Saturday, December 01, 2007
Why oil is going back up
On the spectrum of energy theology, I guess I fall more into the Peak Oil camp. A year ago I was open to the concept, but having worked with two very experienced energy analysts in the past year, I have become convinced the production peak, for all practical puposes, is here or coming fast, and will have enormous implications. For the West, the production peak may be less relevant in the near term to an export peak, which seems to be developing. Either way, supply is pinched, and apparently unlikely to show any big upside surprises.
I will gratefully change my view if shown evidence that there is untapped, accessible, and relatively inexpensive oil ready to go online, or that most existing producers are not actually in a production decline. Existing evidence, in both cases, unfortunately points to the contrary, leaving us with the question of whether industrial society can adapt quickly enough to coming oil shocks.
In this context, I found this article quite interesting.
CHINA is running out of fuel. Police are guarding petrol stations in several inland provinces to prevent fights, as shortages of petrol and diesel are causing huge queues of trucks, buses and cars.
In Kunming, capital of the southwestern province of Yunnan, 1000 trucks are stranded.
A truck driver named Li told the Chuncheng Evening News he had been stranded at the Stone Tiger Gate petrol station for three days after searching for fuel in other places, but failing. He said his delivery date was way overdue.
Another driver, at Geiju city, said a job that would have taken one day in the past, now took three: one on the road, two queuing for fuel.
Nine days ago, a truck driver was reported to have been stabbed to death in central Anhui province after a row about queuing.
A few days earlier, at Ezhou in Hubei province, 100,000 people were stranded, unable to get to work, because city buses had run out of fuel.
Beijing has been insulated from the headache, and the wealthy coastal provinces are mostly better stocked, because the refineries are nearby.
The problem would intensify as winter approached, and was starting to affect exports, warned the Commerce Ministry, since diesel was crucial for shifting products to ports.
Some will say this isn't an oil supply problem, but a refinery constraint, and that is probably the case with these shortages in China. But the point is that the demand for cheap oil worldwide now exceeds supply, and demand is still going up. I think we'll see $100 soon enough, and only briefly as it recedes in the rear view mirror.
15 Comments:
By 
TigerHawk, at
Sat Dec 01, 10:17:00 AM:
Actually, my prediction, phrased as a bet, was that oil would hit $50 before it hit $150. I was rash. I think that $50 might prove to be a psychological barrier on the downside just as $100 has prove to be on the upside. If I had it to do over again, though, I would say that oil will drop below $60 before it exceeds $140 (that is, I'm still taking the bear side of the straddle).
By 
, at
Sat Dec 01, 10:21:00 AM:
I have been hearing for quite a while that oil from sands and shale would be economically feasible at about $50 per barrel. What is your take on the possibility of these coming on-line?
By TigerHawk, at
Sat Dec 01, 10:28:00 AM:
Oil sands have been a great investment; the play is Suncor (SU), the company with the best technology and access. I bought it three or four years ago and it has multiplied about five-fold in that time. That said, the oil is tough to extract in quantities large enough to have anything other than a marginal impact on the total demand.
The 'Villain is clearly right at one level; even if the peak oil theorists are wrong as a geological or economic matter, they might be right as a political matter. With oil so expensive, most exporters are so rolling in it that they have a much-reduced incentive to pump even more. I just think that there is so much free energy to be found in the form of conservation, especially in the United States, that even the smallest gesture in that direction will have a huge impact on the clearing price.
By , at
Sat Dec 01, 11:16:00 AM:
Be very careful.
Analysts often suffer from herd mentality and in the process they ignore the market fundamentals. We had ample evidence of that in the high tech bubble and the housing market
The link below provides some excellent analysis of the current energy market fundamentals.
Beginning of the Correction?
It's no big secret that I think oil prices ran ahead of themselves in the past couple of months. I don't think they should have cracked $90 this year (and despite mass amnesia by analysts, as of August 99% were in that camp as well).
TJIT
By , at
Sat Dec 01, 11:22:00 AM:
I highly recommend the blog below for information on the energy markets, petroleum engineering, and alternative fuels.
It is written by a practicing petroleum engineer and has a wealth of very useful information. Especially on alternative fuels, biofuels and energy markets
R-Squared Energy Blog
TJIT
By cjm, at
Sat Dec 01, 02:04:00 PM:
haven't peak oil arguments been around since the 1970's ? and haven't the proven reserves about tripled since then ? this is the kind of topic that newspapers and npr use as filler, a couple of times a year.
in any event, the u.s. has reserved a goodly portion of its oil reserves, so if a peak oil situation does arise, we will be in a very sweet position to profit from it. also, if oil did become scarce, we could easily take it from whomever still had some. either way we profit.
By agmartin, at
Sat Dec 01, 02:17:00 PM:
I wouldn't put much hope in oil shale saving us from imported oil. The Task Force on Unconventional Fuels in its most aggressive scenario had oil production from oil shale reaching 2.5 million barrels per day in 2035. For comparison the U.S. currently uses 20 million barrels per day.
By John McCormack, at
Sat Dec 01, 07:05:00 PM:
Charlottesvillian,
China is not running out of fuel. It is not even running out of refining capacity.
What has happened is that Chinese government has imposed price controls on gasoline. Whereas retail prices used to be a bit below where the free-market price would have been, the "official" prices are now far below.
Consequently, markets aren't clearly.
Price control-induced "shortages" are quite unrelated to "peak oil" theories (of whatever merit--personally, I am a skeptic).
Price controls would be enough to ensure 'shortages" in Yunnan province even if the international price were still $20 per barrel.
No doubt, Chinese with "guanxi" (i.e. political influence) have been buying price-controlled gasoline at "official prices" and reselling it elsewhere at a premium.
Under such circumstances, John or Jane motorist is simply out of luck.
This happens now in many petroleum EXPORTING countries as well: Iraq, Iran, and Venezuela among them.
By , at
Sat Dec 01, 08:57:00 PM:
In Britain, various taxes account for two thirds of the pump price for petrol. We're paying the equivalent of USD $7.62 per gallon, which loosely equates to about $180-200 per barrel. And our society hasn't collapsed. Yet.
I've posted about this on my blog recently (JamesBarlow.co.uk)
By Purple Avenger, at
Sat Dec 01, 09:16:00 PM:
I think we'll see $100 soon enough, and only briefly as it recedes in the rear view mirror.
And you think the Canadians will ignore that forever eh? I don't.
We are well past the point where shale/tar/coal cracking became economically viable.
The Saudis (at least) are well aware of this and keep pushing for lower prices. They know very well that if the west decides to get serious about the alternatives listed above (which don't require distribution infrastructure changes other alternatives do), that the price soon collapses to the $50/bbl or less range and never budges for a LONG TIME.
By Charlottesvillain, at
Sun Dec 02, 02:05:00 AM:
JMAC: good point on price controls. I'm not up on that situation in China. Certainly they would cause shortages just as they did here in the 70s.
PA: I hope you're right.
Chris: Peak oil theory, developed in the 70s, has actually been pretty damn accurate where applied. Hubbert's initial theories didn't contemplate some of the technologies currently used to maximize outputs in depleted wells, but unless you don't believe that oil is a finite resources, and there are some who don't but they are extremely fringe, than it is difficult to refute peak oil theory. Then the only question is where on the bell curve we are.
By Purple Avenger, at
Sun Dec 02, 08:29:00 PM:
When we get serious about the tar/shale/coal conversion process, the world wide price has to collapse to the cost of extraction+processing+distribution+profit.
The material cost for these alternatives is essentially their processing cost. Today, material cost is set (in essence) arbitrarily by foreign powers.
There's really nothing new required here from a developmental POV. The Germans did all the O-chem and process work during WWII and it was all well documented.
In years past, there was a high measure of risk involved in moving forward on this due to the essentially arbitrary price of the natural product -- the oil pumpers could just decide on a whim to lower prices and make your work economically non-viable.
Today, I believe countries like VE the Saudis, Russia, etc have become addicted to "high" price oil to float their economies -- IOW, we won't see $25bbl oil from them anymore because it would cause domestic crisis if they tried it.
We, OTOH, aren't addicted to high oil prices and our economy would get a big boost if the price were forced to collapse by $50/bbl.
The advantages of having inland on-site refining rather than a bunch of stuff along a hurricane vulnerable coastline are obvious, and the savings from not having to operate a bunch of super-tankers is significant as well.
It may take a few years, but people will eventually walk up, and when they do it will spell the end of OPEC, and Comrade Chavez will have to drink his worthless low grade oil.
By , at
Sun Dec 02, 11:37:00 PM:
What you need to develop a coal liquification plant (or whatever) is simply long terms futures for oil.
If you could buy enough 30 year put options for $100/barrel when you are building your $50/barrel coal liquification plant... then what's the problem?
By Cas, at
Mon Dec 03, 05:15:00 AM:
I also used to believe the "doom and Gloom predictions, until I actually started doing some research, and found this:
http://www.netl.doe.gov/energy-analyses/pubs/Oil%20Shale%20Development%20in%20the%20United%20States%20-%20RAND%20August%20200.pdf
My guess is that this technology is not proven, which is why this source hasn't been publicized much; but the OIL is there, only lacking some effective way to extract it. Not too long ago, the Oil Sands of Canada were not economical to extract either, until the price of world crude jumped.
This isn't a post asking someone to invest all their mony in Green River, Wyoming, only to say that I do NOT believe that we are in the period where oil production has peaked.
By Purple Avenger, at
Tue Dec 04, 11:14:00 PM:
then what's the problem?
Environmentalists. They're already giving Shell a hard time up in Canada with the expansion of their current operation.
IMO, the level of pain to the public needs to increase by another 50-100% or so before people start to seriously tell the enviros to STFU and get out of the way.
It would not surprise me if outfits getting into this, like Shell, have doubled down with some long term put options. They know today's arbitrary pricing scheme has to collapse when the synth stuff comes online.
