Got Oil?

[Mega]

http://oilprice.com/article-there-wi...to-an-end.html

Mike

[Starving Steve]

Re: Got Oil?

http://oilprice.com/article-there-wi...to-an-end.html

Mike

This is a must-read article for everyone. Thank you, Mike, for posting it.

The sad implication for me is that someday, I might not be able to live 12 miles from civilization, out in a log cabin with the bears and cougars of East Sooke, British Columbia, and I might have to become more energy efficient and live in a downtown high-rise, maybe in Victoria or Vancouver. ( Ugh! )

As the article points out, there is no way to grow our way out of the cost of energy, lest we ride scooters and produce and export, the way China and India do now. Riding scooters, they can afford $120 per barrel for oil, but the Western nations can not. At $120, they would still grow while we strangle.

This article nicely shoots-down supply-side economics, at least here in the Western nations. Without cheap oil, there will be no economic recovery ahead.

And the other key point in the article: The value of the dollar has been determined by the price of energy, especially the price of crude oil. The reverse is NOT true; i.e, economic policy does not set the value of the dollar. So all of the juggling with economic policy by the Fed can not trump the scarcity of oil, and post-peak oil prices (much higher prices) mean a much lower dollar as the economic importance of America continues to decline.

Show this article to Larry Kudlow on CNBC.

[jk]

Re: Got Oil?

thanks for posting this, mega.
i copied the article below, adding my own emphases.


There Will be No Economic Recovery as the Era of Cheap Oil Comes to an End


When oil crossed $120 a barrel for the first time in May 2008, oil cornucopians knew they were in trouble. Prices had quadrupled in just five years, yet had failed to bring new production online. Regular crude had flatlined around 74 million barrels per day (mbpd). The case for peak oil was looking stronger with every new uptick in crude futures.

The following month, prominent peak oil critic and cornucopian Daniel Yergin of IHS-CERA changed his stance: The peak oil threat would be neutralized by peak demand. Gasoline consumption had peaked in the U.S. and Europe, he argued, due to the combined effects of increasing efficiency, biofuels, and the recession.

In 2009 the peak demand story seemed confirmed, as prices stabilized around $70 in June, and U.S. consumption remained well off its previous high. Most people thought the nearly 2 mbpd decline in U.S. petroleum demand from 2007 through 2009 owed to efficiency and people driving less.

In reality, only about 15% owed to reduced gasoline demand. The other 85% was lost in the commercial and industrial sector: jet fuel, distillates (including diesel), kerosene, petrochemical feedstocks, lubricants, waxes, petroleum coke, asphalt and road oil, and other miscellaneous products.

Very simply, when oil got to $120 a barrel it cut into real productivity, and forced the world’s most developed economies to shrink. At $147, it wreaked serious damage.

As I explained in “Investment Themes for the Next Decade,” the new normal will be cycles of bumping our heads against the supply ceiling, falling dazed to the floor, rising back to our knees, then finally standing, only to bump our heads against the ceiling once more. [jk- this is the same model as expressed by gregor in an earlier piece i posted about 6-8 months ago, but more colorfully expressed. gregor's model, however, included the notion that ceiling kept getting lower.]

Scooters Will Kill SUVs
Two interesting news stories crossed the wire this week, which portend badly for the world’s #1 net importer, the U.S.

The first was a Reuters report that the last quarter of 2009 had “wiped out” the equity of Mexican state oil monopoly Pemex, leaving it $1.4 billion in the negative. Falling crude output, falling refining margins and a burgeoning dependency of the state on its revenues had squeezed it to death.

Not only did the report offer further confirmation that the oil export crisis has arrived, but it also confirmed my growing suspicion that the oil production everyone has assumed will come online in five to ten years might, in fact, fail to materialize. Negative equity companies have a hard time raising capital for new exploration.

The second was a Bloomberg report that Saudi Arabia had agreed to double its oil exports to India, to some 866,000 barrels per day. India indicated separately that its onshore production of oil may peak this year.

This adds to the pressure on Saudi Arabia’s exports, whose oil shipments to China have been growing at a rate of 11-12% per year and now stand at roughly 1 million barrels per day (mbpd). China has eclipsed the U.S. as the primary bidder for Saudi oil, while U.S. imports from the Persian nation have fallen to a 22-year low.

The last two years have seen the marginal buyers of oil shift decisively to the non-OECD countries. A gallon of fuel delivers so much value in China and India–think peasants on scooters–that even at $120 a barrel, remarkable economic growth rates are possible. In major oil exporting countries like Saudi Arabia and Venezuela, where subsidized gasoline still sells for under 25 cents a gallon, the appetite for fuel grows steadily every year with little thought given to efficiency.

It’s a different story in the U.S. For debt-laden consumers, an extra $50 or $75 to fill up the tank on an SUV every month sharply reduced discretionary income and starved the economy of its most fundamental driver, consumer demand.

The Real Meaning of Peak Demand


The fact is that peak demand in the OECD is not merely a function of efficiency gains and biofuels substitution, aided by a temporary recession.

Instead, peak demand will be the result of a permanent state of increasing depression in which non-OECD countries not only more than make up for the loss of OECD demand, but outbid them for the marginal barrel.

As we enter the post-peak phase of global oil supply sometime around 2012-2014, the price that heavily import-dependent countries like the U.S. would have to pay for that marginal barrel will become increasingly intolerable. In a weakened economy, $100 a barrel (or less) could be the new $120.

The true import of peak oil, therefore, may not be sustained high prices, but economic shrinkage. Demand will be destroyed long before oil gets to $200 a barrel, but it will not be destroyed by improved efficiency.

From where we stand today, it’s hard to make an argument for economic recovery. Persistently high unemployment rates, broken state and federal balance sheets, and an inflationary depression will continue to cut into petroleum demand. We spent the last several decades offshoring the fundamental value-adding sectors like energy production and manufacturing, and now our FIRE economy (finance, insurance, and real estate) rests entirely on real value created elsewhere.

The reason is simple: Energy is the only real currency. Every dollar of fiat currency or GDP was ultimately derived from cheap energy. Trying to print your way out of energy decline is like prescribing ever-higher doses of aspirin for a headache caused by a brain tumor. Yet those at the levers of monetary policy are, by all appearances, completely ignorant (or in willful denial) of this fundamental fact.

The vogue prescription for the sovereign debtors at greatest risk of default is “austerity measures.” The theory is that a period of belt-tightening will stanch the fiscal bleeding until economic recovery puts everyone into the black again.

Yet, if primary energy supply is declining, and the rising star of developing economies is inexorably cutting into the supply available to developed and indebted economies, then there can be no recovery.

I have joked on Twitter that I’m expecting an “M-shaped recovery,” where we’re now on the second hump. A more accurate image is slow strangulation.

Two Questions for Recoveryistas

Those who would argue for economic recovery must answer two intractable questions.
The first is: Where will the energy come from, as more of the world’s net exporters become net importers?

Britain, Argentina, Indonesia, and others have become net importers in recent years. Mexico and Columbia are expected to follow suit within a decade. Clearly, we can’t all be net energy importers.

There is also the obstinate fact that aggregate net energy–the energy you get in return for investing energy in its production–has been dropping steadily. Oil net energy dropped from 100 in the early 1930s to 11 or less today. Net energy for natural gas is now in decline. We don’t have adequate data to know yet, but coal’s net energy is probably in decline too. Meanwhile, the net energy of all substitutes is low: wind, 18; solar, 6.8; nuclear, 5-15; all biofuels, under 2.
It is not surprising that a study of the Herold database (Gagnon, Hall, and Brinker, 2009) showed the amount of oil and gas produced per dollar spent declined between 1999 and 2006.

The second question is: If the creeping infection of sovereign default continues to spread to more countries, where will the money come from to bail them out? The answer has been, and continues to be, more aspirin. Without more cheap energy, monetary tactics to play the game into overtime will not only be futile, they will only draw us closer to the edge of the net energy cliff.

All of which begs a final question: If the answers are transition to renewables, and rebuilding our infrastructure for high efficiency, then where will the money and energy to do it all come from? And how long will it hold out?

Without cheap energy to fuel the growth that is hoped to pay off the accumulated debt, austerity will become an everyday reality, not a short-term fix. A reality that slowly sinks in for the rest of our lives, as net importers become progressively poorer.

The peak demand argument is a good one–but not for the nice reasons.

By. Chris Nelder

http://oilprice.com/article-there-wi...to-an-end.html

[World Traveler]

Exxon Lowers Bar, Buys Assets Once Seen Unattractive

From Bloomberg today:

March 9 (Bloomberg) -- Exxon Mobil Corp., BP Plc and Total SA are investing in assets that previously weren’t worth their time or money after oil-rich nations reduced access to reserves and exploration drilling faltered.

Efforts to find new sources of crude and natural gas are failing more often, with San Ramon, California-based Chevron Corp.’s exploration failure rate jumping to 35 percent last year from 10 percent in 2008. Countries such as Venezuela are making it more expensive for companies to develop their resources, if they’re allowed in at all. And previously developed fields are drying up, reducing oil companies’ future supplies, or reserves.
“Their No. 1 problem is reserves replacement,” said Nansen Saleri, chief executive officer at Quantum Reservoir Impact in Houston and former reservoir-management chief at Saudi Arabia’s state oil company. “That’s the elephant in the room, so that’s what they have to address.”
To compensate, major producers are investing in projects they once eschewed, including geologically complex oil and gas fields, called “unconventional” by the industry to distinguish them from the easy-to-get oil and gas of earlier years.

Irving, Texas-based Exxon agreed to buy gas producer XTO Energy Inc. for $29 billion in December, 14 months after abandoning its own drilling program in Texas’s Barnett Shale unconventional gas formation, where XTO gets more than 20 percent of its output. BP, Total and Statoil ASA bought into U.S. shale-gas joint ventures, and Marathon Oil Corp. and ConocoPhillips are investing in unconventional gas in Europe.
More Acquisitions

Integrated oil companies announced almost $100 billion in acquisitions in the past year, up 53 percent from the preceding 12 months, according to data compiled by Bloomberg.

The low-cost, high-profit resources of the past are disappearing, said Ted Harper, who helps manage about $6 billion at Frost Investment Advisors in Houston. “You’re looking at a higher initial investment and a relatively more-muted return on invested capital relative to what you were to find 10 or 20 years ago,” he said.

Exxon sought last year to buy closely held Kosmos Energy LLC’s Ghana assets, including a stake in the offshore Jubilee field, valued at about $4 billion. Major oil companies had chosen years earlier not to invest in the project, said Anadarko Petroleum Corp., a partner in Jubilee based in The Woodlands, Texas.

Risk Appetites
Those companies are now pursuing West Africa fields that previously didn’t meet their criteria for potential profits relative to risk, Anadarko Chief Executive Officer Jim Hackett said in a March 3 interview. Independent producers, which are typically smaller and don’t own refineries or chemicals plants, have a different risk profile, Hackett said.
“We didn’t have the same portfolio that they may have had, so our tolerance for something new was probably a little greater than theirs was,” Hackett said.

Investments by Exxon, London-based BP, France’s Total, Norway’s Statoil and Royal Dutch Shell Plc of The Hague in shale formations mark “a change in the model” after major producers cut back U.S. onshore projects decades ago, Hackett said.

Advances in drilling showed the big oil and gas companies that shale projects, where rocks are fractured to make gas flow, contain enough gas to increase reserves and can be developed around the world, Hackett said.

Doubling Reserves
Shale projects enabled independent producers such as Fort Worth, Texas-based XTO and Chesapeake Energy Corp. of Oklahoma City to double reserves and production in five years while output slid at major oil companies. Independent producers in the Standard & Poor’s 500 index rose 41 percent last year, versus a 4 percent decline for the majors. Independents are up 1.7 percent this year, compared with a 1.9 percent drop for majors.

Houston-based ConocoPhillips forecast that its output will drop 2.7 percent this year as Chief Executive Officer Jim Mulva seeks to sell $10 billion in assets under his plan to “shrink to grow.” The company’s exploration failure rate rose to 43 percent last year from 32 percent in 2008.

“They don’t do exploration well anymore, or at least they don’t want to,” James Halloran, a consultant at Financial America Securities in Cleveland, said of major oil producers.

Exxon said in October 2008 that it sold stakes in gas fields and a pipeline in the Barnett Shale. The decision came after gas prices dropped by almost half in three months.
Gas Shift?

Leaving the Barnett didn’t indicate any shift in the company’s interest in U.S. gas projects, Exxon spokesman Alan Jeffers said. He said Exxon kept a strong presence in areas such as Colorado’s Piceance Basin, where the company has an unconventional gas project.

Exxon forecasts faster demand growth for gas than for other major energy sources because supplies are ample and gas has lower emissions when burned than oil or coal, Jeffers said.

BP, already the largest natural-gas producer in the U.S., said in a March 2 presentation that the heating and power-plant fuel will be a key source of growth for the company in the second half of this decade.

Total said in January it would spend as much as $2.25 billion for a stake in Chesapeake’s Barnett Shale assets. The deal provides a chance to learn about shale gas and will continue to produce for many years, said Phenelope Semavoine, a Total spokeswoman.

Fields that were long ignored also are getting a fresh look. Exxon said in January that it will inject nitrogen and other gases to revive production at the Hawkins Field, a development east of Dallas that started pumping oil 70 years ago. Gas injections will force crude to the surface, squeezing an additional 40 million barrels of oil out of the field and extending its life by 25 years, Exxon said.

http://www.bloomberg.com/apps/news?p...2MKZMA0&pos=10

[flintlock]

Re: Got Oil?

The sad implication for me is that someday, I might not be able to live 12 miles from civilization, out in a log cabin with the bears and cougars of East Sooke, British Columbia, and I might have to become more energy efficient and live in a downtown high-rise, maybe in Victoria or Vancouver. ( Ugh! )

Oh come on Steve, there are many who think we should be perfectly happy with something like this:



Ugh is right.

[jk]

Re: Got Oil?

this analysis [nelder's] is essentially deflationary: "100 dollar oil is the new 120 dollar oil." i think it describes essentially deflationary forces in the global economy- at least deflationary for the oecd countries. to this must be added various cbs' efforts at reflation- especially q.e. and zirp. so imagine the economy as described in this article, but add a constant flow of new dollars being poured into the system via the banks and via governments' deficit spending.

i think there are counterpoised deflatonary [the developed world today cannot afford $80 oil] and inflationary [but the price really seems to want to trend higher] forces. nelder seems to add that although $80 oil is deflationary for the oecd, it is NOT overpriced for growth to continue in the ldc- the marginal cost [of more expensive oil] of filling the tank of a motor scooter is not that great, and the marginal energy cost of increased productivity in the emerging markets is not that great.

putting these ideas together, we get a world with stagflation in the oecd and inflationary growth in the ldc. the conclusions would be to buy commodities but also to invest in domestic growth in the ldc. [i'm wary of these conclusions, just because they seem so ordinary and crowded] i'm too timid to do the latter- buy emerging markets, yet, because i think that when the u.s. markets finally take notice of the lack of domestic growth in the u.s., there will be another big sell off which will hit commodities, but hit the emerging markets even harder. that will [theoretically] be the time i buy emerging markets.

[c1ue]

Re: Got Oil?

putting these ideas together, we get a world with stagflation in the oecd and inflationary growth in the ldc. the conclusions would be to buy commodities but also to invest in domestic growth in the ldc. [i'm wary of these conclusions, just because they seem so ordinary and crowded] i'm too timid to do the latter- buy emerging markets, yet, because i think that when the u.s. markets finally take notice of the lack of domestic growth in the u.s., there will be another big sell off which will hit commodities, but hit the emerging markets even harder. that will [theoretically] be the time i buy emerging markets.

One of the other dynamics to consider is capital.

At present, much or most of capital is from the OECD.

Without capital, it becomes much harder to achieve maximum 'potential' growth in the ldc. The Malaysia and now China experiences is showing that capital controls are likely necessary.

This in turn makes investment in ldc's much more risky - no more pulling out if a dictator comes on board or some other crap.

[mikedev10]

Re: Got Oil?

so how do i invest in scooters !

[jk]

Re: Got Oil?

One of the other dynamics to consider is capital.

At present, much or most of capital is from the OECD.

Without capital, it becomes much harder to achieve maximum 'potential' growth in the ldc. The Malaysia and now China experiences is showing that capital controls are likely necessary.

This in turn makes investment in ldc's much more risky - no more pulling out if a dictator comes on board or some other crap.

i think oil is a better way to invest than ldc equity for the reason you give, as well as a lot of other reasons. if the ldc's grow, so will demand for oil and the dollar price of oil. otoh, there are scenarios that would cause equities to collapse but oil to skyrocket- e.g. mines in the straits of hormuz.

[GRG55]

Re: Got Oil?

this analysis [nelder's] is essentially deflationary: "100 dollar oil is the new 120 dollar oil." i think it describes essentially deflationary forces in the global economy- at least deflationary for the oecd countries. to this must be added various cbs' efforts at reflation- especially q.e. and zirp. so imagine the economy as described in this article, but add a constant flow of new dollars being poured into the system via the banks and via governments' deficit spending.

i think there are counterpoised deflatonary [the developed world today cannot afford $80 oil] and inflationary [but the price really seems to want to trend higher] forces. nelder seems to add that although $80 oil is deflationary for the oecd, it is NOT overpriced for growth to continue in the ldc- the marginal cost [of more expensive oil] of filling the tank of a motor scooter is not that great, and the marginal energy cost of increased productivity in the emerging markets is not that great.

putting these ideas together, we get a world with stagflation in the oecd and inflationary growth in the ldc. the conclusions would be to buy commodities but also to invest in domestic growth in the ldc. [i'm wary of these conclusions, just because they seem so ordinary and crowded] i'm too timid to do the latter- buy emerging markets, yet, because i think that when the u.s. markets finally take notice of the lack of domestic growth in the u.s., there will be another big sell off which will hit commodities, but hit the emerging markets even harder. that will [theoretically] be the time i buy emerging markets.

Too late for the scooter theory...time to think Tata Nano or Maruti Suzuki, or at least a more powerful [and thirsty] road bike, I believe...

The ride’s over for Bajaj scooters

Dec 18, 2009 03:14 EST

About four decades ago, when the world was swinging along with the Beatles and Bob Dylan, India got her first female Prime Minister, and a large part of the Indian middle class drove in the change on the Bajaj scooter, the telling epitome of prosperity then.

The humble two-wheeler was seen everywhere from Bollywood movies to your own garage, and was more a part of the family than the current muscular, jazzy Pulsar (also from Bajaj) which you don’t even have to kick-start.

Earlier this month, when Indian media reported Bajaj Auto Ltd’s decision to stop scooter production, it struck a chord with many.

“When I bought the first Bajaj Vespa, neighbours came in to take a look — it was a celebration,” says Pinaki Dutta, who bought his scooter in 1986, and still rides it.

“But I can’t picture either of my sons agreeing on riding a scooter by any stretch of imagination. It’s an obsolete option for them, a status climb-down for them.”

The actual decision to stop scooter production might just have been a matter of time, but it sure is a telling indicator of how the Indian middle class has moved along...

Good thing they haven't discovered the SUV yet...

...Ooops, they have...:eek:

[VIT]

Re: Got Oil?

Does anybody could explain me what all these people saying decrease or stabilizing "demand" mean ?

If we go to the classic theory the demand is a curve not a single number so changing demand means the curve is shifted not like you are sliding on it. So I see many factors shifting the demand to the right making the oil more expensive for the same supply. And to shift the demand curve left you need to find not only alternatives to hydrocarbons but CHEAPER alternatives which will make the changes irreversible.

*I hear these speculations about "demand" all the time from various people and try to understand who is out of mind.

[GRG55]

Re: Got Oil?

Does anybody could explain me what all these people saying decrease or stabilizing "demand" mean ?

If we go to the classic theory the demand is a curve not a single number so changing demand means the curve is shifted not like you are sliding on it. So I see many factors shifting the demand to the right making the oil more expensive for the same supply. And to shift the demand curve left you need to find not only alternatives to hydrocarbons but CHEAPER alternatives which will make the changes irreversible.

*I hear these speculations about "demand" all the time from various people and try to understand who is out of mind.

Couldn't agree more.

I've had to take a simpler approach...just replace "demand" with production. For as we both know, when it comes to oil, for all practical purposes demand = production = demand.

[MulaMan]

Re: Got Oil?

or could drive an electric car into town like the rest of the civilized world is working on.

[GRG55]

Re: Got Oil?

or could drive an electric car into town like the rest of the civilized world is working on.

You'll be disappointed at how long it takes for electric cars to secure any meaningful share of the vehicle market, anywhere in the world [other than perhaps your local golf course].

[flintlock]

Re: Got Oil?

or could drive an electric car into town like the rest of the civilized world is working on.

Insert Starving Steve rant on potheads here