the peak is that when it occurs, supply is at its greatest.....
Go read the Club of Rome's report, not the spin. You will see that they made no predictions. All they did was take existing trends and extrapolate them and left the reader to interpret the results.
This is false. The Club of Rome's report made a lot of predictions. Predictions that were wrong.
You are probably talking about Matthew Simmons pdf about it: http://www.masterresource.org/2011/02/matt-simmonss-club-of-rome/
who the hell is the club of rome and why would i care. i have heard all this crap since the 1960's. the earth is dying...global cooling....no oil....no water ...no food...no iron...global warming....etc etc etc. the greatest crime is ethanol....taking "food" and massive amounts of "water" to make a gallon of the shit...unbelievable.
Humans used more stuff between 1970 and 1990 than they had in all previous years combined. This number grows exponentially. We can keep doubling our consumption until we can't. Think "yeast in a jar."
You can't explain P/O to people that slept through 6th grade science.
The Club of Gnomes? See Julian Simon for the alternate view.
Msimon....yes and thank you. paul ehrlich was the complete ass in the seventies running around college campuses spewing the end is coming!!!! i will read up on julian simon.....thanks.
Instead of relying on someone's opinion of a report, read it yourself and find out what was actually said.
flakmeister...is the end coming? how soon? you sure are pushing the peak thingy!
it IS illogical to suggest limited resources in a finite world or worse, suggest that polution can effect the environment. Chemistry, physics, math , none of this suggest an effect
I am only saying that world energy complex is undergoing a change. This has tremendous implications. For example, why would we even give a flying fuck about Libya. Prepare and plan accordingly.
Sorry, but you really should start digging beyond MSM and the corporate hucksters.
http://en.wikipedia.org/wiki/Limits_to_Growth
Not to be sarcastic, but I feel and understand your anger. There has been so much bullshit from the TPTB. All I can say is to read up, become aware, and plan accordingly. Accept those things beyond your control.
"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."
LOL OK so you were;
A. short
B. not long
C both
I've always been under the impression than USO's tracking errors made it a non-starter as well, but in this last run-up it surged some 5% on the day while my PXE (oil services ETF) fell a couple points...non capisco...maybe it's just the instinctive choice for traders out there...we'll see if the other oil-related ETF's catch up in the next few days
the Oil ETF's are not good from what i hear.... but do yourself a favour and stay out, oil is just about to tank hopefully leaving our Hedgie 'expert' Fakemeister with huge losses due to his complete incompetence to do his research and his hysterical delusional nature to believe in such utter tripe as Peak Oil Law ...contrary to every other natural and economic law known to man
Playing semantics.... the last refuge of someone who has lost the debate. C'mon, come up with credible counter arguments to my itemed posted here. The problem is that you can't, so go away and play in the gold and tin-foil conspiracy threads, it is more your style.
And yes, USO, UNG and UGA are bad investments, only for day traders.
we'll see who's playing semantics and also whose research holds water too in the next 6 months ...remember its your Hedgie job to understand this industry i did mine precisely because the usual shrill green empties came out bleating 'Peak Oil' back in 2008 just for fun ...and i rarely call it wrong on major or minor industrial trends or uncovering BS
Peak oil production does not equate peak price... Your ignorance is showing....
Best pure play is PBT
What no stories involving flying first class? I am thoroughly disappointed!
everybody has to tighten their belts! LOL - even Madhedgefundtrader!