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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: el_gaviero who wrote (6637)	2/12/2002 1:19:53 PM
From: kodiak_bull	Read Replies (1) \| Respond to of 206209

EG: My friend MDH4ever, asked me to post this here. Kb Reply: ------------------------------------------------------------------- el_gaviero, I have noted for quite a while the similarities between the oscillations in the drilling sectors (and energy in general) and various control problems which I have encountered in my career as a programmer from 1981-1996. The oscillations are just like those created by P.I.D. (Proportional-Integral-Dirative) "loops" which are supposed to maintain an equilibrium but where 'something' is wrong. That something can be be poor tuning, such as the gain being too high, or it can be due to delays between taking an action and seeing a response. This latter is the type of problem we see in the drilling/price of oil oscillation. "The cure for low oil prices is low oil prices." Here is an example: Over across the river from St. Louis there is a company called Olin that anneals (heat tempers) giant rolls of sheet brass -- about two tons at a time! Back in 1982 a Modicon 584 controller (a hot 'ladder logic' machine at the time) was being used to control the annealing process and the PID loop could not be made to work, so I was brought in. First time I'd ever seen this kind of problem and kind of fun. It seemed that no matter what PID tuning parameters were used, the oven would oscillate out of control, first too hot then too cold, back and forth, back and forth (sound familiar?). That happened because the temperature of the two tons of brass was taken at its center by a thermocouple and that temperature controlled a gas valve. When the system was started the thermocouple would say, "Hey, it's cold in here, I need some heat," and the gas valve would slowly open to 100% until the oven was blasting away at 800 degrees. The thermocouple would stay cold for a looong time, being at the center of two tons of metal! Eventually, however, the center would start to warm up and the thermocouple would call for less heat... only it was way too late, the outside of the coil of metal would have been fried big time (we 'ruined' the same coil of metal many, many times). The solution to the problem was simple: Don't do that. Nothing will ever make that system work. Ever! The solution is called cascaded PID, where the central thermocouple PID loop tells a gas valve PID loop what its setpoint should be, and a second thermocouple monitors the oven's temperature. The interior thermocouple would tell the oven thermocouple, "500 degrees, please" and the oven thermocouple would modulate the gas valve to, say, around 60% open. If the oven warms to 510 degrees the oven thermocouple immediately cuts back the gas valve to, say, 50% (this requires custom tuning of the gas valve PID loop). As the two tons of metal heat up it requires less and less heat to maintain the oven at 500 degrees, so the gas valve is slowly cut back to perhaps 20% near the end of the annealing process. It's as real as can be and works beautifully once the time lags involved are understood. (As an aside, many control system problems are time-lag related.) The "free market" is like the first case with the time delay. It will never work. Ever. The only force which can intervene is government, by mathematically biasing the equation over time, such as by placing (say) a gradually increasing floor price under the free market, something as in this limited example: As a benign King, and worried about the future of energy and future energy shocks to my country, I decide to impose a variable tax at the gas pump. Starting today gasoline is not less than $1.50 per gallon (it might be higher during shortages) and will be increased by one cent per month forever. In 10 years it will be $2.70. I don't care what crude oil costs, I just control the minimum gas pump price. As King, I get to spend the new taxes as I wish (probably on production stabilization tax breaks, energy conservation and multiple-junction white LED research issues for more efficient lighting). The gasoline prices begin low enough that no economic damage is done, but car buyers suddenly take notice that gasoline will always be more and more expensive and slowly, in mass, trend gently to buying more efficient cars, as they can see $2 per gallon - absolutely guaranteed - out there just four years away. The car manufactures slowly notice that they are selling more efficient cars than before and reallocate their resources accordingly. As people migrate to more efficient cars they are surprised to discover that they really aren't spending much more money than they were with their SUVs, thus the economic impact - being so gradual - is minimal. Even beneficial - more of a resource reallocation shift. About 20 years from now the gasoline price is (at minimum) $3.90 per gallon and most people have chosen to drive cars getting 28+ mpg, just about the time that crude oil production starts to really drop off. However, the free market has retuned itself to these new (and ever increasing) costs and the economic impact is only 1/10th of what it would otherwise have been -- my kingdom is saved from the terrible fate of an energy infrastructure collapse. The example is admittedly limited and simplistic, and there may be a better point at which to apply a bias to the industry, but this is the general idea that I'm trying to communicate. The 'free market' can only 'see' out a Very Short Time. Only governments have the power to change the equation -- if they are clever enough to do so. The alternative will -- someday, guaranteed -- be chaos. Consider what would happen to our economy if tomorrow gasoline is just $3 per gallon due to war and it takes $100 to fill your tank. Think of the increased shipping costs applied to... everything! -MDH4ever

To: el_gaviero who wrote (6637)	2/12/2002 11:22:58 PM
From: kormac	Respond to of 206209

El Gaviero and Sharp My thinking about oil has been certainly influenced by Simmons a great deal and the question of how much new technology will help in increasing production I have no way of knowing, since I do not have a good handle on how much the new technology helps in replacing the depletion in the large fields. Simmons's basic point is that we get a large fraction of oil from fields that are now on the average 60 years old, and to replace the depletion from these fields will be difficult. I try to carefully weigh the words of people who not only work in the industry but also have the big picture worked out in their head. Sharp mentions how small over-production or hightened demand can swing the prices a lot. If memory serves, Simmons has one article which shows how the traders twice during the last 12 years? have gone in the opposite direction of the supply demand balance. All other times they have moved in the expected direction. Simmons endlessly complains about the poor quality of data and he is certainly right, as if the data on reserves and depletion were as good elsewhere as they are in the North Sea, we would understand the picture better. As to the theory of future prices, I have not studied the papers to have much to say about this. However, I have become convinced that economists believe two things. First, past price trend is the best way to predict future prices. Thus spikes soon work themselves out. Second there is a controversy between those who believe in substitution and those who have worked out the theory for a finite resource. A search for "Hotteling valuation principle" gives a number of citations on this. Morris Adelman is considered to have been the dean of the American oil economists. I have on front of me a study published by him in Annual Review of Energy and Environment 1997 vol 22, pp. 13-46. The article is a review of his life as a resource economicist, starting in 1948 when he joined MIT's economics department. He belongs to the camp that the resource is not finite in any practical meaning of the word and therefore Hotteling's principle does not apply, if I understand him correctly. Thus, there is no theory. Faith in technological progress and principle of substitution is what most economists believe. Since this board is here to make money, rather than try to come up with a prediction of the future, my own plan, bolstered by the industry people, who do not rely on theory but on intuition of what they have seen going on, and now also the Raymond James view (Tomas just linked to this thread), is to keep watching the backwardation or contango of futures and then depending on how low the share prices sink, commit future funds to them. If they don't sink too much from this and start rising now to the top of this cycle, my gains will be modest. best, Seppo P.S. Took a position on MVK today thanks to JimP. I also held it during the last cycle for nice gain.

To: el_gaviero who wrote (6637)	2/13/2002 12:23:08 PM
From: Sharp_End_Of_Drill	Read Replies (1) \| Respond to of 206209

El Gaviero, in reply to your post: >>>...that we are headed for a trap set by geology & economics. Because more and more effort is required to get the same amount of oil out of the ground, supply will lag demand, prices will spike then fall, and the resulting volatility will inhibit investment in the oil patch.<<< I don't fully agree with this. The problem is the assumption that more & more effort is required to get more oil. At the moment this is false. We are now producing more oil than ever, with less and less people & effort in recent years. The assumption is true for any given field, but so far has been false on a worldwide scale. Once that changes then this logic may work. Look at the last little natural gas boom, where we had about 1,100 rigs working of which say 850 were drilling for gas. The supply response was enough to give us this glut we are now in (granted combined with the economic downturn in demand). How does that contrast in effort & manpower to the 4,000+ rigs we had working in the early 80's? Not very well. I believe this shows the tremendous benefit of new technology. I think Simmons has consistently underestimated the impacts of technology, which is why he hasn't been right yet. >>>Also, I don’t see the rest of the world ever being able to do what we have done here in the USA -- make a profit on oil wells of low productivity. Out there in the world where the oil is, social, political and legal conditions are not conducive to such an intensive level of activity.<<< I have mixed feelings on this. People in Nigeria make a living selling used coke bottles, cardboard boxes, etc. - any little thing of trifling value that they can try to turn a profit on. Do you really think they couldn't make a go of a stripper well operation? Maybe, maybe not. I will say that most countries have a few thousand wells versus our 500,000+, so inherently their stripper operations wouldn't amount to much anyway since they just don't have the numbers. You also asked why isn't my industry attracting new talent? I hear tales all the time of how good things were in the past. More money, loose expense accounts, less regulation, more of a swashbuckling seat of the pants engineering approach (i.e. fun). Right now we are being asked to work in companies with skeleton crews during boom times, and bloated ranks fearing layoffs in busts. It is not easy or for the weak of heart. Why even bother when in recent years you could just be a trader and make more money, or go somewhere with a semblance of stability. The money really isn't good enough to justify working the ridiculously long hours in operations, being sent to West Africa or the Middle East, and a good deal of the fun has gone out due to ever increasing regulations & paper work. I really do believe we are going to have a huge oil crisis one of the these days, but that day keeps getting put off several years or more. The cyclical nature of the biz is probably here to stay, and will become worse as long as the traders are allowed to continue their current practices (ala Simmons "tail wagging the dog"), and the data remains poor. How can we profit is a more immediate question. I'm personally hoping for a good E&P washout this spring to set up a great buying opportunity. I'm also keeping a close eye on OSX stocks (as always), hoping for better prices than we currently have. Sharp