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Politics : Rat's Nest - Chronicles of Collapse

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To: Wharf Rat who wrote (9460)	8/26/2009 6:32:43 PM
From: Wharf Rat	Read Replies (1) of 24213

Interesting Drum comment memmel on August 26, 2009 - 3:51pm Thanks. Haven't posted much still busy moving. I now hate and loath cardboard boxes. When I was in collage I packed my air mattress and clothes in a garbage bag and was done. I do want to say one thing. What we probably have done is highly fractionated the remaining oil supply but this I mean it really consists of two types of remaining reserves. What I call conventional reserves which are reasonably new oil fields extracted with primary and secondary extraction at high flow rates these are on land and shallow offshore regions. And easy way to make a distinction between these two is to note that the best oil reserves where found on land and in shallow waters. Most of the shallow offshore production is a continuation of onshore geological regions. The North Sea was a bit unique in having almost no onshore production. In any case the shallow offshore regions where developed late but they represent only 6% of the world surface. My point and I posted on this before is we probably discovered and produced all the good stuff by the early 1990's. In fact we where pretty much done by the late 80's. Now this production represents as far as I can tell about 50% of the worlds production and my bust guess is its 70% or so depleted. As far as I can tell it was about 1.200-1.5 trillion barrels. Our current production levels are highly dependent on these conventional reserves. Certainly we have plently of other basically junk reserves to develop but the hallmark of these is they are in general expensive have low EROEI and generally low production rates vs reserve levels. Even deep offshore which is produced fast once its developed actually has a low production rate vs reserves once you include the time to develop. Assuming that demand for oil remains high and the infrastructure etc remains these could potentially supply us with oil at a production rate about half of todays for a long time. WHT's models correctly reproduce this long tail. However between the long tail of production and our current levels is a sort of gray area where its hard to determine how the production levels will change. My best guess is that we will see accelerated decline rates in production in fact so far in general it looks like this is what is happening. Also you might as well include export land since this is also important. Lets assume that we are now losing 6mbd of production to depletion and 2mbd to export land on and annual basis for a total of 8mbd. Thats about 700kbd per month. So assume right now its at 70mbd thus next year same time we would be at 62mbd including the effects of export land as lost production. To offset this sort of decline you would need about 300 million barrels of excess oil stored for the entire year. During the economic crisis it looks like we managed to store at least 100-150 million barrels. Not enough to offset this sort of decline rate but probably enough to keep prices in check for 6 to at most 12 months. Changes on the demand side obviously will play a big role the first year you head over a cliff in production if thats whats happening. How do you manage to store this much oil given the production situation. Its a bit of a trick but bringing the worlds banking system to the edge of collapse tends to throw a monkey wrench in the worlds economy. Its a bit fascinating that the one thing that could cover this sort of decline actually happened. However if this scenario is real then you have a problem in that it becomes increasingly difficult to push demand down and keep oil prices low. Financial tinkering and large storage can only last so long its a very short term play. Lets break it down by year for whatever reason things seem to have fallen across years so lets start mid 2007-mid 2008 2007->mid 2008 is peak BAU oil demand is still driven by growing debt etc. Mid 2008-2009 rapid credit collapse effectively shuts down the world economy. For all intents and purposed the entire world took almost a week off from using oil. At 70mbd * 7 = This gives and excess of about 500 million barrels of oil over about a six month period as the world economy screeched to a halt. Some of this was put into storage some simply was not produced etc. Second half 2009---> ? The rapid collapse slows and this wall of oil is slowly drained down. Now things seem to be moving such that events no more or less match up with the new years. 2010 The economy is no longer being particularly goosed to grow most of the money being pumped in instead is simply preventing further collapse. Now if we assume that we have continued and probably accelerating declines in production/export land we being to finally hit our sort of long term post peak scenario. Growth becomes impossible and its and its ever more problematic to keep the BAU situation going. In my opinion we are at the start of a very very different situation from what we have seen even up to about 3 months ago. Over the last few months I believe the world has undergone a basic shift. Now intrinsically the decision for many is between paying for daily expenses vs servicing debt from the individual up to the largest corporation. Whats important is that banks are forced to tighten lending standards. As access to future credit wanes the desire to service current debt wanes right along with it. Why pay the mortgage or credit cards if your credit rating is shot ? Assuming the price of oil continues to rise the economy will increasingly choose to default on current debt regardless of its effect on future credit availability in order function over the short term. Whats important is that this sort of scenario can't easily be corrected by playing banking games. Flooding the world with credit simply does not do any good. Its a cash flow game. Fractional reserve lending playing banking games etc can't change anything. Any real money that makes it into the economy is quickly used for purchases of oil or goods and services created from oil its not used to create and service new or existing debt. I'm not going to incite a war by discussing price because thats not the key factor the critical factor is that central banks which operate by creating new debt for debt junkies become increasingly powerless as the use of debt instruments is rejected in favor of survival. Thats not to say that where debt is made available it won't be taken on just that it will fairly quickly be defaulted on. Finally this is important because playing banking games to try and slow the economy become ineffective because they are based on adding and removing debt thats serviced. Economic changes become coupled to critical commodities not the debt supply. This is why I think from now on out what we will see is ever increasing rates of defaults on debt esp if oil prices continue to increase. The economy will increasingly move towards cash flow and short term business survival. We have a huge amount of debt that can be defaulted on to free up cash for day to day needs. In my opinion we have barely seen the tip of the iceberg of whats coming. Only after a substantial amount of the worlds debt has been defaulted on and rejection of debt can no longer free up cash flow do we move to the next phase where BAU is simply no longer possible. If I'm right and production rates are falling rapidly all of this should happen fairly quickly. We should transition to a world of scarce oil and massive debt default this year and it should become very obvious starting next year as the worlds oil storage is drained. Price of course will be determined by the supply demand balance but the underlying situation of defaulting on debt to buy oil is true regardless of the price. Relatively low prices would result only when defaulting on debt actually lowered oil consumption. I'd argue that this time this scenario is not the driving force instead we are defaulting on debt to buy oil. I.e debt defaults are occurring to maintain current consumption levels. Thus is fundamentally different from 2007 early 2009 where debt was used to purchase oil in a over heated economy. In peak BAU debt was taken on to buy expensive oil in post BAU debt is rejected to free cash flow to buy oil. Its simply a different world from the past. This coupling of course hinges on the rate of change in oil supply. If its very slow i.e less than 4% per year then we probably won't see this stark of a change. Debt defaults will start to fall off and oil prices will probably not rise all that much as simple conservation efforts can mute the decline rate. Whats important is in a slow decline scenario keeping your credit rating remains important while in a fast crash its the first thing that gets tossed. And of course people in default on debt don't pay taxes so .... theoildrum.com

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