Jim Jubak Gets Religion, NPC Endorses Peak Lite

Jim Jubak, a popular prognosticator over at MSN’s MoneyCentral, has gotten religion over peak oil:

The oil squeeze has just begun

“World will face oil crunch in five years.”

That’s not exactly the kind of headline you want to read when crude oil is already at $73 a barrel. When things are this bad — crude prices are up 12% in the past two months as of July 12 — you don’t want to hear that they’re going to get worse.

Yet that’s exactly what consumers — and investors — should expect, the International Energy Agency said in its latest Medium-Term Oil Market Report, issued July 9. The market for oil will get even tighter over the next five years. (And in case you’re looking for a way out, natural-gas markets may be even tighter.)

He also highlights an argument that I have been making for 5 years. Contrary to the beliefs of many that the oil industry is a dying industry, or that declining reserves will cause the value of oil companies to decrease, I have argued that oil companies will become even more valuable as they supply an increasingly valuable resource. Jubak writes:

You can debate whether the world is running out of oil all you want. It is certain, however, that the world has run out of cheap oil.

Almost any oil stock will profit from that scenario, especially if the company owns oil still in the ground. In an era of rising prices for oil, such companies are sitting on an appreciating asset.

That is exactly right. I don’t like to provide investment advice, but I really believe that investments in oil companies will be good for a very long time. In a time of constrained supplies and rising demand, profits will be solid quarter after quarter. The cyclical days are over, because if this view is correct it will no longer be possible to crash prices by overbuilding capacity.

That’s why I went to work for an oil company, and that’s why I believe job security will be very good. That’s especially true in light of Robert Bryce’s excellent article on the impending shortfall of labor in the industry:

Energy’s Manpower Peak? – Why the biggest problem might not be oil.

Funny story. I didn’t realize I had been quoted in the article until I had already sent the link to several people after seeing the opening two paragraphs at The Oil Drum on Monday. I need to elaborate on that theme at some point, because it is shaping up to be a very big problem.

National Petroleum Council Endorses Peak Lite

First the IEA, now the NPC are endorsing Peak Lite. All I can say is that it took these guys long enough.

US Petroleum Industry Draft Sees Energy Demand Soaring

World oil and gas supplies from conventional sources are unlikely to keep up with rising global demand over the next 25 years, the U.S. petroleum industry says in a draft report of a study commissioned by the government.

The findings suggest that, far from being temporary, high energy prices are likely for decades to come. “It is a hard truth that the global supply of oil and natural gas from the conventional sources relied upon historically is unlikely to meet projected 50% to 60% growth in demand over the next 25 years,” says the draft report, titled “Facing the Hard Truths About Energy.”

The conclusions appear to be the first explicit concession by the petroleum industry that it alone can’t meet burgeoning global demand for oil, which may rise to as much as 120 million barrels a day by 2030 from about 84 million barrels a day currently, according to some projections.

Hey, I have been making that explicit concession for a long time, and critics are always telling me that I represent the petroleum industry.

18 thoughts on “Jim Jubak Gets Religion, NPC Endorses Peak Lite”

  1. I’ve expected the same things, and I’ve also been right so far.

    The important thing is not to take that as confirmation of future predictions. It’s a new game every time.

    The investment world is full of data on this. We tend to make predictions with runs of success (or failure) which sadly match Monte Carlo experiments and randomized results.

    There is also what I’ve called “rich guy disease” when I’ve seen it over the years. People who have been successful in one field tent to assume success in their next venture (even when that venture is in a totally new field where their experience does not directly apply).

    This may seem like I’m getting further afield that usual here, but it is all really about our human minds, and how we think about risk and probability in the future:

    “We find that the firms of CEOs who achieve “superstar” status via prestigious nationwide awards from the business press subsequently underperform beyond mere mean reversion…”

    from Marc Andreessen’s blog

    So sure, you and I have agreed on this squeeze, and that it should mobilize some market response toward alt fuels and greater efficiency.

    We’ve agreed for years.

    Is the difference in how dedicated we are to a particular future, from here on out? How much we believe our “confirmation” matters?

  2. Predictions, with high humility and low confidence:

    – I think we’ll have higher energy prices next year.

    – An oil high of $80-90 and a gas high of $4 seems as good a guess as any.

    – There are lots of events from all fields (politics to weather) that could blow that to the upside.

    – There are even some events (recessions on various scales) that could tilt things down.

    – Peak could be quietly creeping in, or not. It doesn’t really matter.

    – What matters is when peak becomes undeniable … and that is probably 10+ years away. Far enough not to shape our world for some time.

    It continues to be a mugs game to say we will have X, with no possibility of storm or recession.

    (For that reason, people who predict typically say those real worlds with storms or recessions “don’t count.”)

  3. Jubak’s own story supports a different conclusion. He says:
    “The problem is geology, not politics”

    I disagree, it is both. Politicians in the US, Venezuela, Russia, and elsewhere have chosen to exclude international oil companies from developing their oil reserves. Jubak goes on to discuss the Cantarell field and how state owned oil companies are having trouble producing oil at just 5-10% water. There are fields in Oklahoma and Kansas that produce 20 barrels of water for every barrel of crude!

    State run oil companies are just not very good at producing energy. Here is why:
    * Popular social programs compete with state company for money & capital

    * Cronyism dominates upper levels of state companies not skill or merit

    * Corruption is endemic in state oil

    * With no publicly traded stock, no stock options, or employee ownership plans – state employees, particular senior managers, are not incentivized to do their best

    * State oil employees have some of the best and highest paid jobs in the country, with few other job prospects. So they take no risk, no innovation and spend most of their time in CYA and politicing.

    The problem is that 90% of the world’s oil and gas reserves are being developed under a SOCIALIST economic model. In the last half of the 20th century there was a war between socialism and capitalism – guess which system won?

  4. The important thing is not to take that as confirmation of future predictions. It’s a new game every time.

    I have said the same many times, as well as “success in one field does not imply success in another.” Or, my dentist is a great dentist, but I didn’t go to him with my kidney stone.

    Predictions, with high humility and low confidence:

    Following your comments in another thread, I decided to try to run down my predictions – correct, incorrect, and still pending – over the past year or so. I will post that tomorrow. I have a lot that are still pending, I missed on a couple, but I called a lot correctly. And I also pointed out that my predictions usually come with caveats: Here’s what might go wrong.

  5. xlint. We may agree more than I think when I “scan for differences” ๐Ÿ˜‰

    Ideas for that future post:

    – peak oil seems a “place” where people gather to make new (or the same) predictions every day, year in and year out.

    – what becomes then the culture? is it a culture of peak oil or a culture of prediction?

    – why do people show up with their predictions and say “mine’s bigger?”

    – at what point, when the limits of prediction have been explored, without resolution, is it rational to just back off?

    (I actually keep less than one eye on oil’s “current events” now. I hope that is enough that I will be altered of changes to the status quo … but really the last couple years look to me like continuations of prior trends. The same predictions continue to be made.)

  6. The state company employees who have worked for me were good folks stuck in a bad system. Loyalty to the state was everything. They got their salary, pension, their homes, their health care, their kids schools, everything was provided by their company. If they lost their jobs, they literally were turned out on to the street. Consequently, they never bucked their superiors, avoided making decisions (for fear of being wrong). Most of them worked little side businesses (during work time), or supplemented their salaries with petty corruption. They were well aware that they weren’t being paid anywhere near Western standards, so they tried to pad their income when they could with multiple per diems, cheating on expense accounts, etc. Most had at least one child or relative working or going to school in a developed country as an escape plan. My “neighbor” in the Houston suburbs works for one of the state owned African oil companies, with is office in Africa. Wife and kids are safely tucked in US suburbia – just in case.

    In Venezuela, PDVSA employees have to deal with the “Tascon List”. The list has the name and identity number of every Venezuelan who signed the presidential recall petition. Even if you are the best geologist on the planet, doesn’t matter, if you are Venezuelan and on that list you can’t get a job at PDVSA. Chavez claims to repudiate the list, but it is still used.

    To get some idea, imagine if the people running your local Department of Motor Vehicles have just been put in charge of producing and developing the countries energy resources. Then imagine that only members of whatever political party happened to be in charge are the only ones allowed to work there. IF the party changes, everyone who knew anything at the agency gets replaced with new and more loyal employees.

  7. – why do people show up with their predictions and say “mine’s bigger?”

    In my own case, that’s easy: To increase credibility, so I can increase my influence. What I want to do is to be able to have some influence on energy policy.

    When I put predictions out there and show that in general, I know which way the wind is blowing in the energy industry, people – sometimes influential people – contact me for advice. I want to be able to have that sort of input.

  8. The problem is that 90% of the world’s oil and gas reserves are being developed under a SOCIALIST economic model. In the last half of the 20th century there was a war between socialism and capitalism – guess which system won?

    One thing about it, though, is that because oil prices are so high, that socialist model has more staying power. I thought about the irony the other day that high oil prices benefit us, as employees of oil companies, but they also benefit Chavez and OPEC. The way to topple him is for oil prices to crash. But I don’t want oil prices to crash.

  9. I thought about the irony the other day that high oil prices benefit us, as employees of oil companies,

    I’m not so sure about that. In the short run oil companies with reserves in the ground benefit from higher prices. But as opportunities dwindle, there becomes less of a need for workers at the IOCs. Fortunately for us, most of our employee base is in their 50’s and will be retiring in the next 10 years.

    I am coming around to believe in Peak Oil Light, not because I think that the world is running out of reserves, but rather politicians have limited their development.

  10. I am coming around to believe in Peak Oil Light, not because I think that the world is running out of reserves, but rather politicians have limited their development.

    I think Peak Lite provides a good explanation for the oil price runup since 2002: Back then we had 4 million bpd of spare capacity, today that number is much lower. As it diminished, the price went up.

  11. I have some reluctance to accept Peak Lite (TM) as branding for current events.

    I might have to introspect a little more on why that is … but I suppose the branding is only dangerous if it encourages bad prescriptions.

    If the prescription is greater conservation and efficiency today, and investment in alternatives as they prove themselves … no harm done.

  12. Here’s my prediction:
    One of the first countries that would take it on the chin, if oil prices continues to rise is China.

    The reason is that Chinese officials control the price of petrol – which is not a good way to curb demand as oil prices increase and a certain recipe for shortage (as has been argued by many on this blog before).

    The Chinese economy is also large part heavy industry, thus more sensitive to changes in the price of energy.

    The Chinese may pass on the increased cost of production to its customers, but not without affecting demand for its not-so-cheap-anymore products.

    Of course, if the Chinese economy sneezes the US economy is going to catch a cold. Look for interest rates to head for the stratosphere, while Mr. Bernanke makes urgent pleas for everyone to stay calm and act mature. Easy for him to say…

  13. Funny you should mention China. Clearly they are undervaluing their currency in order to drive up exports to maintain employment. It is unclear how long they can keep this up.

    When I travel to Bejing or Shanghai I’ve noticed that a Big Mac is about 1/2 the price charged in the US.
    Big Mac Index Cheap exports to the US are driving their oil usage.

    It was the Asian currency crisis in the late 1990s that led to a collapse in worldwide crude prices, leading to underinvestment and the current high prices. The 4 million barrels or so of excess capacity have disappeared. But could reappear if economies start to falter.

  14. I’ve wanted to see the Big Mac index as a time series, and inflation indicator … but have never found it.

    Maybe it’s there, inside the pay-wall.

  15. With the price of beef on the rise, because of rising corn prices from ethanol, I wonder how long before McDonalds has to raise prices on the Big Mac. At my local supermarket the cheapest cuts of ground meat were going for $2.99 per pound 6 months ago. They are now $3.99.

    It was cheaper to buy nice 21-30 sized shrimp ($5.99 per pound) than even a cheap cut of sirloin ($7.99 per pound).

  16. My reference, a 25 pound bag of high protein wheat flour at a local supply store, has gone from a $5 median price to a recent $7.

    That’s huge.

    Of course, if you run the old bread machine it’s still very cheap protein and calories.

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    For myself, I’m using fans in the summer to blow air through the basement up into the house, with a good effect on both cooling and heating. Just don’t forget the dehumidifier!!! ๐Ÿ™‚

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