Peak Oil News: 10/01/2008 - 11/01/2008

Friday, October 31, 2008

World will struggle to meet oil demand

By Carola Hoyos and Javier Blas

Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.

Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.

The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term de­mand. The effort will become even more acute as prices fall and investment decisions are delayed.

The IEA, the oil watchdog, forecasts that China, India and other developing countries’ demand will require investments of $360bn each year until 2030.

The agency says even with investment, the annual rate of output decline is 6.4 per cent.

The decline will not necessarily be felt in the next few years because demand is slowing down, but with the expected slowdown in investment the eventual effect will be magnified, oil executives say.

“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.

The watchdog warned that the world needed to make a “significant increase in future investments just to maintain the current level of production”.

The battle to replace mature oilfields’ output could even offset the decline in demand growth, which has given the industry – already struggling to find enough supply to meet needs, especially from China – a reprieve in the past few months.

The IEA predicted in its draft report, due to be published next month, that demand would be damped, “reflecting the impact of much higher oil prices and slightly slower economic growth”.

It expects oil consumption in 2030 to reach 106.4m barrels a day, down from last year’s forecast of 116.3m b/d.

The projections could yet be revised lower because the draft report was written a month ago, before the global financial crisis deepened after the collapse of Lehman Brothers.

All the increase in oil demand until 2030 comes from emerging countries, while consumption in developed countries declines.

As a result, the share of rich countries in global demand will drop from last year’s 59 per cent to less than half of the total in 2030.

This is the clearest indication yet that the focus of the industry on the demand – not just the supply – side is moving away from the US, Europe and Japan, towards emerging nations.

Wednesday, October 29, 2008

Oil production predicted to decline within five years

A taskforce of eight British engineering, utility and transport companies is predicting the world will reach peak oil in three to five years.

That's when oil drillers have reached the maximum they can produce and production starts to decline,

The taskforce has given three possible options - a collapse in production, a decline, or a plateauing of production once peak oil is reached.

Taskforce chairman Dr Jeremy Leggett says even the Shell Oil company agrees with the third option, although it's less gloomy about when the plateau will be reached.

"The collapse is the worst case scenario," he says.

"The plateau scenario, interestingly, is Shell's view of what could happen.

"They think that we can get to 2015 and then maybe hold it on a plateau provided they're allowed open season on unconventional oil, tar sands and all the rest of it."

Oil shortage 'bigger threat to UK than terrorism'


A global shortage of oil within five years poses a bigger threat to the UK than terrorism, an industry group has warned.

By David Millward, Transport Editor

It will also see prices soar to far higher levels than the $147 a barrel peak of July, which saw the country's motorists paying 119.7 pence a litre for petrol.

The warning of a looming energy crisis has been made by the UK Industry Taskforce on Peak Oil and Energy Security, an alliance of eight companies drawn from across the economy.

It has predicted that the availability of cheap oil will slump after 2013, with a devastating impact on the British economy.

In recent months the price of oil has dropped because of the downturn in demand from industrial countries.

Gordon Brown has convened a London conference of 38 oil producing countries to discuss in December.

Last week the 13-nation OPEC oil cartel tried to push prices back up by announcing a production cut of 1.5 million barrels a day.

But there are growing fears that the fall in the cost of oil over recent months has been a temporary respite.

In its report the taskforce says Britain must prepare itself for fresh price increases and the impact it will have on the economy.

More expensive oil will push up the rate of inflation because of the rising cost of manufacturing and delivering goods. Food will also become more expensive.

It has warned the Government that the impact of an energy shortage will be felt far earlier than climate change.

"The first report of the Taskforce is a balanced look at the energy risks and opportunities we face," said Will Whitehorn, chairman of the group.

"It is also a wake up call to the urgent actions required in the UK and other major global economies to overcome the consequences of the end of the era of cheap oil.

"The current financial and economic crisis provides a real opportunity for the British Government to lead the world in renewable investment whilst the oil and other commodity prices remain suppressed in the short term by weaker demand."

Another member of the taskforce, Brian Souter, the chief executive of the bus and train conglomerate, Stagecoach, said the Government should respond to the crisis by persuading people to switch to public transport.

"We need more effective partnerships, greater leadership and more bold and imaginative pro-public transport policies from local and national politicians.

"That has to be supported by more investment in the quality and capacity of country's rail and bus network infrastructure if Government is serious about making the UK a more sustainable country in which to live, work and travel."

Jeremy Leggett, another member of the group, said society had become oil dependent.

"What we are warning of is a peak in production beyond which will be a fall, potentially a rapid fall, and that will mean a global energy crisis if the analysis is correct," he said.

"When they fail to meet demand, many countries will experience this as an energy crisis. Some will experience it as an energy famine, as producers start to withhold exports."

Earlier this month Gordon Brown told MPs that Britain was trying to increase North Sea oil especially in marginal oil fields and those which had been explored but were not exhausted.

At the same time Britain is committed to producing 15 per cent of its energy from renewable sources by 2020.

World Is `Drowning in Oil' (Again) After Drought

By Caroline Baum

Three months ago, the world was running out of oil.

Seriously. I kid you not. Everywhere you turned, you heard whispers that the day of petroleum reckoning was at hand.

Now there's too much oil, prodding OPEC to cut production targets for the first time in two years. Last week, the Organization of Petroleum Exporting Countries, confronted with the halving of oil prices since July, announced a 1.5 million barrel-a-day cut in output.

World markets greeted the news of reduced oil supply by pushing prices down further. Crude oil fell $3.69 a barrel Friday to $64.15. Yesterday, oil dropped another 93 cents to $63.22, a 17-month low.

How quickly things change. Or do they?

All speculative bubbles have a kernel of truth behind them to justify their existence. This time around it was China and India. These emerging Asian giants were gobbling up all the commodities the world could produce to fuel their rapid industrialization.

It wasn't that the story was untrue; it was old. Growing global demand probably was the reason for the gradual rise in oil prices from $20 a barrel to $40 earlier in the decade, and even to $60 by mid-2005.

It was the moon shot to $147 that took on a life, and a litany, of its own. Emerging nations didn't start gobbling up crude, coal and copper all of a sudden in the middle of 2007.

Diversification Justification

Yet analysts on TV and in print told us with a straight face that the doubling in oil prices from July 2007 to July 2008 was a result of fundamental demand, not speculative buying or investors, including pension funds, ``diversifying'' into ``alternative investments'' in search of ``uncorrelated returns.'' (It sounds a lot better than admitting you got suckered into buying what was going up and are now stuck with a pile of stuff that no one wants.)

``It happens in every market,'' says Michael Aronstein, president of Marketfield Asset Management in New York. ``Once it goes up an enormous amount, creating unfathomable wealth for the fortunate participants, someone makes an ex-post case as to why we are only at a beginning and it's not too late to get in.''

This advice is ``generally formulated by someone who has a vested interest in selling the stuff,'' he says.

By the early 1980s, following two oil shocks in the previous decade, the running crude commentary went something like this: Oil prices couldn't go down because they were controlled by a cartel (OPEC). Banks extended credit to the Oil Patch based on -- you guessed it -- a belief that the underlying asset couldn't go down.

When prices plunged to about $11 a barrel in 1986, that myth went down with them.

Oil `Peaked'

The spike in crude oil earlier this year had the support of the popular theory of ``peak oil.'' In a 2005 book, ``Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,'' investment banker Matthew Simmons argued that oil production by Saudi Arabia, the world's largest producer, is ``at or near peak sustainable volume'' and likely to decline in the foreseeable future.

Just a few years before the peak-oil theory was hot, the world was ``Drowning in Oil,'' according to the Economist magazine's March 6, 1999, cover story.

Oil was trading at $13.50 a barrel at the time. ``We may be heading for $5,'' the Economist predicted. ``Consumers everywhere will rejoice at the prospect of cheap, plentiful oil for the foreseeable future.''

Oil prices took off and never looked back.

Like the world of fashion, trends in markets come and go. Oil is a limited, albeit vast, resource. At some point in the future, we probably will run out of petroleum, at least as we know it.

Curve Balls

Man's ingenuity is equally vast. When the time comes, given all the tax incentives that will be thrown in the direction of alternative energy, I have full confidence the world will not return to travel by horse and buggy.

The silliness that accompanies speculative bubbles isn't to be outdone by what passes for economic analysis. It's just over three months since commodities began their sharp, swift descent, and already the nonsense is starting: Lower oil prices are going to boost consumer demand.

Whoa! The price of oil (and other raw materials) is falling because of a cutback in demand, both actual and expected. Expressed as a graph, the demand curve for oil has shifted back, to the left. Consumers demand less energy (gasoline, heating oil) at any given price than they did before.

To say that lower prices will stimulate demand, a widely held misconception, confuses a movement along the demand curve (lower price, higher quantity) with a shift back in the curve (lower price, lower quantity).

Cause and Effect

Why this is such a hard concept to understand, I'm not sure. People imbue oil prices with all kinds of mystical powers. They see a falling price and treat it as a cause, not an effect.

That oil prices are falling in the face of OPEC's announced production cuts -- a reduction in supply would tend to raise the price, not lower it -- suggests that demand is falling even faster than OPEC can reduce supply.

That won't boost demand, but who knows? Maybe it will help recapitalize the banks!

(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at

Peak Oil And The Systemic Collapse Of Modern Civilization

By Peter Goodchild

Systemic collapse has ten principal parts, each with a somewhat causal relationship to the next. Fuel, metals, and electricity are a tightly-knit group, since no industrial civilization can have one without the others. As those three disappear, food and fresh water become scarce. Matters of infrastructure then follow: transportation and communication. Social structure fails: government, finance, and education. After these ten, there is psychic breakdown: madness and chaos.

If we look at a chart of human population over the millennia, we see what is virtually a horizontal line. Then around 1800 or 1900 the line begins to curve upward, so that for the last few decades it has been basically a vertical line. In other words, there are billions of human beings, and every few years that number doubles. That isn’t merely a mathematical curiosity. It’s a great misfortune. Half the people in the world go to bed hungry, and the other half have to fight tooth and nail to make sure they get a meal. Those facts cannot be learned from watching TV, perhaps not even from browsing the Internet, but anyone who is not too lazy to read books can confirm all the above statements.

The number of humans on the Earth is roughly the same as the number of mice, or the number of rats, as far as can be determined. It is not natural for a large mammal such as Homo sapiens to be so numerous. We outnumber wolves, for example, by about a million to one.

No one can really learn much by watching TV. The mainstream news media are tightly controlled by a very small number of very powerful corporations. They do not censor a great deal, although they distort considerably, but one thing they do not allow is any story that casts aspersions on the first principle of capitalism: that “economic growth” must never be curtailed, although it is only growth in the sense of “profits.” “More, bigger, faster” makes profits. And yet the fundamental truth is that the planet Earth is dying from two problems, each the converse of the other: resource-consumption and overpopulation.

To narrow our focus very slightly, we might consider the concept of “civilization.” Looking only at the western hemisphere, how many civilizations do we see? Egypt, Babylon, Assyria, Persia, Greece, Rome? They do not break down easily into distinct units. And then there is an even more amorphous something called “modern civilization.” Instead of being restricted to one segment of a continent, it seems to have spread all over the world. It might almost be called “Anglo-American civilization,” but even that name is both anachronistic and too restrictive.

“Modern civilization” is unique, then, in the sense that it is global rather than local. It is also unique in the sense that its means of production is not the labor of humans or draft animals, but a malodorous substance known as petroleum --- oil. This substance was rarely used until the late nineteenth century, when it was realized that a steam engine could be modified to run on petroleum. These new engines were soon everywhere. Petroleum is a great mixture of hydrocarbons, and some of the variants could be used or modified to produce other substances such as plastic. In almost no time, we had created a world that was literally “driven” by oil. The planet Earth seemed infinitely large now, and we not only stopped worrying about overpopulation, but we felt that there would be no limits to industrialization, capitalism, “free enterprise,” and all the rest of the ideology that was remarkably lacking in “ideo-.” We just never got around to thinking that all of this was dependent on that dirty substance known as oil.

But even if we didn’t like to talk about it, this black muck seemed practically unlimited, as if the entire planet was just a liquid-filled balloon. By the end of the twentieth century, we were pumping 30 billion barrels out of the ground every year.

We were becoming more addicted. Like any previous civilization, ours required metals such as iron and copper. We dug miles into the ground to get those metals. All of this digging required powerful machinery. What was it run on? Oil. We have dug those metals out of the ground so much that they are becoming scarce, at least in their more-workable forms, and without that machinery we would have no metals at all.

We have also needed electricity, which acts as the nervous system of any machinery. The electrical grids, with their enormous towers, are by far the largest devices ever built by humans. But electricity is not a source of energy, it is merely a means of carrying energy. Electricity can be based on any form of energy, from dammed-up rivers to nuclear fuel, but most of it comes from hydrocarbons such as oil or coal.

Around 1950, a number of engineers realized that there were several ways of putting the history of oil use on a graph: the amount of oil produced, the amount that was discovered each year, the number of giant oilfields discovered, and so on. But no matter which data were selected, the result was the same: oil would start to run out soon after the beginning of the twenty-first century. Although this was learned around 1950, not many people talked about it, and even fewer people were listening. One of the oddities of corporate behavior is that shareholders start to panic when a company announces that production will decline: declining production does not necessarily mean declining profits, but the average shareholder cannot deal with such mathematics. So the oil companies said nothing. While the chronology of Egyptian civilization could be measured in millennia, that of our own must be measured in centuries or decades. We have burned up our resources with a profligacy that no TV program will reveal.

With oil, metals, and electricity gone, the rest is sure to follow: food, fresh water, transportation, communication, government, finance, education. And after that there is another layer, more psychological or sociological, that I call “the four Cs.” The first three are crime, cults, and craziness --- the breakdown of traditional law, the tendency toward anti-intellectualism, the inability to distinguish mental health from mental illness. There is also a more general one that is simple chaos, which results in the pervasive sense that “nothing works any more.”

The road from culture to chaos, from oilfields to etiquette, is no less real for being ineffable. Everywhere I see graduate students who cannot add or spell, I meet thirty-year-old adults who have the social skills one would expect of ten-year-olds. The “will of the people” has been replaced in this generation by no will at all, sheer nihilism. Slumped in front of a TV set, these creatures are asking nothing, and they are being told nothing. Such an account of Homo televisionus, however, is not meant as a value judgment, far less as old-fashioned lamentation. It is merely a reflection on the psychic or spiritual aspects of that systemic collapse.

Peter Goodchild is the author of Survival Skills of the North American Indians, published by Chicago Review Press. He is temporarily living in the Sultanate of Oman. He can be reached at

Needed: A few ideas on what to do when oil's gone

Houston Chronicle

Is there a ‘silver bullet’ that will take the place of petroleum as America’s primary fuel source?

By Peter Bishop

Energy is on everyone’s mind these days, particularly Houstonians, after we just spent weeks without electricity.

Imagine doing without electricity, natural gas, gasoline and water, all at the same time! Despite the recent drop in the price of oil (which is likely only temporary), many experts believe big changes are ahead in the world when it comes to energy, especially how we supply and use it.

Last October, the city of Houston and the UH College of Technology sponsored the third annual meeting of the Association for the Study of Peak Oil-USA. There, Matt Simmons, T. Boone Pickens and other oil experts discussed the concept of peak oil: how close the world is to producing as much oil as it can. Some, like Pickens, think the peak has already passed. Statistically, the current peak occurred in May 2005 and world oil production has declined (slightly) since then. Others disagree since recent price increases have spurred more exploration and development.

What is more, Al Gore galvanized popular opinion with his award-winning book, presentation and movie, An Inconvenient Truth. Many claim that he exaggerated the threat. While there is natural variation in the Earth’s climate, almost all scientists explain the dramatic rise in greenhouse gases and in the Earth’s temperature as the result of the combustion of fossil fuels.

There will be many twists and turns from here, but it is worthwhile to explore what the energy system might look like in the long run. Will it be the end of civilization as we know it? Will it be a permanent return to conditions similar to those that occurred after Hurricane Ike? Probably not, but it will be different, and we should start preparing for those differences today.

The U.S. imports about 60 percent of its crude oil, a number that has been rising annually since 1985. We hold 3 percent of the world’s oil reserves, yet we consume 25 percent of the supply. So there is no way the U.S. can meet its oil needs domestically. For now, we are dependent on our suppliers, friends and foes alike.

There may be a substitute for oil, but it will not be cheap. The easiest would be another liquid hydrocarbon, perhaps produced from natural gas or biomass, so we can use the present infrastructure. However, corn-based ethanol won’t work because it costs too much to grow, transport and harvest, and it competes with food production, driving up food prices worldwide.

Brazil became energy independent in 2006 based on a sugar cane-based ethanol system. Since the climate in the U.S. is not conducive to massive sugar cane production, that avenue is probably closed to us as well.

While research still needs to be done, early reports suggest that algae is much more productive per acre than any field crop. Algae also can be grown wherever the sun shines, near cities and on nonarable lands, so it may be a logical substitute for transportation fuel.

While airplanes will always need a highdensity liquid fuel, automobiles and trucks can run on electricity. Gasoline-electric and plug-in hybrids, to be released next year, are promising. While current storage technology allows a small car to go only about 50 miles on a charge, parking garages and meters could be equipped with recharge plugs at a cost. The fuel cost of an electric vehicle today is only about 25 percent the cost of gasoline.

Natural gas consumption has not increased much in the U.S. since the 1970s, though its use has shifted from electricity production to other uses today. The U.S. imports about 15 percent of its natural gas today, and there does not seem to be an imminent shortage of natural gas, at least for now. In fact, some are looking to vast natural gas reserves in shale formations in the Northeast. Releasing the gas requires a lot of water, however, and environmentalists are worried that the cost to the environment won’t be worth the benefits of the gas recovered

Coal accounts for 50 percent of U.S. electricity production, but it also accounts for 35 percent of the emissions of U.S. greenhouse gases. Capturing coal’s emissions before they leave the stack and sequestering them underground is an active area of research and development, but it would most certainly boost the price of electricity. Almost all of the locations that could produce electricity using hydro are doing so. Some states are actually dismantling hydro facilities because of damaging environmental effects. Others are threatened by reduced rainfall in the Southwest. Since the public has become concerned about the price of energy and the effects of climate change, nuclear power is being revived and is expected to grow slowly.

But since concerns remain over what to do with the waste, nuclear is not expected to increase much beyond its current 20 percent share of U.S. electricity production.

With subsidized costs comparable to coal, wind energy is clearly the renewable of choice today. Wind power has doubled in the last two years, but its share of electricity production is still less than 1 percent. Wind will be a component of the future energy mix, but the goal to produce 20 percent of electricity by 2030 is questionable. It has two hurdles to overcome: The wind blows where people aren’t, and the wind does not blow all the time or always at the right time.

The longer play in renewables is solar. Huge amounts of the sun’s energy fall on the Earth daily. It can be used directly to heat water for homes and businesses, to run turbines to generate electricity, or can be converted into electricity via photovoltaic (PV) cells, which continue to improve, especially with the application of nanotechnology. Photovoltaic systems promise to decentralize electricity generation as dramatically as the PC decentralized computing.

All buildings in the future will sport solar appendages that will generate a good portion of the building’s electricity and might even return some to the grid. This will slow the growth of expensive and environmentally questionable central electricity capacity.

Areas near seismic faults, like California, will certainly exploit geothermal energy near the surface. Others are looking to harness wave or tidal energy, although those systems are still in the research phase. All renewables will get a boost from any legislation that attempts to put a cost on emitting carbon. While good for the climate, any such scheme will also mean higher costs for consumers.

The take-away to all of this: There will be no one substitute for oil, or any other energy source in the future. Our society has formed itself around a relatively inexpensive, high density, easily managed energy source — oil. In its place, we are likely looking at a whole complex of different, more expensive, less easily managed sources.

“There are no silver bullets,” as the saying goes, “only silver BBs!”

Another strategy for replacing oil is not to demand as much energy in the first place.

Energy guru Amory Lovins and others believe that the potential for energy efficiency far outweighs the potential for new energy sources.

Once we put our engineering talent and ingenuity to the task, under the discipline of higher prices and lower availability, we may realize significant energy efficiencies. So, we maintain our standard of living by using what energy we have more wisely.

If finding new energy sources and energy efficiency doesn’t work, we will be required to change our behavior. Few expect human society to disappear in a reduced energy environment, but it could change dramatically. We have already seen some inevitable changes: driving less, cooler homes in the winter and warmer in the summer, more local production of food and manufactured goods.

Other changes will take longer: higher population density in cities, increased telecommuting, alternative vehicles for different purposes, more mass transit options and increased walking and cycling. Under this scenario, the world could be considerably different in 2050.

While we can’t predict the future, exploring plausible scenarios in the story of human civilization is exciting and valuable for us today. Who knows how much energy a reconfigured system will deliver, or how much energy we can save? In any case, behavior will square the circle and fill the gaps. Will future generations develop more powerful energy technologies? Will they resent us for using all the oil, or be fine with lives that rely less on energy?

Since the Enlightenment and the Industrial Revolution, each generation has felt it has progressed from what previous generations had. When it is all said and done, future generations might even value their lives over ours.

Bishop is an associate professor in the College of Technology at the University of Houston, and coordinates the graduate program Futures Studies in Commerce.

Thursday, October 16, 2008

The Peak Oil Crisis: The Crash of 2008

Falls Church News-Press

By Tom Whipple

For weeks now the stock markets and commodity prices have been falling. Oil is currently trading around $76 a barrel which is close to a 50 percent drop since the middle of July.

Large portions of the credit world's markets are frozen, a situation which will lead to all sorts of economic problems if not freed up soon. The world's governments are thrashing around in an effort to revive the credit markets by throwing literally trillions of dollars at the problem, but so far there have been few readily observable results.

This week's plan involves having the U.S. and European governments spend hundreds of billions in a coordinated plan to recapitalize the banks. The general theory is that if the government owns all, or part, or at least guarantees the banks and their loans, nobody should be afraid of a bank failing, no matter how many bad loans it has hidden on its books. While the latest plan may eventually be enough to restore the credit markets, it seems unlikely to stem falling house prices, save Detroit, or reduce the steady increase in unemployment. If recent polls are valid, America's voters are becoming increasingly terrified of the future and are in a mood for major changes.

Despite the dramatic drop in oil prices during the last three months, recent developments have only made the supply and demand situation worse. Oil consumption in the U.S. has fallen by 1.8 million barrels a day (b/d) or nearly 9 percent as compared to last year due to a combination of high prices, a slowing economy, and the shortages resulting from the hurricanes that tore up Gulf coast production and refining last month. During September, however, Chinese imports increased by 2 million b/d as Beijing took advantage of the low prices to start building its strategic reserves -so much for falling American demand. The major oil forecasting agencies are now saying that the increase in worldwide demand for oil will slow from rates seen in recent years, but that worldwide oil consumption is still forecast to increase this year and next.

U.S. gasoline prices are down by a $1 per gallon as compared to last July. It will be interesting to see whether U.S. gasoline consumption begins to climb again due to lower prices and the end of the shortages across the Southeast. Although there is a lot of fear in the future, the American lifestyle and economy is still dependent on liquid fuels. While reducing discretionary summer travel is easy, reducing fuel use in daily life is much more difficult.

So far there have been two major reactions to the rapid fall in the price of oil. First we are seeing numerous companies around the world cancel or slow oil and natural gas production projects because prices have fallen too low to make their projects profitable and the outlook for future oil demand is not all that good. The second shoe that will soon drop belongs to OPEC. The cartel has seen the average price it gets for its products drop from $138 a barrel in July to $78 a barrel last week. If the current weakness in oil prices continues, the average that OPEC gets for its oil will be in the $60s.

There have already been reports that OPEC has cut production in the last few weeks, and the organization has scheduled an emergency meeting for mid-November. Analysts are already talking about OPEC cutting production by another million b/d on top of the 500,000 b/d cuts they announced two weeks ago. A mid-November OPEC production decision takes any production-cut/renewed-surge-in-prices problem out of the hands of the Bush administration and leaves it to his successor.

Taken together, the developments of the last few months indicate that despite the steep decline in gasoline prices, the effects of the peaking of world oil production will still be with us. So far the recession we are entering has not been enough to actually reduce worldwide demand for oil, but the drop in oil prices and the overall economic situation is hurting investment in future oil production products.

When these developments come together, be it a few months or a few years from now, world oil production will decline more steeply than would have been expected. Whether this decline comes from a deep economic recession reducing demand or depletion simply getting ahead of new production does not matter -- the results will be the same.

The bottom line for this week remains that there is little to cheer about. While oil is dropping in lock step with the equity markets, OPEC is already moving to halt the decline which will not last much longer. At least some of the recent drop in oil prices comes from hedge funds selling off assets to meet margin and redemption calls. If so, this is a one-time phenomenon. With the lower prices we should be seeing in the next few weeks, U.S. demand for gasoline seems likely to start rising again -- at least until the economic situation gets much worse.

For now, there seems to be little more to say other than there will be many more surprises in all this. If you have the feeling that events are spinning out of control, you are probably right. Welcome to the 21st Century.

Wednesday, October 15, 2008

Why Drill, Baby, Drill Will Never be an Energy Solution and is NOT an Energy Policy

Red, Green, and Blue

By Jennifer Lance

I’m sure at tonight’s presidential debate, we will hear more of John McCain’s energy policy. I’ve recently read some enlightening information in The Bush League of Nations: The Coalition of the Unwilling, the Bullied, and the Bribed by James A. Swanson that proves “Drill, baby, drill” is not an energy policy, and it will never make us energy independent. US oil production peaked in 1970 at more than 11 million barrels a day, ironically just three years before the oil crisis. Consider these statistics from Swanson’s book:

* By the end of 2005, US crude oil production had dropped to 4.86 million barrels per day, which is less than 45% of America’s peak production in 1970.
* By 2005, America was producing less oil than it did in 1950.
* The 1970 record oil production represented more than 40% of total world production, but it was still not enough to meet America’s appetite for oil-almost 15 million barrels per day in 1970.
* By the end of 2005, U.S. oil consumption had increased to about 21 million barrels per day, while U.S. production, as noted above, had dropped to 5 million barrels. American now has to import more than 75% of the oil it consumes.
* By way of comparison, at the time of the 1973 oil crisis, during which Americans endured closed gas stations and gas lines blocks long, the United States imported less than one-third of its oil.
* In 2004, there were only 1,200 rigs actively exploring for oil and natural gas in the United States, a drop of almost three-quarters from the 1981 peak of 4,530 rigs. This drop occurred notwithstanding a huge increase in the price of oil and reflect the fact that almost all of America’s oil has already been discovered.
* The United States has lots of oil wells, more than 500,000, but they on average don’t produce much-slightly more than 10 barrels of oil a day each. On the other hand, Saudi Arabia has only 1,500 producing wells, but they average 5000 barrels per day (500 times the U.S. average).

Big Oil loves the GOP. Consider the fact that Chevron named an oil tanker after Condoleezza Rice, and that George W. Bush actually said in 2002 that “We need an energy bill that encourages consumption”, I have no faith in the GOP to make us energy independent. Swanson states we were energy independent in 1950; we will never be able to drill our way back to this level without drastically cutting consumption. I’m not sure it is even possible, since we have already reached peak oil production in this country three decades ago. Bush’s policies and wars have made us more dependent on foreign oil. McCain is delusional if he thinks we can drill our way out of this problem, it won’t even buy us enough time to develop alternative energy solutions.

Saturday, October 11, 2008

Are Oil Prices Rigged?


By Ari J. Officer and Garrett J. Hayes

We've all read that speculators are driving oil prices artificially high — a claim that gets more interesting in light of oil's recent fall below $115. But maybe we're looking at it from the wrong perspective. Suppose that major suppliers in the oil industry are these manipulative speculators.

Is it possible that oil prices are rigged? You bet. Here's how:

Just how would you raise prices if you were an oil supplier? Controlling the supply — as in the 1973 OPEC embargo — has become less effective with more sources of oil worldwide. And oil suppliers clearly cannot raise prices by controlling demand in the physical oil market; ultimately, they need to sell their oil, not buy it. However, with the market inefficiencies that we expose here, oil suppliers can regain the upper hand by artificially inflating demand using a different market. To understand this mechanism, we must take a glimpse into the future — the futures market, that is.

The price of oil reported in the news is actually the price of oil in the futures market. In this market, traders do not exchange physical barrels of oil, but instead trade contracts which obligate them to exchange oil at a quoted price at a specific date in the future, usually months in advance. Such a contract allows companies to hedge positions by locking in prices early. Airlines might buy futures contracts to reduce their exposure to rising fuel prices. Conversely, oil companies might sell futures contracts to assure a profit against future price drops. It's all about reducing risk and uncertainty. But what if oil suppliers were instead buying oil futures, compounding their own risk and reaping enormous profits from the explosion in the price of physical oil?

The futures market has become the public driving force in pricing oil. But the vast majority of oil consumed in the world is purchased through private deals, given the massive undertaking of physically delivering millions of barrels. However, a series of private deals cannot establish a market price. Because pricing in the futures market is transparent, in that trade activity is publicly available, it establishes the widely accepted benchmark for the price of oil. In other words, the futures market serves as the price discovery mechanism for the oil the world consumes.

Thanks to margin in the futures market, you can trade ten times more oil than you could otherwise afford. For only $9,000, you could control more than $140,000 of oil at recent highs.

All told, about one billion barrels of oil are traded daily through futures contracts at the New York Mercantile Exchange (NYMEX). This volume significantly overshadows the 80 million barrels of oil consumed each day worldwide. Yet this large volume of trading is misleading. Most of the trades are just noise: speculators going for quick profits, taking a position, and closing it out immediately.

A better measure of the size of a futures market is the open interest, the total number of outstanding positions. For contracts ranging from next month to a decade from now, there is a total of one billion barrels accounted for from the total number of outstanding positions. Interestingly enough, more than 30 billion barrels of oil are actually consumed each year. Despite all the volume, the claims realized through open interest pale in comparison to the actual consumption of oil. The futures market is much smaller than the real oil market. When you consider margin, the amount of money actually invested is even smaller. Indeed, one dollar invested in a long-term position in the futures market carries the leveraged weight of more than $300 in the physical oil market.

The point is, it would only take about $9 billion to control the entire long position in oil. That sounds like an enormous amount of money, but some of the major individual players in oil are bigger than the market itself: Sultan Hassanal Bolkiah Muizzaddin, of Brunei Shell Petroleum, is worth about $23 billion; Saudi Prince Alwaleed Bin Talal Alsaud is worth about $21 billion; Russian Vagit Alekperov of LUKoil is worth about $13 billion. No, we're not implicating any of these guys in market rigging; in fact the list of billionaires with that kind of swag is long. The point is that anyone in that category could clearly handle the risks of the oil futures market, and they might even be willing to take delivery on oil. With suppliers holding back their large stakes in oil before delivery, those speculators and hedgers on the other side (those who have sold oil) will need to pay higher prices to get out of their positions. Oil suppliers' ties to the oil market itself give them a unique advantage in cornering the market.

Why would these individuals or their companies risk their own money and reputations, should they be discovered? They don't need to. There's an anonymous investment vehicle — the hedge fund — with which they can even risk other investors' money for futures speculation. Although we're all affected by oil prices, we as oil consumers don't set the prices. Herein lies the problem. The futures market that serves as a price discovery mechanism for the physical oil market is open only to the elite. We trust these elites to determine the prices, but who are they? Who are the so-called experts? Hedge funds, oil companies, OPEC — the very people who profit from massive, consistent increases in prices. Notice a conflict of interest?

All an oil supplier would have to do to raise prices is buy up futures contracts.

It's not even that risky. Either the suppliers/investors risk an insignificant fraction of their gargantuan fortune, or they entice other investors to share the risk. With virtually unlimited resources and an actual tie to the underlying commodity, oil suppliers are in a far better position to accomplish this manipulation than, say, the Hunt brothers were during their attempt to corner the silver market in the 1970s.

It is in every oil supplier's best interest for prices to go up. Oil is a finite commodity. The world will eventually become more efficient and develop alternative energy sources. In the meantime, suppliers want to squeeze out as much profit as possible from their limited resources. Even if they know that the price of oil is too high (to the point of reducing demand) it is not in their interest to correct it. By setting prices in the smaller but more "trusted" futures market, oil producers realize multiplied gains on their physical oil sales.

Prices in the futures market — and, indeed, any real-life market on a standardized good — do not form where actual supply meets actual demand; they form where perceived supply meets perceived demand. Participants in the futures market merely represent the world around them. A veil has been placed over the public's eyes, and they accept this illusion of a fair price.

Unfortunately, the price set by the all-too-small futures market transcends oil to influence the entire American economy. Our oil-dependent economy is shaped by oil's arbitrarily determined price. In many ways, oil has become a pseudo-currency. Similarly, with oil traded internationally in U.S. dollars, the dollar is pegged against oil. While squeezing American industry, high oil prices also devalue the dollar. With the state of our economy reflected in the price of oil, it has become a new standard for valuing America. We are slaves to this black gold standard.

The American market system, purportedly a free market despite its flaws and gross inefficiencies, has opened this vulnerability. The oil suppliers may tighten the noose, but we tied it around our throats long ago. Hiding behind the wall of anonymity, the perpetrators profit and achieve their own ends, bringing down America in the process.

The futures markets is a closed book that needs to be opened beyond price transparency to participant transparency. After each contract has expired, NYMEX and other exchanges should reveal the participants in each trade. Tear down the wall of anonymity, and long positions will, we believe, connect back to oil suppliers, who should theoretically be sellers of oil, not buyers.

Is this vulnerability a reality? Is economics so wrong in applying its supply-demand theory that we might confuse corrupt manipulation with fair pricing? There's motive, opportunity, and greed at play. Why would we expect anything else?

Ari J. Officer studies financial mathematics at Stanford University. Garrett J. Hayes studies materials science and engineering at Stanford University

Is Cheaper Oil A Good Thing?


By Vivienne Walt

How far can it fall? People have been anxiously wondering as they watch the plunging stock market. But increasingly the same question is being asked about another crucial figure: the price of oil. It has plummeted nearly 40% in just three months, from about $147 a barrel in July to below $83 on Friday, with no obvious bottom in sight. If that sounds good, you are probably a driver who winces these days at filling your gas tank. But the downward spiral could mean trouble for oil-rich countries and for the environment.

Oil analysts admit that most of them failed to predict how fast oil prices would drop. Just a few months ago, some were saying oil might reach $200 a barrel by year's end. "The analysts have been quite surprised by the pace and volatility of the decline," says David Fyfe, senior oil analyst for the International Energy Agency in Paris, which as a rule does not predict oil prices. "The volatility has been quite marked."

This year's sky-high oil prices are partly responsible for the drop. Since oil hit $100 a barrel for the first time early this year, Americans (who consume one-quarter of the world's energy) began cutting back. When gas began selling above $4 a gallon, American consumers made "a psychological shift into the sense of crisis and a sense of permanence," says Greg Priddy, oil analyst for the Eurasia Group in Washington. Instead of believing that gas prices would finally fall again, many began changing their daily habits — they started driving the smaller car in a two-car garage or consolidating shopping trips. That has meant a huge slump in Americans' gas use. Even before the market meltdown, Americans consumed 800,000 barrels of oil a day less during the first half of this year than the same period last year. As demand fell, so did prices, and as prices have fallen, investors have begun pulling money out of the oil market, fearing a collapse, says Leila Benali, an expert on Middle East oil for the Cambridge Energy Research Associates in Paris, adding: "People are getting nervous about demand next year. There is talk of a global recession."

For oil-rich countries the slump has come at a bad time. As the oil price began rising during the past few years, governments and big oil companies plowed billions into exploring and developing new fields in Russia, Angola, Mexico, Brazil and Saudi Arabia — projects whose costs have more than doubled in the past few years, in part because soaring steel prices drove up drilling equipment costs and oil-rig rentals. Just as global demand has begun to slow, millions more barrels of oil a day from new fields have hit the world market.

The big oil producers have good reason to be nervous. Many are still haunted by a disastrous error made at an Opec meeting in Jakarta in 1999, when the cartel — which produces more than a third of the world's oil — opted to raise its production levels. Within weeks Asian stock markets tumbled, driving world oil prices down to $11 a barrel. Oil officials in Saudi Arabia and elsewhere have cited that price crash as the reason they've rebuffed pleas from President Bush to pump more oil. Says Benali: "Countries have learned the lessons of the past."

Though oil-producers and environmentalists rarely agree about anything, both groups have done extremely well from sky-high oil prices during the past year. The high price at U.S. gas pumps has pushed both Barack Obama and John McCain into making the development of alternative fuels and electric cars key elements of their campaign platforms. But if gas prices continue to drop, those initiatives might begin to seem unnecessarily costly to many Americans. (Time's Bryan Walsh reported this week that some countries are already reviewing environmental initiatives as gas prices fall.) "If gas prices drop under $3 a gallon, it will be interesting to see whether it saps the political will," says Priddy. "Americans like their sprawl and generally don't like to give those things up."

If oil producers have their way, oil prices could start rising again. Their growing anxiety erupted early this week, when Iranian and Venezuelan officials warned that if Opec waited much longer before cutting its output, it could face another massive price collapse. On Thursday, Opec officials scheduled an emergency meeting in Vienna for Nov. 18 rather than wait until the cartel's scheduled summit in Algiers in early December. In the meantime, the world's biggest oil producer, Saudi Arabia — which increased production in the summer — has already begun loading less oil on its tankers, according to global oil figures.

For some countries there is a fear far greater than an economic recession: political turmoil. Iran, which earns 80% of its revenues from oil exports, set this year's budget on the assumption that oil would trade at $90 a barrel — a figure which seemed conservatively low until recently, but which is now above the world price. "If the price stays there a while Iran would cut spending," Priddy says. That might include cutting heavy gas subsidies for Iranian drivers, who have rioted in the past when the government tried to ration gas or raise the price at the pump. Hugo Chavez could face similar problems in Venezuela if oil prices drop below $75 a barrel — the rate at which the country calculated this year's budget. The problems lower prices could cause in those countries could be more visceral than those posed so far by the current financial upheaval.

Friday, October 10, 2008

The Peak Oil Crisis: Mea Culpa

Falls Church News-Press

By Tom Whipple

Earlier this week The Washington Post's media critic, Howard Kurtz, published an apology on behalf of the media for its weak coverage of the multi-year run-up to the current financial debacle.

To quote the Post, "The shaky house of financial cards that has come tumbling down was erected largely in public view: overextended investment banks, risky practices by Fannie Mae and Freddie Mac, exotic mortgage instruments that became part of a shadow banking system. But while these were conveyed in incremental stories -- and a few whistle-blowing columns -- the business press never conveyed a real sense of alarm until institutions began to collapse."

In reading through the story I was struck by how eerily similar are the now admitted journalistic lapses and the failure to connect the dots in the financial story to what we have been witnessing in the media's coverage of peak oil. The heart of Kurtz's apologia is the troubling question "Why didn't they see this coming?"

Lets look at a few of his points about the financial crisis and their analogies to peak oil. First, "the media warned repeatedly that the surge in housing prices might turn out to be a bubble, but the emphasis was on the potential toll on homeowners." Nobody connected the dots to warn that a collapse in housing prices would leave many major financial institutions holding so many worthless loans that they would be rendered insolvent; and that this in turn would result in what may turn out to be a meltdown of the world financial system.

There is no lack of coverage of the oil in the financial and popular press. Much of this, however, is in terms of high gas prices and their damage to family finances and effect on inflation. The rapid growth in oil prices in recent years is usually attributed to increases in Asian demand for oil which has resulted in tight world markets. Here too the dots are rarely connected, and certainly not on the front page where the impending crisis might start to sink in readers' consciousness. Few in the mainstream media have warned prominently that worldwide oil supply has been basically flat for the last four years, has little prospect for increasing significantly, and that the available evidence says world production will soon begin to decline creating untold havoc on the world's economy.

Another issue in warning of a coming financial crisis is simply being believed. As a senior editor of Fortune told the Post reporter "if we had written stories in late 2000 saying this whole thing [the housing/financial bubble] is going to collapse, people would have said, ‘Ha ha, maybe' and gone about their business." The executive editor of Post, who until last spring was the top editor at the Wall Street Journal, told his writer that "These are really difficult issues to convey to a popular audience... We also have to remember you're pushing against a powerful force, which is greed."

With peak oil this issue is similar: the implications of the concept are so horrendous that few want to hear about or ponder its implications. The admission that journalism has an obligation to push important issues (like the end of the oil age) into public consciousness is good, but the mention of greed is interesting. With the housing/financial bubble everyone was benefiting -- financiers, homeowners, governments, and countless middlemen. Everybody was making money. So too is the case with cheap, freely available oil. We are all benefiting in untold ways and we most certainly do not want to be told that it is all about to end.

Finally we come to the problem of journalists trying to take on the wealth, power, and expertise of the status quo. Where billions of dollars are at stake those with a vested interest, be it Wall Street investment banks or ExxonMobil, are going to react vigorously when their righteousness is challenged. According to the Post story, journalists concerned that the housing bubble and securitization of mortgages was a disaster waiting to happen were told that they simply did not have the expertise to understand the problem. Stories critical of what was taking place resulted in complaints to editors and newspaper owners.

With peak oil the story is similar. First you have extremely rich and powerful organizations such as ExxonMobil, most international oil companies, the governments and national oil companies of most oil producing states, which for one reason or another deem it to be in their best interests if the complete story of peak oil and its implications does not come to the attention of the general populace for as long as absolutely possible. You can add most national governments who simply don't want to call for the sacrifices required to mitigate the consequences of peak oil.

You can add to this list the official U.S. and International Agencies, the EIA and the IEA that are charged with tracking world oil production and forecasting just when it will go into decline. Until now, their official position has been that the peak of world oil production is not imminent, but these official positions seem to be changing. When you get right down to it there is not a living soul on the planet that really wants to hear about peak oil and its implications. The peak oil story certainly will not sell newspapers until the affordability and availability of oil gets so bad that some sort of action must be taken.

Is there a lesson from the current financial crisis that might be applied to the impending peak oil crisis? For now the peak oil story is lost in the collapse of the equity markets, the commodity markets, and who knows what else. When people and their elected representatives are worried about what will happen to jobs, retirement accounts, and food supplies over the next six months, it will become increasing difficult to get them to heed warnings of higher gasoline prices and even shortages years from now.

Perhaps the one point we should all take away from this is the admonition by the Washington Post's executive editor, Marcus Brauchli, that "you do have an obligation as a journalist to push important issues into the public consciousness."