Peak Oil News: An Oil Panic In Plain Sight

Wednesday, August 31, 2005

An Oil Panic In Plain Sight

HoweStreet.com

The Rude Awakening PRESENTS: Hurricane Katrina smashes "Energy Alley," a concentrated area of oil production in Gulf of Mexico that supplies about 35% of America's domestic oil.

By Sean Brodrick

- Hurricane Katrina smashes "Energy Alley," a concentrated area of oil production in Gulf of Mexico that supplies about 35% of America's domestic oil.

- White House says oil will get cheaper, but makes hush- hush plans to increase the Strategic Petroleum Reserve by 42% to ONE BILLION barrels of crude. Why are they so eager to add to the SPR when oil prices are high?

- Saudis reveal they won't be able to meet oil demand – first time EVER they've admitted the awful truth

Hurricane Katrina delivered a devastating blow to America even before it slammed into Louisiana. The Massive storm smashed through "Energy Alley," a concentrated area of oil rigs off the coast that supply about 35% of America's domestic oil production and 20% of its natural gas. It damaged much of our nation's oil production.

At the same time, workers rushed to shut down the offshore Louisiana Offshore Oil Port, which processes loads from tankers too large for mainland ports. The LOOP is the nation's largest oil import terminal, handling 11% of U.S. imports. And refiners shut down more than a million barrels a day of production as they braced for the impact from the monster storm. Those refineries will probably be out for at least two weeks, setting the stage for a potential gasoline shortage.

Panicked oil traders are pushing oil prices over $70 per barrel. And now for the really scary part. A devastating hurricane strike at America's oil and gas operations in the Gulf of Mexico is just one of the major forces that could send oil to $80 ... $100 ... $150 a barrel. Other forces that could send oil prices surging are potentially much more serious...and permanent!

The Saudis are the "central bank of oil," right? So how come the central bank is scrounging for loose change under the couch cushions?

Earlier this month came news that Saudi Arabia hired five Rowan jackup oil rigs for drilling offshore oil wells on a three year contract. Those rigs are currently under contract in the Gulf of Mexico, so that means Saudi Arabia outbid somebody to get those rigs – and rig rates have already run up to obscenely high levels – 30% to 50% more than a year ago.

Drilling for oil underwater is very expensive. You'd expect the Saudis to be drilling out their cheapest oil first. Don't they have a desert full of this stuff? So why are they suddenly digging deep for underwater oil, and willing to pay a premium to do it?

Unless... maybe the Saudis don't have as much oil as they say they do.

We already know that the Saudis have confessed that OPEC won't be able to meet western oil demand in 10 to 15 years. I'm starting to think they might come up short a lot sooner than that.

Are the Saudis lying? Well, at least it seems like they're not telling the whole truth. What's more, I believe there's a whole lot our own government isn't telling us. I'll get to that in a moment. First, some ugly facts...

· The world uses a BILLION barrels of oil every 12 days. Do we find a billion barrels of oil every 12 days? NO! In fact, if everything goes perfectly, we'll find just 30 million barrels of oil in the same time period. If things go badly, we'll find less. Much less.

· The global depletion rate runs at least 5% a year, perhaps much higher , as once-reliable sources of oil are in serious decline. Oil production in Britain fell the steepest of any country last year, with production in the once-prolific North Sea falling by 10% (230,000 barrels per day) last year ... Production in Alaska's Prudhoe Bay has fallen 75% from its peak in 1987 ... Iraq's oil production is still half of what it was before the war ...Mexico's production is declining so quickly it will have to start importing oil in the next 10 years!

· The U.S. Energy Information Agency has fallen in line with the International Energy Agency and admits that oil demand will exceed supply starting in the fourth quarter of this year. Total world demand is expected to be 86.4 million barrels per day, according to the EIA, while total world supply is expected to be 85.4 million barrels per day. The EIA ups the ante by saying there will be a shortfall in the first quarter of 2006 as well.

Publicly, the White House urges calm and predicts that oil prices will retreat from their current high levels. But privately, the U.S. government is quietly planning to add to existing oil reserves at a furious pace.

Squirreled away in new energy legislation is a directive to increase the Strategic Petroleum Reserve from 700 million barrels (70 days' supply of imports) to ONE BILLION BARRELS. They're adding to the SPR when oil prices are sky- high. What are they afraid of?

A confidential source in the Department of Energy gave me the scoop on the addition to the SPR. This stunning new directive was placed inside the 1,724-page Energy Policy Act of 2005 without any fanfare whatsoever – it's hidden in plain sight. And the mainstream media is too busy going to beltway cocktail parties to notice.

This 42% jump in reserves is so huge, the government doesn't even have a place to put it all – yet. The plan is to fill the SPR to capacity with a minimum of market disruption or undue influence on the market, blah-blah. If you're planning to fill the SPR when oil is over $60 per barrel, you aren't planning on getting that oil on the cheap.

I don't know what is motivating the Bush administration to boost petroleum reserves. But I do know that two oil men are in the White House right now. They probably have access to raw data on America's oil fields – including depletion rates – that the rest of us don't. Again, what are they afraid of? I'm certainly not going to buy the "don't' worry, be happy," line peddled by the White House.

Still, there are plenty of people still willing to push the government line. An analyst recently quoted in a Bloomberg story tried to push the idea that oil is still cheap, explaining: "A barrel of Starbucks latte would cost you $1,500, compared to a barrel of crude, even at $66 a barrel."

Ri-i-i-i-i-ight! Starbucks coffee is a luxury – that's why they can charge so much for it. Is oil a luxury? Not right now. But it might be down the road.

I believe we're careening toward a good ol' fashioned oil panic. I believe the government knows a lot more than it's letting on. And I believe anyone who doesn't invest for the coming energy emergency is a bloody fool.

The time to take action is now. Today's energy crisis is transforming the world – from geopolitics to the financial markets to the gas pump to the production cost of almost every product we consume on a daily basis.


5 Comments:

At 11:17 PM, August 31, 2005, Anonymous Anonymous said...

The current price gouging by traders, OPEC and everyone else involved is a direct result of U.S. foreign policy. Now, while it does not take a rocket scientist to conclude that the U.S. is despised around the world on many political, cultural, moral and socio-economic levels, it appears that very few people see the obvious fact that the bitch known as payback is crude oil prices being jacked so sky high that you will need a telescope to find the ceiling. Whether you love Bush or hate him, regardless of your individual political ideology, (assuming you even have one)or any other belief system you lean on to get through the day, unless the United States turns Swiss overnight, oil prices are going to permanently escalate past $100.00 per bbl. It's the OPEC "We Hate America, Americans and Everything In and About It" Tax.

 
At 7:57 AM, September 01, 2005, Anonymous Anonymous said...

So invest in renewable energy. A micro wind turbine on your house can cost £1000 for a 1kw system. These will pay back within 5yrs at current commodity costs. That's 20% return on capital. An awesome return that will keep rising. Energy efficiency provides even greater returns. We should be investing what little capital we have left on these two things before we can no longer afford to do so.

 
At 11:41 AM, September 01, 2005, Blogger writebrain said...

On another note, I'm watching an analyst on CNBC say that oil prices will be in the $65 to $69 range for the next four or five years. 99% of the guys on Wall Street just don't get it. I could be wrong, but I believe there will be a time -- soon -- when we WISH oil was only $69.

I'm the author of "An Oil Panic in Plain Sight," by the way. Let me recommend another blog you'll find interesting: http://butterflypolitics.blogspot.com/

 
At 11:41 AM, September 01, 2005, Blogger writebrain said...

On another note, I'm watching an analyst on CNBC say that oil prices will be in the $65 to $69 range for the next four or five years. 99% of the guys on Wall Street just don't get it. I could be wrong, but I believe there will be a time -- soon -- when we WISH oil was only $69.

I'm the author of "An Oil Panic in Plain Sight," by the way. Let me recommend another blog you'll find interesting: http://butterflypolitics.blogspot.com/

 
At 7:17 AM, September 02, 2005, Anonymous Anonymous said...

Just a reality check: SPRO being increased to 1 billion bbls, just to make sure everyone understands this clearly, is NOT so that good ol' Uncle Sugar can pull it out for our SUVs when the going gets tough...
Recent token gestures notwithstanding, the purpose of SRPO is to fuel our "strategic" national assets, including our armed forces, in the event of a global energy crisis, which seems to be inevitable...

 

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