Empty Holes and Black Swans
A ten-to-one bet we reached Peak Oil in May of 2005,
Demand for crude leaves production in its wake,
Blasphemy from the world's oil windpipe and plenty more...
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Joel Bowman, from the Arabian Gulf...
It may be blasphemous to ponder in a region that produces a good deal of the world's hydrocarbon-based energy, but what if Peak Oil has already occurred?
"My opinion is that it's increasingly likely that we actually set an all-time record in May 2005 of 74,252,000 barrels per day," states Matt Simmons, founder and chairman of the world's largest energy investment banking company, Simmons & Co. International.
"And for the first three months of 2007," Simmons continues, "we were almost a million barrels per day behind that, and we're dropping fast. If that record still holds a year from now, I'll bet someone ten-to-one that we set peak oil in May 2005 and it's now past tense."
Not one to shy away from a bet, Bud Conrad, chief economist at Casey Energy Speculator and fellow Peak Oil enthusiast, plotted the following slightly more inclusive chart to give us an idea of where we stand today.
As the graph clearly illustrates, world production has been on a rather unimpressive plateau for the past couple of years. Part of this stagnation in global output growth stems from the coughing, spluttering "chokepoints" that we read about in the news every other day.
Just this past weekend we saw crude shoot up about four bucks on the back of threats made by Venezuela's head honcho, Hugo Chavez, that he may sever export lines to the thirsty U.S. Then there was a decline in production in Nigeria...troubles in the North Sea...ongoing issues in Iran...the "problem with Putin"...the list goes on.
The thumbscrews are tightening for net oil importers. As we explained in yesterday's Rude, "The American SUV driver was a tad sluggish in his gait this morning. Once again his pocketbook has been pinched. The hefty drive from his suburban McMansion to work in the city and the heating in his Connecticut vacation home just became a little more expensive."
But the issues that face net-importing nations around the world may soon be felt by the net-exporting nations too. Oil, as a finite commodity, will one day dry up. The impetus for economies with a heavy oil hand to diversify, therefore, is rather serious.
Consider that Abu Dhabi, capital of the UAE and one of the Middle East's largest crude exporters, has just pumped $15 billion into their Masdar Green City initiative and one begins to understand just how seriously even the crude rich nations are taking the issue of ultimate depletion.
In the following column, Bud sits down with Matt Simmons to root out some of the grim realities emerging at the tail end of our petroleum age. This may hurt a little...but we hope it also helps. Enjoy...
Empty Holes and Black Swans
Bud Conrad interviews Matt Simmons
Bud Conrad (BC): Let's jump right into it. The Peak Oil issue certainly looks ominous, and should be scary to more people than it seems to be.
Matt Simmons (MS): It ought to be. I don't know if you read the National Petroleum Council study that was released just last year...
BC: The IEA report too!
[Ed. Note: Matt Simmons is referring to the National Petroleum Council report "Facing the Hard Truths about Energy," released in, 2007, which was roundly criticized as glossing over all the hard truths and replacing them with the delusions of a Pollyanna mentality.
Bud is referring to the IEA mid-term report that came out around the same time, claiming that oil demand will outstrip production causing a supply crunch starting in 2010 that will worsen until 2012. The graph below shows the IEA conclusions, with increasing demand growth represented by lines, and diminishing supply growth represented by bars.)
MS: The IEA thing, basically, was good news. That's the first huge change in the mood of the IEA of finally being realistic that we have some unbelievable problems. But you know what the major oil companies got wrong in this NPC study? They basically didn't understand that the peak oil people were talking about flow rates. They thought we were talking about the ultimate resource base, which is the funniest concept in the world.
BC: Let's discuss that for clarification. We know that flow rates are what we measure to understand whether we're at peak or not. In M. King Hubbert's work, peak oil is calculated using the total resource base, but your point is that we may still have oil that we're just not able to produce in an economic way.
MS : If it's in the ground and you can barely get it out, it's as irrelevant as me looking out over Penobscot Bay and saying "There's a vast amount of hydrates about a thousand miles from here, a thousand feet underwater." Well, so what? That's not useful energy.
BC: If it takes more energy to dig up that last barrel of oil than it produces, then there's no sense in trying.
MS: And another important concept is that if you're lucky enough to find a highly pressurized field and it turns out to be condensate, which is sometimes called natural motor gasoline, you can literally bypass the refinery - because it's been baked in the ground - and put it right in your car. It doesn't run perfectly, but it runs. With the heavy oil out of Canada, you have to expend energy to make it ooze out of the ground, and once it's oozed out of the ground, you still have totally unusable oil.
BC: You still have to go through a fairly hefty process...
MS : ...of upgrading, and then finally diluting it with high-quality oil before it can flow. So one is total junk oil, and the other is the Rolls Royce of petroleum.
BC: The world needs to understand that we've been using up the Rolls Royces first because they're more available. The harder-to-find and harder-to-refine stuff is what's left. I think that's misunderstood.
MS: Oh, it's totally misunderstood. Sour, heavy oil is really not worth very much.
BC: We're probably in more serious a situation than most people would realize, and it's no better with natural gas. Switching gears for a moment, do you think the rise of LNG will be enough to keep up with declines in natural gas discovery and subsequently in natural gas production?
MS: Well, first of all, the problem with LNG is that if we try to develop a spot market out of LNG, the odds of it ending in bankruptcy are about 90%.
BC: Who goes bankrupt?
MS: All the players. The cost to produce and distribute LNG is so high that to make LNG work in any sort of financial reality, you would need a 25- or 30-year guaranteed supply. And then you can amortize it over 25 or 30 years. If you're going on a spot supply, you've got to write it off over 10 years and then you'll need $40 per million BTU to make the economics work. The other thing is that about 35% of the hydrocarbon value gets chewed up in the process of cryogenically freezing natural gas, transporting it, and then re-gassing it.
BC: In your opinion then, LNG is not an economically viable solution. We won't do it.
MS: We shouldn't do it. But it turns out that high-quality natural gas – sweet, high-quality natural gas – is just like sweet oil. It's basically in decline.
BC: And therefore also harder to find, despite our original hope of about a decade ago. Clean energy was going to fix everything through natural gas for electricity and everything else.
MS: Yes, and using natural gas for electricity turned out to be an unbelievably stupid decision. Using electricity for heat was equally stupid. Natural gas should be refined to one use and one use only, and that's creating instantaneous and high-efficiency heat.
BC: In one of your presentations, you have a very memorable clip of a ration book from World War II. Are we headed towards rationing and if so, between here and there, what are your estimates on what the price of energy might do, especially if we're hit by any ugly political events?
MS: I try to stay agnostic about political events because they're unpredictable. If you took a blackboard and filled it up with every political event that could impact the supply of energy, not a single one of them is positive. All political events are just unforeseen black swans.
[Joel's Note: Stay tuned for Part II of Bud's interview with Matt Simmons in tomorrow's edition of your Rude Awakening. Matt shares some insight as to what he sees as the major investment themes and opportunities looking to squeeze some profits out of the great global energy crunch. If you're interested in learning more about how you can be on the RIGHT side of the next wave of energy-related trades, you could do much worse than checking out the Casey Energy Speculator . They've got a 3-month risk free trial going on at the moment, so it's well worth a look.
In the meantime, send comments and questions along to us here and we'll catch you tomorrow...
Joel Bowman
Rude Awakening
aussiejoel@the-rude-awakening.com |
