Back to the showAs you go further back in time, fewer links actually work. 


Cheap Oil Myths and Energy Transition

Andrew McKillop has been good enough to send in another report on oil prices and, among other things, the problems caused by using monetary policy as a response. q.v.  He takes on the question of sudden price spikes brought on by an overstretched oil supply system and the risks of trying to control the price level with interest rate hikes.

... The intensifying fall of the US dollar, depriving commodity exporters whose exports are traded in dollars of real revenues at a time when many minerals and agro-commodity prices, outside gold, oil and gas, remain at low levels, or suffer from very high volatility, is itself a downside factor for world economic growth, and a guarantee of future supply shortage through investors delaying decisions to take risk in the face of volatile prices. Yet recourse to the interest rate weapon when or if oil prices climb through sensitive and psychological barriers, like the $40 - $45/barrel range, could well intensify the flight from the dollar rather than bring it rapid new strength, while the UK pound might be shielded to some extent by its declining petromoney status, before it is almost inevitably abandoned with UK entry to the Euro. Overall, any use of the interest rate weapon in the face of fast-rising oil prices would likely entrain an OECD-wide recession, and further destabilize the lengthening list of ‘emerging’ economies such as Russia with highly unstable national currencies, severe debt, and major financial restructuring burdens....

... Annual demand increase on a worldwide base is forecast by many influential sources (like the US EIA and OECD IEA) as likely to be above or close to 1.6 Mbd. In much less than 6 years, at that rate of demand growth, a “new Saudi Arabia” is required to satisfy the increase in world demand. Taking account of depletion, this horizon is reduced to around 2 years. No “new Saudi Arabias” will be discovered, proven, developed and produced at this rate. As the special case of Iraq shows, major producers can almost overnight collapse, with restoration of production able to cover national or domestic demand taking many months through 2003. Oil exploration-development, still at a low level for a mix of reasons (including declining prospectivity or success rates), has resulted in an inevitable fall in annual discoveries, that are at best one-third to one-fifth of annual consumption on a worldwide base....


Just How Much Oil Do the Oil Companies Have? (2)

Whatever the financial story, when it comes to increasing physical energy assets, it has been a bad quarter century for the universe of large oil companies that EIA tracks.  The privately-owned oil companies haven't been able to replace their crude oil reserves over the period, and have only barely managed it for natural gas reserves.  Meanwhile the demand those same companies must satisfy has grown very rapidly.  For the most part that demand is being met at the margin from reserves owned by state-owned companies abroad.  Note that while this is true for the group, some individual oil companies have done very well in replacing both crude and natural gas reserves. 

				     1977	     2002	  Difference	% Change
Crude & Natural Gas Liquids (M Barrels):
   Net Ownership Interest Reserves:
         Domestic, Total 	 25,861,826 	 16,131,887 	 (9,729,939)	-37.6%
         Domestic, Onshore	 23,424,489 	 11,652,226 	(11,772,263)	-50.3%
         Domestic, Offshore	  2,437,337 	  4,479,661 	  2,042,324 	 83.8%
         Foreign, Total	 	 14,345,475 	 18,744,396 	  4,398,921 	 30.7%
   Total, Foreign and Domestic	 40,207,301 	 34,876,283 	 (5,331,018)	-13.3%
Natural Gas (MMCF):
   Net Ownership Interest Reserves:
      Beginning of Period
         Domestic, Total 	123,553,978 	 87,999,728 	(35,554,250)	-28.8%
         Domestic, Onshore	 96,372,134 	 68,514,618 	(27,857,516)	-28.9%
         Domestic, Offshore	 27,181,844 	 19,485,110 	 (7,696,734)	-28.3%
         Foreign, Total	 	 48,547,036 	 84,707,105 	 36,160,069 	 74.5%
   Total, Foreign and Domestic	172,101,014 	172,706,833 	    605,819 	  0.4%
Source: EIA

Russia's Warning to OPEC

The Russian oil minister Igor Yusufov has warned OPEC to back off. q.v. "If OPEC continues to suppress output, western oil countries won't be able to handle the added pressure. It isn't correct to take advantage of your partner at a moment of weakness."  This is a very polite way of suggesting that it is not a good idea to take advantage of the US while it is still reeling from its mistakes and loss of face, and while it hasn't yet understood the damage being done by another six months of oil prices above $30 as it tries to recover from a recession. True, there is a dark irony in the president's political power base, the oil patch, working over its boy as he prepares to seek reelection: they had better come up with some oil price relief fairly quickly because it certainly hasn't been a good couple of months for him politically.  He has the right to expect that the economic recovery he paid so heavily for (and the rest of us will keep paying heavily for indefinitely), should produce a visible employment boost, but it hasn't.  It may still come in time to be a factor in the election, but there are reasons for the administration to be worried. 


Will the Energy Bill Make a Difference?

It will be expensive. No question there. But will all that money be worth it? Just how much will the real world change? EIA has taken a crack at analyzing what effect, if any, the final conference energy bill would have assuming it were enacted compared to EIA's most recent business as usual forecast.  Here's the summary:

Much ado about nothing, thinks Pete. Congress is just not good at energy policy and is never likely to be. Bring back the Energy Czar.


Just How Much Oil Do the Oil Companies Have? (1)

With the Royal Dutch write-off of 20% of its petroleum reserves, and El Paso's write-off of 40%, investors have every reason to worry whether what they thought were assets really are.  It can be a difficult question because what qualifies for a booked reserve for SEC reporting purposes is not necessarily the same for other reporting purposes, nor for project financing.  Investors are used to thinking of oil company reserves as analogous to, say, warehouses full of Tide when considering Proctor & Gamble's working inventory, but they aren't that analogous.  Even though it is not supposed to be more art than science,  there have always been subjective issues that must be considered when valuing oil reserves, such as whether the reserve can be economically produced at current market conditions, in addition to the level of certainty over the threshold question of whether they even exist in the first place.  Reserves are really something you know only after some experience with the field, whatever the initial flow rates and saturation zone data may have been.

Even so, such large write downs are painful for all who put credence in the earlier numbers. A recent study by the consultancy Wood Mackenzie has reportedly shown there is more of a problem than most supposed.  They found that reserves held by the top 10 oil companies, ranked by market capitalization, were mostly resources found years before but never booked as reserves. So if the companies reported to the SEC that they'd increased reserves by an additional 9.53 billion barrels for 2002, new commercial discoveries amounted to only 3.34 billion barrels, the rest being revisions and extensions of known but never booked resources discovered previously. In addition, they reportedly found that for 2001 and 2002 the cost of  exploration exceeded the value of new discoveries. 


Projected Global CO2 Emissions

Source: NASA, Can We Difuse the Global Warming Time Bomb? q.v.  Note: Scenarios refer to a range of scenarios modeled by the Intergovernmental Panel on Climate Change. See source for further information.

While on the subject, no more Los Angeles after 2050? q.v.


The Past as Prolog

Aficionados of energy forecasting history, and anyone else surprised by what they've been paying for natural gas, may be interested in the domestic petroleum industry's attempt to put EIA straight on what was about to happen. Acting through DOE's Office of Fossil Energy, six industry trade associations tried to explain what was going on with natural gas depletion.  They took great trouble to specify realistic modeling values for key parameters, and to develop a series of credible alternate cases to capture what was about to happen. q.v. They weren't exactly doing it from unselfish motives, since they hoped to make it known how important production from the major Rocky mountain provinces would be in the future, and how much of that production was locked in by regulations they hoped to remove.

Unfortunately, it didn't work. EIA did run the cases through the National Energy Modeling System (NEMS). The results showed dramatic changes over the reference case ("In 2010, the lower 48 wellhead price of natural gas in the Accelerated Depletion Case is projected to be $2.62 per thousand cubic feet—14 cents higher than in the Reference Case (all prices in 1998 dollars). By 2020, the wellhead price in the Accelerated Depletion Case is projected to be $4.12 per thousand cubic feet—more than double the 1998 price and $1.33 higher than in the Reference Case."). The industry got the conclusion it wanted ("These results suggest that at least in the short to medium term, the potential negative effects of accelerated depletion could be offset to some degree by more research and by expanding the areas where exploration and production is allowed."), but overall EIA dismissed the whole exercise as contrary to historical depletion rates ("The assumptions used to create the Reference Case specifically extrapolate from historical trends, whereas the assumptions used in the Accelerated Depletion Case were chosen to illustrate a scenario in which the effects of depletion are more acute then they have been historically. Therefore, the Accelerated Depletion Cases, which illustrate how the effects of depletion may become increasingly important in the decades to come, should be seen as sensitivity cases rather than forecasts.")

So, preferring history to current reality, EIA's forecasting chief, Mary Hutzler, offered testimony before Congress (q.v.) in 2001 that proved woefully wrong ("The average wellhead price of natural gas is projected to increase from $2.17 per thousand cubic feet in 1999 to $3.13 per thousand cubic feet in 2020," for one instance), cost everyone who had deployed capital in non-energy sectors a fortune, and reaffirmed the agency's long-standing inability to get gas right. To its credit, EIA has since realized that there was reason to accept what the natural gas industry was trying to tell it and has adjusted its forecasts accordingly. But the damage has been done.


OPEC Situation

 

 

11/01/2003

 

January 2004

 

OPEC 10 Quota

Production

Capacity

Surplus Capacity

Algeria

782

1,200

1,200

0

Indonesia  

1,270

980

980

0

Iran  

3,597

3,800

3,800

0

Kuwait  

1,966

2,200

2,200

0

Libya  

1,312

1,420

1,420

0

Nigeria  

2,018

2,300

2,300

0

Qatar  

635

750

850

100

Saudi Arabia  

7,963

8,700

10,000 - 10,500

1,300 - 1,800

United Arab Emirates   

2,138

2,250

2,500

250

Venezuela  

2,819

2,450

2,450

0

OPEC 10  

24,500

26,050

27,700 - 28,200

1,650 - 2,150

Iraq  

 

2,100

2,100

0

Crude Oil Total  

 

28,150

29,800 - 30,300

1,650 - 2,150

Other Liquids  

 

3,730

 

 

Total OPEC Supply  

 

31,880

 

 

Notes: Units are thousand barrels per day of crude oil production.  Source: EIA Short-Term Energy Outlook -- February 2004See source for notes.  

OPEC's task is tricky: it must quickly cut prices to avoid damage to the world economy while simultaneously preparing for the normal spring seasonal decline in demand. It has announced a 1 m/b/d production cut, reasoning as follows, 

"... Crude oil prices have remained high since our last meeting on 4 December, and there have been calls for OPEC to raise its output ceiling to help bring prices down.

OPEC is sensitive to such calls, especially when they come from other responsible members of the global energy community. Indeed, our own day-to-day monitoring of oil market movements itself picks up the same signals. We take these situations very seriously, because we know that, if oil prices pass certain threshold levels — either upper or lower levels — they can have an adverse impact in a broader economic and political realm, which may ultimately rebound on the petroleum industry.

Why, therefore, have we not taken action on price levels which have consistently exceeded the top end of our price band of US $22–28 a barrel for OPEC’s Reference Basket since our December meeting?

The principal reason is our judgment that the oil market is already well-supplied with crude. However, the benefits of this are being mitigated [sic, perhaps they mean negated] by low crude oil inventory levels in the USA, excessive speculation and continued geopolitical tensions.

In particular, prices are being affected by US crude oil stocks falling beneath the perceived lower minimum operating levels in a regime of just-in-time inventory policies and the high level of non-commercial speculation. These destabilising forces are, to a great extent, treatable, but they are beyond the reach of OPEC...." [q.v.]

Pete finds the 'you-have-only-yourselves-to-blame' quality of this argument a bit farfetched. OPEC should go back to the charts to see what happened to its collective lot last time the oil price was kept this high this long (below).  


Winter Heating Expense

Here's EIA's assessment of how much it's costing consumers to get through the winter:

According to the analysis, winter 2003-2004 national averages will be generally more expensive than the previous winter: natural gas-heated homes: up 11 percent; heating oil users: down 1 percent; propane-heated households: up 7 percent; and homes with electric heat: up about 2 percent.  But consider how far prices have moved from the final Clinton years, and keep in mind that this year there is no nice tax relief to help get everyone through.


Natural Gas Background Data

Source: EIA Note Louisiana included federal off-shore GOM through 1996.


The Pie:  World Oil Consumption in 2001

Source: EIA


Where the Oil Companies Are Placing Their Bets

  FRS Company Regional E&D Expense

1996

1997

1998

1999

2000

2001

2002

U.S. Onshore

7,913

13,020

13,460

6,570

27,089

24,244

22,330

U.S. Offshore

6,719

8,826

10,968

6,917

20,955

9,614

9,482

   Total United States

14,632

21,846

24,428

13,487

48,044

33,858

31,812

Canada

1,565

1,998

4,806

2,056

4,881

15,324

6,687

OECD Europe

5,567

7,052

8,586

4,137

7,520

5,373

9,794

Former Soviet Union and Eastern Europe

461

628

1,267

606

893

881

1,273

Africa

2,793

2,978

3,134

3,094

2,719

5,547

5,091

Middle East

463

643

942

393

550

739

774

Other Eastern Hemisphere

4,132

2,984

3,949

3,442

6,787

4,991

6,195

Other Western Hemisphere

1,637

1,648

3,709

3,790

5,448

3,090

1,558

   Total Foreign

16,618

17,931

26,393

17,518

28,798

35,944

31,372

      Total Worldwide

31,250

39,777

50,821

31,005

76,842

69,802

63,184

Source: EIA. Note: FRS companies represent the collection of primarily large international oil companies that report to the financial reporting system maintained by EIA.


It's an Ill Wind That Blows No Good

... so Pete was delighted to hear that his favorite Swiss legislator and long-time wind enthusiast, Rudolf Rechsteiner, had new information for readers:

Still reading and enjoying your comments. The interesting thing about your recently published graphs from EIA is the low cost of wind power that is for the first time revealed officially. Thank you! For the first time it is rated as cheapest electricity generation in 2010. And this price estimate for sure can not go but to the downside, because primary energy (wind) is free.*

The rising cost estimate for 2025 IMO is not comprehensive, because wind power costs will drop with rising production and size of turbines in coming years. The US has a huge potential to fill all its electricity needs by wind. What is missing are transmission facilities. AWEA [American Wind Energy Association] has done some interesting lobbying around this.

Maybe you find time to write about this. I give you some links on Europe an studies on that:

- Trans-Mediterranean Renewable Energy Cooperation “TREC”
http://www.iset.uni-kassel.de/abt/w3-w/projekte/TREC.pdf

- Global Renewable Energy Potential and Approaches to its Use http://www.iset.uni-kassel.de/abt/w3-w/folien/magdeb030901/

- High wind power penetration within huge catchment areas shown in an European example http://www.iset.uni-kassel.de/abt/w3-w/projekte/awea_2001_czisch_ernst.pdf

*Pete notes that the primary energy source may be free but someone has to pay for the cost of required, non-wind backup capacity, or the turbines, or the transmission facilities, or all three.  Still, none of the three documents can be faulted for not thinking big.  For his part, Pete is astounded by the apparent European political proclivity for continent-wide wind schemes (boondoggles?).  Certainly before it goes too far and costly damage is done, he hopes someone looks into the real effect of transmission line losses, and the cost of having to install a natural gas-fired backup system capable of replacing at least a quarter (and perhaps a much larger slice depending on how responsible one wants to be) of installed wind turbine capacity.  That the wind reaching any given turbine is intermittent cannot be overcome by assuming that some other turbine a thousand miles away will be receiving wind.  Even if it were true, it does not mean that second turbine alone can produce economically viable electricity for the market near the first turbine, even if both turbines are connected to the same grid.


EIA's Forecast

Key bits of recent mid-term EIA forecasts haven't been worth the pixels required to display them, and pixels are free. So the fact they're out with another is more a tribute to the passage of time than a correction to Mary Hutzler's forecasting myopia. But in fairness, EIA has tried to rethink natural gas and no longer expects the system to deliver 35 Tcf for $2.50/Mcf, or what ever it was. Here are a few of the charts Pete found most interesting, but the whole shooting match is available. q.v.

Figure 2. Energy consumption by fuel, 1970-2025 (quadrillion Btu).  Having problems, call our National Energy Information Center at 202-586-8800 for help. Figure 43. World Oil prices in three cases, 1970-2025 (2002 dollars per barrel).  Having problems, call our National Energy Information Center at 202-586-8800 for help.
Figure 17. Major sources of incremental natural gas supply, 2002-2025 (trillion cubic feet).  Having problems, call our National Energy Information Center at 202-586-8800 for help. Figure 71. Electricity generation capacity additions by fuel type, including combined heat and power, 2002-2025 (gigawatts).  Having problems, call our National Energy Information Center at 202-586-8800 for help.
Figure 11. Conventional onshore nonassociated natural gas reserve additions per well, 1990-2025 (trillion cubic feet). Having problems, call our National Energy Information Center at 202-586-8800 for help. Figure 72. Levelized electricity generation costs, 2010 and 2025 (2002 mills per kilowatthour).  Having problems, call our National Energy Information Center at 202-586-8800 for help.

On Oil Price Levels and Demand

Andrew McKillop has sent in a report on the oil price outlook: "  ...  There can be legitimate concern that over-rapid and overlarge oil price rises might trigger a defensive strategy of interest rate hikes, to strangle economic growth and oil demand in the OECD countries. However, the real world, real economy impacts of the effective 230% price rise for traded oil through 1998-99, followed by fast rising natural gas prices in the US market, underlines the simple fact that effective and real energy prices are far below any ‘recession trigger’ level. The fragile oil supply environment is itself a permanent risk of runaway price rises when or if there is a supply interruption or cut of no more than about 3 Mbd, that continues for more than a few weeks. Taking the 3-year period of 2002-2005, the maintenance of current average growth rates for oil demand (about 5 Mbd in 36 months) will certainly outstrip OPEC production raising capacities, resulting in Russia becoming the only possible ‘wild card’. In the present context it is highly unlikely that substitute supplies could be made up: prices might be bid up through successive ‘barriers’ such as $50/bbl and $75/bbl, before defensive interest rate hikes were decided.   ...  "  To read the report, click here

As mentioned before, Pete disagrees.  OPEC and the oil industry are flirting with another recession pace 79-82 and the extraordinary consequences post 1985:

Even though prices came down after the late seventies spike, they did not come down fast enough to prevent a second recession.  Note the similarities to the current situation ...

They would do well to moderate oil prices and even bring them down somewhat. If the Chinese follow through with assurances to suppress internal demand growth for a while, it may be possible to keep the recovery going.


Relative Gasoline Demand: Germany v. US

How low can Germany go?US keeps on using more and more

Source: IEA


Red October

Figure 1.  October 2003 Temperature Anomalies

October was not only the hottest ever, it was 0.6 degrees Celsius hotter that the long-term mean.  Not a good month for the administration's rope-a-dope climate change policy.

According to Pete's sources, "From January of 1981 until November of 2003, 61 monthly assessments tied or exceeded any prior temperature for that particular month, according to the NASA GISS global mean anomaly that attempts to measure surface temperatures from both the land and oceans.  There were 285 opportunities in this period, so we have set monthly records once every four to five months, since [the late 70s].  There is nothing really 'new' about Red October, other than since the 1998 El Nino was such a hum dinger, it has taken us 60 months to overtake that prior peak and regain the high ground wherein the normal statistical potential for a monthly record is re-attained."


Which is the Better Nuclear Strategy: Once-Through or Breeder?

Graham Cowan writes from Canada with a reaction to Gavin Longmuir's comments q.v. on liberals and energy policy:

Gavin Longmuir's heart seems to be in the right place but without explanation he predicts dire consequences if we don't build breeder reactors.

Maybe he thinks solar energy can't work, but he mentions only photovoltaics, not the large-scale concentrating thermal approaches that seem more practical, and indeed even on a small scale were briefly competitive 90 years ago (http://www.solarenergy.com/info_history.html). Those engines worked only when the sun shone, but the intervening years have seen ways around that both proposed (make boron while the sun shines, I say) and demonstrated (heat molten salt as Solar Two did).

Maybe he thinks a real uranium shortage could be closer to us, timewise, than the signing of the Magna Carta. No. No chance, no how, no way. 

For electricity production, once-through uranium burner reactors have mostly shut down oil burners. Since petroleum costs ~US$30 per barrel, versus uranium's present cost for these reactors of US$0.36 per barrel-of-oil-equivalent (BOE), that's never going to be undone.

Breeder reactor advocates commonly predict that only 200 trillion to 300 trillion BOE of uranium can ever be found that costs less than US$0.80/BOE to mine. In so doing they are, of course, on the pipe. Averaged over good years and bad, the recent cost of finding very high-grade uranium ore in northern Saskatchewan has averaged less than ten cents per BOE.

But suppose they were right. Suppose in only a few decades uranium miners were going to stop supplying BOEs to burner reactor operators without the bid improve to a dollar-ten or even more. How long could that go on? 

According to Deffeyes (of recent oil-depletion repute) and MacGregor, "World Uranium Resources", Sci. Am. January 1980, a tenfold decrease in the minimum recoverable ore grade for a mineral that, like uranium, has numerous different potential ores increases the amount available 300-fold.

I must apologize for the inexact memory that led me earlier to unknowingly change the "tenfold ore grade decrease" part of the rule to "tenfold price rise". Thus garbled, the rule predicts that raising the maximum bid from $0.80/BOE to $5/BOE will increase uranium supply by a factor of 300^(5/0.8/10), i.e. about 35-fold. Instead of two hundred billion BOE, 7 trillion BOE should become economic.

Does the modified rule seem to be making sense? The example of the 400 trillion once-through BOE of uranium in the ocean suggests it's a little pessimistic. A price rise that makes it economically feasible to win half of this increases reserves 1,000-fold rather than 35-fold, and the base-300 logarithm of 1,000 is near 1.2, so from the US$0.80 limit that is used for making misleading predictions of uranium scarcity, it should be a 12-fold rise. The most expensive of those 200 trillion BOE should cost US$9.60. However, Japanese experiments -- abstract at http://tinyurl.com/2x8f7 -- suggest the cost of extraction would really be US$1 to US$2 per BOE.

I turn now to the Paks accident [in Hungary that Pete] mentioned a few weeks ago. The IAEA has assessed it (http://tinyurl.com/2m233). In general, if your readers need to be quickly apprised of power system accidents not involving reactor core damage nor off-site radiation injury, you might do well to refer them to a compilation like this: http://tinyurl.com/x3l2 .

--- Graham Cowan  -- How cars gain nuclear cachet


US Oil and Gas Reserves: 1977 to 2002

Longer-term reserves picture

Source: EIA

The oil industry's record over the quarter century looks relatively impressive to Pete.