A Mixed Bag of Oil Projections in the MSM

Update: One more noteworthy story from Newsweek:

The Coming Energy Wars

Oil drives so much of the global economy, it’s almost impossible to fully imagine the world of $200 oil. No question, the shock will force nations to go greener much faster than now, particularly by conserving energy and developing and adopting new non-fossil fuels. But none of this can happen full stop in six to 24 months. So the predictions tend to be gloomy: some analysts see a shift toward regional trade, and even a major reversal of globalization itself, as rising transport costs make it too expensive to ship many kinds of goods long distances.

A major acceleration in the transfer of wealth that has, in the past five years, shifted trillions of petrodollars from oil consumers to producers would alter the world balance of power—including a boost for the troublesome oil autocrats of Iran, Venezuela and Russia. At $200 a barrel the proven oil reserves of the six Gulf nations alone would rise in value to $95 trillion, about twice the size of public equity markets, according to Morgan Stanley managing director Stephen Jen. That would make the Sovereign Wealth Funds of oil states market kingmakers. Western efforts to press more openness on these funds, many controlled by royal courts, would surely grow.


As I browsed through recent energy headlines on my Sunday morning – which lately has been the only time slot that allows me to catch up – I saw two contrasting stories in the mainstream media. One is from CNN Money, warning of $6 gasoline if we have a bad hurricane season:

An ill wind for gas prices

NEW YORK (CNNMoney.com) — Batten down the hatches: hurricane season starts on June 1. It’s expected to be a rough one, threatening to upend refineries and disrupt pipelines in the southern United States.

“With the market the way it is now, a move in crude because of a hurricane could really be exacerbated,” said MF Global energy analyst Don Luke.

Peter Beutel, oil analyst at Cameron Hanover Beutel, said if a Katrina-like hurricane were to hit in July, gas prices could go as high as $5 or even $6.

“The last thing this market needs at this time is a hurricane, because we can’t afford to lose any of our refining capacity at this point,” said Beutel. “If anything bullish happens with the market in this state, it would make it go absolutely crazy.”

One thing that I haven’t covered lately is that gasoline stocks have now slid to the lower end of the normal range, which you can see at the lastest version of This Week in Petroleum:

As was discussed at length last season (also note my warnings in those archives of rising gas prices), that does put the pieces into place for a huge run-up in case of a disruption. Last year, we didn’t see any bad hurricanes than interrupted supplies, but we certainly take a risk in this situation.

The other MSM story comes from Newsweek:

What Goes Up Must Come Down

There are widespread signs that the surging oil price is leading to demand destruction in the largest consumer of oil—the United States. From reports of the sharpest ever year-over-year drop in miles driven, SUV sales falling off a cliff and cutbacks airlines are making to their flight operations, U.S. consumers are clearly coming under severe stress. Oil spending as a share of the global economy has risen to more than 7 percent, a level last seen in late 1979. What happened next is instructive: from 1980 to 1983, the consumption of oil fell by 10 percent, and it took another seven years for oil consumption to reach the 1979 peak level of consumption. The length of the cycles may vary, but in the end, oil, too, is a cyclical business.

Encouraging signs that we are reducing our consumption, but I think the author misses the mark with that last statement. Oil has historically been a cyclical business. This will change when supply growth can no longer outstrip demand. This is going to be the case when oil production peaks, and all signs indicate to me that the erosion of excess capacity is driving the current surge in prices. Unless we have enormous demand destruction (and how is that going to occur other than through very high prices?), or there are a couple of Saudi Arabia’s hiding in the Arctic and soon to be discovered, I can’t easily see supply getting far ahead of demand. That is what would be required to continue the cycles – an oversupply situation.

All price setbacks in oil over the past three decades have been demand- and not supply-led. Still, the oil bulls are willing to ignore evidence of demand destruction and are instead obsessed with supply issues. While there may be some merit in the increasingly fashionable “peak oil” theory, which essentially postulates that the world will have consumed most of its oil within a 300-year period, there is no evidence that world oil production is peaking today. The crude-oil market is currently well supplied, and production is expected to grow by 1.5 to 2 percent this year.

Peak oil is now “fashionable.” That’s a relief. Now I am going to try to promote this idea I have called “Peak Money” theory. It goes like this. If I inherit a bank account, and I draw money out of it – yet I make no deposits – eventually I will run out of money. If my spending is increasing over time, then I will need to make some big adjustments when I start to run out of money. In truth, this is no more theory than peak oil is a theory. It puzzles me to hear people refer to “so-called peak oil theory” or some other term that indicates that it is anything other than an observation.

There is no question that global oil production will peak. We have country after country in which this has already taken place. The key questions are “When?” and “What are the impacts?” I believe the answer to the timing is that it is soon. Even the most optimistic predictions mean that my children will have to deal with it. The more pessimistic suggest that it is upon us now. Personally, I think >90% probability of a global peak within 5 years – which is why I spend so much time pondering the impacts.

Regarding the question on the impacts, that debate continues to play out in my mind – and in this blog.

31 thoughts on “A Mixed Bag of Oil Projections in the MSM”

  1. I can’t think of of a commodity that hasn’t tripled in price over the last five years. Potatoes are still a bargain. Seriously though,why would oil prices stand still while everything else tripled?

  2. Peak Oil? But reserves keep expanding. What if shale becomes a reserve? Shell says they can pump it up for $30 a barrel. If so, we have to postpone Peak Oil until the next generation.
    Brazil say they have yet to hit a dry hole in their Tupi field, and now they say it has 30 billion barrels. The number keeps growing. Brazil becoming an export, not importer.
    Oil production is declining in many oil states, but that is because they are nearly all thug states. Still, it is a reality we can’t get the oil, even in Mexico. You might want to label this “Political Peak Oil.”
    The sleeper? Not one is watching: demand is dropping. We have hit Peak Demand well before we hit Peak Oil.
    BP reports worldwide crude demand in 2006 rose by 0.7 percent. Given the direction of prices, I would say 2007 was the Peak Demand year, and 2008 will be down. USA demand down last year and is down again ths year. It is a fact: We have already hit Peak Demand in the USA, and we are just started. They were buying the Hummers until this March.
    Iran is storing sour crude on oil tankers as it has nowhere to send the stuff. If new refineries come online that can handle sour crude…..and they are.
    And GM Volt is coming (we hope).
    There may be a mammoth glut of oil coming in about five years. In 10 years, we will have to find new threats to obsess about.

  3. There’s not much talk out there about “peak cement” for some reason. When I paved an extra driveway in ’04 it cost me $55 a yard. My new patio ran me $125 a yard. I think everything but VHS recorders (which must comprise 90% of the the CPI index)tripled in price along with oil. The 50 cent coke machine charges $1.25 now. $1.99 milk costs $5.00. I got $600 for a junk van a few weeks ago. The salvage price was MAYBE $150 two years back. Have we reached “peak junk cars” too,or is it possible we’re suffering hyperinflation?

  4. I doubt we have hyper inflatation. I think it’s the underlying fuel costs going nuts. Everything has to be transported…

    Also, harking to the 100$/gallon exercise, I doubt the USA automotive base will deal with high priced gas for long. I think Demand Destruction is a very real problem for OPEC, and that we will make the switch to something else if the pressure becomes too great (and it is — I know plenty of people with plenty of money that are beginning to complain loudly).

    I, for one, welcome our new Lithium Ion overlords, but will keep my dino-fueled Z28 until gas really does hit 100/gallon and there is no alternative to put in the tank.

  5. They say freshly minted petroleum engineers are making more than Wall Streeters. Maybe justice at last. Still, the long, long history of commodity booms is bust-a-rama. For now, it is heartening to see the farmers and steel millers making money, while Wall Street takes in the nuts. For a change.
    I wish it would last forever (good times for people who actually produce goods), but the price mechanism is carries a big, big hatchet in commodities. We will see.
    You may want to consider buying puts on commodities indices somewhere along the line.

  6. “I think it’s the underlying fuel costs going nuts.”

    Maybe you’re right David. But,if you were buying gas with gold bought in ’03,you’d be paying about $1.29 a gallon. Pay with gold bought in ’05,and you’d be paying about $1.89. I think everything but trinkets made in China has doubled or tripled along with gold. China tied their currency to the dollar and they’ve done a good job holding down trinket prices. The dollar has undergone some serious devaluation lately. It would be glaringly obvious if China played the game like everyone else.

  7. Maury, a third or more of the CPI basket is rental equivalents.

    Real estate prices and rental rates to a much lower degree are falling.

    Car prices for gas guzzlers are falling (adjusted for rebates and $2.99 gas deals.)

    The cost of services remain tame (the cost of stock trades, other financial services, DSL, cable, cellular service–including data center plans)

    You can see the CPI index in detail at the bureau of labor statistics.

    Still, the inflation rate is rising. The 5 year expected inflation rate survey is the highest since at least 1990.

    To change the topic, I don’t think we are anywhere near peak oil. With the surge in exploration budgets and improving extraction technology, proven, probable and possible oil deposits will likely surge in the coming years.

    Also note that Iraq, Venezuela and other countries will sharply increase production.

  8. I hope you’re right about Iraq Anand. Lord knows they could use some good fortune for once. Iraq has 40 years of proven reserves if they pumped 10M barrels a day,or 175 years worth at the current rate of production. I can’t imagine a world using oil 50 years down the road,so hopefully Iraq will get its act together soon.

  9. Iraq claims to have 350 billion barrels of oil,which would last 500 or so years at the current rate of production. But,most sources still show 115 billion barrels in proven reserves. Any way you look at it,it’s a heck of a lot of oil.

  10. RR, I don’t think the MSM seriously dispute the reality of depletion and an eventual production peak. The term “Peak Oil Theory” has come to be synonymous with the doomer viewpoint that there are no substitutes and therefore we’re headed for a dieoff. It has also come to be used by the MSM as synonymous with a near-term peak. Both of those slants on Peak Oil are debatable.

  11. Also note that Iraq, Venezuela and other countries will sharply increase production.

    Iraq, maybe if they open access to western companies using a Norwegian style model.

    Venezuela – no, not gonna happen as long as Chavez is around. PDVSA is hopelessly incompetent. PDVSA can’t even get drilling companies to come down for fear that their rigs get “nationalized”. Have you heard of any new fields opening in the last 2 years? Chavez likes to sign and announce deals but so far none of it has amounted to real production.

  12. Anectodally I can confirm demand destruction.

    I picked up the license plates for the “KingofKaty hybrid” this weekend. My salesman said their dealership hadn’t sold a single F-150 or F-250 truck in the month of May. The F-150 is the best selling vehicle on the planet. In fact car sales were really slow altogether. What is selling are their higher mileage vehicles the Ford Focus and Ford Fusion.

    Every day I drive past a long line of car dealerships, nearly every major brand. They are all touting fuel efficiency. One dealer has all their models lined up along the curb with giant 4′ vinyl stickers on the sides showing the MPG of each model.

    In the US, on average the fleet turns over every 8 years. If we are on the 2nd year of turnover that means that by end of the year 1/4 of the vehicles on the road could have been replaced by higher mileage cars in the US. If the aveage fuel savings is 20% (I’m personally saving 50%.) then you are looking at something like 5% lower US demand, that is over a million barrels a day of gasoline.

    There are better technologies available today than we had 30 years ago, the last time we had prices this high. Oil producing states are taking an ax to demand.

  13. I love this story: Gas prices drive Metros from Clunker to Chic .

    Not everyone can afford a Toyonda Pious . But you can get Pious type gas mileages for less than 1/3 the price.

    Thought experiment – should congress impose a “windfall” Geo Metro tax? After all, the owners of these cars didn’t do anything to deserve making this extra money. Wouldn’t it make sense to tax these vehicles and give the money to GM to subsidize the Volt or some newer technology?

    Would a Geo Metro tax put MORE or LESS Geo Metro’s out on the street. If you are a member of congress the answer might not be obvious to you.

  14. I still want to know why DOT is reporting 4.3% VMT declines and MasterCard is reporting 5-6% declines in gasoline purchases yet the DOE/EIA shows only 1% decline in gasoline consumption. Something doesn’t add up.

    Does anyone have any ideas? Possible EIA measuring lags? Paging Doug MacIntyre!

  15. Robert,

    This is completely unrelated to this post (maybe tangentally related because it is about projections), but I read some old post you had on TOD about the HL method. The modeling aspect catches my attention due to my background (Ph.D. in statistics).

    I have to say that you are 100% correct in that the procedure itself is bankrupt in terms of future predictive capability. The problem is an objective method for choosing the data points to do the predicting is not established — they are just chosen on a case by case basis to best match the history.

    Ideally, one would say, use the points between the 10th and 60th percentile (as an example) of the cumulative distribution…but no one does.

    Just wanted to commend you for pointing this out — sad to see the backlash for pointing out the obvious.

    In the end, I doubt the argument really matters as there will likely be some serious questions regarding energy resouces; however, in my opinion, it is unethical to tout models that are not proven in a scientific matter.

  16. We are much more than 5 years away from peak oil:

    1) It will take that long for Iraq, Venezuela, Nigeria and other unstable parts of the world to max their annual oil production (a post Chavez government will need to initiate major oil development contracts . . . especially for oil shale and oil sands. Only the next Iraqi government elected 12.15.09 will issue long term oil development contracts, and those start in 2011. 2016 before a major jump in production.
    2) It will take more than 5 years to build pipelines to carry ocean salt water inland to process oil shale and oil sands (since current processing technologies can require 2 X or more barrels of water per barrel of oil generated.
    3) Oil exploration budgets are surging. Investment in new oil extraction technologies is surging. This will lead to a surge in proven, probable and possible oil reserves over the next 5 to 10 years. And a surge in annual production over the next 10 to 15 years.
    4) Oil will start becoming increasingly obsolete for energy generation purposes over the next couple of decades, although still valuable for chemicals (plastics and other uses.) As oil producers recognize this, they will try to boost annual oil production over the medium term (say 10 to 20 years from now.)

    All this said, you do have a broader point . . . annual oil production will rise slowly over the medium term (10 or more years.) The derivative of the production function is falling.

  17. To better model when oil production peaks, we need additional data on emerging alternate energy technologies (how quickly oil becomes obsolete for energy purposes.)

    Here are some relavent questions:
    1) How quickly does PV (cell and one of the many emerging thin film or nano technologies), and concentrated solar electricity costs drop below $0.10 a kilowatt hour?
    2) How quickly does wind fall below $0.10 per kilowatt hour?
    3) How quickly does coal sequestration become a proven technology and cost effective, allowing cheap low carbon footprint coal firing power plants?
    4) How quickly do biofuel costs–from genetically modified plants and cellulosic–come down?
    5) How quickly does storage technology advance (measured by weight and volume) to enable the substitution of electricity powered devices for gasoline powered devices?

    Here are some basic questions that could be used to refine a model to predict when peak oil production might be reached. I think that intermediate term oil production surges when the long term (more than 10 years out) forward oil prices start falling.

  18. doogydog-
    I wonder too. In an earlier life, I worked at the Congressional Budget Office. Federal data collection 25 years ago was fairly good. Today? I dunno.
    I suspect the EIA and the IEA (sorry for the alphabet soup)are badly lagging reality. Anecdotes suggest demand is falling. Credit card companies say demand is falling. British Petroleum says demand is falling. New cars sales suggest falling demand. Only the EIA and the IEA seem to suggest the is some demand growth (though no in the U.S.)

  19. ~ Benny said: “Shell says they can pump it up for $30 a barrel.”

    Then why aren’t they doing it?

    If that was true, and were I on the Shell board of directors, I would be a bit upset that we could be pumping for $30/barrel and selling at $125/barrel and not doing it.

  20. Maury said: “There’s not much talk out there about “peak cement” for some reason.”


    That’s because there is no shortage of cement resulting from a shortage of raw materials.

    There is a shortage, but that shortage is caused solely by environmental concerns and regulatory reasons. There is no shortage of the raw materials (limestone, gypsum, and clay) needed to make cement.

    Cement plants are environmentally dirty. I don’t have a cite for this, but I heard not long ago that there have been no cement plants built in the U.S. for more than 30 years because of the environmental regulations.

  21. Gary,
    1) it takes years to award exploration contracts and rights (for legislatures to agree on the terms and conditions of auctions and for the auctions to be completed)
    2) it takes years of exploration to locate possible oil reserves
    3) it takes years feasibility testing to upgrade possible reserves to probable reserves
    4) it takes years of additional 2nd stage feasibility studies to upgrade reserves from probable to provable, and develop a plan to extract the oil
    5) it takes many years to convert proven reserves into actual oil production

    We are talking 4 to 10 years for the process to complete.

    Regarding Shale and Oil sands, would it be fair to say it costs about $30 a barrel + water costs + royalty to the owner of the oil field to obtain oil? Because of our global water shortage, a lot of the water will have to be piped in from salt water oceans. It will take years to build the aqueducts.

  22. 2) How quickly does wind fall below $0.10 per kilowatt hour?

    Wind is currently $0.06-0.08/kWh. It hit a nickel not long ago but prices have risen recently due to weak dollar, higher raw materials cost and increased demand.

  23. Can wind scale up to over 1 terawatt hour globally at six to eight cents a kilowatt hour?

    (Current global demand is about 18 kilowatt hours.)

    If the answer is yes, we could start seeing downward pressure on electricity prices within a decade.

    plug in vehicles become very attractive at 6 to 8 cents per watt hour.

  24. gary Dikkers-

    they are buying land, obtaining water etc. Lots and lots and lots of regs to comply with. It is a new technology for bringing up the oil. Hot rods go into ground, heat the shale, and oil comes out. They have tested it, and it works.
    They have announced it. I am sure tha Shell board and shareholders want this to happent oday, and I do too.
    In reference to Peak Oil, I suspect if oil hit $200 a barrel, the President and Congress and everybody else would provisionally waive regs on shale oil — the day it costs $1000 a month to heat a house in the northeast is the day Mr. Greenjeans turns into Mr. Screw It and Drill It.

  25. “That’s because there is no shortage of cement resulting from a shortage of raw materials.”

    I was being snide Gary. Of course there’s no shortage of cement. I just think it’s curious how we want to blame peak oil for increased fuel costs,even though every other commodity and raw material has experienced the same price increases. Isn’t it more likely that paper currencies(especially the U.S. dollar) have been drastically devalued? Someone buying gas with gold or silver hasn’t seen any increase at all.

  26. Can wind scale up to over 1 terawatt hour globally?

    US wind should produce 48 TWh this year, a little more than 1% of US electricity. US wind resource is estimated at 11,000 TWh, more than twice current US consumption. This does not include offshore.

    US VMT of 3 trillion miles would require only 750 TWh of wind. At historic growth rate we’ll produce that much by 2019.

    I’m not familiar with global wind. Installations have been concentrated in countries with high subsidies, such as Germany and Spain, where the wind resource is poor. Similarly, we built wind farms in CA in the 1980s because that’s where the subsidies were, but CA has only 0.5% of US wind resource. Almost all our wind resource is in the plains states and their immediate neighbors.

  27. US truck sales down 30%+ in May, small car sales up 10-50% for various models.

    Ford F-series loses its #1 spot for the first time since oil got cheap in 1986. The new #1? Honda Civic.

    When will this show up in EIA gasoline consumption numbers?

  28. ~ Maury said: “I was being snide Gary. Of course there’s no shortage of cement.”

    Actually there is a shortage of cement. But as I said, it’s not due to a lack of raw materials — it’s regulatory.

    Environmental regulations in the U.S. have created too may hoops to jump through for anyone who is thinking of building a new cement plant here.

    That’s why all the new cement plants have been built in China, India, and other places with less stringent regulations.

  29. “US wind should produce 48 TWh this year, a little more than 1% of US electricity. US wind resource is estimated at 11,000 TWh, more than twice current US consumption. This does not include offshore.

    US VMT of 3 trillion miles would require only 750 TWh of wind. At historic growth rate we’ll produce that much by 2019.”

    Global electricity consumption is 18 Petawatt hours. At about 10 cents a kilowatt hour, electricity is about a 1.8 trillion dollar annual business.

    What is the expect electricity production by type for 2009 (estimates vary considerably.)

    Peta = 1000 Tera = 1,000,000 Giga = 1,000,000,000 Mega in case some readers want to avoid looking the numbers up.

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