As you go
further back in time, fewer links actually work. So it goes ...
The Problem List Grows Longer
Back in the days when there actually
was a military industrial complex, and the idea that a firm like, say,
Halliburton, was in any way a key part of it was laughable, many powerful
people would be getting a bit nervous looking at the geopolitical state
of play. Here for instance is EIA's list of hotspots where
petroleum is produced and an indication of what the problem is or will
Armed militants have confronted gov't
Large reserves of NG (24 Tcf), exports
may be delayed due to controversial new laws unfriendly to foreigners
BTC [pipeline] opened, many ethnic conflicts, high
expectations for future oil production, no maritime border agt.
Strategic transit area for NG and oil
Destabilizing force in S. America, oil
exports subject to attack by protesters, armed militants
Meanwhile the remains of the
military-industrial complex are still turning out useless anachronisms
like nuclear submarine missile platforms.
The Fix Is In,
Or How Pete Took Over the Plunge Prevention Team
We all agree these are perilous times. A national
catastrophe has occurred and the market has yet to fully digest the
implications of living without an appreciable fraction of its oil and
gas, let alone that fraction of supply and demand generated along the
gulf coast. Ugly rumors surface about the extent of the
bankruptcies and disruption that will inevitably happen. It is said that
shadowy meetings at the Federal Reserve are mapping a way out, or
staunching the damage, or what? Who knows? A group in Canada has
charged that the US government has been actively intervening in the
stock markets to prop them up.
qv2. The charge is that an elusive, secret group inside the US
government, known as the Plunge Prevention Team and established by
Treasury Secretary Robert Rubin during the Clinton Administration (now
with Citigroup), has played
an unspoken but very significant role in maintaining our collective
financial well being. You may well wonder how Pete ended up
its chairman. [continued]
of Louisiana off-shore damage are in.
The circus comes to town:
the political class drags before itself the rich, hapless
pirates from the oil patch. Will some one please say they're sorry and
look sort of sincere about it? Note to Congress: force majeur is not
the same thing as price gouging.
What's an oil minister here
or there? Iran has gone through four of them in recent weeks.
NY Times begins to understand
the dangers of natural gas this winter.
The Saudi oil minister on the
need for additional oil deliverability
q.v. That is,
Exxon, BP, Shell: build some refineries with some of your loot.
On not confusing current
petroleum market conditions with peak oil.
Greenspan may have whipped
deflation but can Bernanke master the consequences? Grant warns.
What is the North Atlantic
oscillation and who will it be keeping cold this winter?
Why the dollar didn't tank--
it seems Congress offered a one-time amnesty-like provision that allows
multi-nationals to repatriate foreign profits at a special low tax rate.
Good jumping off point with
links to many of the important things happening in Canadian energy.
q.v. Pete's view
remains that while Canadian coal seam methane can't save us this winter, it
can make the next decade a lot better by reducing the need for so much LNG.
State energy officials on the
need for a greater federal role in getting people through the winter.
State by state laws or
proposals on price gouging.
The American Bankers
Association reported that consumer credit card delinquencies reached a
record high. Nearly 5% of accounts were delinquent in the second quarter.
What will $3 gasoline and $14 natural gas do? Well, you can always refinance
the house again, right? Yes, but be warned: Alan Greenspan appears to have
decided that he was wrong all along and there really is a housing bubble.
qv3 Too bad he won't be around when it bursts.
Foreign oil firms doing
business with Venezuela have a new partner who's in for a 60-80% share.
Guess who? Maybe windfall profit taxes really aren't all that bad after all.
On historical forecasts of
consolidation of oil and gas positions continues.
GM recently purchased to full
pages of the New York Times to announce that it had nine cars available for
consumers that get more than 30 m.p.g.
The Iran oil bourse, whatever
that may be, will price oil in Euros.
Liquidity floods: how many
know that the Bank of Japan's balance sheet is now the size of 30% of
Japan's GDP? q.v.
"The average US
family spends $1.22 for every dollar it earns, has 13 credit cards and
$9,312 in credit card debt – twice as much as 10 years ago, according to
Anyone can rack-up popularity points while the ratio
is declining, but who can govern when it is not?
Oil Prices: Geopolitical Spin
It has always been Pete's policy to steer clear of the
political currents affecting the Arab-Israeli conflict, divisions within
Islam, and so forth. But readers in the rest of the world who
wonder how the American public can support such peculiar policies in the
middle east may find the PBS production, "The Road to 9/11"
interesting, if only as an instance of a flawed attempt to set the
mental weather. Even though most of the show is a fairly standard
recital of recent history, there is a troubling overlay that purports to
explain that history. (Hint: Islamic fundamentalists are nazis at heart and the Saudis are the
bad guys). The trouble is that it works all too well.
Oil Prices: How Much Is Too Much?
Leigh Yaxley, a Petroleum Engineering Manager based in
Indonesia, has sent in an analysis of the issue.
suggests that the key ratio is the percentage of GDP spent on net oil
imports. Based on the economic downturn following events in the late
1970s / early 80s, he believes that a sustained period where the ratio
exceeds1.5%will bring on stagflation.*
*It is worth noting that Saudi Arabia may have a
similar view, as it has taken unilateral steps to reduce the selling
price of its marker crude. It also should be noted that net oil imports
currently account for a smaller fraction of total imports than they did
Oil Prices: Who Said $70 Oil Was a Good Thing?
Oil prices mckilloped up through $70 / bbl. and the
economy refused to tank, just as the master* predicted. While a
few observers noticed the fed had thrown caution to the wind and had its
collective foot no where near the hose, one must give credit where due.
The new oil price regime was undoubtedly helping provide some incentive
to transition to whatever comes next and as far as anyone knows, the
economy, if not booming, was certainly holding its own.** So McKillop had
been right all along.
Regrettably, Pete, last seen cowering in the shadows
with both hands protecting his head and muttering something about the
sky falling, was not his usual magnanimous self and refused to
acknowledge McKillop's obvious prescience. He had just bet the farm on
Walmart puts (metaphorically, that is), and was too busy pondering the damage to energy
*Andrew J. McKillop, author of Why We Need $70 /
Price Signals for Energy Transition
q.v. etc. that appeared on these pages several years ago. **Second
quarter 2005 GDP was growing at 3.3%.
Background - US Energy Production and Consumption
Energy Production in
the US Economy
Capita Energy Consumption
per Dollar of Real Gross Domestic Product
The juicy parts, in Pete's view. Of course, the real
picture is far more complex. See the full report.
From a Future History
"...There is no support for the idea that the First Energy
War was caused by the impotent Energy Policy Act of
2005. Whatever its obvious deficiencies as policy, the act
represented the best the US political system could offer after years of
trying. The problems it failed to address were neither new nor difficult to
understand technically, but they lacked a politically tenable solution. Over-reliance on fossil fuels had been ignored for a generation, and
the situation was passed down from one Congress
to the next with much hand wringing but without noticeable change. Quite
simply, there was no constituency for the drastic revamping of American
life that would be required to deal with either the coming petroleum
shortages or global climate change. The people who had fashioned a
totally new way of life following World War II, based on removal of
transportation constraints and cheap energy, proved incapable of
adjusting to life
not only without SUVs and the suburbs, but above all without secure and
reasonably-priced energy supplies. When the act at last was signed, to no fanfare, the economic system
shrugged and sent energy prices even higher. However clear and
long-standing the warnings, Americans continued to live as they
US democratic institutions retained a
superficial semblance of functioning throughout, but had already failed at a deeper
level, particularly the links between the economic and political systems. The economic damage caused by the inexorable redirection of
capital and savings away from the advanced elements of the American
economy back into the primitive energy economy grew worse over time
until little could be done to correct it, even though the domestic
energy sector was incapable of providing a remedy. The famously
flexible economic system that had always managed to adjust to each new
situation, and had just embarked on globalization in the fullest sense, grew less and
less capable of providing what Americans had come to expect once
resource constraints took hold. Levels of debt reached record
proportions and continued to grow without corresponding increases in
real income, external payment flows gradually
hardened into structural disequilibria, the pension system started
to fail, bankruptcies grew, interest rates rose, and the dollar
threatened to collapse. Added to the chaos was an ineffective war undertaken in the
mistaken hope that the components of Islam could be remade into
democratic pluralist states.
The initial financial crisis struck toward the
end of 2009, but it was the military crisis that followed two months
later that caused events to spin out of control. For more than two
decades, the governments of the oil importing countries had been
laying plans for just such an eventuality. Finally, for reasons
still not clear but having to do with fear of inadequate future
petroleum supplies, the Indian intelligence service used a false
flag operation to induce Iranian terrorists to detonate a radiation device in Washington, DC. Without
hesitating, the Americans moved residual troops from Afghanistan and
seize oil facilities in southern Iran and throughout the Middle
East. However, the Americans were taken off guard when the Chinese
quickly dropped troops into Indonesia, western sections of
Kazakhstan, and portions of Siberia. The Europeans, Russia, and
Japan followed these events with a general mobilization and demands
that China and the US withdraw. Within days, the situation lapsed
into a bitter stalemate which lasted for several months as the
Americans pieced the real story together, but behind the scenes two
makeshift coalitions were being formed. ... "
What Kind of Handshake Is This, Anyway?
Must be one of those "We'll supply the money, you
supply the oil" handshakes. Presumably that's the reason US
Secretary Snow is shown with Canadian Finance Minister Ralph Goodale at
the oil sands facility at Fort McMurray, Canada instead of
US Energy Secretary Bodman. But who'll supply the natural gas?
Pete hopes this doesn't mean Secretary Bodman has
already attained the obscurity that his recent predecessors achieved.
The Growing Capacity Dependence of the US Refining
As US petroleum demand has grown, there has been a
decline in the portion of petroleum products supplied to the domestic
market that was refined by US based capacity.
Refining Sector: Refining Capacity v. Actual Petroleum
(Thousand Barrels per Calendar Day)
There are many potentially valid commercial reasons to
import product refined abroad, ranging from lower labor costs to the
absence of EPA regulations. But there are also national security
consequences and potential regulatory problems when the lack of adequate
US capacity causes prices to spike as happened earlier this year.
The growing use of off-shore refining is in itself a form of energy
dependence, but unlike crude oil dependence, is a potential source of
weakness that can be readily addressed by government policy.* **
*As Jim Williams has pointed out, these numbers are
probably understated.**Apparently, Sec. Bodman agrees, perhaps a bit
The Reality Facing Ethanol and Biodiesel
The problem with ethanol and biodiesel is not that
they don't work: in the right configuration they both work well as fuels. The problem is they consume more energy in
production than they make available as fuel.
q.v. According to the referenced study,
requires 29 percent more fossil energy than the ethanol
switch grass requires 45 percent more fossil
energy than the ethanol produced;
wood biomass requires 57 percent more fossil energy
than the ethanol produced;
soybean plants requires 27 percent more fossil
energy than the biodiesel produced, and
sunflower plants requires 118 percent more fossil
energy than the biodiesel produced.
There's nothing new in this; the net energy problem
has been known for a long time. But subsidies to grow plants for
fuel remain wildly popular politically, however much they cost, because
most other agricultural subsidies are scheduled for phase out, and
people love the idea of using renewable plants to replace non-renewable
fossil fuels. And so there is
always a very vocal segment pushing the strategy despite it's inability
to produce fossil fuel savings. Unfortunately, Congress has yet to catch
on, much like the
businessman who thought he could make up a unit loss per item by
increasing sales volume.
Nick has written in to suggest that readers may be
interested in some of the links mentioned in the article that draw
different conclusions, "...In the
first, we have, 'In the United States, ethanol yielded only
about 10 percent more energy than was required to produce it...'
which is at variance with the article you linked to. [The article] adds, ' in
Brazil, where a different process is used, ethanol yielded 3.7 times
more energy than was used to produce it.' Interesting. The
second article is about a new process that, '..will allow
ethanol to become economically competitive with fossil fuels for the
first time.' Also, 'His ethanol genes served to redirect the
digestive processes in these bacteria to produce ethanol at 90 to 95
percent efficiency.' "
*Pete apologizes for originally putting methanol when
ethanol was meant.
Deep Gas Right Instead of Getting LNG Wrong
The US energy jones is about to start getting really
nasty. The petroleum industry and the government, having totally
misunderstood as recently as 2000 what was going to happen to the
natural gas supply beginning now, are really panicked. Several
dozen crash LNG projects are all on the fast track, being considered by
good old FERC on a myopic case by case basis, and pretty soon a growing
part of the natural gas 56 million American families use to cook their
food and heat their residences will be brought in (at what threatens to
be ungodly expense) from the same unstable regions that provide export
oil. But unlike oil, where bidding up the price can resolve any
short-term supply problems, natural gas dependency is fraught with
danger. Miss a half dozen shipments through political action or
terrorism or what have you in the early stages of a bad winter, and
suddenly not just the region where those supplies were destined, but the
system itself, that has a big, big problem. And it's not the sort of problem
you can buy your way out of, or send in troops to cure. True,
there is already a small trade in LNG and it has worked out fairly well,
but that doesn't mean much. LNG is not the sort of dependency a rational
government would ever choose. Nor has the government set aside any
natural gas in the equivalent of an emergency reserve the way it has
done for oil, despite the more dire
The point is that there are alternatives. The first is
to relieve some of the demand pressure on the system by getting as many
electricity producers using gas year round off the system as soon as
possible. This can be done by requiring all new and larger existing
non-seasonal gas-fired turbines to demonstrate actual alternative fuel
capability or other replacement capacity. The second is to try and
figure out what, if anything, is happening to traditional proved
reserves. On the books, at least, gas supply is a non-problem over
the near term, made
even more of a non-problem by prices persistently higher than $5 per mmbtu over the past several years.
According to the formal reserve accounts filed by petroleum companies
for years, there should have been plenty of
conventional proved reserves to get the US through at least the start of
the new millennium, so where are they? Who's playing games?
But the most
import thing to do is use available non-conventional domestic supplies
including those most people know nothing about.Of
the non-conventional supplies, the most important is gas trapped in tight
sands in Wyoming and other parts of the west. The importance of this
resource for the future is already well understood, and sufficient
efforts are being made to develop it.
This, however, is not the
case with shallow-water deep gas (sometimes known as geopressurized
methane; others call it deep shelf gas). This is gas, at least 55
Tcf worth in the federal offshore, drilled from platforms located at water depths of less than 600
feet, but only accessible by drilling to 15 thousand feet or more.
The onshore amounts are not known but are also believed to be
substantial. Drilling that deep is very expensive, and the same technology
that guides drilling choices in conventional geologic structures doesn't
apply in quite the same way since the methane is not trapped in rock but
dissolved at great pressure in the brine, so the risks are far greater.
Even so, there are lots of companies
that either have deep shelf projects (Anadarko’s Hickory, El Paso’s ST
204, and Shell’s Alex Discoveries) or are just starting them (McMoRan’s
“JB” Mountain and Mounds Point in South Marsh Island). This resource
should be given top priority. Interior's Mineral Management
Service already has special incentives,
but more companies, including those fronting big LNG facilities, need to be involved. It should be possible to quickly
boost production from this source and rely on it until the new pipeline
from the north slope can be built.*
And while at it, why aren't restrictions removed so
someone can drill that humongous amount of conventional gas lying off
the gulf coast of Florida? Once that has been done, then we can talk
about the 600 Tcf of Canadian coal seam gas waiting to be developed, or the 100,000 Tcf of gas
hydrates that could/might also be used. There are many
alternatives that can staunch the threat posed by LNG and they need to
be brought on line as the need develops.
*Peter Hunt writes with the fascinating suggestion that
readers wishing to know more about deep gas recovery should read the
original oil company patents
qv2 on how it can be done and what proportions will be recovered. He
agrees that it's a cheap bet that should be reexamined.
Background - Expected World Natural Gas Consumption
That capacity factor can't go up forever, so time to
add some more capacity -- a lot more as part of an overall
electrification strategy, thinks Pete.
Exxon's Quick Guide to Future Oil Demand
China Buys Into
the Oil Patch?
With the US Congress busy thinking up
protectionist schemes to apply against China for buying too much US
treasury paper instead of converting trade surpluses back to yuan,
China's national oil company offered to buy Unocal for $67 all cash per
q.v. Chevron thought it had already bought the company with its $62
cash and stock bid the previous month. While only 27% of Unocal's
oil reserves are in Asia, 67% of its natural gas reserves are there, and
they are thought to be the interesting asset for the Chinese. But
who knows, it may be the oil, which may cause Congress, after the
apoplexy dies down, to politely explain that this isn't what they had in
it raises the question: what are trade surpluses if not a claim on US
assets, and since when can't the new owners of assets sell those assets wherever found
and send them to wherever they choose? Too bad for US geopolitical
interests in Asia, but the disadvantages of having neither trade
equilibrium nor an energy policy are becoming all too clear.
When in Doubt, Sue
Not having an inkling of what to do about
$60 oil, the US Senate has threatened to direct the Justice Department to sue OPEC.
q.v. Ah, the political class strikes again. Brilliant.*
*Of course, it's deja vu all over again.
Try entering 'OPEC antitrust' in the Google search for Pete's
flip-flopping opinion back in 2001 (see, Unsung Hereos).
With oil prices hitting new records, Pete was at a
loss for something sympathetic to say about oil exporters. So he
turned to EIA, and discovered just how tough the cartel business can be:
O for halcyon days of yore. *
* Pat Murphy writes in with the
observation, " Your chart showing oil revenues per
capita in OPEC would be even more interesting if it showed the per
capita total income and the per capita total income of the major oil
importing nations. It would give the Arab point of view.
To which Scott Wilkes offers, "I
would like to see two charts: One chart showing the
Saudi Royal Families per capita income from crude oil exports. The
second chart showing non-royal families per capita income. That,
Pat Murphy, would give the Arab people the proper point of view.
Sorry State of Iraq's Oil Industry
EIA reports that Iraq may possibly return to the
export capability that existed prior to two wars with the United States,
but it will be years before it happens.
q.v. A combination
of mismanagement, war damage, sabotage, and bad luck has plagued
petroleum operations and only a return to peace and the preconditions
required for major investment can help the situation. But when the
investment is made, it should be profitable, as Iraq has the potential
to be one of the world's least expensive producing regions.
Background: GM's Hourly Work Force
But that was before GM announced a
further reduction of 25,000.
worry, all you laid-off UAW guys, your pensions are secure and we're all
earning the benefits of globalization, right?
The Problem With
At long last, there are signs that the
system is finally beginning to catch on -- if you want even the
possibility of limited energy independence and think something major
should be done about global warming, the only reasonable policy is nuclear power. The time is right: the major difficulty with
nuclear is that it is highly capital-intensive to build the plants, but
capital can be rented free in real terms these days. The last time the
industry was looking to expand, around the time of Three Mile Island,
short-term money was going for 18%. Also, the vaunted alternative fuels
for generating electricity turn out not only not to be abundant, they
are in critically short supply and are priced accordingly, to the point that it
is a real waste to burn say natural gas to generate electricity, or run
city buses, or any of the other stupid ideas of the 90s.
The problem with nuclear is not that it
doesn't work extremely well -- the trouble is that the utility industry,
generally, is full of half-baked idiots who belong in another line of
work. The people in charge in the Clinton and Bush administrations
deregulated the electricity production industry and sold off most of the
best assets, leaving energy traders as the résumés of choice, under the
premise that whoever could purchase fuel feedstocks at least cost would
win the biggest rewards for shareholders.
So we end up not with Homer Simpsons in charge of nuclear, but with the
Jeff Skillings. And they, Jeff and his ilk, quite simply can't be
trusted with a technology as demanding and (potentially) dangerous as
nuclear power. Nuclear power requires skilled professionals averse to
risk, hedged to their eyeballs, willing to pay for whatever safety may
require, not riverboat gamblers with no spare capacity betting on how
high they can squeeze prices. As California proved in spades,
electricity deregulation doesn't really work unless it is really not
deregulation at all. It's analogous to airlines, you can't be
cutting corners, avoiding safety checks, dumping pension plans on the
government, and so forth, and hope to have an industry worthy of trust.
After all, no one other than a few executives benefited from
deregulation, ratepayers certainly didn't.
These comments have drawn a quick and
fairly decisive response. From Lisa Shell:
I understand your aversion to the
folks that drove Enron into the ground, but those kind of crooks do
not run nuclear power plants.
Furthermore, even honest CEOs, CFOs, and executives don't run the
plants. Highly-trained operators, engineers (like me), and skilled
I, and my colleagues, are the skilled professionals you speak of and
we do everything that safety requires not only because we are
ethically and professionally bound to, but because we work at and
live near the plants ourselves. Doing anything else would mean
jeopardizing our own health and safety and that of our families and
friends. Taking such risks is not an option.
Eric McErlain, Senior Writer and Editor, Nuclear Energy Institute
Nuclear Notes, :
With all due respect Pete, I've never met a more risk
averse and safety conscious crew than the folks in the nuclear energy
When it comes to industrial
security, there's nobody better than these guys, and to lump them
together with the criminals at Enron is unfair and inaccurate.
This didn't just happen overnight, but rather is the result of decades
of work from the nuclear industry, and the efforts of the
Institute of Nuclear Power Operators -- an organization that
effectively uses peer review (and pressure) to keep plants operating
safely and efficiently.
OK, Pete stands corrected as far as operating
personnel are concerned, but still thinks it is an interesting
question whether the dynamic created by deregulation is really the
one that will help the nuclear industry begin to grow again.
Are Likely to Restrain Transportation Fuel Demand in a Supply Emergency?
Source: IEA Symposium
q.v., estimates by Robert Noland, Imperial College, London
US Petroleum Imports Come From
Top 15 Sources of US Petroleum Imports
(Thousand Barrels per Day)
Note: The data above exclude
oil imports into the U.S. territories. Source:
Who Brings It In
Largest Petroleum Company Importers of Crude Oil
Company Importing to US
% Persian Gulf
MKTG & SUPPLY CO
EXXONMOBIL CO USA
EXXONMOBIL OIL CORP
PRODTS N AMER INC
ASHLAND PETRO LLC
HILLS RESOURCES LP
REFG GROUP INC THE
CITGO REFG LP
(including others not listed)
Persian Gulf includes =
Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and United
Arab Emirates. Source:
Exxon Do Enough? - 3
OK, Lee Raymond,
president of Exxon, makes $2 million less than the $40 million said to
be pulled down by the comedian who plays the Raymond that everyone
loves, and Pete is a jealous soul, but he just can't figure out why an
oil executive should get paid so much. Yes, 2004 was the best year in
the history of the universe for oil companies and Exxon made more money
than ever before, but it still seems an order of magnitude too much.
Here is the scorecard as Pete sees it:
earnings were $16.7 billion, up 15% and an all-time record
return on average capital employed was 33% !!!
income per oil-equivalent barrel was $10.81
liquids and gas production was greater than all nongovernmental
proved reserves were replaced (1.8 net oil-equivalent barrels
were added, without even counting the impact of economic
price/cost revisions and excluding net asset sales)
replacement was greater than production for the 11th straight
total proved oil-equivalent reserves were more than those of any
costs per oil-equivalent barrel were only $0.44 !!!!!
managed to reduce upstream capital and exploration expense in 2004
($11.7 billion v. $12 billion in 2003)
The rest of the US
economy got screwed -- in significant part by lack of refining capacity, by lack of
commercial storage facilities, and by the resulting $55 per
barrel oil price
United States has 393,000 oil stripper wells and 260,000 natural gas
stripper wells, and they are typically operated by small,
independent companies in fields that are long past their peaks. The
definition applies to oil wells delivering no more than 10 barrels
per day and gas wells delivering no more than 60,000 cubic feet per
But without the stripper wells' aggregate production, the United
States would have to import an additional 860,000 barrels of oil a
day (an increase of seven percent), and 1.5 trillion cubic feet of
natural gas (an increase of 38 percent).
Life extension technologies will reduce plugging and abandonment
rates and sustain the stripper wells' contribution to U.S. energy
supply and security. In 2002 alone, more than 3,800 gas wells and
14,000 oil wells were abandoned, even though most were still
producing. Once stripper wells are plugged and abandoned, the costs
to re-access the reserves are prohibitive, and the energy resources
may be lost forever. ...
The purpose of
the release is to explain recent technical advances that should increase
stripper production, or at least keep it from dropping too fast.
GM and Ford
Descend to Junk
If ever there
was damning proof that American energy policy doesn't work, the descent
of the remainder of its auto industry into the netherworld of junk bond
ratings seals it. It wasn't just that the two inept behemoths were
unable to adapt quickly enough to the tripling of oil prices between
1998 and 2000, five years later they remain without a viable product
slate despite a further near doubling of oil prices. The blame must also
be assigned both to the government and the domestic energy industry
which failed to honestly evaluate how supply and demand fundamentals
were changing and to anticipate how dire the energy price situation
would become. Nor was it understood how dysfunctional the capital
allocation process would become: massive amounts of money required to
retool the auto industry for the world of $50 oil and consolidate land
use development were instead wasted on enriching the already wealthy but
impotent domestic energy production sector.
The saddest part
of all is how ineffective democratic institutions have been. It is
often said that there's an energy bill just about to emerge from the
labyrinths of capitol hill, just as it has been said for years. If
a bill does emerge, it will be of interest only to future historians
favoring the Howard Cosell school of florid prose ("what could they have
been smoking to think it was a tax break kind of problem?", "drill ANWR? who the hell cares"). This doesn't mean that GM and Ford
will fail. They can't be allowed to fail; they owe too much and
are at the center of a key component of the American economy. It seems
likely the Fed will view the auto industry's troubles as a warning of
how weak the real economy really is, and delay the return
of interest rates to the levels required to bring the no less dangerous housing sector
price situation under control.
With This Picture?
Federal Reserve has learned from the past and refuses to raise rates
materially when oil prices fly up, thereby either preventing or
forestalling the recession that otherwise would have followed. The macro
economic effect of sharply higher energy prices has always been
deflationary (periods of recession are marked in pink), but separating
out whether the real cause was the disease or the cure, or the
combination of both, has been difficult. Still, there seems little doubt
that whatever is going on now is markedly different than in the past.
Unless, of course, the usual cure is late but about to be applied to
keep the dollar from sliding further. If so, one might expect the usual
The real problem
is that the capital flows redirected toward the energy sector's higher
returns produce a dysfunctional result, since the resource-constrained
oil and gas sector, while able to enjoy the profits, is not able to use
them productively. No matter what the price, the industry has
proved incapable of producing a supply response worthy of the name
(supply effort yes, but not a real increase in supplies). So
capital is drained from the rest of the economy and used less than
productively in the increasingly more challenging search for something
even approaching the previous level of supplies. Meanwhile, on the
demand side, no one wishes to be bumped back to the 19th century, so
higher oil prices mean that consumer debt levels keep setting new
records only to be repaid by home refinancing that harvests the equity
accumulated from bubble housing prices, which in turn result from the
very low real interest rate.
The Chairman on
Energy - 1
only person in Washington with some influence over energy markets, did
his best to figure out what was going on. Here are selected excerpts:
....Long-term demand elasticities have proved
noticeably higher than those that are evident short term.
Altering the magnitude and manner of U.S. energy consumption
will significantly affect the path of the U.S. economy over the
long term. For years, long-term prospects for oil and gas prices
appeared benign. When choosing capital projects, businesses in
the past could mostly look through short-run fluctuations in oil
and natural gas prices to moderate prices over the longer haul.
The recent shift in expectations, however, has been substantial
enough and persistent enough to bias business-investment
decisions in favor of energy-cost reduction.
Of critical importance will be the extent to which the more
than 200 million light vehicles on U.S. highways, which consume
11 percent of total world oil production, become more fuel
efficient as vehicle buyers choose the lower fuel costs of
lighter or hybrid vehicles.
... Besides feared shortfalls in crude oil
capacity, the status of world refining capacity has become
worrisome as well. Of special concern is the need to add
adequate coking and desulphurization capacity to convert the
average gravity and sulphur content of the world's crude oil to
the lighter and sweeter needs of product markets, which are
increasingly dominated by transportation fuels that must meet
ever-more stringent environmental requirements. ...
....The larger question, of course, is what
will increased world trade in LNG and expanded U.S. import
capacity do to currently uncompetitive natural gas prices in the
United States? During the past couple of years, when U.S. prices
of natural gas hovered around $6 million Btu, import prices of
LNG in Europe have ranged between $2 and $4 per million Btu, and
those in Japan and Korea have generally been between $3 and $5
per million Btu. Estimates of production and delivery costs of
LNG to North America appear to hover around $3 per million Btu.
In the short run, exporters to the United States are likely to
receive our domestic price, currently above $7 per million Btu.
But unless world gas markets tighten aggressively, competitive
pressures will arbitrage the U.S. natural gas price down,
possibly significantly, through increased imports.
to increased supplies from abroad, North America still has
numerous unexploited sources of gas production. Significant
quantities of recoverable gas reserves are located in Alaska and
the northern territories of Canada. Negotiations over the
construction of pipelines connecting these northern supplies to
existing delivery infrastructure are currently under way.
....Conversion of the vast Athabasca oil sands reserves
in Alberta to productive capacity has been slow. But at current market
prices they have become competitive. Moreover, new technologies are
facilitating U.S. production of so-called unconventional gas reserves,
such as tight sands gas, shale gas, and coalbed methane. Production from
unconventional sources has more than doubled since 1990 and currently
accounts for roughly one-third of U.S. dry gas production. ....
...We are unable to judge with certainty how
technological possibilities will play out in the future, but we can say
with some assurance that developments in energy markets will remain
central in determining the longer-run health of our nation's economy.
As usual, it is
better to read the whole thing.
Pete has always
maintained you can't know when oil has peaked until many years after the
fact. But there is no doubt that it is a very important issue,
deserving as much careful attention as possible since the stakes are so
enormous. Jeffrey Brown has sent in a report on the basics of what
one needs to understand:
"Change is coming
whether we like it or not; whether we are prepared for
it or not. If we don't begin right away to make better
choices then we will face political, social, and
economic disorders that will shake this nation to its
James Howard Kunstler
Oil in Four Easy Steps:
This analysis is based on Chapter
Three of Kenneth Deffeyes latest book "Beyond Oil: The View
From Hubbert's Peak." Dr. Deffeyes outlines a very simple
method for predicting ultimate recoverable reserves and the
production peak for a region. I am using Texas as a model.
This takes less than five minutes. You might consider doing
this since Peak Oil will profoundly affect each and every
(1) Obtain a piece of graph paper and draw two perpendicular
lines that intersect and terminate against each other in the
lower left hand corner (or graph it using a computer program)..
The vertical (Y) axis is P/Q, where P = annual Texas oil
production and Q = cumulative Texas oil production to date (for
the corresponding year). The horizontal axis is Q.
(2) The P/Q (vertical) scale is from 0 to 0.08, in increments
of 0.01. The Q (horizontal) scale is from 0 to 68 billion
barrels of oil, in increments of four billion barrels of oil.
(3) Plot the following points (Q & P/Q), corresponding to Texas
production numbers for selected years:
1940: (6.5 & 0.075)
1950: (13.6 & 0.060)
1960: (23.4 & 0.04)
1970: (33.5 & 0.036)
1980: (44.8 & 0.020)
1990: (52.6 & 0.012)
2000: (57.7 & 0.007)
The first few years are pretty noisy. Lower 48 data settled
down into pretty much a straight line in the Fifties. M. King
Hubbert made his famous and accurate prediction in 1956 (that
Lower 48 oil production would peak in 1970).
If you plot the above points, the data settle down into a linear
plot from 1960 on. Draw in your best fit for a straight line
using the 1960 to 2000 data and extend the line to the
horizontal axis. At the point where the extrapolated line
intersects the horizontal axis, P would be equal to zero, which
gives you ultimate recoverable reserves (we would have produced
the last barrel of oil). When I plotted the best fit to the
data, I came up with estimated ultimate recoverable reserves of
about 66 billion barrels of oil.
(4) The assumption is that production peaks when about half of
the estimated reserves have been produced. Therefore, the
predicted peak would be when we had produced 33 billion barrels
of oil, which was in 1970. The actual Texas peak was two years
later in 1972. Texas oil production has been falling for 33
years. This model suggests that Texas has produced about 90%
of all the oil that we will ever produce. Note that I used an
estimate from the Railroad Commission of 3.8 billion barrels for
production prior to 1935. The commission only shows 1935 and
later data data on their website:
That's Peak Oil in four easy steps. Note that the technique
picked the Texas peak within two years and note that Texas oil
production has followed the predicted path downward.
Dr. Deffeyes has applied this same model to the world. The P/Q
versus Q data points settled down into a linear plot after
1983. He is predicting that we peak this year and that
conventional oil production will soon begin a permanent
Current events seem to suggest that Dr. Deffeyes is correct.
Oil prices closed at another all time (nominal) record high on
Friday. There appears to be no excess light, sweet crude oil
capacity in the world, and the IEA is talking about emergency
oil conservation measures this winter.
While we are (or were) producing a record amount of
oil, worldwide we have not found a truly large oil
field (a million barrels per day or more) since
1976. The latest EIA production data show falling
world oil production. In my opinion, the only
real question is how fast the industry can bring on
oil production from tar sands and increase
production of non-conventional liquid transportation
fuels (primarily ethanol). In my opinion,
non-conventional oil and non-conventional liquid
transportation fuels will only serve to slow the
rate of decline of total liquid transportation fuel
My advice: cut spending, get out of debt and
consider moving to much smaller, more energy
efficient housing closer to where you work or closer
to mass transit lines. This is the New Urbanism
solution. Where possible, you should look into
organic gardening. Small raised bed permaculture
gardens can be pretty prolific. The other model is
for organic farms clustered around small towns.
Currently, for every calorie of food we consume, we
consume 10 calories of fossil fuels used in food
For a critique of the Deffeyes Plot technique and a look at at
least some of the alternatives, Conrad Davis has written to suggest
by John Walsh.
Further to the above, Jeffrey Brown has added a
The graph for Saudi Arabia can be found
There are some fascinating comparisons between Texas & Saudi
The P/Q versus Q plot (the Hubbert/Deffeyes technique) for
Texas shows 66 billion barrels in ultimate cumulative production
(Qf). Texas peaked in 1972 at 3.5 MMBOPD. Texas peaked when
we had produced 54% of Qf (two years past the 50% mark).
A P/Q versus Q plot (by Laherrere*) for Saudi Arabia shows a
Qf of 180 billion barrels. They have produced about 55% of Qf.
If you do a simple ratio, the Texas model suggests a Saudi
peak production rate of 9.5 MMBOPD.
The latest EIA data show an estimated steady production rate
of 9.5 MMBOPD in Saudi Arabia.
Kind of spooky. Saudi Arabia is precisely where Texas was in
Is it a "scuse
me mr. your excellency, sir, but would you mind not killin' the economy
just now. We gotta win the mid-terms" handshake? Or is it a "I know some
A-rab boys thats gonna get a mighty whooping if they don't sit up and
fly right" handshake? Or is it just the traditional Bush family
expression of love for all democratic Saudi crown princes and a possible
invitation to the prom next year? Hard to say.* **
the Saudi government, which should know, it was a "not our fault, old man, if your
refineries can't keep up" handshake. In the words of the Saudi news
release, "The current price of oil does not reflect a problem
with the availability of supply; rather, it is a
problem with the growing global demand for oil and
the inability of existing related infrastructure,
such as shipping and refining capabilities, to keep
up. For example, Saudi Arabia can ship as much oil
to the United States as it wants, but if that oil
cannot be turned into gasoline, the price of
gasoline will not decrease. Both Saudi and American
leaders agree that oil at $50 per barrel is too high
for the global economy to contend with. Our two
countries are addressing ways to deal with these
issues that are affecting the price of oil."
Pete thinks it was damn nice of the Saudis to offer to become a Saudi
Arabia and a half, oil-equivalent-delivery-wise. Half a Saudi Arabia
down, only 9 1/2 more to go by 2020, right Exxon? (see below)
** A recent book (Gerald Posner,
Secrets of the Kingdom) that claims to be based
on reliable intelligence sources (ha!) is said to assert that the
Saudi's have wired each component of their production infrastructure
with explosives, to be used should the Wahabis ever lose control, be
invaded by infidel foreigners, etc. If so, it may have been an
"unwise, my friend, unwise; do anything else to encourage the Shia and
you'll have to ask yourself if you're feeling lucky" kind of handshake.
Uranium (U3O8) Prices
According to the Uranium Miner
prices have more than doubled as the world prepares to add as many as 64
reactors to combat greenhouse gases and provide additional power:
The prices represent a average spot price per pound as
quoted by five major dealers or brokers. However, these prices
bear little resemblance to official statistics.
Dear Plunge Prevention Pete,
[Reprise of the part
about the Plunge Prevention Team]
This sounds like a lot of conjecture, but it is not unprecedented. The
HKMA intervened in the their stock market after the Asian Crisis, which was
widely criticized, but looks like a canny move now. The Hang Seng bottomed
at 6912 and subsequently climbed to 17.912, obviously not only on CB buying,
but they turned the tide when it was against the index.
Also, CB have routinely intervened to stabilize currency markets. One could
argue that concerted intervention also bridges the unfettered market
principle, but is widely understood to be the perogative of CBs the world
over. And, the fact that they intervene through commercial banks also sends
a price signal first to those participants rather than giving all market
participants equal access to this information, which again violates the idea
of a level playing field.
I don't think it is unreasonable for the Fed and the Treasury to co-ordinate
with investment banks and brokers to stabilize markets, which are in a
crisis. However, we have to realise that intervention is usually only
effective when the fundamentals point in that direction in any case. During
the ERM crisis all the central banks in Europe could not defend their target
bands once the market figured out that they were out of line with the
underlying fundamentals. George Soros will tell you about the day he broke
the BoE [Bank of England].
Many Asian CB's have also learnt the hard way (i.e. Bank Negara) that even
privileged information is no guarantee of success when speculating against
the wisdom of the market.
In any case, a highly entertaining and informative blog. Good luck in your
new role as Plunge Protector.
Thanks. I'll need it. But you'll need it even more.
The DOE 'family' gets ready
to open the SPR spigots.
q.v. But can anyone refine it? Uncle Exxon, Cousin Valero? More to the
point, what are Aunt Chicago and Aunt Boston going to use to cook
Thanksgiving turkey? To bad we forgot to add a SPR for natural gas.
That elusive hydrogen economy
seems to have gotten lost again. Here's DOE's (and Pete's) best guess as to
why: "The cost of producing and delivering hydrogen from a
small scale reformer of natural gas for a fuel cell vehicle could be as high
as $40 per million BTUs with today's technology. This would make hydrogen
about four times as expensive as gasoline at the pump untaxed."
q.v. Maybe someone should have told Congress. Curiously, the new energy bill not only thinks the hydrogen
economy is not dead but gave hydrogen the full scale go-ahead spending wise, and seems to think
it will somehow overcome these disadvantages in the future. Pete
offering free lunch to the first reader who emails a photo of a new hydrogen
gas pump taken down at his or her neighborhood filling station (the one at the Potempkin
Village Shell on Capitol Hill doesn't count).
[Contest update: Helen Oros
writes from Romania to point out that there are many, many hydrogen pumps in
qv1, qv2. Pete
concedes that he was wrong, and is only glad half of California didn't take
him up on the lunch offer, but hopes she will when next in Washington, DC or
he in Romania.]