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Shale gas, peak oil and our future

Shale gas, peak oil and our future.

The following interview with Richard Heinberg was originally published in Flemish at the Belgian website De Wereld Morgen. The interview was given in conjunction with the release of the Dutch translation of Richard’s Book Snake Oil: How Fracking’s False Promise of Plenty Imperils Our Future. The Dutch title is Schaliegas, piekolie & onze toekomst.

Selma Franssen: Considering the shale gas and oil reserves in Europe, is there any sense in fracking here, all other objections aside?
Richard Heinberg: Until test wells are drilled, it’s very difficult to know what the actual shale gas and oil production potential is for Europe. All sorts of numbers have been cited, but they are simply guesses. Back in 2011, the US Energy Information Administration estimated that Poland’s shale gas reserves were 187 trillion cubic feet, but a little on-the-ground exploration led the Polish Geological Institute to downgrade that figure to a mere 27 TCF—a number that may still be overly optimistic. My institute’s research suggests that US future production of shale oil and gas has been wildly over-estimated too. So, without attempting to put a specific number to it, I think it would be wise to assume that Europe’s actual reserves are much, much smaller than the drilling companies are saying. We do know that the geology in Europe is not as favorable as it is in some of the US formations, so even in cases where gas or oil is present, production potential may be low—that is, it may not be possible to get much of that resource out of the ground profitably. That being the case, governments should undertake a realistic cost-risk-benefit analysis using very conservative assumptions about likely production potential.
One argument often heard in Europe is that fracking companies have gained knowledge and experience from extraction in the US and will cause less pollution and leaks when they start operating in Europe. Is there such a thing as safe fracking?
The petroleum industry has certainly been trying to clean up its act, and it’s true that progress has been made in improving operational safety. However it’s also true that the industry has systematically hidden evidence of pollution, and of environmental and human health impacts. The industry has often claimed that there are no documented instances of such impacts, and that’s arrant nonsense. Where environmental and health harms are clear, the industry typically offers a cash payment to the parties affected, but that is tied to a non-disclosure agreement, so that no one else will ever find out what happened. The industry also points to studies showing low methane emissions and no groundwater contamination. These studies tend to describe operations where everything is working perfectly, with no mistakes or malfunctions. But of course in the real world well casings fail, equipment breaks, pipes leak, and operators cut corners or make simple human errors. Take a look at regions of the US where fracking is happening right now, presumably with state-of-the-art equipment: have all the bugs really been worked out? Evidently not, because there is still a steady stream of reports of bad water and bad air.
Are unconventional gas and oil, as ‘transition fuels’, buying us extra time in the face of peak oil, or actually halting investments in renewables?
Unconventional oil and gas require enormous financial investments. The petroleum industry as a whole has doubled its rate of investment in exploration and production in the past decade. That’s because companies have run out of conventional production prospects—onshore fields of oil or gas that is easy and cheap to extract. The trend is clear: if we continue increasing our dependence on oil and gas, the levels of required investment will grow exponentially. Where will the money come from to develop renewable energy sources? Available energy investment capital will all have been spoken for. This is not hypothetical: it is exactly what we see in the US. A few years ago, it was understood that the nation had to transition away from fossil fuels, and there was a nascent effort to divert energy investment capital away from coal, oil, and gas and toward the renewables sector. But as shale gas and tight oil came into view, that effort largely stalled as private investors piled onto the shale bubble and government renewable energy programs were sidelined. Once the brief current shale boom is over (well before the end of this decade), America will be in a fix—it will have lost a decade in which it could have pursued the energy transition vigorously and insulated itself against a fossil energy supply crisis that is inevitable and entirely predictable.
Josh Fox, director of the Gasland documentaries, recently said that the fossil fuel industry is so powerful that “democracy in the 21st century is impossible as long as we rely on fossil fuels”. What are your thoughts?
I think there is some sense to Fox’s comment, though I would have to add that there are plenty of other threats to democracy in this century. It’s true that the fossil fuel industry represents an enormous concentration of capital, and money is power. The industry buys political advantage, tax breaks, advertising, public relations, foreign policy, and more. But at a more basic level it controls all of society. That’s because everything we do requires energy. No exceptions. Fossil fuels supply roughly 85 percent of the energy we use, so whoever controls those energy sources exerts a subtle but very real influence on nearly everything that happens in society. That’s why America is a nation of highways, a country designed and built for the convenience of petroleum-fueled automobiles. If, hypothetically, the US had spent the last century getting most of its energy from sunlight, you can bet it would be a very different place today.
Is it possible that fracking has a silver lining to it, in the sense that it is highly visible, comes very close to home and causes a lot of debate among locals, engaging more people in the energy debate and raising awareness around peak oil and the need to transition to renewables?
Possibly so, especially in Europe. There are at least three important factors that might limit fracking socially and politically in the European context. First is the number of wells needed. Because production rates in shale gas and tight oil wells tend to decline very rapidly, petroleum companies have to drill many wells in order to keep overall production levels up. In the US, the current total is over 80,000 horizontal wells drilled and fracked. If Europe says yes to shale gas, prepare for an onslaught of drilling.
The second factor is population density: Europe, of course, has a much higher population density than the US. So taking these first two factors into account, Europeans face a significant likelihood of living in close proximity to one of these future shale gas or oil wells.
The third factor is the legal status of ownership of subsurface mineral rights. In most of the US, landowners control mineral rights; therefore if a company wants to drill on your land, it must obtain your agreement, pay you an initial fee, and also pay a subsequent royalty for the oil or gas actually extracted. (Gas and oil companies actually avoid paying royalties in many instances, but that’s another story.) As a result, citizens have a financial stake in resource extraction, and they therefore have an incentive to overlook or even help cover up environmental and health impacts from fracking. This is especially true in poor communities, where a little lease or royalty money can go a long way. In Europe, national governments control mineral rights. Therefore there is no incentive for local citizens to take the industry’s side if there are disputes over pollution. There has been a strong citizen backlash to fracking in the US; in Europe it is likely to be overwhelming.
The message ‘peakists’ bring, namely that the party’s over, as you put it, is not popular with corporate backed media, for obvious reasons. Is there a media blackout on peak oil?
There is no formal blackout, but there is indeed an informal one. Peak oil is one of the defining issues of our time, yet it is treated as if it were either an esoteric controversy among petroleum engineers, or a conspiracy theory. This much is axiomatic: fossil fuels are finite resources, and we are extracting them using the “best-first” principle. We have bet our future on the continued availability of cheap oil, gas, and coal, but that is quite obviously a very bad bet. So where are the in-depth television, radio, and newspaper discussions of this? Very few programs and articles appear. I think that’s partly because commercial media outlets depend on the fossil fuel industry for advertising, and partly because the peak oil message is threatening to people’s sense of social equilibrium—it makes them start to question the basic premises of consumerism, among other things.
In Snake Oil, you write that we must reduce our dependency on fossil fuels as quickly as possible. Which steps should be taken in this ‘project of the century’ and on what time scale? 
We really need a wartime level of mobilization, prioritization, and implementation. Obviously, one of the priorities must be to build renewable energy generation capacity. But we must also completely rethink transportation, agriculture, and building construction/maintenance. This isn’t just about how we get energy; it is also about how we use it. We have built entire societies to take advantage of the unique properties of energy sources that have no future. For example, oil is energy-dense and portable, making it a perfect transport fuel. Without oil, we will not have an airline industry in any recognizable form. Altogether, society will be less mobile. That means we have to start thinking about how to re-localize production of food and other basic necessities. We also need to redesign our cities so that people do not need cars in order to live. These are enormous projects, and we must accomplish them by mid-century. There is absolutely no time to waste.

Libya declares state of emergency – Middle East – Al Jazeera English

Libya declares state of emergency – Middle East – Al Jazeera English.

Libya has declared a state of emergency as the air force attacked gunmen in the remote south to end unrest between rival armed groups that have been clashing for days.

The General National Congress, Libya’s highest political authority, took the decision on Saturday during an “extraordinary session” after the parliament put the army on alert as gunmen stormed the air force base, Tamenhant, near the southern city of Sabha, an official said.

“A force was readied, then aircraft moved and took off and dealt with the targets,” Abdul-Raziq al-Shabahi, defence ministry spokesman, told reporters in Tripoli.

He said the army was tracking the attackers after they fled into the desert.

Earlier on Saturday, Prime Minister Ali Zeidan said a small group of gunmen had entered the air force base outside Sabha, 770km south of the capital Tripoli, but the government was in control of the town and its civilian airport.

“This confrontation (at the air base) is continuing but in a few hours it will be solved,” the prime minister told a televised address, without elaborating.

Zeidan said he had sent his defence minister to Misrata to instruct troops based there to move to the south.

“The troops from Misrata have been commissioned by the government to conduct a national task … to spread security and stability in the region,” he said in the address.

Tribal clashes

Local sources said the clashes that started last week were sparked by the death of a rebel chief linked to the Awled Sleiman, adding that the tribe accused the Toubou of murdering him.

The Toubou are black oasis farmers by tradition who also live in southern Libya, northern Chad and Niger, who have repeatedly said they were being marginalised.

Western powers fear the OPEC producer will slide into instability as the government struggles to contain heavily-armed groups and tribesmen who helped topped Muammar Gaddafi in 2011 but refuse to disarm.

The future of oil supply

The future of oil supply.


  1. Richard G. Miller1 and
  2. Steven R. Sorrell2

+Author Affiliations

  1. 180 Howards Lane, Addlestone, Surrey KT15 1ES, UK

  2. 2Sussex Energy Group, SPRU (Science and Technology Policy Research), University of Sussex, Jubilee Building, Falmer, Brighton BN1 9QE, UK
  1. e-mail: richardmiller99@aol.com


Abundant supplies of oil form the foundation of modern industrial economies, but the capacity to maintain and grow global supply is attracting increasing concern. Some commentators forecast a peak in the near future and a subsequent terminal decline in global oil production, while others highlight the recent growth in ‘tight oil’ production and the scope for developing unconventional resources. There are disagreements over the size, cost and recoverability of different resources, the technical and economic potential of different technologies, the contribution of different factors to market trends and the economic implications of reduced supply. Few debates are more important, more contentious, more wide-ranging or more confused. This paper summarizes the main concepts, terms, issues and evidence that are necessary to understand the ‘peak oil’ debate. These include: the origin, nature and classification of oil resources; the trends in oil production and discoveries; the typical production profiles of oil fields, basins and producing regions; the mechanisms underlying those profiles; the extent of depletion of conventional oil; the risk of an approaching peak in global production; and the potential of various mitigation options. The aim is to introduce the subject to non-specialist readers and provide a basis for the subsequent papers in this Theme Issue.

1. Introduction

Abundant supplies of cheap natural liquid fuels form the foundation of modern industrial economies, and at present the vast majority of these fuels are obtained from so-called ‘conventional’ oil. Oil accounts for more than one third of global primary energy supply and more than 95% of transport energy use—a critically important sector where there are no easy substitutes. Our familiarity with oil can obstruct recognition of how remarkable a substance it is: oil took millions of years to form from the remains of marine and other organisms; it is only found in a limited number of locations where a specific combination of geological conditions coincide; it possesses an unequalled combination of high energy per unit mass and per unit volume; and it is both highly flexible and easily transportable. One litre of diesel contains enough energy to move a 40 tonne truck three kilometres—a feat that would be impossible with battery-electric propulsion for example. Nonetheless, despite heavy taxation in most countries and historically high global oil prices, a litre of diesel remains cheaper than a cup of coffee.

Oil is a finite and rapidly depleting fossil resource, and the capacity to maintain and grow supply has been a recurrent concern for over 50 years. During the first decade of this century, an increasing number of commentators began forecasting a near-term peak and subsequent terminal decline in the global production of conventional oil—so-called ‘peak oil’. This process was forecast to lead to substantial and sustained disruption of the global economy, with alternative sources of energy being unable to ‘fill the gap’ at acceptable cost on the time scale required. Countering this, other commentators argued that rising oil prices would stimulate the discovery and enhanced recovery of conventional oil, the development of ‘non-conventional’ resources such as oil sands, and the diffusion of substitutes such as biofuels and electric vehicles, without economic disruption. In support of their arguments, the first group cite the plateau in crude oil production since 2005 and the associated rise in oil prices (figure 1), while the latter group cite the recent rapid growth in US tight oil production. But despite these differences, there is a growing consensus that the era of cheap oil has passed and that we are entering a new and very different phase.

Figure 1.

Monthly average crude oil price (right axis) and global oil supply (left axis). Source: US Energy Information Administration. For oil definitions see figure 2 andbox 1. Oil supply has been slow to respond to the doubling of crude oil prices since mid-2005. This is partly because of political conflicts in key regions (e.g. Iraq) and the strategies of key exporters (e.g. Saudi Arabia), but largely reflects the growing lead times on new projects (5–10 years) and the increasing difficulty and cost (up 50% since 2005) of finding and developing new resources. (Online version in colour.)

The contemporary debate over peak oil has its roots in long-standing disputes between ‘resource optimists’ and ‘resource pessimists’ that can be traced at least as far back as Malthus [1]. These disputes are underpinned by the differing perspectives of natural and social scientists, but in the case of oil they are greatly amplified by the difficulties in accessing the relevant data, the unreliability of the data that are available and the pervasive influence of powerful economic and political interests. Moreover, a full appraisal of the challenge posed by oil depletion must extend beyond geological assessments of resource size to include the potential of different extraction technologies, the cost of production of different resources, the operation of global fuel markets, the geopolitics of oil security, and the technical and economic potential for both efficiency improvements and resource substitution in multiple end-use sectors. In practice, few studies can adequately address this complexity.

In this paper, we introduce the data, concepts, terms and evidence that underlie this debate and provide a foundation and context for the papers that follow. The paper is structured as follows. Section 2 summarizes the origin, nature and classification of different types of oil resources, while §3 describes the mechanisms of oil production, the global estimates of resources and reserves and the trends in oil production and discoveries. Section 4 examines the typical production profiles of oil fields, basins and producing regions and shows how these underpin concerns about future supply. Section 5 summarizes the arguments for and against a near-term peak in global oil production and briefly evaluates some mitigation options. Finally, §6 introduces the papers in this Theme Issue.

2. Oil formation and classification

Petroleum comprises all naturally occurring hydrocarbons in rocks, and originates from organic materials (most commonly marine organisms) incorporated into sedimentary rocks.1 These are termed source rocks and are typically fine-grained mudstones or shales. The subsidence and burial of these rocks over geological time raises their temperature and pressure and commences the process of organic maturation. This process first converts the fossilized organic material into an insoluble mixture of extremely large organic molecules, termed kerogen, and then as maturation increases, progressively breaks off smaller hydrogen-rich molecules which form a liquid, leaving an increasingly carbon-rich and refractory kerogen residue. Significant generation of liquid oil typically commences at temperatures around 70°C and continues until 120–160°C, a range called the oil window. Higher temperatures may cause further decomposition of remaining kerogen to produce gaseous C1–C5 hydrocarbons (methane–pentane) and also thermal breakdown of previously generated oil into progressively smaller molecules. The current rate of global oil generation has been estimated at no more than a few million barrels2 per year [3], compared to global consumption of some 30 billion barrels per year. Crude oil production grew at approximately 1.5% per year between 1995 and 2005, but then plateaued with more recent increases in liquids supply deriving from natural gas liquids (NGLs; see box 1), oil sands and tight oil. These trends are expected to continue.

Box 1.

Categories of hydrocarbon liquids.

  • — Crude oil is a heterogeneous mix of hydrocarbons that remain in liquid phase when extracted to the surface. Crude oil is commonly classified by its density, measured in degrees of API gravity with higher API indicating lighter oil.3 Industry definitions vary, but heavy oil is typically less than 20°API.

  • — Condensate is a very light, volatile liquid, typically 50–75° API, which condenses from produced gas when it cools at the surface. Condensate is generally mixed with crude oil and produced volumes are rarely reported separately.

  • — Natural gas liquids (NGLs) is a generic term for the non-methane fraction of natural gas (mostly ethane to pentane) that is either liquid at normal temperatures and pressures, or can be relatively easily turned into a liquid with the application of moderate pressure.

  • — Extra-heavy oil is crude oil with an API gravity of less than 10° and typical viscosity more than or equal to 10 000 centipoise.4 Most current production is from the Orinoco belt in Venezuela.

  • — Oil sands (or tar sands) are a near-surface mixture of sand, water, clay and bitumen, where the latter has an API gravity less than 10° and typical viscosity 10 000–1 000 000 centipoise. The bitumen is the degraded remnant of conventional oil when oil in near-surface accumulations has been altered by the loss of the lighter hydrocarbon molecules, primarily by bacterial oxidation and biodegradation and by dissolution in groundwater. The remaining oil becomes progressively richer in bitumen, denser and more viscous. Most current production is from Alberta and uses surface mining to depths up to 65 m. The bitumen can be diluted or upgraded to a synthetic crude for transport by pipeline.

  • — Tight oil (or shale oil) is light crude oil contained in shale or carbonate rocks with very low permeabilities that can be produced using horizontal wells with multi-stage hydraulic fracturing. Most current production is from the Bakken and Eagle Ford shales in the USA.

  • — Kerogen oil (or ‘oil shale’ oil) is the oil obtained from processing the kerogen contained in fine-grained sedimentary rocks. This involves mining and crushing the rock, heating for prolonged periods at high temperatures, driving off a vapour and distilling. In situ processes are also under development, but neither approach is likely to be economic for the foreseeable future.

  • — Gas-to-liquids (GTLs) are derived through the liquefaction of methane using the Fischer–Tropsch process. This involves steam reforming of natural gas to produce carbon monoxide and hydrogen followed by catalysed chemical reactions to produce liquid hydrocarbons and water.

  • — Coal-to-liquids (CTLs) are derived either by pyrolysis of coal (low yield) or by gasification followed by a Fischer–Tropsch process (high yield).

  • — Biofuels are transport fuels derived from biological sources. At present, these consist of either ethanol produced through the yeast fermentation of sugar or starch-rich arable crops, or biodiesel derived from seed oils. Second generation cellulosic biofuels using non-food feedstocks are also under development.

Mature source rock in contact with adjacent porous rocks may expel generated petroleum down the fluid pressure gradient. If oil cannot be expelled from its source rock it is described as tight oil, a class which includes all oil trapped in impermeable rocks. Expelled oil is less dense than water so will tend to slowly migrate upwards through permeable rocks, replacing pore water. Oil may migrate to the surface and emerge as a seep, but if it reaches an impermeable barrier or seal, in a structure forming a trap, it may accumulate in place as apool within a reservoir rock. Reservoir rocks are primarily characterized by their porosity and permeability, but also by their thickness, continuity, uniformity and lithology (mineralogy, composition and structure). Typical impermeable seal lithologies include shale and salt. An oil pool usually has water-saturated rock underlying it and possibly a gas cap overlying it. An oil play is a specific set of geological conditions, defined by source, maturity, migration route, reservoir, trap and seal, which is conducive to the existence of oil pools within a geographically defined region.

An oil field may consist of one or more separate pools. Generally speaking, oil fields are accumulations large enough to be spatially defined, but are not necessarily economically viable. There is a complete size spectrum of accumulations ranging up to the giant and supergiant fields, which are usually defined as holding more than 500 million and 5000 million barrels of recoverable oil, respectively. The size distribution of commercial fields is fairly well known [4], but the distribution of smaller fields is not, in part because these are neither deliberately sought nor always announced when encountered.

In both individual plays and larger regions (petroleum basins), the majority of oil resources tend to be located within a small number of large accumulations. For example, although there are up to 70 000 producing oil fields in the world, around 500 giant and supergiant fields account for two-thirds of all the oil that has ever been discovered [4]. As discussed later, this basic physical characteristic of oil resources is of critical importance for future supply.

Oil resources are commonly classified into different categories on the basis of physical oil and rock properties, extraction technology or location, but there are inconsistencies in the terminology used. Figure 2 summarizes our classification, while box 1 expands upon these definitions. We define conventional oil as crude oil, condensate and NGLs and non-conventional oil as tight oil, extra-heavy oil, oil sands and kerogen oil. Since tight oil is similar in chemical composition to crude oil (while the other non-conventional oils are not), it could equally be classified as conventional. We classify it as non-conventional here, to emphasize the fact that tight oil is a new and rapidly growing source of liquid fuels that was historically excluded from conventional oil resource estimates and production forecasts. Tight oil also differs from conventional oil in both the geological characteristics of the resource and the methods of production.

Figure 2.

Classification of hydrocarbon liquids. (Online version in colour.)

The core issue for future supply is the extent and the rate of depletion of conventional oil, since this currently provides around 95% of global all-liquids supply. Options for mitigating this depletion include:

  • — substituting conventional oil with non-conventional oil;

  • — substituting all-oil with other non-conventional liquids (gas-to-liquids, coal-to-liquids and biofuels); and

  • — reducing demand for all-liquids (e.g. through improving end-use efficiency, substituting non-liquid energy carriers such as gas or electricity or reducing demand for the relevant energy services).

Both the extent and rate of depletion and the feasibility and cost of different mitigation options are the subject of intense debate.

3. Oil production and resources

Conventional oil has traditionally been recovered through vertical oil wells, drilled through reservoirs from top to bottom. Since these typically contact only a few metres or tens of metres of the reservoir, large reservoirs require multiple wells. Today many wells commence vertically but are then deviated to follow the reservoir. Modern methods allow the drilling of several thousand metres of horizontal sections, thereby increasing access to the edges of the reservoir and achieving higher recovery with fewer wells.

After drilling, oil initially flows to the surface under its own pressure (primary recovery), but this is usually supplemented by pumping and by injecting water or gases into the field to maintain the pressure (secondary recovery). Falling pressure reduces the flow rate and may also permit gas to exsolve from the oil. On average around 35% of the original oil in place can be recovered by these methods [57]. Wells become uneconomic when the oil flow rate becomes too low, particularly when large volumes of water from secondary recovery are co-produced. In later life, many oil wells produce far more water than oil.

The recovery factor may be increased through the use of various enhanced oil recovery (EOR) techniques, such as steam injection, CO2 injection and chemical flooding. These aim to reduce oil viscosity, to block the competing flow of gas or water and/or to drive oil towards the wells. The feasibility of different EOR techniques varies widely from one field to another and they currently account for less than 3% of global production. EOR typically raises recovery factors by 5–15%, but in rare cases total field recovery factors of over 70% can be achieved.

Recovery of tight oil is achieved through a combination of horizontal drilling and hydraulic fracturing (‘fracking’) of relatively impermeable rocks to release oil and gas at economic rates. Recovery of extra-heavy oil can be achieved through a variety of methods, but most commonly by steam injection followed by upgrading and/or dilution for transport by pipeline. Current recovery of oil sands is primarily through open-cast mining, but in situ methods using steam injection are being developed to access much larger deposits at greater depths and with lower environmental impacts. The recovery and conversion of kerogen oil is extremely energy intensive and is little practised on a commercial scale.

(a) Oil production

Global production of all-liquids averaged 85.7 million barrels per day (mb per day) in 2011, or 31.2 billion barrels per year (Gb per year). Global cumulative production amounted to approximately 1248 Gb, with half of this occurring since 1988 (figure 3). Crude oil and condensate5 accounted for 80.0% of all-liquids production in 2011, with the remainder deriving from NGLs (14.1%) and non-conventional liquids (5.9%) (figure 4). Crude oil production grew at approximately 1.5% per year between 1995 and 2005, but then plateaued with more recent increases in liquids supply largely deriving from NGLs, oil sands and tight oil. These trends are expected to continue—for example, the International Energy Agency (IEA) [8] projects NGLs accounting for 19% of global all-liquids production by 2035, and unconventional oil 13.6% (figure 15). On a per capitabasis, annual all-oil production peaked at 5.5 barrels in 1979 and has remained around 4.5 barrels since the mid-1980s. Annual consumption averages approximately 2.5 barrels per person in non-Organization for Economic Co-operation and Development (OECD) countries (82% of the global population) and approximately 14 barrels per person in the OECD, with the USA an outlier at 25 barrels per person.

Figure 3.

Global trends in all-oil production. Source: IHS Energy. Includes crude oil, condensate, NGLs, tight oil, heavy oil and syncrude from oil sands. (Online version in colour.)

Figure 4.

Breakdown of global all-liquids production in 2011 (mb per day). Source: IEA [8]. (Online version in colour.)

Crude oil production is heavily concentrated in a small number of countries and a small number of giant fields, with approximately 100 fields producing one half of global supply, 25 producing one quarter and a single field (Ghawar in Saudi Arabia) producing approximately 7% [5]. Most of these giant fields are relatively old, many are well past their peak of production [9], most of the rest seem likely to enter decline within the next decade or so and few new giant fields are expected to be found [4]. Future global production is therefore heavily dependent on the future prospects of the giant fields, but this remains uncertain—in part because the required field-level data are either unavailable or unreliable [4].6

(b) Oil reserves

The volumes of oil underground are variously described as reserves or resources depending upon how probable it is that these volumes will be produced over a given time frame with existing technologies. These volumes can be very different and must be clearly defined.

Oil reserves are those quantities of oil in known fields which are considered to be technically possible and economically feasible to extract under defined conditions. Reserve estimates rely upon uncertain assumptions about geology, technology and economics and are best expressed as a probability distribution. Point estimates may be quoted to three levels of confidence, namely proved (1P),proved and probable (2P) and proved, probable and possible (3P). While definitions vary, these are often considered equivalent to the probabilistic definitions P90, P50 and P10 which express the percentage probability that at least this quantity will be recovered [10]. Most data sources report proved reserves but these provide a highly conservative estimate of future recovery, especially at the regional level [11].7

Only a subset of global reserves is subject to formal reporting requirements and this is largely confined to the reporting of proved reserves for aggregate regions. Such data are notoriously unreliable, with many countries reporting unchanged reserves for decades (figure 5).8 Proved and probable (2P) estimates should provide a more accurate guide to future recovery, as well as posing fewer problems with aggregation, but these estimates are more difficult to obtain and are not necessarily more reliable.

Figure 5.

Annual proved reserves estimates for five Middle East states (1980–2011). Source: BP [13]. Saudi Arabia produced 100 Gb and the United Arab Emirates 27 Gb during this period. (Online version in colour.)

Globally, BP [13] estimates 1263 Gb of conventional proved reserves in 2011 (slightly more than cumulative production to date) and 389 Gb of non-conventional proved reserves. The latter comprise 169 Gb of Canadian oil sands and 220 Gb of Venezuelan extra-heavy oil, but both estimates are disputed and only a fraction of this volume is likely to be recovered over the next 25 years. In principle, global 2P reserves should be larger than 1P reserves, but according to an authoritative industry source (IHS Energy) global 2P reserves are approximately the same as national declared 1P reserves—suggesting an overstatement of proved reserves by several producing countries. Global proved reserves are rising, together with the global proved reserve to production (R/P) ratio (figure 6), suggesting to some that there is little risk of near-term supply constraints [15]. But proved reserves provide a misleading basis with which to measure depletion or forecast future production rates [16] and similar trends in R/P ratios have been observed in regions such as the UK where production has peaked and then declined [11].

Figure 6.

Global trends in all-oil proved reserves and the proved reserve to annual production ratio. Source: BP [13]. (Online version in colour.)

(c) Oil discoveries

The sum of cumulative production and reserves is commonly referred to ascumulative discoveries. At end 2011, both BP [13] and IHS Energy estimated global cumulative discoveries of conventional oil to be around 2486 Gb, although their reserve definitions and coverage of liquids do not coincide. Regional cumulative discovery estimates are changed by the discovery of new fields and by revisions to the reserve estimates for existing fields. The latter is commonly referred to as reserve growth, although cumulative discovery growth is a more accurate term, because high production rates may still cause the remaining reserves to fall year by year. Sources of reserve growth include better geological understanding, improved extraction technology, variations in economic conditions and changes in reporting practices.

The term discoveries may mean the resources contained in fields that are newly discovered within a particular time period or the change in cumulative discoveries from one period to the next. These are not necessarily the same, since reserve growth at existing fields contributes to ‘discoveries’ under the second definition even if no new fields are found. Some data sources (e.g. BP) record this reserve growth in the year in which the adjustments are made, while others (e.g. IHS) backdate the revisions to the year in which the relevant fields were discovered. Figure 7 (which uses backdated data) suggests that global new-field discoveries peaked in the 1960s and have fallen steadily since, although with an upturn around the turn of the century. Despite continuing improvements in exploration technology, most of the giant fields were discovered decades ago with more recent discoveries being smaller and more challenging to find and produce.

Figure 7.

Global trends in backdated discoveries and cumulative discoveries. Source: IHS Energy. Includes crude oil, condensate, NGL, liquefied petroleum gas, heavy oil and syncrude. Based upon backdated 2P reserve estimates. (Online version in colour.)

Figure 8 suggests that annual production has exceeded annual discoveries since 1980, but this conclusion neglects the contribution of reserve growth. The latter is hidden in figure 8 since the data source (IHS) backdates reserve revisions to the date of field discovery. When revisions are not backdated, annual reserve additions (i.e. the sum of newly discovered fields and reserve growth at existing fields) are found to exceed annual production, leading to an upward trend in global reserves (figure 6) [13,18]. Using industry 2P data, we estimate that approximately 48 Gb was added to global reserves each year between 2000 and 2007, split between approximately 15 Gb per year of new discoveries and approximately 33 Gb per year of reserve growth [11]. Reserve growth is therefore of considerable importance, but as production shifts towards newer, smaller and offshore fields the rate of reserve growth is expected to decrease in both percentage and absolute terms [1921].

Figure 8.

Global trends in production and backdated discoveries. Source: IHS Energy. Includes crude oil, condensate, NGLs, heavy oil and syncrude from oil sands. Discoveries based upon backdated 2P reserve estimates. While discoveries have fallen over time, the graph is potentially misleading since the discoveries for different years have not been estimated on a consistent basis. For example, the estimates for 1957 include 50 years of reserve growth, while the estimates for 2006 include only one year. This helps explain why comparable graphs published at different times have slightly different ‘heights’ and shapes for the backdated discovery data [17]. (Online version in colour.)

(d) Oil resources

The oil resource may refer to all the oil in an area, regardless of whether or not it is dispersed or accumulated, discovered or undiscovered, technically recoverable or economic to produce. Confusingly, the term sometimes refers solely to potentially recoverable oil. Estimates may be made of the technically recoverable resource (TRR) and/or the economically recoverable resource (ERR), but the range of uncertainty is usually very wide and these terms are often used interchangeably. The term ultimately recoverable resource (URR) refers to the oil that is estimated to be recoverable from a field or region over all time—from when production begins to when it finally ends.9

For conventional oil, the regional URR represents the sum of cumulative production, declared reserves, the anticipated reserve growth at known fields and the resources estimated to be recoverable from undiscovered fields—commonly termed the yet-to-find (YTF). The latter term is less appropriate for tight oil and oil sands, since these are located in continuous formations rather than discrete fields. However, extensive drilling is required to establish the spatial boundaries, geological characteristics and recoverable resources of these formations, and the productivity of individual wells varies widely both within and between such formations [2225].

Estimates of the global URR for conventional oil fall within the range 2000–4300 Gb, compared to cumulative production of 1248 Gb through to 2011 [11]. The IEA’s [8] most recent estimate is 3926 Gb which is higher than earlier estimates and reflects recent reassessments of the non-US YTF (731 Gb)10 and future reserve growth (681 Gb) [27,28]. Estimates of the URR of all-oil are much larger (e.g. 7119 Gb from the IEA [8]) and suggest that only one-sixth of the total recoverable resources has been produced (figure 9). However, the confidence intervals for such estimates are very wide [11,2729].

Figure 9.

IEA estimate of the remaining technically recoverable resource of all-oil. Source: IEA [8]. (Online version in colour.)

In interpreting these numbers, it is essential to recognize that large quantities of resources within the Earth’s crust provide no guarantee that these can be produced at particular rates and/or at reasonable cost. There are huge variations both within and between resource types in terms of size of accumulation, depth, accessibility, chemical composition, energy content, extraction cost, net energy yield (i.e. the energy obtained from the resource minus the energy required to find, extract and process it), local and global environmental impacts and, most importantly, the feasible rate of extraction—to say nothing of the geopolitics of access. Higher quality resources tend to be found and developed first, and as production shifts down the ‘resource pyramid’, increasing reliance must be placed upon less accessible, poorer quality and more expensive resources that have a progressively lower net energy yield and are increasingly difficult to produce at high rates. Compare, for example, the monetary and energy investment required to produce 100 kb per day from the giant oil fields of the Middle East to that required to achieve comparable rates of production from deep-water oil fields, subarctic resources or the Canadian oil sands. To quote a widely used phrase in this context, it is not so much the size of the tank that matters but the size of the tap.

This is not simply an issue of the steeply rising production costs of poorer quality resources because technical and net energy constraints may make some resources inaccessible and some production rates unachievable regardless of cost. Kerogen oil is especially constrained in rate and net energy terms and may never become economic to produce, yet it accounts for 19% of the IEA estimate of remaining recoverable resources (figure 9). Hence, a critical evaluation of future supply prospects must go beyond appraisals of aggregate resource size and examine the technical, economic and political feasibility of accessing different resources at different rates over different periods of time.

4. Oil ‘peaking’

The production of conventional oil must eventually decline to almost zero, because it is a finite resource. The phenomenon of ‘peak oil’ derives from basic physical features of the oil resource that constrain the ‘shape’ of the production cycle from an oil-producing region (i.e. the rate of production over time) and typically lead production to rise to a peak and then decline. But these physical features are mediated by multiple technical, economic and political factors that create a range of possibilities for the shape of the production cycle for a region and considerable uncertainty about the timing of any future peaks in production. The relative importance of these ‘below-ground’ and ‘above-ground’ factors varies between regions and over time and has become a central focus of dispute.

(a) Well and field peaking

As an oil well is brought online, its rate of production rises rapidly to a peak which may be extended into a plateau by restricting the flow rate or injecting fluids to maintain reservoir pressure. But at some point, production begins to decline as a result of falling pressure and/or the breakthrough of gas or water (figure 9). In mature wells, the ‘water-cut’ may represent 90% or more of the volume of produced liquids, creating a challenge for disposal. Production profiles of individual fields tend to be similar, with larger fields having longer plateaus achieved in part by drilling new wells.

Post-plateau, the production from individual wells and fields typically declines at a constant rate (exponential decline) or at a falling rate (hyperbolic decline). Empirical equations to model this production decline are widely used to forecast future well or field production and to estimate ultimate recovery [9,30,31]. In practice, the shape of the production cycle is often modified by production interruptions, the introduction of new technology and other factors.

For most oil fields, the decline period accounts for the majority of the production cycle and the bulk of cumulative production. As an illustration, figure 10 shows how each of the UK’s largest offshore fields (Forties, Brent and Ninian) took 3–8 years to reach peak, stayed on a plateau for 2–3 years and then entered a prolonged and approximately exponential decline. Forties produced 29% of its cumulative production to date before peak, Ninian 30% and Brent 40%. From a sample of 77 post-peak UK fields, we estimate an average decline rate of approximately 12.5% per year, and an average of 40% of cumulative production before peak—a number that will fall with time because the fields are still producing [4].

Figure 10.

Production profiles for three UK North Sea oil fields, with indicative exponential decline curves. Source: UK Department of Energy and Climate Change. (Online version in colour.)

To maintain or increase regional production, the declining production from post-peak fields needs to be replaced by increased production from new fields.11Hence, the average rate of decline from post-peak fields is a critical determinant of regional and global investment needs and future oil supply. Recent studies of globally representative samples of post-peak crude oil fields find a production-weighted average decline rate of at least 6.5% per year [5,32,33]. This is lower than the average decline rate, since larger fields tend to decline more slowly [4,3237]. Decline rates appear particularly low for the supergiant fields of the Middle East, but this is partly a consequence of quota restrictions of the Organization of the Petroleum Exporting Countries and disruptions from political conflict. The same studies also demonstrate that offshore fields decline faster than onshore fields and that newer fields decline faster than older fields [4]. If smaller, younger and offshore fields account for an increasing share of future global production, the average decline rate for conventional oil fields will increase prior to the peak [5].12 Greater reliance upon tight oil resources produced using hydraulic fracturing will exacerbate any rising trend in global average decline rates, since these wells have no plateau and decline extremely fast—for example, by 90% or more in the first 5 years (figure 11) [24]. The implications of this for global production are explored further below.

Figure 11.

Mean decline curve of tight oil wells in the Bakken play in North America. Source: Hughes [24]. Compiled from 66 months of production data from Bakken wells up to May 2012. The total number of wells climbed from approximately 20 in 2004 to 4598 in May 2012. The mean first year decline is 69% and the overall decline over five years is 94%. (Online version in colour.)

(b) Regional peaking

petroleum basin is a geologically defined region containing several fields, such as the North Sea. The shape of the basin production cycle depends upon the size distribution of the component fields, the order in which they are discovered and produced and the production cycle of each. Most oil resources in a basin tend to be located in a small number of large fields, with the balance being located in a much larger number of small fields [4,3941].13 The large fields tend to be discovered relatively early, in part because they occupy a larger area, with subsequent discoveries tending to be progressively smaller and requiring more effort to locate [11].

Despite varying political and economic influences on resource development, this broad pattern usually applies and has important implications that can be illustrated with the help of a simple model (figure 12). Here, it is assumed that one field is brought into production every year and each field is 10% smaller than its predecessor. In this example, the regional peak of production (in year nine) occurs when the additional production from the small fields that were developed relatively late becomes insufficient to compensate for the decline in production from the large fields that were developed relatively early. At this point, approximately one-third of the recoverable resources of the basin have been produced, half are contained in the reserves of producing and discovered fields, and one-fifth remain to be discovered.

Figure 12.

Simple model of the production cycle of a basin. Assume that (i) one field is brought on-stream each year in declining order of size; (ii) each field is 10% smaller than the previous field; (iii) fields take two years to reach peak, which is sustained for two years; (iv) peak production is 10% of URR annually; and (v) annual post-peak production is 13% of remaining resources, yielding a production decline rate of 13% per year. Source: based on Bentley et al. [42]. (Online version in colour.)

Models such as this are robust to a variety of assumptions about the size distribution, discovery sequence and production cycle of individual fields, providedit is assumed that the larger fields are found and developed relatively early [43]. Such models suggest that production from the basin will begin to decline when less than half of the regional URR has been produced, leading to an aggregate production cycle that is asymmetric to the left [11]. This is strongly supported by empirical evidence from the growing number of oil-producing regions that have passed their peak of production. For example, Brandt [44] analysed 74 post-peak regions and found that the rate of production increase exceeded the rate of decline in over 90% of cases. Similarly we analysed 37 post-peak countries and found an average of only 24% of the estimated URR had been produced at the onset of decline.14

The UK North Sea (figure 13) provides an excellent example of this process and is one of few where the relevant data are in the public domain. The first peak preceded the Piper Alpha disaster of 1988, which led to extensive remedial engineering and lower production in many fields, but the second was driven by the mechanisms described above. It may not be a coincidence that this peak occurred in 1999 when oil prices and exploratory drilling were at a 30-year low, but the small size of subsequent discoveries suggests that the peak could not have been significantly delayed—and in the absence of Piper Alpha may have occurred earlier.

Figure 13.

UK offshore oil production by field, 1975–2011. Source: data from UK Department of Energy and Climate Change. (Online version in colour.)

Oil-producing countries incorporate partial, single or multiple basins that are not necessarily developed in decreasing order of size. Nevertheless, country or regional production cycles are usually similar to those of individual basins.Figure 14 shows the aggregate production profile for the USA, broken down by region and oil type. The 1970 peak in Lower 48 production (9.6 mb per day) was anticipated by Hubbert [46] and largely driven by the declining size of newly discovered fields although state restrictions on production influenced the timing [47]. New plays in Alaska and the deep-water Gulf of Mexico temporarily increased aggregate US oil production in the late 1970s and mid-1980s, and the development of tight oil resources has done the same since 2008.

Figure 14.

US crude oil production by region and type, 1949–2011. Source: US Energy Information Adminis- tration (http://www.eia.gov/totalenergy/data/annual/showtext.cfm?t=ptb0501b;http://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbblpd_a.htm); North Dakota Department of Mineral Resources (http://www.dmr.nd.gov/oilgas/stats/statisticsvw.asp); Texas Railroad Commission (http://www.rrc.state.tx.us/eagleford/index.php#stats). Bakken Formation tight oil production estimated by subtracting extrapolated conventional oil production from total production. (Online version in colour.)

The production cycle for tight oil resources is driven by a slightly different set of mechanisms since this resource is located in continuous formations rather than discrete fields. Nevertheless, the outcome is similar to that for conventional oil. With exceptionally high decline rates for individual wells (figure 11) regional tight oil production can only be maintained through the continuous drilling of closely spaced wells.15 But tight oil plays are heterogeneous, with much higher well productivity in the ‘sweet spots’ than elsewhere [2224,48]. So when the sweet spots become exhausted, it becomes increasingly difficult to maintain regional production. Based upon these considerations, Hughes [24] suggests that aggregate US tight oil production is likely to peak around 2.5 mb per day (compared to total US oil production of 6.9 mb per day in 2008) and is likely to decline very rapidly after 2017.16 Other, less detailed studies are more optimistic: for example, the IEA projects a peak of 3.2 mb per day in 2025, followed by a slower decline.

5. Oil futures

(a) Anticipating the global peak

The same mechanisms that lead to peaks and declines in regional oil production should ultimately lead to a peak and decline in global production. This inevitability was first pointed out by Hubbert in the mid-1950s, but the multiple forecasts of regional and global peaks that have been made since that date have frequently proved premature [49]. More optimistic forecasts have often proved equally incorrect, but it takes longer for their errors to become evident [50,51].

The available methods for forecasting future oil supply vary widely in their theoretical basis, inclusion of different variables, level of aggregation and complexity [11,52]. Each approach has strengths and weaknesses and none can yet provide generally accepted estimates (box 2).

Box 2.

Methods of forecasting oil supply.

Hubbert’s method involved fitting curves to historical trends in regional production and discovery and extrapolating these forward in time, constrained by assumptions about the size of recoverable resources. This ‘curve-fitting’ approach is straightforward and widely used, but lacks an adequate theoretical basis, relies upon uncertain assumptions about the regional URR, is sensitive to the choice of functional form and neglects important economic and political variables [53]. The latter may be more easily accommodated with econometric techniques [54,55], but while these provide a better match to historical data this may not translate to more accurate forecasts of future production. Hybrids of curve-fitting and econometrics offer promise, but can also have the disadvantages of both [56,57]. Systems dynamic models [58,59] reproduce the physical and economic mechanisms that govern oil production, but can also be overcomplicated and unstable and frequently lack both empirical validation and sufficient data for parametrization. Perhaps the most promising approach is to model the production of individual fields and projects and to construct regional forecasts by aggregating this bottom-up information [60]. However, existing bottom-up models are hampered by their reliance on proprietary datasets, lack of transparency, uncertainty over key variables and the need to make multiple assumptions [52]. Given the potential for political, economic, or technological disruptions, no model can provide estimates of great precision. Moreover, increasing model complexity does little to address this problem and is subject to rapidly diminishing returns.

But despite multiple uncertainties, the timing of the global peak in conventionaloil production appears relatively insensitive to both the size of recoverable resources and the shape of the production cycle [11,61]. Simple calculations suggest that delaying a global peak in conventional oil production beyond 2030 would require more than 1700 Gb of remaining recoverable resources (i.e. a URR>3000 Gb), together with a relatively slow increase in production prior to the peak and a relatively rapid decline thereafter, especially if the peak is extended into a multi-year plateau [11].

Following an earlier literature review, we concluded that a sustained decline in global conventional production appears probable before 2030 and there is significant risk of this beginning before 2020 [11,62]. This assessment excluded tight oil resources since these were classified as unconventional. However, on current evidence the inclusion of tight oil resources appears unlikely to significantly affect this conclusion, partly because the resource base appears relatively modest (figure 9). Despite rising proved reserves, the depletion of conventional oil resources is relatively advanced with cumulative production equal to at least 30% of the global URR (i.e. close to the point at which production has typically been found to decline in a region). A significant portion of this resource is located in small fields in difficult locations that are unlikely to be accessed quickly. However, global supply is profoundly influenced by geopolitical factors and any supply constraints are likely to trigger much greater price increases and demand/substitution responses than would be the case at the regional level—a process that is already underway. As a consequence, a sharp peak in global conventional oil production appears unlikely.

To maintain or increase global liquids supply, any decline in production from post-peak fields needs to be replaced by investment in EOR at those fields (at much greater than historic investment rates, the effects of which contribute to the current global post-peak decline rate), the discovery and development of new fields or increased production of other liquid fuels. Current evidence on average field decline rates suggests that a minimum of 3 mb per day of new capacity must be brought on stream each year to compensate for declining crude oil production—equivalent to a new Saudi Arabia coming on stream every three years [4,8]. If demand grows and/or decline rates increase, significantly greater annual investment will be required.

Based upon these considerations, the IEA [8] anticipates crude oil production from existing fields falling from 68.5 mb per day in 2011 to only 26 mb per day in 2035 (figure 15). However, it expects total crude production to fall only slightly by that date (to 65.4 mb per day) as a result of the rapid development of ‘fallow’17 and undiscovered crude oil fields. Moreover, it anticipates global all-liquids production increasing to 96.8 mb per day over that period as a result of rapid growth in NGL production and the development of tight oil, oil sands and other unconventional resources. In other words, while the IEA now suggests that global crude oil production is past its peak, it does not anticipate a significant decline before 2035 and it foresees no peak in conventionalall-oil orall-liquids production before that date.

Figure 15.

IEA projection of global all-liquids production to 2035. Source: IEA [8]. The ‘New Policies’ scenario takes into account policy commitments and plans that have already been implemented, as well as those that have been announced. (Online version in colour.)

Despite the projected global liquids supply up to 2035 being significantly lower than in earlier IEA publications, these projections remain the target of criticism. For example, Höök et al. [37] argue that production from existing fields could decline more quickly than the IEA assumes, while Aleklett et al. [63] argue that the projections rely upon implausible assumptions about the rate at which fallow and undiscovered fields can be developed and produced.18 Both studies imply more rapid decline of global crude oil production and hence more difficulty in maintaining aggregate global liquids supply. Furthermore, the IEA projection assumes adequate investment, no geopolitical interruptions and prices that do not significantly constrain global economic growth.

(b) Substitution and demand reduction

Given the multiple uncertainties involved, disputes over the precise timing of a global peak in conventional oil production are unhelpful. What is more relevant is the appropriate response to the risk of rising prices and supply constraints and the extent to which markets can be relied upon to mitigate those risks. Mitigation can be achieved through fuel substitution and demand reduction but both will prove challenging owing to the scale of investment required and the associated lead times. For example, a 2008 report for the US Department of Energy [64] argued that large-scale mitigation programmes need to be initiated at least 20 years before a global peak if serious shortfalls in liquid fuels supply are to be avoided. While this report overlooked key options such as electric vehicles and tight oil, it also assumed a relatively modest rate of post-peak crude oil decline (2% per year)19 and ignored the environmental consequences of expanding the supply of non-conventional resources. Avoiding these would necessarily restrict the range of available options.

Many sources anticipate large-scale substitution of NGLs for crude production over the next two decades, owing to expanding gas supply (including shale gas) and/or increases in the average NGL content of that gas. While the IEA [5] states that the latter is expected to remain constant, its projections imply a doubling. But even assuming production grows as anticipated, NGLs cannot fully substitute for crude oil since they contain about a third less energy per unit volume and only about one-third of that volume can be blended into transport fuels.20 NGLs can substitute for crude oil as a petrochemical feedstock and may partially compensate for increased heavy oil within the refinery input mix, but at some point a rising volume of NGLs will be unable to adequately make up for reduced crude supply.

The rapid and largely unexpected expansion of tight oil since 2007 provides a powerful demonstration of how technical change, incentivized by rising prices, can offset depletion. Heralded by some as a revolution [65], this resource is at an early stage of development and its future prospects remain highly uncertain. On current evidence, tight oil appears unlikely to offset the depletion of crude oil for an extended period of time, in part because the resource base appears relatively modest (figure 9). The IEA mean estimate of 240 Gb is comparable to McGlade’s [66] (278 Gb)21 and is only 10% of its estimate of conventional oil resources. Also, the very high decline rates make it challenging to sustain regional production, and the requirement for continuous drilling of closely spaced wells is likely to restrict development in densely populated areas. Nevertheless, the future potential of this resource is much debated and is a key area of uncertainty to resolve.

 Oil sands already make an important contribution to global liquids supply and most forecasts anticipate a significant expansion over the next 20 years. But according to the Canadian Association of Petroleum Producers [68], the Canadian oil sands will deliver only 5 mb per day by 2030, which represents less than 6% of the IEA projection of all-liquids production by that date. Similarly, Söderbergh et al. [69] conclude that a ‘crash programme’ to develop the oil sands could only deliver a comparable amount. Also, this resource is significantly more energy- and carbon-intensive than conventional oil, and surface mining has massive impacts on local and regional environments.

 GTLs and CTLs are already produced in small volumes as high cost alternatives to conventional oil and may be expected to expand their contribution in the future. But the environmental impacts of CTL production are severe and the inefficiencies of the process mean that significant quantities of coal and gas would be required to provide more than a marginal contribution to total liquids supply [70]. Taken together, these features are likely to greatly restrict their potential contribution.

Finally, biofuels offer promise as well as potentially lower environmental impacts, but expansion of production is constrained by the large land areas required22 and the probable conflicts with food production. Commercially produced biofuels also have a lower net energy yield than conventional oil, implying the need for a 50–600% increase in primary energy inputs to produce an equivalent volume of transportation fuels [72]. While several studies suggest that ‘second-generation’ biofuels could provide up to a quarter of global transport fuel by 2050 [73], these projections are sensitive to key assumptions [74] and would require significant technological breakthroughs.

Box 3

Oil and gas resources and cumulative carbon emissions. Source: [8,13,66,67].

A growing body of evidence indicates that global temperature change is approximately linearly related to cumulative carbon dioxide emissions and largely independent of the pattern of emissions over time [7882]. Several modelling studies suggest that the most probable cumulative emissions for an average global temperature increase of 2°C is around 1100 GtC, with a 5–95% uncertainty range of 1–2.5°C per 1000 GtC [80]. Given that humanity has already emitted some 550 GtC (to end 2011), a 50 : 50 chance of meeting the 2°C target is likely to require future cumulative emissions to remain below a similar value (approx. 550 GtC)—with a higher probability of meeting the target requiring lower emissions.

As the following figure indicates, such a threshold will be reached if the remaining recoverable resources (RRR) of conventional oil and gas are used, together with the proved reserves of oil sands and extra-heavy oil. Further exploitation of unconventional oil and gas resources would significantly reduce the probability of meeting the temperature target, unless those emissions can be captured and sequestered. However, this analysis ignores the emissions from coal combustion, which are currently 70% of those from oil and gas and are increasing more rapidly. As a result, the allowable ‘budget’ of oil and gas resources is much less than indicated here. Indeed, with a realistic allowance for future coal consumption, a 2°C target implies that only some of the conventional oil and gas resources can be used.


These judgements deserve much closer scrutiny and need to be re-evaluated as experience grows in producing these resources. Based upon current evidence [8,70,73,7577], we estimate that around 11–15 mb per day of non-conventional liquids production could be achieved in the next 20 years at costs similar to or higher than today’s ‘marginal barrel’ at approximately $90–120 per barrel (figure 16). This would justify the IEA projection (figure 15), but only if crude oil production remains on a plateau over that period and NGL production expands as anticipated. If crude oil production falls, then total liquids production seems likely to fall as well, leading to significant price increases and potentially serious impacts on the global economy. Also, figure 15 obscures the falling energy content per unit volume of global liquids supply, together with the falling net energy yield and growing carbon intensity. The last point is especially serious, since ambitious targets for reducing carbon emissions are likely to be inconsistent with expanding the supply of non-conventional liquids. As box 3shows, avoiding dangerous climate change requires the bulk of these resources to remain in the ground.

Figure 16.

Estimated production cost of various oil resources. Source: IHS-CERA. Assumes 15% rate of return. Canadian oil sand production is relatively cheap at the mine mouth, but requires expensive upgrading before it can be transported by pipeline to refineries. Source: [8,13,66,67]. (Online version in colour.)

The final and most promising mitigation option is to weaken the link between economic growth and liquid fuel demand. This will require major changes in the transport sector which accounts for half of global consumption and nearly two-thirds of OECD consumption. Passenger cars are responsible for approximately half of this, but substantial reductions can be achieved through improving vehicle efficiency, increasing average occupancy, accelerating the diffusion of alternative vehicle technologies, shifting to different transport modes or simply reducing the overall demand for mobility. Given the potential of all these alternatives [83] and the necessity to move rapidly towards low carbon transport systems, they deserve to be given the highest priority. Important changes in this direction are already underway, such as the recent halting of the long-term trend of increased passenger travel in OECD countries (‘peak car’) [84], and the multiple policy initiatives being introduced around the world. But the core issue is the rate at which this transition can be achieved and the extent to which it can offset the rapidly growing and potentially huge demand for car-based mobility in emerging economies and the developing world. For example, with over one hundred million cars, China is now the largest car market in the world, but per capita levels of car ownership remain comparable to that in the USA in 1920.

As Sager et al. [85] have shown, OECD levels of car-based mobility are unlikely to be sustainable for a global population of 9 billion, even assuming a rapid, global transition to battery-electric vehicles and very low carbon electricity systems. Hence, technical improvements will need to be accompanied by serious efforts to restrict the overall growth in mobility and to promote the most efficient modes. This conclusion applies even more strongly to shipping, road freight and aviation which currently account for 40% of transport energy use and which have comparatively few technical solutions available. We therefore expect the combination of oil depletion and environmental constraints to have far-reaching implications for these modes, along with the economic activities and social practices they enable. But most governments and electorates remain either unaware of these implications or reluctant to face up to them.

6. An overview of the Theme Issue

As the above discussion demonstrates, future oil supply is a complex and multifaceted topic, with multiple influencing variables and varying opportunities for mitigation. To improve understanding of these issues, the papers in this Theme Issue of Philosophical Transactions A seek to provide an up-to-date synthesis of the uncertainties and risks surrounding future global oil supply, as well as assessing the potential of several mitigation options. The papers include perspectives from both the natural and social sciences and reflect a range of views.

The first five papers examine a number of aspects of conventional oil depletion. In the first, Sorrell & Speirs [86] examine the use of curve-fitting techniques for estimating recoverable resources—an approach closely associated with the peak oil debate. They summarize the historical origins, contemporary application and strengths and weaknesses of nine different types of curve-fitting technique, and update and extend Hubbert’s mathematical synthesis of those techniques [87,88]. Using illustrative data from a number of oil-producing regions, they demonstrate how different techniques, together with variations in the length of time series, functional form and number of curves, repeatedly lead to inconsistent results. They conclude that such techniques have a systematic tendency to underestimate recoverable resources and hence raise concerns about their use in forecasting future oil supply.

 Höök et al. [89] summarize the current state of knowledge on the rate of decline of production from different types of crude oil fields (decline rates) and the rate at which remaining resources are being and can be produced (depletion rates). They clarify the definition of decline and depletion rates, identify their physical and economic determinants, explain their importance for regional and global oil supply and examine how these rates vary between different regions and types of field. They conclude that decline and depletion rates are generally higher for smaller fields and question the values that are assumed or implied for these variables within several global supply forecasts.

 Murphy [90] examines the importance of the energy return on investment(EROI) for liquid fuels production and the implications of declining EROI for the global economy. From a review of the rather limited literature on this topic, Murphy concludes that: the EROI for global oil and gas production is roughly 15 and declining while that for the USA is 11 and declining; the EROI for unconventional oil and biofuels is generally less than 10; there is a negative exponential relationship between oil prices and aggregate EROI which may become nonlinear as the latter falls below 10; and the minimum oil price needed to increase oil supply is consistent with that which has historically triggered economic recessions. Murphy concludes that the declining EROI of liquid fuels will make it increasingly difficult to sustain global economic growth.

 Jackson & Smith [38] provide an optimistic view of global oil supply, based in part upon industry data on the production from individual fields and assumptions about the contribution of new technology and tight oil. They emphasize the economic and political factors influencing long-term supply and argue that resource depletion will not provide a significant constraint for at least two or three decades. Instead, they anticipate significantly lower rates of demand growth contributing to an initial ‘undulating plateau’ and subsequent slow decline of both conventional and all-oil production sometime after 2040. They anticipate a steady increase in upstream investment requirements and oil price volatility, leading to fuel substitution and improved energy efficiency.

 Kumhof & Muir [91] use the International Monetary Fund’s Global Integrated Monetary and Fiscal Model to assess the implications of oil supply constraints for the global economy. They initially assume that oil demand and supply are unresponsive to price changes and find that a small reduction in the growth rate of world oil production has only modest effects on gross domestic product. They then investigate three alternative scenarios in which: (i) there is less scope for substitution between oil and other energy resources; (ii) the contribution of oil to economic output is higher than conventionally assumed; and (iii) the reduction in global oil production is larger. Each scenario alone, but especially in combination, leads to a significant reduction in economic activity. Kumhof and Muir highlight the competing views about the plausibility of these alternative scenarios, the potential for nonlinear responses and the risk of greater impacts from oil depletion than orthodox economic theory suggests.

The remaining six papers investigate the potential of various mitigation options. In the first, Muggeridge et al. [6] provide a comprehensive overview of the nature, status and prospects for EOR techniques and their potential contribution to global oil supply. They begin by introducing the oil field recovery equation, summarizing the evidence on global recovery rates and explaining why these are typically low. They then examine the nature of EOR processes, the history of their application and the current status and contribution of EOR worldwide. They describe two, new, broadly applicable, low cost EOR technologies and give examples of existing and new EOR projects in different regions of the world. They conclude by highlighting the synergy between CO2 sequestration and EOR, the further technical advances that may be expected and the need to accelerate global deployment.

 Chew [92] describes the nature, extent and characteristics of ‘unconventional’ oil and gas resources. He reviews the extraction technologies and provides a detailed assessment of the size and recoverability of each resource. Chew finds that oil sands, extra-heavy oil and kerogen oil have large in-place resources, large areal extent, low exploration risk and the potential for long, stable production life. However, their low recovery factors, high cost, capital and energy intensity and long lead times make them only a partial substitute for conventional oil. Tight oil presents fewer recovery problems, but the resource base is modest. In contrast, unconventional gas resources appear significantly larger than those of unconventional liquids and continued growth in unconventional gas production could have significant impacts on the global oil market.

 Höök et al. [70] provide an overview of CTL and GTL technologies, including their chemistry, technology, process efficiencies, input requirements, economics and environmental impacts. They argue that economic analyses have tended to underestimate costs and that a significant and locally concentrated amount of coal and gas would be required for these technologies to provide more than a marginal contribution to liquid fuel supply. Moreover, CTL and GTL production has significant environmental impacts which could slow or even stop their development unless adequate solutions can be found.

 Timilsina [73] examines the potential contribution of biofuels to the global energy mix. Concern over the impact of biofuels on food prices has led several countries to reduce policy support, thereby slowing down the rate of production growth and increasing interest in second generation feedstocks. Given their relatively high costs, Timilsina estimates that biofuels are unlikely to contribute more than 5% of global transport fuel demand over the next 10–15 years. Projections of biofuels contributing one quarter of transport fuel demand by 2050 appear optimistic and would require significant technological breakthroughs. The contribution of biofuels to greenhouse gas emission reduction is also undermined by their indirect impacts on land use change.

 Delucchi et al. [93] evaluate the status and prospects of electric vehicles (EVs) as a mitigation option. They begin by describing the technical features of battery, fuel cell and plug-in hybrid technology and their current state of development. They then examine the key technical challenges, including the cost, performance and lifetime of batteries and fuel cells, and the energy use, driving range, power and recharging time of different types of vehicle. They demonstrate the significant environmental benefits of EVs, argue that their lifetime cost can become comparable to that of conventional vehicles and suggest that problems of material scarcity can be overcome. Large-scale deployment hinges upon infrastructure development—including battery charging options and integration with low carbon electricity systems—and requires policies that bolster emerging markets, facilitate EV ownership and boost consumer confidence.

The final paper by Freedman [94] investigates the market and contextual factors influencing the uptake of EVs. The implementation of these technologies at scale requires careful attention to consumer-behavioural and policy challenges as well as adapting existing value chains and introducing new ones. The legacy of diverse urban planning and fuel taxation policies and varying degrees of consumer inertia will lead to very different rates of adoption in regional markets. In the absence of technology that provides a compelling consumer proposition, substitution of oil demand in OECD markets will be challenging, as will channelling exponential growth from the growing Asian market into less oil-intensive road transport solutions.

In combination, the papers provide a sobering picture of the challenges ahead. Most authors accept that conventional oil resources are at an advanced stage of depletion and that liquid fuels will become more expensive and increasingly scarce. The tight oil ‘revolution’ has provided some short-term relief, but seems unlikely to make a significant difference in the longer term. Even with a more sanguine view of global supply prospects, the large scale, capital intensity, long lead times and constrained potential of the various mitigation options point to the need for a coordinated response.

At present, rising oil prices are incentivizing the development of supply-side options whose large-scale pursuit would guarantee dangerous climate change (box 3). Avoiding this outcome requires instead the prioritizing of demand-side options and far-reaching changes in global transport systems. Climate-friendly solutions to ‘peak oil’ are available, but they will not be easy, they will not be quick and they appear unlikely to allow the majority of the world’s population to achieve the levels of mobility currently enjoyed in the West. Lower mobility, in turn, implies a very different direction for future economic development. In sum, adapting rapidly and peacefully to oil scarcity in a manner that does not destroy the global environment provides humanity with a formidable challenge.


We are grateful to Peter Jackson, Ann Muggeridge and anonymous reviewers for most helpful comments on earlier drafts. We are also grateful to IHS Inc. for the data in figures 378 and 16. The use of such content was authorized in advance by IHS. Any further use or redistribution of this content is strictly prohibited without written permission by IHS Inc. who reserve all rights.


  • One contribution of 13 to a Theme Issue ‘The future of oil supply’.

  • 1 Alternative, non-biological (‘abiogenic’) origins for petroleum have also been proposed. These require a deep-Earth source of primordial methane which is converted, by Fischer–Tropsch reactions, into longer chain alkanes and other molecules, either in the upper mantle (the so-called Russian theory) or in the upper crust (the so-called Thomas Gold theory). These theories have been generally discredited, both on chemical and thermodynamic grounds and from considerable empirical evidence, such as the presence of biomarker molecules in oil that are directly traceable to biological precursors [2].

  • 2 Oil production and resources are commonly measured in volumetric terms, despite significant variations in specific gravity and energy content. One barrel (b) is approximately 158 litres and may weigh between 0.12 and 0.16 tonnes. Commonly used multiples include thousand (kb), million (mb) and billion barrels (Gb). A ‘barrel of oil equivalent’ (boe) is a quantity of fuel containing the average thermal energy of a barrel of oil, defined as 6.1 GJ (higher heating value).

  • 3 API gravity is defined as (141.5/specific gravity) – 131.5. API gravity therefore rises as the specific gravity falls.

  • 4 Water at a temperature of 21°C has a viscosity of approximately one centipoise.

  • 5 For brevity, the phrase ‘crude oil’ will be used in place of ‘crude oil and condensate’ in the remainder of this paper. This is because most data sources do not allow the produced volumes of these two liquids to be distinguished.

  • 6 Some field-level data are published annually by oil industry journals. More comprehensive data may be purchased (at considerable cost) from commercial sources, but there are questions over the reliability of some of these data, only a portion of which is audited.

  • 7 Regional reserve estimates are commonly derived by summing the estimates of individual fields, but such aggregation is only appropriate for mean estimates of recoverable resources and will lead to significant underestimation when applied to 1P (P90) estimates [11,12]. Aggregation of 2P (P50) estimates should lead to smaller errors, but the sign and magnitude of these will depend upon the shape of the underlying probability distribution.

  • 8 For example, the Oil and Gas Jounal[14] reports identical reserves estimates for 2010 and 2011 from 69 of 101 oil-producing countries.

  • 9 In principle, this includes oil that is currently undiscovered, not recoverable with existing technology and/or not currently economic, but which is expected to become so before production ceases.

  • 10 This estimate includes resources that are unlikely to be recoverable within the next 25 years, such as 74 Gb in the Arctic and FSU, but also excludes a number of smaller, less accessible regions that may potentially contain oil [26].

  • 11 Historically, EOR has only briefly been able to reverse the decline of any post-peak conventional field, and we see no reason for this behaviour to change. The effects of EOR are already included in contemporary estimates of the average rate of production decline from different groups of fields.

  • 12 In the long term, when global conventional production is past peak and the rate and size of discovery are falling, the old giant fields may increasingly dominate total production. If this occurs, the long term aggregate decline rate would converge towards the average decline rate of the giant fields [38].

  • 13 There is a long-standing debate about whether oil fields typically follow a lognormal or power-law size distribution [4]. But the uncertainties largely relate to the ‘tail’ of the distribution and do not affect this general conclusion.

  • 14 Using US Geological Survey [45] estimates of the regional URR, we estimated a simple mean for ‘depletion at peak’ of 22%, a production-weighted mean of 24% and a maximum of 52%. URR estimates tend to increase over time as knowledge expands, prices increase and technology improves, so estimates of the level of depletion at peak are likely to fall.

  • 15 The largest tight oil play in the USA is the Bakken in North Dakota. In May 2012, this was producing 0.57 mb per day from 4598 wells. Production was on a rising trend, sustained by drilling approximately 1500 wells each year. The US Energy Information Administration (EIA) estimates that there are only approximately 11 700 available drilling locations in the Bakken, although industry estimates are higher [24].

  • 16 Hughes’ [24] analysis is based upon the production history of 65 000 wells from 31 shale plays, contained in the DI Desktop/HDPI database, together with EIA data on the number of available drilling locations within each play. Assuming current drilling rates are maintained, Hughes projects a peak in US tight oil production of 2.3 mb per day in 2016, declining rapidly to 0.7 mb per day in 2025.

  • 17 Fallow fields are fields that are discovered but not currently scheduled for development.

  • 18 Aleklett et al. estimate historical depletion rates for different regions, defined as the ratio of annual production to remaining recoverable resources, together with the depletion rates assumed by the IEA for fallow and undiscovered fields. This leads them to conclude that the depletion rates assumed by the IEA are implausibly large. But their comparison of regional depletion rates with the corresponding rates for specific groups of fields is potentially flawed.

  • 19 To frame this, a 2% decline in crude oil production implies the loss of 1.4 mb per day in the first year. On an energy equivalent basis, this corresponds to the output of ninety 1 GW nuclear power stations, or approximately one quarter of global nuclear capacity.

  • 20 Natural gasoline (pentane and above), isobutane and butane are conventionally blended into gasoline, but ethane and propane are not.

  • 21 Tight oil resources have not been systematically investigated on a global scale. McGlade [66] uses a relatively crude method based upon a review of shale gas resource estimates [67] and assumptions about the ratio of tight oil to shale gas within each region. This gives a range from 150 Gb to 508 Gb, with a central estimate of 278 Gb.

  • 22 For example, replacing US gasoline consumption with corn-based ethanol would require approximately two million km2 of cropland, which is 15% larger than the total US farmland area. Moreover, this calculation neglects the primary energy required to produce, transport, process and deliver the ethanol which appears to be only slightly less than the energy obtained from using it [71]. Hence, corn-based ethanol production is heavily subsidized in energy (as well as monetary) terms, making large-scale substitution impractical over the longer term.


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“Two Roads Diverged” – Wall Street’s Doubts Summarized As “The Liquidity Tide Recedes” | Zero Hedge

“Two Roads Diverged” – Wall Street’s Doubts Summarized As “The Liquidity Tide Recedes” | Zero Hedge.

From Russ Certo, head of rates at Brean Capital

Two Roads Diverged

As we know, it has been a suspect week with a variety of earnings misses.  Although I have been constructive on risk asset markets generally, equities anecdotally, as figured year end push for alpha desires could let it run into year end.  New year and ball game can change quickly.  Just wondering if a larger rotation is in order.

There is an overall considerable theme of what you may find when a liquidity tide recedes as most major crises or risk pullbacks have been precipitated by either combination of tighter monetary or fiscal policy.  Some with a considerable lag like a year after Greenspan departed from Fed helm, or many other examples.  I’m not suggesting NOW is a time for a compression in risk but am aware of the possibility, especially when Fed Chairs take victory laps, Bernanke this week.  Symbolic if nothing more.       Cover of TIME magazine?

I happen to think that 2014 is a VERY different year than 2013 from a variety of viewpoints.  First, there appears to be a dispersion of opinion about markets, valuations, policy frameworks and more. This is a healthy departure from YEARS of artificiality.  Artificiality in valuations, artificiality in market and policy mechanics and essentially artificiality in EVERY financial, and real, relationship on the planet based on central bank(s) balance sheet expansion and other measures intended to be a stop-gap resolution to  tightening financial conditions, adverse expectations of economic activity, and the great rollover….of both financial and non-financial debt financing.       Boy, what a week in the IG issuance space with over $100 billion month to date, maybe $35 billion on the week.        Debt rollover on steroids.

Beneath the veneer of market aesthetics, I already see fundamental (and technical) relevance.  This could be construed as an optimist pursuit or reality that markets are incrementally transcending reliance and/or dependence on the wings of central bank policy prerogatives.  The market bird is trying to fly on its own with inklings of a return to FUNDAMENTAL analysis.  A good thing, conceptually, and gradualist development of passing the valuation baton back to market runners.  A likely major pillar objective of policy despite more than a few critics worried about seemingly dormant lurking imbalances created by immeasurable policy and monetary and fundamentally skewed risk asset relationships globally.

This exercise of summarization of ebb and flow and comings and goings of markets and policy naturally funnels a discussion to what stature of central bank policy currently or accurately exists?  Current events.  What is the accurate stage of policy?

I actually think this is a more delicate nuance than I perceive viewed in overall market sentiment. Granted, we have taken a major step for mankind, which is the topical engagement of some level of scope or reduction of liquidity provisioning,” not tightening.”  Tip of the iceberg communique with markets to INTRODUCE the concept of stepping off the gas but not hitting the break.  Reeks of fragility to me but narrative headed in right direction to stop medicating the patient, the global economy.

Some markets have logically responded in kind.  The highest beta markets as either beneficiaries or vulnerable to monetary policy changes, the emerging markets, have reflected at least the optics of change with policy.  More auditory than optics in hearing a PROSPECTIVE change in garbled Fedspeak.  The high flyer currencies which capture the nominal flighty hot money flows globally affirmed the Fed message.

In literally the simplest of terms, the G7 industrialized, not peripheral; interest rate complex has simply moved the needle in form of +110 basis point higher moves in nominal sovereign interest rates.  And there are a bevy of other expressions which played nicely and rightly conformed to the messages coming out of the central bank sandbox.  But there are ALSO notable dichotomies, which send a different or even the opposite message.

I perceive a deviation in perception of message as some markets or market participants appear to be betting on taper or a return to normalcy in global growth or U.S. growth outcomes???  OR no taper, or conversely QE4 or whatever.  Sovereign spreads have moved materially tighter vs. industrial and supposed risk free rates (Tsys, Gilts, Bunds) both last year and in the first three weeks of 2014. Something a new leg of QE would represent, not a taper.   A different year!!!

There have been VERY reliable risk asset market beta correlations over the last 5 years and sovereign or peripheral spreads have been AS volatile and correlated as any asset class.  These things trade like dancing with a rattle-snake.  Greece, Spain, France etc.  They can bite you with fangs.  They have been meaningfully more correlated to high yield spreads and yields and to central bank balance sheet expansion as nearly any asset class.  So, the infusion of central bank liquidity into markets has seen “relief” rallies in peripherals and one would think the converse would be true as well.  The valuations have represented the flavor and direction of risk on/risk off or liquidity on/liquidity off reliably for many months/years.

But I THOUGHT markets were deliberating tapering views and expressions as validated by some good soldier markets BUT that is not necessarily what the rally in riskiest of sovereign “credits” is suggesting.  The complex seems to be decoupling with Fed balance sheet correlation and message.  Some are OVER 100 standard deviations from the mean!  They are rich and could/should be sold.     Especially if one was to follow the obvious correlation with the direction of central bank as stated.

But look to other arena’s like TIPS breakevens which also have been correlated with liquidity and risk on/off and central bank balance sheet expansion.  Correlated to NASDAQ, HY, peripherals and the like.   BUT this complex COUNTERS what peripherals are doing.  They haven’t shown up to the punch bowl party yet.  Not invited.      This is a departure of markets that have largely and generally been in synch from a liquidity and performance correlation view.

Like gold and silver which got tattooed vis a vis down 35%+ performance last year MOSTLY, but not exclusively, due to perceptions of winds of central bank change.  BUT even within a contrary, the fact that rallies in Spain, France, Greece, and Italy reflect more of central bank easing notions, the opposite of taper.  In essence, the complex has gone batty uber-appreciation this year.  Sure, many eyeball the Launchpad physical metals marginal stabilization no longer falling on a knife but the miner bonds and the mining stocks are string like bull with significant appreciation.  This decidedly isn’t the stuff of taper which had the bond daddy’s romancing notions of 3% 10yr breaks, 40 basis point Green Eurodollar sell-offs,  emerging market rinse, and upticks in volatility amongst other things.

Equity bourses appear to be changing hands between investors with oscillating rotations which mark the first prospective 3 week consecutive sell-off in a while.  New year.  This is taper light.       Somewhere in between and further blurs the correlation metrics.

So, which is it?  Are we tapering or not and why are merely a few global asset classed pointed out here, why are they deviating or arguably pricing in different central bank prospects or scenarios or outcomes?

I’m not afraid but I am intrigued as to the fact that there may some strong opinions within markets and I perceive a widely received comfortability with taper or tightening notions, negative leanings on interest rate forecasts, a complacency of Fed call if you will.  And all of these hingings occur without intimate knowledge of the most critical variable of all, what Janet Yellen thinks? She has been awfully quiet as of late and there are many foregone conclusions or assumptions in market psyche without having heard a peep from the new MAESTRO.

Moreover, looking in the REAR view mirror within a week where multiple (two) Fed Governor proclamations, communicated and implicated notions which arguably would be considered radical in ANY other policy period of a hundred years.  How to conduct “monetary policy at a ZERO lower bound (Williams) ” and “doing something as surprising and drastic as cutting interest on excess reserves BELOW zero (Kocherlakota).”

This doesn’t sound like no stinking taper?  A tale of two markets.  To be or not to be.  To taper or not to taper.  Two roads diverged and I took the one less traveled by, and that has made all the difference.  Robert Frost.

Which is it? Different markets pricing different things.  Right or wrong, the market always has a message; listen critically.


Stiglitz: Worry! | ToTheTick™ToTheTick™

Stiglitz: Worry! | ToTheTick™ToTheTick™.

Joseph Stiglitz, in an interview with CNBC has said what we are all probably thinking right now. Even President Obama can’t be foolhardy and ostrich-like with his head buried in the sand to imagine that the US economy is picking up. Hope against hope and all the rain dancing you can do won’t get the economy moving because the wrong decisions have been taken by the people that thought that they had the ultimate solution to the world’s woes. Joseph Stiglitz is right when he says that the economy is not in recovery mode and hasn’t been.

Talk as much as we might wish about growth, it just hasn’t materialized. The lackluster growth with the highest growth rate in the third quarter of 2013 (the highest since 2011, which is nothing in itself to write home about) has not even dented the US economy let alone kick-started it into 2014. We have everything to be still worried about as the problems are just stagnating there as the people at the top take the decisions that are going to bring the economy further down into the doldrums. Just how far can we go?


The US stock market has hardly had a good start to the year. Just about the only thing that is doing well is the banking sector. As usual, some might say. The correction that has been promised now for months looks set to be rearing its ugly head at any moment now. Equities have fallen already almost 2% since the start of this year. Those that had somehow foolishly believed that the only way was up or that the sky was the limit look as if they are going to be in for a rough ride.

The market hasn’t corrected itself now for the last 28 months. The longer the wait, the bigger it will be. Statistics show that there is a correction of the market roughly every 18 months that is in the region of 10%. Yesterday was the worst session for the Dow Jones Industrial Average. It fell 1.1% at the close, down 1.9% for the start of 2014. The S&P 500 is down 1.6% and the NASDAQ has fallen by 1.5% so far this year.


The US employment situation is far from good. Jobs haven’t and just aren’t been created these days whatever the government has been telling us. We get people rejoicing over a few thousand jobs that are created, when we need literally hundreds of thousands of jobs every month. Data from last week showed that 74, 000 jobs had been created in December. We we’re expecting 200, 000.

It doesn’t create uncertainty; it just leaves the bitter pessimistic taste of failure in your mouth, Mr. President.

The participation rate in the US hasn’t been this low since 1978. It stands at just 62.8% for December. The number of people that are actively looking for work or in work hasn’t been lower now for more than 35 years. Stiglitz stated: “We have millions who have given up looking for a job. They’ve looked and looked and there are no jobs…more and more Americans have said there’s no future”.


All of that just brings on the same old story about the Federal Reserve’s decision ti cut the Quantitative Easing and shut down the printing presses after injecting $3 trillion into the US economy to keep it floating. All the bailing out that you can do is not going to plug the hole in the bottom of the boat, is it?

Stiglitz believes that it’s fiscal stimulus that will get the economy moving again and certainly not throwing bad money after even worse money. No amount of printing the greenback will have little if any effect on the economy. They might as well just go, get down on their knees and start praying in Washington. Nothing else will happen.

Fourth-quarter growth for 2013 looks as if it will be mediocre at best. Profits growth for S&P 500 is predicted to reach an increase of 7.7% in comparison with December 2012.

Robust growth, let alone any growth at all, is certainly not on the cards this year. According to Stiglitz, we should start worrying (or at least continue).

The most misleading claim in Obama’s NSA speech – The Week

The most misleading claim in Obama’s NSA speech – The Week.

Details, details...
Details, details… (Mark Wilson/Getty Images)

n Friday, President Obama outlined his proposed reforms for the National Security Agency and the nation’s spying practices, conceding that the government had indeed gone too far with its tech snooping.

“Our system of government is built on the premise that our liberty cannot depend on the good intentions of those in power,” he said. “It depends upon the law to constrain those in power.”

But before you write the obituary of the American surveillance state, let’s take a closer look at one telling reveal in the speech that strongly indicated that Obama’s changes will largely be cosmetic rather than substantive.

On the most controversial privacy issue — the NSA’s bulk collection of phone metadata — Obama said he was “ordering a transition that will end the Section 215 bulk metadata program as it currently exists, and establish a mechanism that preserves the capabilities we need without the government holding this bulk metadata.” (The government has used Section 215 of the Patriot Act as a legal basis to vacuum up domestic metadata.)

The key here is the phrase “as it currently exists.” It seems Obama has no intention of dramatically curtailing the collection of metadata itself, as the practice’s most vocal critics have demanded. Rather, his changes mostly pertain to how the government can store and use the material it obtains.

Obama offered a two-part process to move away from the existing program. The first aspect of this plan involves a concrete change: The feds will only pursue phone calls up to two steps removed from those associated with terrorist organizations; they currently pursue calls up to three steps removed. Going forward, the government will be casting a narrower net.

The second part of the plan is more nebulous: Obama asked Attorney General Eric Holder and the intelligence community to come up with a way to “fill the gaps that the Section 215 program was designed to address without the government holding this metadata.”

The problem here is that there are as yet no good options for ending the practice of the government “holding” metadata. Obama’s NSA review panel recommended handing that responsibility to third parties, an approach the president shot down Friday.

In other words, though Obama said he wants the government to stop holding metadata, he has no idea how to accomplish that. As we’ve seen with the president’s unfulfilled vow to close the Guantanamo Bay detention facility, politically fraught challenges like these can go unresolved for years.

Then there’s the problem of how Obama framed the 215 program to begin with, saying it was “important that the capability that this program is designed to meet is preserved.” Specifically, he defended the program’s effectiveness by citing the case of 9/11 hijacker Khalid al-Mihdhar.

However, the effectiveness of the NSA’s metadata program in that case is highly suspect, as adetailed account from The New Yorker showed. And moreover, skeptical lawmakers, a federal judge, and independent reviews have all cast doubt on whether the program has actually stopped any terror plots; the White House’s own NSA review panel concluded that metadata “was not essential to preventing attacks and could readily have been obtained in a timely manner using conventional section 215 orders.”

As for privacy concerns, Obama said the system had never been “intentionally abused.” Yet a judge on the Foreign Intelligence Surveillance Court, in a once-secret opinion obtained by The Guardian, concluded the agency had engaged in “systemic over-collection” pretty much since the program’s inception.

So: Bulk metadata collection will persist, albeit in a lightly curtailed form. And though Obama wants to change how that metadata is stored and used, he has no idea how to do so, and doesn’t like the one suggestion his own review panel gave him to that end. That’s not change, believable or otherwise.

Turkey passes controversial medical aid bill – Europe – Al Jazeera English

Turkey passes controversial medical aid bill – Europe – Al Jazeera English.

After 11 years in power, Erdogan is accused of becoming increasingly authoritarian [AP]
A controversial medical bill that makes it a crime for doctors to provide emergency first aid without government authorisation has come into force in Turkey despite an outcry from rights groups.Under the legislation that was approved by President Abdullah Gul on Friday, those convicted could be imprisoned for up to three years and face fines of nearly $1m from January 18.

Critics fear it could be used to bar doctors and medical workers from treating protesters wounded in anti-government demonstrations as reportedly happened during mass street protests in June last year.

The US-based Physicians for Human Rights (PHR) branded the legislation another attempt by the government of Prime Minister Recep Tayyip Erdogan to quash dissent.

“Passing a bill that criminalises emergency care and punishes those who care for injured protesters is part of the Turkish government’s relentless effort to silence any opposing voices,” PHR senior medical adviser Vincent Iacopino said.

“This kind of targeting of the medical community is not only repugnant, but puts everyone’s health at risk,” he said in a statement on the PHR website.

The legislation, drawn up by the ruling Justice and Development Party (AKP), bars medical professionals from working outside state health institutions and is aimed at preventing doctors from setting up private clinics for example.

Medical professionals who break the law would face up to three years in prison and be fined up to $985,000 (728,000 euros).

Political protesters

Last month, the United Nations had also raised concerns about the bill and urged the government to reconsider it.

“If adopted, it will have a chilling effect on the availability and accessibility of emergency medical care in a country prone to natural disasters and a democracy that is not immune from demonstrations,” UN Special Rapporteur on the right to health, Anand Grover, said in a statement.

“Enacting laws and policies criminalising provision of medical care to people challenging state authorities, such as political protesters, will certainly deter healthcare workers from providing services due to fear of prosecution,” he said.

During the unrest which gripped the country last year, the Turkish doctors’ association repeatedly accused government forces of preventing medics from treating injured people.

At least six people were killed and about 8,000 hurt in nationwide clashes between police and protesters who took to the streets in a wave of public opposition to Erdogan.

After 11 years in power, Erdogan is accused of becoming increasingly authoritarian and of trying to impose greater government control and his conservative religious values on all sectors of the traditionally secular society.

Is China’s economy headed for a crash? | azizonomics

Is China’s economy headed for a crash? | azizonomics.

In his assessment of the global economy’s performance 2013, legendary financier George Soros warned of dangers in the Chinese economy:

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.

That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35 percent of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing.

There are some eerie resemblances with the financial conditions that prevailed in the U.S. in the years preceding the crash of 2008. [Project Syndicate]

That, as William Pesek notes, is a rather ominous conclusion. So is China due a crash?

Read More At TheWeek.com

Activist Post: The Hows and Whys of Gold Price Manipulation

Activist Post: The Hows and Whys of Gold Price Manipulation.

Paul Craig Roberts and Dave Kranzler
Activist Post

The deregulation of the financial system during the Clinton and George W. Bush regimes had the predictable result: financial concentration and reckless behavior. A handful of banks grew so large that financial authorities declared them “too big to fail.” Removed from market discipline, the banks became wards of the government requiring massive creation of new money by the Federal Reserve in order to support through the policy of Quantitative Easing the prices of financial instruments on the banks’ balance sheets and in order to finance at low interest rates trillion dollar federal budget deficits associated with the long recession caused by the financial crisis.

The Fed’s policy of monetizing one trillion dollars of bonds annually put pressure on the US dollar, the value of which declined in terms of gold. When gold hit $1,900 per ounce in 2011, the Federal Reserve realized that $2,000 per ounce could have a psychological impact that would spread into the dollar’s exchange rate with other currencies, resulting in a run on the dollar as both foreign and domestic holders sold dollars to avoid the fall in value. Once this realization hit, the manipulation of the gold price moved beyond central bank leasing of gold to bullion dealers in order to create an artificial market supply to absorb demand that otherwise would have pushed gold prices higher.

The manipulation consists of the Fed using bullion banks as its agents to sell naked gold shorts in the New York Comex futures market. Short selling drives down the gold price, triggers stop-loss orders and margin calls, and scares participants out of the gold trusts. The bullion banks purchase the deserted shares and present them to the trusts for redemption in bullion. The bullion can then be sold in the London physical gold market, where the sales both ratify the lower price that short-selling achieved on the Comex floor and provide a supply of bullion to meet Asian demands for physical gold as opposed to paper claims on gold.

The evidence of gold price manipulation is clear. In this article we present evidence and describe the process. We conclude that ability to manipulate the gold price is disappearing as physical gold moves from New York and London to Asia, leaving the West with paper claims to gold that greatly exceed the available supply.

The primary venue of the Fed’s manipulation activity is the New York Comex exchange, where the world trades gold futures. Each gold futures contract represents one gold 100 ounce bar. The Comex is referred to as a paper gold exchange because of the use of these futures contracts. Although several large global banks are trading members of the Comex, JP Morgan, HSBC and Bank Nova Scotia conduct the majority of the trading volume. Trading of gold (and silver) futures occurs in an auction-style market on the floor of the Comex daily from 8:20 a.m. to 1:30 p.m. New York time. Comex futures trading also occurs on what is known as Globex. Globex is a computerized trading system used for derivatives, currency and futures contracts. It operates continuously except on weekends. Anyone anywhere in the world with access to a computer-based futures trading platform has access to the Globex system.

In addition to the Comex, the Fed also engages in manipulating the price of gold on the far bigger–in terms of total dollar value of trading–London gold market. This market is called the LBMA (London Bullion Marketing Association) market. It is comprised of several large banks who are LMBA market makers known as “bullion banks” (Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorganChase, Merrill Lynch/Bank of America, Mitsui, Societe Generale, Bank of Nova Scotia and UBS). Whereas the Comex is a “paper gold” exchange, the LBMA is the nexus of global physical gold trading and has been for centuries. When large buyers like Central Banks, big investment funds or wealthy private investors want to buy or sell a large amount of physical gold, they do this on the LBMA market.

The Fed’s gold manipulation operation involves exerting forceful downward pressure on the price of gold by selling a massive amount of Comex gold futures, which are dropped like bombs either on the Comex floor during NY trading hours or via the Globex system. A recent example of this occurred on Monday, January 6, 2014. After rallying over $15 in the Asian and European markets, the price of gold suddenly plunged $35 at 10:14 a.m. In a space of less than 60 seconds, more than 12,000 contracts traded – equal to more than 10% of the day’s entire volume during the 23 hour trading period in which which gold futures trade. There was no apparent news or market event that would have triggered the sudden massive increase in Comex futures selling which caused the sudden steep drop in the price of gold. At the same time, no other securities market (other than silver) experienced any unusual price or volume movement. 12,000 contracts represents 1.2 million ounces of gold, an amount that exceeds by a factor of three the total amount of gold in Comex vaults that could be delivered to the buyers of these contracts.

This manipulation by the Fed involves the short-selling of uncovered Comex gold futures. “Uncovered” means that these are contracts that are sold without any underlying physical gold to deliver if the buyer on the other side decides to ask for delivery. This is also known as “naked short selling.” The execution of the manipulative trading is conducted through one of the major gold futures trading banks, such as JPMorganChase, HSBC, and Bank of Nova Scotia. These banks do the actual selling on behalf of the Fed. The manner in which the Fed dumps a large quantity of futures contracts into the market differs from the way in which a bona fide trader looking to sell a big position would operate. The latter would try to work off his position carefully over an extended period of time with the goal of trying to disguise his selling and to disturb the price as little as possible in order to maximize profits or minimize losses. In contrast, the Fed‘s sales telegraph the intent to drive the price lower with no regard for preserving profits or fear or incurring losses, because the goal is to inflict as much damage as possible on the price and intimidate potential buyers.

The Fed also actively manipulates gold via the Globex system. The Globex market is punctuated with periods of “quiet” time in which the trade volume is very low. It is during these periods that the Fed has its agent banks bombard the market with massive quantities of gold futures over a very brief period of time for the purpose of driving the price lower. The banks know that there are very few buyers around during these time periods to absorb the selling. This drives the price lower than if the selling operation occurred when the market is more active.

A primary example of this type of intervention occurred on December 18, 2013, immediately after the FOMC announced its decision to reduce bond purchases by $10 billion monthly beginning in January 2014. With the rest of the trading world closed, including the actual Comex floor trading, a massive amount of Comex gold futures were sold on the Globex computer trading system during one of its least active periods. This selling pushed the price of gold down $23 dollars in the space of two hours. The next wave of futures selling occurred in the overnight period starting at 2:30 a.m. NY time on December 19th. This time of day is one of the least active trading periods during any 23 hour trading day (there’s one hour when gold futures stop trading altogether). Over 4900 gold contracts representing 14.5 tonnes of gold were dumped into the Globex system in a 2-minute period from 2:40-2:41 a.m, resulting in a $24 decline in the price of gold. This wasn’t the end of the selling. Shortly after the Comex floor opened later that morning, another 1,654 contracts were sold followed shortly after by another 2,295 contracts. This represented another 12.2 tonnes of gold. Then at 10:00 a.m. EST, another 2,530 contracts were unloaded on the market followed by an additional 3,482 contracts just six minutes later. These sales represented another 18.7 tonnes of gold.

All together, in 6 minutes during an eight hour period, a total amount of 37.6 tonnes (a “tonne” is a metric ton–about 10% more weight than a US ”ton”) of gold future contracts were sold. The contracts sold during these 6 minutes accounted for 10% of the total volume during that 23 hours period of time. Four-tenths of one percent of the trading day accounted for 10% of the total volume. The gold represented by the futures contracts that were sold during these 6 minutes was a multiple of the amount of physical gold available to Comex for delivery.

The purpose of driving the price of gold down was to prevent the announced reduction in bond purchases (the so-called tapering) from sending the dollar, stock and bond markets down. The markets understand that the liquidity that Quantitative Easing provides is the reason for the high bond and stock prices and understand also that the gains from the rising stock market discourage gold purchases. Previously when the Fed had mentioned that it might reduce bond purchases, the stock market fell and bonds sold off. To neutralize the market scare, the Fed manipulated both gold and stock markets. (See Pam Martens for explanation of the manipulation of the stock market:http://wallstreetonparade.com/2013/12/why-didn’t-the-stock-market-sell-off-on-the-fed’s-taper-announcement/ )

While the manipulation of the gold market has been occurring since the start of the bull market in gold in late 2000, this pattern of rampant manipulative short-selling of futures contracts has been occurring on a more intense basis over the last 2 years, during gold’s price decline from a high of $1900 in September 2011. The attack on gold’s price typically will occur during one of several key points in time during the 23 hour Globex trading period. The most common is right at the open of Comex gold futures trading, which is 8:20 a.m. New York time. To set the tone of trading, the price of gold is usually knocked down when the Comex opens. Here are the other most common times when gold futures are sold during illiquid Globex system time periods:

– 6:00 p.m NY time weekdays, when the Globex system re-opens after closing for an hour;
– 6:00 p.m. Sunday evening NY time when Globex opens for the week;
– 2:30 a.m. NY time, when Shanghai Gold Exchange closes
– 4:00 a.m. NY time, just after the morning gold “fix” on the London gold market (LBMA);
– 2:00 p.m. NY time any day but especially on Friday, after the Comex floor trading has closed – it’s an illiquid Globex-only session and the rest of the world is still closed.

In addition to selling futures contracts on the Comex exchange in order to drive the price of gold lower, the Fed and its agent bullion banks also intermittently sell large quantities of physical gold in London’s LBMA gold market. The process of buying and selling actual physical gold is more cumbersome and complicated than trading futures contracts. When a large supply of physical gold hits the London market all at once, it forces the market a lot lower than an equivalent amount of futures contracts would. As the availability of large amounts of physical gold is limited, these “physical gold drops” are used carefully and selectively and at times when the intended effect on the market will be most effective.

The primary purpose for short-selling futures contracts on Comex is to protect the dollar’s value from the growing supply of dollars created by the Fed’s policy of Quantitative Easing. The Fed’s use of gold leasing to supply gold to the market in order to reduce the rate of rise in the gold price has drained the Fed’s gold holdings and is creating a shortage in physical gold. Historically most big buyers would leave their gold for safe-keeping in the vaults of the Fed, Bank of England or private bullion banks rather than incur the cost of moving gold to local depositories. However, large purchasers of gold, such as China, now require actual delivery of the gold they buy.

Demands for gold delivery have forced the use of extraordinary and apparently illegal tactics in order to obtain physical gold to settle futures contracts that demand delivery and to be able to deliver bullion purchased on the London market (LBMA). Gold for delivery is obtained from opaque Central Bank gold leasing transactions, from “borrowing” client gold held by the bullion banks like JP Morgan in their LBMA custodial vaults, and by looting the gold trusts, such as GLD, of their gold holdings by purchasing large blocks of shares and redeeming the shares for gold.

Central Bank gold leasing occurs when Central Banks take physical gold they hold in custody and lease it to bullion banks. The banks sell the gold on the London physical gold market. The gold leasing transaction makes available physical gold that can be delivered to buyers in quantities that would not be available at existing prices. The use of gold leasing to manipulate the price of gold became a prevalent practice in the 1990s. While Central Banks admit to engaging in gold lease transactions, they do not admit to its purpose, which is to moderate rises in the price of gold, although Fed Chairman Alan Greenspan did admit during Congressional testimony on derivatives in 1998 that “Central banks stand ready to lease gold in increasing quantities should the price rise.”

Another method of obtaining bullion for sale or delivery is known as “rehypothecation.” Rehypothecation occurs when a bank or brokerage firm “borrows” client assets being held in custody by banks. Technically, bank/brokerage firm clients sign an agreement when they open an account in which the assets in the account might be pledged for loans, like margin loans. But the banks then take pledged assets and use them for their own purpose rather than the client’s. This is rehypothecation. Although Central Banks fully disclose the practice of leasing gold, banks/brokers do not publicly disclose the details of their rehypothecation activities.

Over the course of the 13-year gold bull market, gold leasing and rehypothecation operations have largely depleted most of the gold in the vaults of the Federal Reserve, Bank of England, European Central Bank and private bullion banks such as JPMorganChase. The depletion of vault gold became a problem when Venezuela was the first country to repatriate all of its gold being held by foreign Central Banks, primarily the Fed and the BOE. Venezuela’s request was provoked by rumors circulating the market that gold was being leased and hypothecated in increasing quantities. About a year later, Germany made a similar request. The Fed refused to honor Germany’s request and, instead, negotiated a seven year timeline in which it would ship back 300 of Germany’s 1500 tonnes. This made it apparent that the Fed did not have the gold it was supposed to be holding for Germany.

Why does the Fed need seven years in which to return 20 percent of Germany’s gold? The answer is that the Fed does not have the gold in its vault to deliver. In 2011 it took four months to return Venezuela’s 160 tonnes of gold. Obviously, the gold was not readily at hand and had to be borrowed, perhaps from unsuspecting private owners who mistakenly believe that their gold is held in trust.

Western central banks have pushed fractional gold reserve banking to the point that they haven’t enough reserves to cover withdrawals. Fractional reserve banking originated when medieval goldsmiths learned that owners of gold stored in their vault seldom withdrew the gold. Instead, those who had gold on deposit circulated paper claims to gold. This allowed goldsmiths to lend gold that they did not have by issuing paper receipts. This is what the Fed has done. The Fed has created paper claims to gold that does not exist in physical form and sold these claims in mass quantities in order to drive down the gold price. The paper claims to gold are a large multiple of the amount of actual gold available for delivery. The Royal Bank of India reports that the ratio of paper claims to gold exceed the amount of gold available for delivery by 93:1.

Fractional reserve systems break down when too many depositors or holders of paper claims present them for delivery. Breakdown is occurring in the Fed’s fractional bullion operation. In the last few years the Asian markets–specifically and especially the Chinese–are demanding actual physical delivery of the bullion they buy. This has created a sense of urgency among the Fed, Treasury and the bullion banks to utilize any means possible to flush out as many weak holders of gold as possible with orchestrated price declines in order to acquire physical gold that can be delivered to Asian buyers.

The $650 decline in the price of gold since it hit $1900 in September 2011 is the result of a manipulative effort designed both to protect the dollar from Quantitative Easing and to free up enough gold to satisfy Asian demands for delivery of gold purchases.

Around the time of the substantial drop in gold’s price in April, 2013, the Bank of England’s public records showed a 1300 tonne decline in the amount of gold being held in the BOE bullion vaults. This is a fact that has not been denied or reasonably explained by BOE officials despite several published inquiries. This is gold that was being held in custody but not owned by the Bank of England. The truth is that the 1300 tonnes is gold that was required to satisfy delivery demands from the large Asian buyers. It is one thing for the Fed or BOE to sell, lease or rehypothecate gold out of their vault that is being safe-kept knowing the entitled owner likely won’t ask for it anytime soon, but it is another thing altogether to default on a gold delivery to Asians demanding delivery.

Default on delivery of purchased gold would terminate the Federal Reserve’s ability to manipulate the gold price. The entire world would realize that the demand for gold greatly exceeds the supply, and the price of gold would explode upwards. The Federal Reserve would lose control and would have to abandon Quantitative Easing. Otherwise, the exchange value of the US dollar would collapse, bringing to an end US financial hegemony over the world.

Last April, the major takedown in the gold price began with Goldman Sachs issuing a “technical analysis” report with an $850 price target (gold was around $1650 at that time). Goldman Sachs also broadcast to every major brokerage firm and hedge fund in New York that gold was going to drop hard in price and urged brokers to get their clients out of all physical gold holdings and/or shares in physical gold trusts like GLD or CEF. GLD and CEF are trusts that purchase physical gold/silver bullion and issue shares that represent claims on the bullion holdings. The shares are marketed as investments in gold, but represent claims that can only be redeemed in very large blocks of shares, such as 100,000, and perhaps only by bullion banks. GLD is the largest gold ETF (exchange traded firm), but not the only one. The purpose of Goldman Sachs’ announcement was to spur gold sales that would magnify the price effect of the short-selling of futures contracts. Heavy selling of futures contracts drove down the gold price and forced sales of GLD and other ETF shares, which were bought up by the bullion banks and redeemed for gold.

At the beginning of 2013, GLD held 1350 tonnes of gold. By April 12th, when the heavy intervention operation began, GLD held 1,154 tonnes. After the series of successive raids in April, the removal of gold from GLD accelerated and currently there are 793 tonnes left in the trust. In a little more than one year, more than 41% of the gold bars held by GLD were removed – most of that after the mid-April intervention operation.

In addition, the Bank of England made its gold available for purchase by the bullion banks in order to add to the ability to deliver gold to Asian purchasers.

The financial media, which is used to discredit gold as a safe haven from the printing of fiat currencies, claims that the decline in GLD’s physical gold is an indication that the public is rejecting gold as an investment. In fact, the manipulation of the gold price downward is being done systematically in order to coerce holders of GLD to unload their shares. This enables the bullion banks to accumulate the amount of shares required to redeem gold from the GLD Trust and ship that gold to Asia in order to meet the enormous delivery demands. For example, in the event described above on January 6th, 14% of GLD’s total volume for the day traded in a 1-minute period starting at 10:14 a.m. The total volume on the day for GLD was almost 35% higher than the average trading volume in GLD over the previous ten trading days.

Before 2013, the amount of gold in the GLD vault was one of the largest stockpiles of gold in the world. The swift decline in GLD’s gold inventory is the most glaring indicator of the growing shortage of physical gold supply that can be delivered to the Asian market and other large physical gold buyers. The more the price of gold is driven down in the Western paper gold market, the higher the demand for physical bullion in Asian markets. In addition, several smaller physical gold ETFs have experienced substantial gold withdrawals. Including the more than 100 tonnes of gold that has disappeared from the Comex vaults in the last year, well over 1,000 tonnes of gold has been removed from the various ETFs and bank custodial vaults in the last year. Furthermore, there is no telling how much gold that is kept in bullion bank private vaults on behalf of wealthy investors has been rehypothecated. All of this gold was removed in order to avoid defaulting on delivery demands being imposed by Asian commercial, investment and sovereign gold buyers.

The Federal Reserve seems to be trapped. The Fed is creating approximately 1,000 billion new US dollars annually in order to support the prices of debt related derivatives on the books of the few banks that have been declared to be “to big to fail” and in order to finance the large federal budget deficit that is now too large to be financed by the recycling of Chinese and OPEC trade surpluses into US Treasury debt. The problem with Quantitative Easing is that the annual creation of an enormous supply of new dollars is raising questions among American and foreign holders of vast amounts of US dollar-denominated financial instruments. They see their dollar holdings being diluted by the creation of new dollars that are not the result of an increase in wealth or GDP and for which there is no demand.

Quantitative Easing is a threat to the dollar’s exchange value. The Federal Reserve, fearful that the falling value of the dollar in terms of gold would spread into the currency markets and depreciate the dollar, decided to employ more extreme methods of gold price manipulation.

When gold hit $1,900, the Federal Reserve panicked. The manipulation of the gold price became more intense. It became more imperative to drive down the price, but the lower price resulted in higher Asian demand for which scant supplies of gold were available to meet.

Having created more paper gold claims than there is gold to satisfy, the Fed has used its dependent bullion banks to loot the gold exchange traded funds (ETFs) of gold in order to avoid default on Asian deliveries. Default would collapse the fractional bullion system that allows the Fed to drive down the gold price and protect the dollar from QE.

What we are witnessing is our central bank pulling out all stops on integrity and lawfulness in order to serve a small handful of banks that financial deregulation allowed to become “too big to fail” at the expense of our economy and our currency. When the Fed runs out of gold to borrow, to rehypothecate, and to loot from ETFs, the Fed will have to abandon QE or the US dollar will collapse and with it Washington’s power to exercise hegemony over the world.

Dave Kranzler traded high yield bonds for Bankers Trust for a decade. As a co-founder and principal of Golden Returns Capital LLC, he manages the Precious Metals Opportunity Fund.

This article first appeared at Paul Craig Roberts’ new website Institute For Political Economy.  Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His Internet columns have attracted a worldwide following.

Egyptian editor backtracks after saying ‘Americans will be killed in streets’ | World news | theguardian.com

Egyptian editor backtracks after saying ‘Americans will be killed in streets’ | World news | theguardian.com.

General Abdel Fatah al-Sisi

Bakry claims there is a plot to killed General Abdel Fatah al-Sisi (pictured). Photograph: Mohamed Abd El Ghany/Reuters

A prominent Egyptian editor who threatened that Americans could be slaughtered in the streets has been forced to backtrack on his remarks after they were reported by western media.

In an extreme example of the growing xenophobic rhetoric by media outlets who back the country’s army chief, General Abdel Fatah al-Sisi, Mostafa Bakry made the threat on a major TV talkshow, also warning the US president, Barack Obama, and his “puppets” that “we will enter their houses, and we will kill them one by one”.

Bakry speculated that the US government planned to assassinate Sisi, who ousted Egypt‘s first democratically elected leader, Mohamed Morsi, last July after mass protests against his one-year rule.

“There is a plot to kill General Sisi, and the security services know it well,” said Bakry – a pro-regime journalist known for his provocative behaviour. He then suggested that a similar US-backed plot had led to the assassination of Pakistani politician, Benazir Bhutto.

Such a scenario would lead the Egyptian people to rise up in a “revolution to kill the Americans in the streets”, he said.

Egypt’s foreign ministry later forwarded the following clarification from Bakry himself: “These comments were made regarding terrorism and the terrorist group that is waging a war against Egypt. I am opposed to any violence, including any violence against US citizens, and I would like to make it clear that we have no enmity with or hostility towards the American people at all.

“The intention of my comments was to highlight Egyptian independence, and our adamant refusal to allow any outside party, be that the US or any other party, to interfere in internal Egyptian affairs.”

Bakry’s remarks came as the US is reportedly poised to unfreeze millions of dollars in aid to Egypt after the successful completion of a referendum on a new constitution, and follow praise of Egypt’s post-Morsi transition by US the secretary of state, John Kerry.

Egypt’s pro-regime media have increasingly portrayed any dissent – of either a secular or Islamist bent – against the current regime as an unpatriotic act.

Egypt’s flagship state newspaper, al-Ahram, has several times in recent months used its front page to air claims that the US government has joined forces with Morsi’s Muslim Brotherhood to divide up Egypt into smaller countries, and to spread chaos within its borders.

The Brotherhood also often uses xenophobic rhetoric to smear its opponents. In its propaganda, the US is conversely portrayed as both a supporter and instigator of Morsi’s overthrow.

But Bakry’s earlier outburst is not a reflection of the views of ordinary Egyptians, many of whom crave the return of Egypt’s decimated tourism industry.

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