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Inexpensive oil vanishing at alarming rate
The United States is awash in shale oil. Iran, once OPEC’s second-largest producer, is slowly ramping up output. Oil consumption growth in the Western world has been somewhere between negative and flat since the 2008 financial crisis. The “peak oil” theory has pretty much vanished, along with The Oil Drum, the bible of peak oil believers. Rest in peace.
Or turn in your grave, for the oil price charts tell a different story.
On the New York Mercantile Exchange, crude oil futures are up 13 per cent over one year. Since 2009, they have climbed every year except 2012. In Europe, the Brent crude futures are flat over the year after rising three years on the trot. Brent, the de facto global benchmark, trades at about $108 (U.S.) a barrel; West Texas Intermediate, the North American benchmark, is at $97. For the sake of argument, let’s say the world is valuing oil at $100. You would think the price would be far less as the United States challenges Saudi Arabia for top producer status.
While the oil forecasters were pumping out bearish calls, the market itself has stuck to its triple-digit price outlook. Oil buyers apparently know the Western world’s economic recovery will boost consumption, since growth and oil use are aligned. That’s not all. They also know that the math doesn’t work: Prices can’t go into gradual, long-term decline, or even stay flat, when the world’s conventional oil fields are in fairly rapid decline.
Exotic production – oil sands, biofuels, natural gas liquids – are supposed to fill the gap. But this so-called unconventional production is highly expensive and quite possibly insufficient to cover the drop off in cheap, conventional production. Prices will rise to the point that demand will have to level off or fall. The “peak oil” and “peak demand” theories are really opposite sides of the same coin.
A few days ago, Richard Miller, the former BP geochemist turned independent oil consultant, delivered a sobering lecture at University College London that laid out the case for dwindling future oil supply. His talk was based on published data from the U.S. Energy Information Agency, the International Energy Agency, the International Monetary Fund and other official sources.
The data leave no doubt that the inexpensive oil is vanishing quickly. Conventional oil production peaked in 2008 at about 70 million barrels a day and is declining by about 3.3 million barrels a day, every year. Saudi Arabia pumps about 10 million barrels a day. The math says a new Saudi Arabia has to be found every three years to offset the conventional oil drop off. Good luck. Now you know why Russians, Canadians and Americans are so keen to lock up the Arctic, the alleged keeper of vast new reserves.
About one-quarter of conventional production comes from the 20 biggest fields and most of them are in decline, some precipitously. North Sea oil production peaked at 4.5-million barrels a day in 1999. This year’s production is forecast at between 1.2 million and 1.4 million barrels a day. The so-called Forties field, the North Sea’s biggest, has been losing 9 per cent a year for more than 20 years. Ditto two other North Sea biggies – Brent and Ninian.
Great Britain shed its status as an energy powerhouse about a decade ago, when it became a net energy importer. Its energy import bill is horrendous. Last year, Britain spent almost £22-billion ($38-billion) buying foreign oil, natural gas and coal.
Repeat all over the world, from Mexico to Indonesia. Indonesia’s oil production has been in steady decline since the mid-1990s, and the country has gone from oil exporter to importer, at which point it got kicked out of the Organization of Petroleum Exporting Countries. While new exploration and technologies will extend the life of some of the gasping old fields, the long-term downward trend is intact.
The conventional fields are running out of puff just as world demand is climbing again, which can only put upward pressure on prices. This week, the IEA estimated that oil demand will rise by 1.2 million barrels a day in 2014, or 1.3 per cent, to 92.4 million barrels.
The increase is driven by economic recovery and ever-rising demand in China and elsewhere in the developing world. China is willing to pay almost any price for oil because oil drives growth more than it does in the West, where energy use is less intensive per unit of economic output. China has also developed a love affair with traffic jams. The number of cars and motorbikes in China increased twentyfold between 2000 and 2010. It is forecast to double again in the next 20 years.
The oil shills, the tech geeks and most, but not all, oil companies would have you believe that non-conventional energy will fill the gap as the cheap, easy-to-pump oil heads gently into the night. It might, but at what price and cost to the environment? Or it might not at any price.
Deep-sea production is monstrously expensive and risky, as BP found out when its Macondo well in the Gulf of Mexico blew up. The Alberta oil sands also spew out more carbon dioxide than conventional production. Most biofuels, such as U.S. corn-based ethanol, are taxpayer-subsidized economic horror shows with dubious environmental benefits.
The peak oil crowd has thinned out, to be sure, but it won’t disappear. Gushing U.S. shale oil doesn’t mean oil is about to become cheap and plentiful. The fall off in conventional oil production is real, and scary.
OPEC just published their latest Monthly Oil Market Report with crude only production data through November 2013. Their October numbers were revised downward by 67,000 barrels per day to 29,827 kb/d. Their November production was 29,633 /b/d. That was 261 kb/d below their unrevised October production and 194 kb/d below their revised October production numbers.
OPEC production at 29,633,000 bp/d is at their lowest point since June 2011. As you can see from the chart OPEC has hat two peaks since 2005. Actually these are the two highest peaks ever for OPEC if the EIA data is correct. I only have MOMR data going back to January 2005.
The July 2008 peak was 31,672,000 bp/d and the April 12 peak was 31,619,000 bp/d. I thought it might be interesting to plot who was up and who was down since those two peaks. The Gainers were Ecuador, Iraq, Kuwait, Saudi Arabia, UAE and Venezuela. Ecuador and Venezuela were up only slightly however. Here is a chart of the six gainers.
In July 2008 the combined Gainers production stood at 19,976,000 bp/d. In November their combined production stood at 21,769,000 bp/d, up 1,793,000 bp/d since that point
The losers were Algeria, Angola, Iran, Libya, Nigeria and Qatar.
The Losers peaked in December 2007 at 11,870,000 bp/d. In November 2013 their combined production stood at 8,498,000 bp/d, down 3,372,000 since their peak. Libya and Iran account for 2 million bp/d of this. So even if both were producing flat out the losers would still be down almost 1.4 mb/d.
However even before the sanctions Iran was in serious decline. If sanctions were lifted tomorrow they would be lucky to get back to half a million barrels per day below their 2005 level of about 3.9 million barrels per day. Their November production stood at 2.7 mb/d.
Libya, after the revolution could only get up to within 200,000 barrels per day of their pre-revolution production numbers. They will likely not ever get that close again however.
But something is always happening somewhere. One can say, “if there were no sanctions, no revolutions, no terrorists attacks and no other political problems then they could produce a lot more”. But there has never been a such a time in recorded history and it is not likely there will ever be such a time. So we can only measure what each country is producing today and go with that.
One person has posted me and seems very concerned over the sudden rise in US consumption. It also caught OPEC’s attention. From the latest MOMR, link up top, page 32:
The oil production cartel, which is meeting in Vienna today, is set to keep its production target unchanged.
ON THIS TOPIC
- Opec big hitters weather US oil discount
- Oil supply The cartel’s challenge
- China car growth fuels Opec bullishness on crude demand
- Opec keeps production targets unchanged
With Brent crude, the global benchmark, hitting a two-month high of more than $113 per barrel, oil ministers from the group which spans Venezuela to Saudi Arabia have said they want to keep targeting production of 30m b/d.
In spite of the apparent consensus, this week’s meeting has seen aggressive jockeying for internal position within the cartel.
Speaking to Iranian journalists in Farsi minutes before ministers went into a closed-door meeting, Bijan Zangeneh, Iran’s oil minister, said: “Under any circumstances we will reach 4m b/d even if the price of oil falls to $20 per barrel.”
“We will not give up our rights on this issue,” Mr Zangeneh added, suggesting Opec would be able to accommodate rising Iranian production to keep prices high.
Opec pumps around a third of the world’s crude oil supplies, and as the only source of spare production capacity plays a key role in setting prices.
Brent has averaged close to $110 per barrel this year, easily above the group’s unofficial target, as production disruptions in Nigeria and Libya have offset rapidly growing US shale oil output.
Buoyed by an interim agreement on its nuclear programme ten days ago, Iran said it would raise production from around 2.8m b/d today to 4m b/d next year.
Iran’s president Hassan Rouhani is looking to pursue a foreign policy of moderation to revive deadlocked nuclear talks with the west after tough financial sanctions have brought the Islamic Republic’s economy to a standstill
Iraq, meanwhile, has also said it plans to increase production by 1m b/d next year to 4mb/d.
That would put pressure on prices, and push the cartel to respond by reining in production from other members, although both countries face significant challenges in meeting their ambitious targets: Iran faces months of tricky negotiations before sanctions could be lifted, and Iraq’s oil industry is labouring under security and infrastructure problems.
Saudi Arabia, the world’s largest oil exporter and de facto leader of the cartel, would face most pressure to cut back on production to accommodate Iran and Iraq, as the kingdom has been producing at near record levels of more than 10mb/d as production from other Opec members has faltered.
But Saudi officials have suggested Iranian and Iraqi production growth is unlikely to materialise quickly, and ahead of the meeting Ali al-Naimi, the Saudi oil minister, brushed off Iran’s aggressive stance on price:
“You are preoccupied by Iran and that is not a good preoccupation,” he said. “You know what is going to happen if the price goes to $20? You know how many countries would be out of producing, including shale oil, including Canadian sands oil, including subsalt oil. All of that will be gone.
Brent was trading down 42 cents at $112.20 a barrel by mid-morning in London.
The first U.S. energy secretary, James Schlesinger, observed in 1977 that when it comes to energy, the United States has “only two modes — complacency and panic.” Today, with the country in the middle of an oil and gas boom that could one day crown it the world’s largest oil producer, the pendulum has swung toward complacency. But 40 years ago this week, panic ruled the day, as petroleum prices quadrupled in a matter of months and Americans endured a traumatic gasoline shortage, waiting for hours in long lines only to be greeted by signs reading “Sorry, no gas.”
The cause of these ills, Americans explained to themselves, was the Arab oil embargo — the decision by Iran and the Arab members of the Organization of Petroleum Exporting Countries (OPEC) to cut off oil exports to the United States and its allies as punishment for their support of Israel in the 1973 Yom Kippur War. And the lessons they drew were far-reaching. The fear that, at any given moment, the United States’ oil supply could be interrupted by a foreign country convinced Washington that its entire approach to energy security should center on one goal: reducing oil imports from that volatile region.
But Americans were wrong on both counts. The embargo itself was not the root cause of the energy crisis. Contrary to popular belief, the United States has never really been dependent on the Middle East for its supply of oil — today only nine percent of the U.S. oil supply comes from the region. At no point in history did that figure surpass 15 percent. Rather, the crux of the United States’ energy vulnerability was its inability to keep the price of oil under control, given the Arab oil kingdoms’ stranglehold on the global petroleum supply. Nonetheless, for the last four decades, Washington’s energy policy has been based on the faulty conclusion that the country could solve all its energy woes by reducing its reliance on Middle Eastern oil….
- Remembering the 1973 Arab Oil Embargo (grumpyelder.com)
- 40 Years Since the Oil Embargo Changed Everything (blogs.wsj.com)
- 1973 embargo shaped energy policy (thedailyblogreport.wordpress.com)
How the 1973 Oil Embargo Saved the Planet | Foreign Affairs. (FULL ARTICLE)
Forty years ago this week, six Persian Gulf oil producers voted to raise their benchmark oil price by 70 percent. Over the next two months, the Arab members of the Organization of the Petroleum Exporting Countries (OPEC) cut production and stopped oil shipments to the United States and other countries that were backing Israel in the Yom Kippur War. By the time the embargo was lifted in March 1974, oil prices had stabilized at around $12 a barrel — almost four times the pre-crisis price. In 1973, that oil shock looked like a triumph for OPEC and a calamity for the rest of the world. The OPEC states enjoyed enormous windfalls and new geopolitical influence, whereas the United States and other oil importers were hit by unprecedented fuel costs and painful recessions.
But over the last four decades, those fortunes have reversed: higher oil prices in the OPEC states have led to spiraling corruption, stagnation, and political repression. In the rest of the world, expensive oil triggered a surge of investment in alternative energy and drastic improvements in energy efficiency. The 1973 oil shock holds an even greater irony. The panic that it induced brought sweeping changes to global energy policies in the 1970s and 1980s in preparation for the imminent depletion of global oil and gas reserves, which turned out to be illusory. The effort to avoid that imaginary crisis helped the non-OPEC countries cope with a real one, leading to energy conservation and investment policies that fortuitously brought about enormous reductions in global carbon emissions. The OPEC members that created the oil crisis inadvertently gave the rest of the world a life-saving head start in the struggle to avoid, or at least mitigate, the threat of catastrophic climate change….
- It’s time to shock O.P.E.C. (canadafreepress.com)
- 40 Years After the 1973 Oil Embargo, the U.S. Is Stronger on Energy – but So Is the Middle East (science.time.com)
- Peak Oil Redux: World oil production is 50% higher today than in 1973 (climatedepot.com)
- “Peak Oil Demand” = Peak Oil (resilience.org)
- Heinberg: Ten Years After (peakoil.com)
- Peak oil is dead: long live peak oil! (peakoil.com)
- Shocker, The World Is Depending On The USA to Save Us From Peak Oil (peakoil.com)
- Three nails in the coffin of peak oil (fuelfix.com)
- Peak Oil (rearlesy.wordpress.com)
- UPDATE 3-Oil steadies above $106 on Mideast, expected demand (xe.com)
- OPEC to Study US Shale Oil Bonanza as Export Concern Rises – Bloomberg (bloomberg.com)
- Sinking into the Devil’s Excrement (tstack07.wordpress.com)
- Shale oil supply shock: US to go from leading global importer, to exporter (riehlworldview.com)
- IEA Says Push For Renewables And Nuclear Power Is Coherent With Finland’s Long-Term Decarbonisation Strategy (eurasiareview.com)
- IEA commends renewables’ role in Finnish policy (energyandnuclear.com)
- IEA Warns Merkel to Reduce Cost of German Clean-Energy Switch – Bloomberg (bloomberg.com)
- Oil slides as IEA sees US output rising (seattlepi.com)
- In changing region, U.S. committed to military ties with Gulf Arabs (dailystar.com.lb)
- Saudi Arabia’s Al-Naimi Sees Demand Holding Strong in Asia – Bloomberg (bloomberg.com)
- Leave It To The New York Times To Gin Up A Downside To The American Oil Boom (forbes.com)
- Why Energy Experts Get Things Wrong So Often (resilience.org)
- U.S. Won’t Allow Crude Exports Within the Next Decade – Bloomberg (bloomberg.com)
- Money Talking: Is Energy Independence A Reality? (wnyc.org)