Peak Oil News: A Challenge to Peak Oilers

Monday, August 15, 2005

A Challenge to Peak Oilers

by Charles H. Featherstone

A few days ago, I was exchanging e-mails with someone who had decided to challenge my position on "peak oil." I'm surprised that I still get e-mails from my piece last year about world oil markets and how they work.

The correspondence did not start out pleasantly, as no conversation can where one party begins by calling the other party an "idiot."

I try, however, whenever I respond to someone who disagrees with any point I make or even with the mere fact I draw breath, to do so at least with some semblance of manners. Manners are cheap and easy to use, and if you cultivate them well and use them often, make life much easier for you, even sometimes when dealing with arrogant, badge-wearing men and women. I've also been online for too long – since signing up for on-line access with the Institute for Global Communications in 1989 or 1990 when I was at San Francisco State University – and realized too long ago it was very easy to use the anonymity of the Internet to lash out angrily at people. I'm ashamed to say I've done it a time or two myself, and have regretted it. I've also been bullied and harassed a few times by people who apparently don't have lives that don't involve their computers and believe that an argument involves insults, broadsides of supposed "facts" and attempts at humiliation.

We didn't see eye-to-eye, my correspondent and I, but our conversation became less angry and bitter and we did work an amicable understanding. I think we eventually saw each other as human beings, which is what counts. Sometimes that happens. Sometimes it doesn't.

I guess the peak oil piece has gained interest again because the New York light, sweet crude contract has vaulted into new record territory, trading above $67 per barrel late last week. Of course, the peak oilers – by that, I mean the folks who believe the top of the Hubbard's Peak curve for world oil output is coming sometime in the next few years – are all patting themselves on the back and pointing to these high market prices and saying "see, we told you so."

Only you didn't. Why are prices so high right now? Fear, plain and simple. Last week was a bad week for an already tight refining system in the United States, and every small fire and power outage – from the Paramount Refinery in Los Angeles to the ConocoPhilips plant in Illinois – as well as BP's continuing safety issues with its high-pressure reforming units at its Texas City refinery mean there is near panic over future supplies of gasoline and distillates (heating oil, diesel and jet fuel). This autumn's refinery maintenance season could be longer and more difficult than average, since so many US refineries have to retool for the new low-sulfur diesel mandates. And the shortage of distillates in the "Atlantic Basin" (North America and northern Europe) means that if it's a cold winter this year, a lot of people in New England, Germany and Scandinavia may have to learn to go without heat for periods of time. (This doesn't even begin to touch the astronomical price of natural gas in the US, which will cause huge problems elsewhere in North America if a bitterly cold wind blows south from Canada and settles over the United States this winter.)

And fear that world energy markets may have to deal with yet more geopolitical uncertainty in the form of American military action against Iran.

"All options are on the table," George W. Bush told Israeli TV when asked about Iran. "The use of force is the last option for any president. You know we have used force in the recent past to secure our country."

The evolving confrontation can hardly be much of a comfort (and we know that force is never this president's last option). Iran produces about 4 million barrels per day, only about 5% of world demand. But everyone who can produce is producing, and of the major oil-producing nations, only Iran, Saudi Arabia and the United Arab Emirates have significant extra capacity. Which means if the world loses Iran, it loses that 4 million barrels. No one can make that production up. And depending on how prepared Iran is to wage war, the world could lose a lot more.

I would like to think the Bush administration is not this stupid. But I'm not going to hope for reason and intelligence coming from the self-involved, self-obsessed idiots who currently occupy the American executive. They may think that any problems resulting from that war are "manageable," or they may simply not care what war with Iran does to the US or world economies.

(Did I mention that the 700 million barrel US Strategic Petroleum Reserve is more or less full?)

So what tends to move oil futures prices is the day-to-day outlook. Let's look at the New York Mercantile Exchange's (NYMEX) own data on oil futures contracts out to December 2011. If peak oil were imminent – and the concept seems to be catching on, at least partly, among analysts and investment houses – then prices ought to reflect that. Below I have data (circa Saturday morning) reflecting highs, lows, last trades (sometimes in overnight ACCESS trading) and settlement prices (the final price recorded at the end of a trading day, 3:00 pm. Eastern Time) for all the contracts with current open interest.

The current "front month," the price of oil you hear quoted when you hear "the price of oil," is West Texas Intermediate for delivery in September. It settled Friday at $66.86 per barrel.

Now, I've heard peak oil estimated as soon as November, 2007. Which just happens to be an open contract, though it does not appear to be have been traded Friday. It last settled at $62.63, a full $4 under the current front month. I've also heard mid-to-late 2011 tossed around as the peak oil moment too. The last contract with open interest is December 2011, which did trade on Friday, settling at $58.65 after trading as high $59.25.

If peak oil were imminent, and the market were taking it into consideration, we would expect continuous rising contract prices. Which we don't have. Contract prices peak with January and February of 2006, and then begin to taper off.

Click to read chart on original source page

This suggests several things. First, traders only really care about the immediate future. And this is true, so far as it goes. The curve has looked like this – with prices highest about five months ahead – since earlier this year. So, we can say that traders are not so much concerned about crude oil supplies in January as they are worried about crude oil supplies five months from now (whenever now is). However, most of these guys have mortgages and would probably like to be in business ten years from now. If there's a trend they need to be on top of, you'd think it would be imminent peak oil. And yet, based solely on futures contracts (I have not looked at options), there seems to be no sign of real, long-term panic.

Second, it suggests that traders may not know about imminent peak oil. Regardless, this is where all you peak oilers come in. As I was writing a response to my correspondent, a thought struck me, a way to challenge believers in imminent "peak oil" and have them, literally, put their money where their mouths are.

It's a simple challenge – if you think you know exactly when peak oil production will hit, down to either the year or even the month, then pool your money and invest in crude oil futures and options on the NYMEX or the International Petroleum Exchange (IPE) in London. Go long; that is, buy contracts or the ability to buy contracts to sell oil. In a world market that ought to be clamoring for crude as the gap between demand and supply widens, and when only Daniel Yergin is going short (if he's putting his money where his mouth is), you should be sitting pretty.

You'll make a killing. You'll have more money than you know what to do with. And you'll have taught us all a thing or two.

I know, a lot of you don't believe in free markets and profits. So what do you do with all that icky money, earned as a result of the suffering, the unfulfilled wants and needs of so many hundreds of millions of human beings? Well, the taxman will take his share, and if you really feel that guilty, the world's tax authorities would be more than happy to take all of your "ill-gotten" gains off your hands. After a fashion, I'm certain some of that money – pennies, maybe – would be used for something "useful," like research into alternative fuels or that new-fangled tokamak. Most of it will probably be spent on the useless short-term things the welfare/warfare state specializes in: subsidies, armaments, social insurance checks, police, the like.

(That reality might even turn many of you into libertarians!)

No, the truth is that too many of you peak oilers believe far too much in the efficacy and power of government. At some point you are all, even those of you who are demanding immediate action, going to have to give up on government. The various bureaucratic centralisms that govern the world right now – especially the Brussels and Washington varieties – don't have anyone's or anything's long-term interests at heart, regardless of what they say. Except maybe their own. If the disaster is as imminent as many of you fear, it is far too late for government to act anyway. There's no way to change that. Electorates in the industrialized world aren't going to vote for the technocratic governments of wise engineers and environmentalists that so many of you seem to believe is necessary to properly address the problem. I cannot imagine such a group leading a coup to seize power either.

So y'all are going to have to face it, you have about as many real friends in government as we anarcho-capitalists do.

If you're right, you make your bets wisely and profit handsomely, then you could easily jump-start work on the technology and the products that you think will save the world and end the inefficient and nasty use of hydrocarbons. If peak oil is coming – and by that, I mean coming soon – then high oil and gas prices (and imminent peak oil means we haven't seen anything yet) will dictate the economic feasibility of non-hydrocarbon choices. The market many of you don't seem to like very much is going to work in your favor. Have a little faith and work for the future you want, rather than grumbling about how everyone else – like me – who doesn't see things your way is an "idiot" and that we are all "doomed."

Do it. Prove us wrong. And save the world.

(If there are any peak oil investment funds out there, betting on oil prices with an aim to eventually fund future alternative energy and technology research, I'd like to know about them.)


At 7:28 AM, August 17, 2005, Anonymous HCG said...

The lower settle price for oil in 2011 is a present value amount. That is, it is discounted to the present. I do not know what is the discount rate that oil traders use, but a risk free rate is a good approximation in this very efficient market. Using 3% as the risk free rate, the future price of a barrel in December 2011 is $71.07, excluding inflation, that is, in today's prices. Inflation will make it higher when 2001 arrives.

So the markets are betting that the real price of oil will rise.


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