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Wall Street History
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06/13/2008
All About Oil
Some recent thoughts on oil and our energy predicament, specifically the idea of peak oil and how America is a hypocrite.
Carola Hoyos / Financial Times
“Most of the world’s oil executives, government ministers, analysts and consultants reject the ‘peak oil’ theory – the notion based on the 1950s work of Marion King Hubbert, a Shell geologist, that crude production will soon enter terminal decline. They say it understates remaining reserves, plays down the contribution of technological advances and ignores the role of market forces in shaping future supply.
“But with the oil price at ($130+) a barrel, more than 1,000 percent higher than a decade ago, fears of the end of the hydrocarbon age have seeped into the mainstream .
“So are the peak oilists right? A series of recent events certainly appears to lend credence to those who argue that the world’s ageing oilfields are being sucked dry amid China’s and India’s determination to lift themselves out of poverty and the west’s reluctance to give up the luxuries of modern oil-dependent life.
“The fact that Russia’s oil production declined almost half a percentage point in April, the first drop in a decade, was shocking enough news from the world’s second biggest oil producer, whose output was growing at a rate of 12 percent just five years ago. But Russian oil executives have gone a step further. Leonid Fedun, vice president of Lukoil, told the Financial Times the country’s production may have already reached its peak.
“Just days later Saudi Arabia, the world’s biggest oil producer and by far the largest exporter, confirmed it had put on hold plans to increase the kingdom’s production capacity .when the kingdom produces more oil, it eats into its cushion of spare supply .
“One problem is that nobody really knows what is going on inside Saudi Arabia’s oil industry. Riyadh is so guarded that analysts from Sanford Bernstein, took to spying on its activity via satellite. They spent nine months monitoring the country’s drilling activities and measuring whether Ghawar, the world’s biggest oilfield, had subsided. Their conclusion: Saudi Arabia is having to work harder than the country’s engineers and geologists expected in 2004 to squeeze more out of the northern part of the ageing Ghawar field.
“Matthew Simmons, an energy investment banker, has a bleaker view of Ghawar’s health. He took the news that Saudi Arabia was not planning to expand to 15mmbd as further evidence that the kingdom was struggling to ward off a collapse of its oilfields.”
Simmons published his now famous book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” in 2005, and aside from Saudi Arabia’s production issues, found that “the world depends on just a few giant, old, declining oilfields and that almost nothing to match them has been discovered since the 1970s. One in every five barrels of oil consumed each day is pumped from a field that is more than 40 years old. Not a single field discovered in the past 30 years has ever been able to produce more than 1mmbd and the number and size of the fields discovered since then have been shrinking dramatically.”
Take Mexico’s Cantarell field. Discovered in 1976, at its peak Cantarell produced 2mmbd. Today it’s half that.
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Paul Roberts / National Geographic (June 2008)
“(Even) oil optimists concede that physical limits are beginning to loom. Consider the issue of discovery rates. Oil can’t be pumped from the ground until it has been found, and yet the volume discovered each year has steadily fallen since the early 1960s – despite dazzling technological advances, including computer-assisted seismic imaging that allows companies to ‘see’ oil deep below the Earth’s surface. One reason for the decline is simple mathematics: Most of the big, easily located fields – the so-called ‘elephants’ – were discovered decades ago, and the remaining fields tend to be small. Not only are they harder to find than big fields, but they must also be found in greater numbers to produce as much oil. Last November, for example, oil executives were ecstatic over the discovery off the Brazilian coast of a field called Tupi, thought to be the biggest find in seven years. And yet with as much as eight billion barrels, Tupi is about a fifteenth the size of Saudi Arabia’s legendary Ghawar, which held about 120 billion barrels at its discovery in 1948.
“Smaller fields also cost more to operate than larger ones do. ‘The world has zillions of little fields,’ says Matt Simmons. ‘But the problem is, you need a zillion oil rigs to get at them all.’ This cost disparity is one reason the industry prefers to rely on large fields – and why they supply more than a third of our daily output. Unfortunately, because most of the biggest finds were made decades ago, much of our oil is coming from mature fields that are now approaching their peaks, or are even in decline; output is plummeting in once prolific regions such as the North Sea and Alaska’s North Slope.
“Worldwide, output from existing fields is falling by as much as 8 percent a year, which means that oil companies must develop up to seven million barrels a day in additional capacity simply to keep current output steady – plus many more millions of barrels to meet the growth in demand of about 1.5 percent a year. And yet, with declining field sizes, rising costs, and political barriers, finding those new barrels is getting harder and harder .
“By 2010, according to James Mulva, CEO of ConocoPhillips, nearly 40 percent of the world’s daily oil output will have to come from fields that have not been tapped – or even discovered. By 2030 nearly all our oil will come from fields not currently in operation. Mulva, for one, isn’t sure enough new oil can be pumped. At a conference in New York last fall, he predicted output would stall at 100 million barrels a day – the same figure Total’s chief had projected. ‘And the reason,’ Mulva said, ‘is, where is all that going to come from?’
“Whatever the ceiling turns out to be, one prediction seems secure: The era of cheap oil is behind us. If the past is any guide, the world may be in for a rough ride. In the early 1970s, during the Arab oil embargo, U.S. policymakers considered desperate measures to keep oil supplies flowing, even drawing up contingency plans to seize Middle Eastern oil fields.
“Washington backed away from military action then, but such tensions are likely to reemerge. Since Saudi Arabia and other members of OPEC control 75 percent of the world’s total oil reserves, their output will peak substantially later than that of other oil regions, giving them even more power over prices and the world economy. A peak or plateau in oil production will also mean that, with rising population, the amount of gasoline, kerosene, and diesel available for each person on the planet may be significantly less than it is today. And if that’s bad news, for energy-intensive economies, such as the United States, it could be disastrous for the developing world, which relies on petroleum fuels not just for transport but also for cooking, lighting, and irrigation.”
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George Will / Washington Post
“Rising in the Senate on May 13, Chuck Schumer, the New York Democrat, explained: ‘I rise to discuss rising energy prices.’ The president was heading to Saudi Arabia to seek an increase in its oil production and Schumer’s gorge was rising.
“Saudi Arabia, he said, ‘holds the key to reducing gasoline prices at home in the short term.’ Therefore arms sales to that kingdom should be blocked unless it ‘increases its oil production by one million barrels per day,’ which would cause the price of gasoline to fall ’50 cents a gallon almost immediately.’
“Can a senator, with so many things on his mind, know so precisely how the price of gasoline would respond to that increase in the oil supply?
“Schumer does know that if you increase the supply of something, the price of it probably will fall. That’s why he and 96 other senators recently voted to increase the supply of oil on the market by stopping the flow of oil into the Strategic Petroleum Reserve, which protects against major physical interruptions.
“Seventy-one of the 97 senators who voted to stop filling the SPR also oppose drilling in the Arctic National Wildlife Refuge.
“One million barrels is what might today be flowing from ANWR if in 1995 President Bill Clinton hadn’t vetoed legislation to permit drilling there. One million barrels produce 27 million gallons of gasoline and diesel fuel. Seventy-two of today’s senators – including Schumer, of course, and 38 other Democrats, including Barack Obama, and 33 Republicans, including John McCain – have voted to keep ANWR’s estimated 10.4 billion barrels of oil off the market.
“So Schumer, according to Schumer, is complicit in taking $10 away from every American who buys 20 gallons of gasoline .
“Also disqualified from complaining are all voters who sent to Washington senators and representatives who’ve voted to keep ANWR’s oil in the ground, and who voted to put 85 percent of America’s offshore territory off-limits to drilling .
“Drilling is underway 60 miles off Florida. The drilling is being done by China, in cooperation with Cuba, which is drilling closer to South Florida than U.S. companies are.
“ANWR is larger than the combined areas of five states (Massachusetts, Connecticut, Rhode Island, New Jersey, Delaware) and drilling along its coastal plane would be confined to a space one-sixth the size of Washington’s Dulles Airport.
“Offshore? Hurricanes Katrina and Rita destroyed or damaged hundreds of drilling rigs without causing a large spill. There hasn’t been a significant spill from an offshore U.S. well since 1969 .
“America says to foreign producers: We prefer not to pump our oil, so please pump more of yours, thereby lowering its value, for our benefit. Let it not be said that America has no energy policy.”
Wall Street History returns next week.
Brian Trumbore
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