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Tyler Havlin has left a new comment on your post "Internet Attacked as Tool of Terror Bird Flu Archi...":
What's good for GM is good for America
GM shares fall below $10 for the first time since 1954
http://biz.yahoo.com/ap/080702/auto_stocks.html
A number of local governments in Japan (including Tokyo) are considering a plan to force convenience stores to close during the wee hours. The reason given is "to reduce emissions and curb global warming." Without getting into the argument about the reality of global warming, I do agree that it is being used as a tool to reduce energy consumption. This allows the government to avoid telling the populace about peak oil. At least for a little while.
What's really ironic about this is that until recently Tokyo and other major cities have boasted about being "24-hour cities," as if this is some kind of desirable status. And now suddenly energy realities have intruded upon these "24-hour" cities. It won't be long until even the big cities start rolling up their streets at dusk just like my village.
Well, folks, the latest oil megaproject update has been posted on The Oil Drum.
http://canada.theoildrum.com/node/3958
I guess I have been placed in the doomer camp with respect to my outlook on peak oil, but even I was not ready for such a pessimistic assessment. The analysis shows that even with all the megaprojects added to date, there is no hope for a big jump in world oil production. In fact, we can expect hardly anything at all. So the situation basically is "stagnant supply meets roaring demand." And after the period of stagnation (the so-called plateau, where we stand now), there comes the inevitable decline.
Besides the inability of new megaprojects to significantly boost production, we have other factors like geopolitical realities and a very serious problem that Matt Simmons has been pointing out: World oil infrastructure is literally rusting away. As Kunstler says in his understated way, "We need to make other arrangements."
Maybe someone can help me out in understanding this...Statistics are showing that Canada exports more petroleum than any other country into the United States. But isn't Canada's primary source of petroleum their tar sands? And isn't it much more expensive to extract petroleum from their tar sands than from traditional oil fields?
I thought that because of this additional expense that the tar sands would only become a viable ongoing source of petroleum when the price of petroleum rose to be significantly higher.
So:
1) Can profits already be made from extracting petroleum from the tar sands?
And
2) Does Canada really export more petroleum than any other country into the United States?
Businessman -- To start with question (2), the answer is yes, as you can see from these EIA figures.
http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html
That is a big factor behind the North American Union effort, and why people are now realistically discussing a scenario in which the US invades Canada to take over its energy resources. If energy nationalism takes off in Canada (some Canadians are already incensed about this situation), look for some real action.
The answer to question (1) is also yes, with some qualifying. First, skyrocketing oil prices make even poor-quality oil profitable. Second, the profit margin also depends on how many costs can be externalized. Tar sand extraction and processing are not only very energy-intensive, but also environmentally destructive. The more environmental costs companies can externalize, the more profitable they will be. If they totally remediate exhausted sites, it could well make them unprofitable, even at these high oil prices. We would have to see figures to actually know the extent, however.
This brings up another argument that often appears when discussing marginal energy resources like tar sands and shale oil. Do we assess the viability of these resources in terms of EROEI, in terms of profitability, or in terms of "national security"? The energy returns from tar sands, ethanol, and the like are low. In the case of corn ethanol, the energy balance is likely negative for corn that needs irrigation, even if distiller's grain is included as a plus in the calculations. But even if the energy balance is negative (i.e., more energy is needed to produce the energy than you get out of it), this may nevertheless be considered desirable if (a) the producer is making a profit and/or (b) it is deemed desirable for "national security."
Hope this helps.
Thanks, rice farmer. I had been under the impression that the price of gas needed to get over $6.00 or more per gallon here in the U.S. for the tar sands to really make sense as a major source of petroleum for us.
Under the assumption that the only stupid question is the one you didn't ask, here goes: with oil company profitability skyrocketing it appears that the cost of extraction is remaining relatively flat. What does that do to the assumption that extraction should be getting more difficult / expensive as we hit or pass peak? Thank you!
Hello Sue. The cost of oil extraction IS going up, up, up. You can easily confirm this by reading news stories on oil or checking out energy-related sites. New oil finds are increasingly more costly to exploit because the "low-hanging fruit" has all been found, and we are now exploiting oil fields that are hard to access and/or low in quality. The cost estimates now being floated for new deepwater projects are astronomical. Just the cost of renting a deepsea drilling rig is hundreds of thousands of dollars a day, and the operator Seadrill recently said the cost would soon hit $700,000/day. So I don't know where you got the idea that extraction costs are flat.
Thank you for your response, Rice Farmer! It's something I read yesterday but did not research further myself, that seemed to be in sync with astronomical profitability reported by Big Oil; shouldn't profitability be flat if costs are growing along with revenues? And I would appreciate, also, if someone would chime in with their views on the role of speculation in the price of oil.
Sue...Although I haven't been looking into the details of the most recent financial statements from the oil companies, what I've read is that they've cut back in a big way on research and development expenditures, expenses related to looking for more sources of petroleum, and expenses related to investing in more equipment to drill for more petroleum. This is because they're convinced that those expenses would prove to be a waste of money because no major oil fields have been discovered since the 1960s. So when you no longer have these same annual expenses factored into their recent profit and loss statements, the companies will show a huge profit, even when taking into consideration the higher cost of extraction these days.
Speculation as a factor in rocketing crude prices has been thoroughly debunked. Which is not to say that it has no effect at all. Speculation and the dollar's decline no doubt have some effect, but they are minor in comparison with the supply-demand imbalance. Add to that the incipient panic among those who realize that oil producers are never going to come up with the big increases that have been projected.
There are some important things to realize about speculation. First, speculators actually benefit the market by providing what is called "liquidity." This actually facilitates market transactions. Further, speculation is a zero-sum game: for each speculator that makes a buck, another speculator loses a buck. Not all speculators are betting that oil or any other commodity is going up. But more importantly, to corner a market and drive up prices you have to create or aggravate a shortage. Since speculators actually don't take delivery of oil (where would they put it?), all they can do is bet on the price of oil by buying futures. Here's a recent article that points this out.
http://money.cnn.com/2008/07/01/magazines/fortune/birger_hunt.fortune/index.htm
The US wanted to test VX and GB, better known as sarin nerve gas, on Australian troops in the 1960s newly declassified documents show.
Good article, rice farmer.
Thanks.
Rice Farmer, Sue:
Good analysis of the role of speculators in their playing little or no part in driving up the cost of oil. US and Israeli war posturing is certainly doing nothing to help curb the instincts of speculators, either.
I disagree with your assertion that the major cause of today's oil crisis has its roots in supply and demand, however.
The main cause of rising prices in oil (including costs that prohibit exploration) is the weakening purchasing power of the dollar. If oil were priced in gold, you'd be able to buy just as much oil today as you would have been able to buy in 1940...give or take a few cents. Supply is meeting demand, albeit not by much.
The real culprit in all of this is the Central Banking scheme in the United States (and other countries). Under a gold standard, there would be no boom and bust periods - and true economic growth would reign supreme.
Sue, in order to genuinely understand the causes behind price increases, some research on Federal Reserve would be very beneficial to you. While I do not entirely discard the Peak Oil Theory, I do not think it plays as much of a role in today's price spikes as others. In my view, Peak Oil's major flaw is that it tends to ignore or gloss over basic economic principles.
I do agree that the weak dollar has some effect on oil price. If you graph the dollar's value and the price of crude, there definitely appears to be some correlation. But I must respectfully disagree with the position that it is the main cause.
If there were a plentiful supply of high-quality (light sweet) crude to meet demand, plus a swing producer to take up slack, even the cheap dollar could not raise the price of crude so fast (plus, such circumstances would work to keep the US economy and therefore the dollar strong). Such is the situation that has long prevailed.
The new situation is much changed. First, SA can no longer play the swing producer, and no other producer can take its place. The recent "production increase" is a joke. Do the math. It's like pissing in the Pacific. And in fact, despite repeated announcements of production increases, Saudi crude production has never gotten much higher than 9.5 mbd.
http://europe.theoildrum.com/node/4202?nocomments
Second, most oil producers are barely holding their own or are in decline.
Third, new finds are far more costly to exploit and lower in quality. When "junk oil" like tar sands starts to make money, you know we are scraping the bottom of the barrel.
Fourth, the world's oil infrastructure is in critical condition: literally rusting away. Matt Simmons estimates that 80 to 90% of it must be replaced. It's highly doubtful that sufficient investment funds will ever be found, or that the construction work could be done fast enough.
Fifth, the overall quality of crude is declining. There is a higher proportion of heavy sour crude, and less sweet light crude. That means more energy expenditure and higher costs across the board -- from pumping to refining -- and also a lower energy yield per barrel. All oil is not created equal.
But check it out yourself. These and other factors make for a very bleak outlook, and fully justify even higher crude prices, in whatever currency. Considering the essential nature of oil to the world economy, even $200 would be too cheap.
So, we have continuing strong demand, and the fact that oil is the lifeblood of the world economy. But we also have all the signs of a decreasing ability to supply. Thus the price skyrockets. THAT's Econ 101.
Why is oil expensive? Here is an excellent roundup with some very sobering facts and figures. I should have posted this instead of writing something myself...
http://anz.theoildrum.com/node/4260
Rice Farmer:
Thanks for the input and the article - a sobering read, indeed.
I do not dispute the bulk of the claims made by you and others on this site. Peak Oil is relevant, and I have FTW to thank for introducing me to the concept.
What I was getting at when I referred to the Peak Oilists' tendency to pooh pooh basic economic principles was the lack of discussion regarding the purchasing power of the currency used to purchase oil in the world market. As FTW readers are well aware, the dollar is the de facto world reserve currency, and the only currency accepted in exchange for oil (Iran's Kish Island the only exception).
The key to understanding oil price increases is knowing the relationship between oil prices and the purchasing power of the dollar. It's no accident that oil prices decrease whenever the market reports newfound "strength" in the US dollar - it means there's the same or fewer dollars chasing a static amount of oil in the market.
From this, it follows that an increase in the number of dollars chasing a static amount of oil in the market will result in a price increase. The latter scenario is the one the US has chosen to pursue, and we can expect higher energy prices as a result.
Further, if dollars were immune from purchasing power measurements, obviously the US would just print the amount of dollars needed to purchase the oil it required.
The best way to measure "true" price increases is to measure the (dollar) price of oil in terms of the (dollar) price of another commodity, like gold. When priced in gold, oil prices have barely increased over the past 40 plus years. This indicates present demand is being met.
My point is this: gold, because it is a commodity, is a much better indicator of whether or not we have reached Peak. Citing price increases in dollars is foolish and misleading - and this oversight is Peak Oil's biggest weakness.
To me, the best indicator of an oil peak will come when we see oil prices increase in terms of gold. Given Oil Drum's chart showing the nexus between world oil production and capacity, that spike is not far away.
Eddie Willers - good point. Difficult to measure something when the yardstick keeps shrinking.
The US (in fact all the world's central banks) have been inflating the currency at an increasing rate. Since 2006, the US no longer reports M3 (aggregate money supply) and has long distorted other measures like the CPI to hide this fact. Here is graph by John Williams at Shadowstats.com showing that the Fed is now pushing M3 through a record rate of 16% a year: Shadow Government Statistics. The last time this happened was when Nixon closed the gold window and the result was was a decade of inflation and recession (stagflation).
Historically, an ounce of gold has been about 15 times the price of a barrel of oil. But that has changed in recent years. $80 a barrel in September last year vs $750 an ounce for gold. Today's price for oil $136 vs gold at $917. So, gold is not keeping up. To me that is a confirmation that the oil price hikes of recent years are due to supply & demand and/or that gold has a lot of upside potential. I'd say some of each.
I do not dispute the role of the weak dollar in oil price, but the reality of increasingly tight supply vs roaring demand is a reality that exists independent of currency values. I believe that case has been made.
BTW, one other thing to note about oil prices is that they are easily influenced by such things as announcements of crude oil and refined product inventories (especially those in the US), and news reports on geopolitical events. This extreme sensitivity of oil prices to such factors illustrates global nervousness over the tight supply and demand balance. In fact, Jeff Vail has made a good point about peak oil and geopolitical feedback loops.
http://www.theoildrum.com/node/4196
It would be incredibly naive to think that none of this is factored into crude prices.
Totally agree, Rice Farmer, general nervousness coupled with tight supply/demand will increase prices. The same is true when considering the price of any commodity; for example, a few years ago the price of tomatoes went up when California experienced a mid-summer freeze.
The oil market will jump, decline, level off, etc. depending on a number of factors - but as worries and events work themselves out the price becomes stable again. The "true" increase in price can only be measured in terms of another commodity, like gold. When the value of oil goes up in terms of gold, you'll know we're approaching Peak.
Remember, one cannot divorce price from supply and demand - they're inherently linked. As Isis cogently put it, it's difficult to measure something when the yardstick keeps shrinking. The key is to understand purchasing power, Rice Farmer, and I apologize if I did a poor job of explaining it to you in my earlier comment.
Finally, Isis, excellent point about the oil/gold ratio. Do you find any truth to the rumors that the gold price has been suppressed?
Plenty has been written about the suppression of the gold price. just google "gold cartel" and you'll find plenty. I've seen some striking graphs, too.
On the price of oil, I still say that, regardless of the price of oil measured in gold, most of the price rise over the last few years is due to supply limitations vs growing demand. Sure, the dollar yardstick is shrinking, but the overall decline in the dollar is small in comparison to the increase in oil price. If a fall in the dollar index raised the price of oil from $15 to $17, for example, that would mean that the world is awash in cheap, high-quality oil, which it still was as recently as 1998 when oil actually sold for such prices.
Instead, a change in the dollar index might change the price of oil a dollar or two. The question is, what put the triple-digit floor under the price of oil? Certainly not the dollar, because its relative decline in value is small.
Again, it brings us back to supply and demand. In a way, the Saudis are right in saying that "the market is well-supplied," because it is -- with oil of increasingly declining quality, stuff that nobody wants. Look at oil price quotes and you'll see they are for light sweet crude. The difference in oil quality is big enough that people will still pay big bucks for the good stuff.
So, the high floor under crude price is supply and demand, and differences due to dollar fluctuations are on top of that.
Thanks, Rice Farmer - I'll look in to the gold cartel. I've done modest research into the subject but wanted to avoid mentioning any borderline wacko ideas in order to avoid being labeled a conspiracy theorist.
Not that there's anything wrong with a conspiracy, mind you - they make the world a much more interesting place!
Sometimes I think a conspiracy theorist is just someone who doeesn't believe that the government and the media are telling us the entire story.
Amen Businessman, amen. Personally, I subscribe to Rockwell's law: Always believe the opposite of what the government says.
There's a lot of truth in that, EW.
I think for any real major change to take place people really need to understand how completely untrustworthy and controlled the media is. In my opinion, the purpose of the media from the position of those who really control it is to shape the opinions, beliefs, and actions of all of us to serve those who really have the power over everyone. Most people don't really understand how very few people really have control over what gets reported to us as the national news. And the news anchors themselves are really at the bottom end of all of this reporting, as the news is written for them by other people, and it's read from teleprompters.
As an example of how controlled the news that we hear about is at the national level, take a look at the following news story. This is a story that every single American would definitely want to know about, yet it only appeared on the front page of the Houston Post, and was not allowed to spread like wildfire to all of the other national media outlets at the time.
So in reading the circled headline, along with the article itself below it, it's easy to understand how there are so many stories that we'll never, ever know about:
http://tinyurl.com/ysg7l
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