$300 oil, very soon?

[Mega]

Your Thoughts People:-
http://www.marketwatch.com/news/stor...st=SecMostRead
Mike

[BiscayneSunrise]

Re: $300 oil, very soon?

Matt Simmons was recently featured in Forbes, still maintaining we are past peak oil. The most eye popping number he throws out there, though, is that it will cost $100 TRILLION to replace current petroleum infrastructure!! Which raises the question, why spend $100T on a dying energy source? Many people will argue the money is better spent on future energy sources.

http://www.forbes.com/forbes/2009/03...cassandra.html

Crude Cassandra
Christopher Helman, 02.11.09, 06:00 PM EST
Forbes Magazine dated March 02, 2009
As the price of petroleum plunges, the prince of Peak Oil finds himself a contrarian again.

Matthew Simmons

Matthew Simmons has given 30-plus speeches in the past year, to audiences as diverse as the Pentagon and the Colorado School of Mines. One talk was tortuously titled: "Quo Vadis Energy? (Will Dawn Follow Darkness as Twilight of Energy Fades?)" Short answer: No. Simmons' message is always some variation on the global implications of Peak Oil--that point after which global crude supplies wane, prices soar and shortages spur geopolitical strife.

The Ukraine-Russia gas tiff is a first taste of the transnational energy disputes to come. Simmons believes Moscow's saber rattling is political cover for a more serious problem: a shortage of gas in Gazprom's pipeline system. "This is really serious stuff. We've had a peak in Russian gas. Next year Europe is toast. Cold toast." Could he be right? Chief Executive Alexei Miller stated last July that Gazprom's output had flattened out below 2006 production levels. Russia is already importing gas from the central Asian "Stans" and exporting it to Europe.


Peak Oil zealots eat this stuff up. As crude climbed to $147 a barrel last year, Simmons won lots of converts. But prices have since fallen 75%; OPEC has slashed output; oil companies are laying off workers and mothballing drilling rigs at a rate not seen in a decade. The market signals oodles of oil. Can't we put Peak Oil to rest?

No way, says Simmons. In the library of Simmons & Co., the Houston investment bank he founded 40 years ago, he insists we've already passed Peak Oil--but the world won't realize it until economic recovery stimulates oil thirst anew. When that comes, gird for shortages and $500 a barrel. "There's no logical reason for the price to be this low. If it doesn't reverse itself soon, it will destroy the industry," he says. If Simmons ruled the world, he'd order an oil price floor of at least $150 a barrel to stimulate exploration and to combat rust, which he says is the biggest threat to the oil supply. He figures it could cost $100 trillion to replace aged pipelines, rigs and platforms. That's quite a sum--70 years of oil industry revenues, at present rates.

According to the U.S. Department of Energy and the International Energy (otcbb: IENI.OB - news - people ) Agency, non-OPEC output appears to have peaked in 2006 at just above 51 million barrels per day (bpd), and fell below 50 million in 2008. World output inched up to 86 million bpd a year ago only by dint of spigot-opening by OPEC.

"We've avoided shortages only by squeezing every molecule of natural gas liquids, ethanol and biofuels, by increasing refinery gains a bit, by drawing down stocks," says Simmons. "That's how we balanced a market we couldn't supply." OPEC's numbers include natural gas liquids (like propane and butane), up from 4.5 million bpd to 5 million in two years. U.S. figures also include ethanol, which now contributes 600,000 bpd. Back out such substitutes and crude oil volumes have been flat at around 75 million bpd for four years. Simmons prophesies that in ten years oil will be down to 60 million bpd and natural gas production will be off 20%. He thinks the Saudis are lying about their ability to crank up output and that natural decline rates from existing fields will overwhelm new fields from Iraq, Venezuela or Nigeria.

Can the deepest commodities market on earth be getting it so wrong? "What would be really unfortunate is if 80% of the collapse in oil prices were the unforeseen implications of the credit freeze," he says. Simmons contends that traders were forced to liquidate oil contracts as credit dried up, causing prices to fall. He pulls out a chart showing the price of credit default swaps on Glencore (a Swiss firm and the biggest oil trader not part of an oil company). It went from 300 basis points (3%) in September to 3,200 in December. The chart line is a near-perfect inverse of the plunging cost of crude. As credit markets recover, he says, traders will bid up oil once again.

Comment On This Story
It wouldn't be the first time the market miscalculated. Simmons points to a framed copy of a 1999 cover story in the Economist--"Drowning in Oil"--which asserted that crude, then around $10 a barrel, would fall to $5 and stay there for a decade. Simmons (interviewed, but excluded from the article) insisted plenitude was a mirage and prices were set to soar. Nine months later oil passed $25 and the magazine issued a mea culpa.

[Spartacus]

Re: $300 oil, very soon?

quick reply - I'll link to the charts later if I find the time

If you go look on ASPO, in some of their PDFs you'll see "global production" - what you'll see from 2005 to late 2007 the volume of liquid petroleum produced was constant, even though the price more than tripled.

The 2005 production was not surpassed - oil producers could have made three TIMES the money but they weren't producing more.

I thought this was 100% proof we were at peak, but apparently the rising prices did give somebody an incentive to make more , so ...

in 2008 there was like a 10 % increase, and then the price crashed.

We'll have to see if the produced volume comes down - IMHO 2007/2008 will end up being the peak year for petroleum production.

Matt Simmons was recently featured in Forbes, still maintaining we are past peak oil. The most eye popping number he throws out there, though, is that it will cost $100 TRILLION to replace current petroleum infrastructure!! Which raises the question, why spend $100T on a dying energy source? Many people will argue the money is better spent on future energy sources.

http://www.forbes.com/forbes/2009/03...cassandra.html

Crude Cassandra
Christopher Helman, 02.11.09, 06:00 PM EST
Forbes Magazine dated March 02, 2009
As the price of petroleum plunges, the prince of Peak Oil finds himself a contrarian again.

Matthew Simmons

[LargoWinch]

Re: $300 oil, very soon?

I think crude will benefit the most as soon as people know that the CBs game is up.

Gold will benefit too, but by then, Crude supply will be severely constrained.

Also, I can image disruption in the supply of oil due to war etc. that is not the case for gold i.e. there are tons of the stuff in vaults all over the world.

Crude Oil is money.

[GRG55]

Re: $300 oil, very soon?

quick reply - I'll link to the charts later if I find the time

If you go look on ASPO, in some of their PDFs you'll see "global production" - what you'll see from 2005 to late 2007 the volume of liquid petroleum produced was constant, even though the price more than tripled.

The 2005 production was not surpassed - oil producers could have made three TIMES the money but they weren't producing more.

I thought this was 100% proof we were at peak, but apparently the rising prices did give somebody an incentive to make more , so ...

in 2008 there was like a 10 % increase, and then the price crashed.

We'll have to see if the produced volume comes down - IMHO 2007/2008 will end up being the peak year for petroleum production.

Not quite...

Using EIA stats top production months for total world liquids in recent years [includes lease condensates and natural gas liquids, barrels per day]...

May 2005: 85,339
July 2006: 85,409
July 2008: 86,859

After 3 consequtive years [2005 - 2007] with an annual average production near 84,500 bbls/day, 2008 first 11 months average [Dec numbers not yet posted] jumped to 85,557 bbls/day, an increase of 1.1 million bbls/day over 2007, or 1.3%.

[Sharky]

Re: $300 oil, very soon?

The most eye popping number he throws out there, though, is that it will cost $100 TRILLION to replace current petroleum infrastructure!! Which raises the question, why spend $100T on a dying energy source? Many people will argue the money is better spent on future energy sources.

When you say "better spent on future energy sources," what do you mean? There are no other energy sources on the horizon that can deliver the number of BTUs that oil can, on a global basis. At the top of the energy supply curve, the choice isn't oil or alternatives. For the foreseeable future, it's oil or nothing.

[BadJuju]

Re: $300 oil, very soon?

When you say "better spent on future energy sources," what do you mean? There are no other energy sources on the horizon that can deliver the number of BTUs that oil can, on a global basis. At the top of the energy supply curve, the choice isn't oil or alternatives. For the foreseeable future, it's oil or nothing.

Algae biofuel could certainly do well as a substitute. And nuclear energy powering electric vehicles would work quite well, too.

[Spartacus]

Re: $300 oil, very soon?

1% , 10%

what's an order of magnitude between friends?

Anyway, no worse than an economist ...

Not quite...

Using EIA stats top production months for total world liquids in recent years [includes lease condensates and natural gas liquids, barrels per day]...

May 2005: 85,339
July 2006: 85,409
July 2008: 86,859

After 3 consequtive years [2005 - 2007] with an annual average production near 84,500 bbls/day, 2008 first 11 months average [Dec numbers not yet posted] jumped to 85,557 bbls/day, an increase of 1.1 million bbls/day over 2007, or 1.3%.

[GRG55]

Re: $300 oil, very soon?

Algae biofuel could certainly do well as a substitute. And nuclear energy powering electric vehicles would work quite well, too.

All these are possible, but they don't happen overnight.

Coal as the dominant energy source gave way to oil a long time ago, just as coal producing Great Britain gave economic dominance away concurrently to the oil producing USA [which for quite some time was the largest oil producer in the world].

But I note that we global citizens still seem to use a great deal of coal to this day.

History is on oil's side. Displacing it will take generations, regardless of how much money gets thrown at the alternatives.

[Jay]

Re: $300 oil, very soon?

All these are possible, but they don't happen overnight.

Coal as the dominant energy source gave way to oil a long time ago, just as coal producing Great Britain gave economic dominance away concurrently to the oil producing USA [which for quite some time was the largest oil producer in the world].

But I note that we global citizens still seem to use a great deal of coal to this day.

History is on oil's side. Displacing it will take generations, regardless of how much money gets thrown at the alternatives.

And your thoughts GRG55? As the oil sage, bottom in?

[GRG55]

Re: $300 oil, very soon?

And your thoughts GRG55? As the oil sage, bottom in?

Same answer as always...in the short run the oil price can go anywhere. ;)

But the gold/oil ratio is looking absurd, I continue to get reports of supply project cancellations from people I know all over the world, the capital squeeze is now manifesting itself in layoffs of skilled people in the oilsands, deepwater offshore, and unconventional onshore plays, North American natural gas is now trading below the full cycle cost of finding and developing new reserves in any North American basin [which means the companies producing it are liquidating themselves to keep enough cash coming in to avoid shutting off the lights, for now], and I could go on.

None of this is sustainable based on historical pattens. But maybe "it's different this time" and these gets corrected by:

• a collapse in the gold price?
• a permanent reduction in global oil demand?
• a collapse in natural gas services prices [much lower F&D]?
• bankrupcies in the domestic upstream industry?

I am just trying to keep my powder dry and watch.

[flintlock]

Re: $300 oil, very soon?

Also, I can image disruption in the supply of oil due to war etc. that is not the case for gold i.e. there are tons of the stuff in vaults all over the world.

Crude Oil is money.

That was my thinking too. A little hedge on war in the Middle East or some other unforeseen circumstance.

[Supercilious]

Re: $300 oil, very soon?

History is on oil's side. Displacing it will take generations, regardless of how much money gets thrown at the alternatives.

Total displacement of oil as an energy source can take generations if it happens at all (cow patties are still used for making fire in certain parts of the world, and it's a renewable source of energy)

Displacement as the main source of energy can take place in less than a generation depending on the competitive advantage. This is how oil has displaced coal.

[Uno]

Re: $300 oil, very soon?

Replacement of oil as the primary energy source can take place anytime.

Thousands of nuclear plants can be built in the USA in under 5 years, no problem at all.

China builds entire cities in a few years.

Alternatives will be created the momement they are required to be created. It is very simple actually.

The current argument is more about if it is prudent to plan ahead and invest in alternatives to oil as a society or just wait until the last minute and then crash and burn.

[BiscayneSunrise]

Re: $300 oil, very soon?

Replacing coal and nat gas with nuclear for electrical production is easy, replacements for liquid petroleum for transportation is harder.

What I meant when I said the money could be better spent on alternatives is nuclear. society can build an awful lot of nuke capacity for $100T.