Video for X-mas

Charlier Hall explains energy and Jim Hansen explains investing - both in regards to Peak Oil. Video from ASPO-USA 2008 via Peak Moment TV.

Video: George Monbiot interviews Fatih Birol of IEA

More at Guardian.

OPEC cuts, Markets confused, Prices fall

The oil market has become a comedy of sorts. Every minuscule price movement is explained by some temporally correlating event with very little regard to causality.

Hence we get what we got yesterday with Opec's Algeria meeting and announcement of record production cuts. Alphaville blog from FT has the run down.

In short, OPEC announced record cuts. Conveying the message didn't go down too well. Markets were confused: what was the total magnitude of cuts? When will they start to really come into effect? Home much will the excess oil storage now accumulated last? Will the production quotas be honored by the members? What about Iraq's 'special circumstances' that enables it not to adhere to any quotas? Can they pick up the slack?

Thus, the price of oil kept falling and is yet again below $40/barrel, when producers know they need roughly $60-$65 pb to keep on investing.

Either markets are really confused and there will be a huge spike when we get out of the financial mess (not any time soon, mind you), OR we will have an interesting next year, when the cuts and capacity unwinding come into effect and slowly start squeezing the market. There is one more alternative: this will the biggest unwinding in the history of the world ever - everywhere. Markets will not recover in 2009, some not even 2010. Oil consumption and prices will stay low for a decade - as will economic growth. This is not a pretty scenario, but one that each one of us must entertain for now. It does have its upsides as well (emission reduction to mention one).

Currently, IEA/EIA inventories are still growing. And why shouldn't they: it'd be foolish not to fill inventories at these prices. Anybody who's looked at the production data and wants to plan ahead more than a few months, knows this much.

However, once the inventories and reserves are filled and IF demand picks up again, which it usually does at these price levels, get ready for some wild price action again.

When? Nobody knows.

IEA: Global Oil Peak in 2020

Uh-oh... this was unexpected. The party line has been broken:

"Global oil production will peak much earlier than expected amid a collapse in petroleum investment due to the credit crunch, one of the world's foremost experts has revealed.

Fatih Birol, chief economist to the International Energy Agency, told the Guardian that conventional crude output could plateau in 2020, a development that was "not good news" for a world still heavily dependent on petroleum.

Three years ago the Paris-based organisation still denied there was any fundamental threat to the world's petroleum economy."

What is the party line in the rapidly sinking UK?

"The government does not feel the need to hold contingency plans specifically for the eventuality of crude-oil supplies peaking between now and 2020."

Oh, how you will learn the might of the reality. George Monbiot's take on the situation is blunt:

"Around 2020. That casts the issue in quite a different light. Birol's date, if correct, gives us about 11 years to prepare. If the Hirsch report is right, we have already missed the boat."

I'm afraid both Monbiot and IEA are optimistic. Oil will peak way before 2020, unless we continue in worldwide depression for the next 10 years.

Godspeed. We're all going to need it.

Simmons & Hirch : Steps away from a disaster

The always interesting Financial Sense podcast series recently ran an interview with Matthew Simmons & Robert Hirsch (Dec 13, 2008). Here are their quick bios for the gentlemen interviewed:

	Matthew R. Simmons Chairman, Simmons & Company International
	Dr. Robert L. Hirsch Senior Energy Advisor at MISI & consultant in energy, technology and management

Some highlights from the interview:

• IOCs now understand they can't run their operations profitably on $40 USD oil
• OPEC might cut 2Mb next week in a panic
• Massive pressure on oil trading firms (Glencore, etc) due to CDS, causing squeeze on futures positions
• It is becoming increasingly clear that the sustained peak of oil production happened in 2005
• Industry is now in panic and starting to unravel
• If oil industry starts downsizing, we will quickly lose 20% of supply. This is the worst possible scenario
• We are unwinding supply now as fast as we have ever done
• Supply destruction is moving faster than demand destruction [actually demand adjustment]
• China's oil imports have not fallen, their import growth rates have fallen. They imported record rates in October and only slightly less in November
• Shell was buying oil on the sport market when oil fell to $40 and tried to store it in tankers (due to futures contango). Problems is, there are no tankers left
• People do not understand the magnitude of daily oil flows - spare tankers represent such a drop in the bucket it does not matter at all
• Forget that term quick fix. There are no quick fixes. Fix is a minimum 10 year fix
• You have to get off the inventory liquid mind set - think volumetric flow rates. Well educated people do not understand this
• Fatih Birol (IEA) is flying around the world telling political decision makers that the Game is Over. Cheap oil is gone.
  
• Most optimistic IEA scenario oil production will fall to 25Mbpd by 2030, IF we spend a fortune mitigating natural decline rates (9 Mbpd
• 14% of our oil is coming from the 10 largest oil fields. Average age of top 20 oil fields is 59 years. They are very old, mature and near decline.
• We need eight new Saudi Arabias worth of oil to meeting growing oil demand in the next 10 years. Everybody knows that is impossible
  
• When you talk about several Saudi Arabias worth of not yet found oil, you have to understand that it is not possible. This oil does not exist.
• Idea that renewables will solve our problems is just plain wrong.
• Mexico's export capability will end by 2010. This will have a major impact on Mexico and US, which imports a big part of its oil from Mexico.
  
• Brazil's major findings are hard & expensive oil, taking 10-20 years to start understanding what is there. We have never been at these levels, you can't believe how complicated this production is.
• Five years from now our oil production will be down up to 20%
• We just don't have the technical population needed to pull this off: more people in overalls than in three piece suits.
• Skeptics: just put your head in the sand, you deserve to get suffocated
• The scale of changes needed is just mind boggling. We need totally new investments, on a massive scale, at a speed nobody has ever done
• We entered a phase where we are in a very serious trouble and will be for a long time.

A deeply sobering interview. All this financial alphabet hoopla is masking the biggest short range civilization threat we currently face and is in fact, making the financial issue worse, which in turn is making the energy problem worse. Positive feedbacks, anyone?

Keep your eyes on the prize. Everything else is just noise - a distraction at most.

Standard News Roundup for Dec 2008

Your daily dose of standard bad news.

• Fatih Birol (IEA): If Global economy rebounds, we may see a very tight oil market and priced higher than $147 last July. I don't think we are far from a worst-case scenario. We need to invest now.
  
  
• MasterCard SpendPulse study: US gasoline demand has risen back to the earlier 2008 levels due to cheaper gasoline. All this in a recession that has been going on for months now.
  
  
• Nobua Tanaka (IEA): The Era of Cheap Oil is Over. Volatility is here to stay.
  
  
• Heritage Foundation: In a recent simulation run by US top energy scholars and policy experts, the price of oil was modeled in a global energy crisis, which IEA is now predicting. The price of petroleum spiked quickly from $127 to $244 in just a few days. Rise caused a rapid slowdown in economy. If that sounds familiar from this year, get ready for more of it in the years to come.
  
  
• ASPO Australia: Sydney and other big cities must start preparing for peak oil now. They call for a moratorium on new motorway construction.
  
  
• Tyndall Centre for Climate Change: CO2 emisions are soaring, we have exceeded even the worst of IPCC predictions in the past years. The previous stable level of 380ppm has been breached. We can't stabilize emissions to 450ppm. Be prepared to cut emissions by 80% by 2030.
  
  
• Industry Task Force on Peak Oil (UK): Virgin, Yahoo, Fosters, Scottish Energy, Statecoach, and several other UK companies as part of the Industry Task Force on Peak Oil warn about the importance of oil and end of 'easy oil'. Modern cities will be hard places to live in, without oil infra delivered supplies and plentiful cheap oil.
  
  
• Arnaud Chaperon (Total Oil): In the Future, energy demand will be constrained by tight supply. Oil will peak in the next decade.
  
  
• James Hansen (NASA): In the case of Arctic Sea ice, we have already reached the point of no return.In the case of the Arctic, that could mean a complete disappearance of ice in the region during the summer months. Such eventuality would then further magnify global warming. Positive feedbacks are starting to kick in.
  
  
• Nature Magazine via Science News: Wetland soil permafrost is releasing methane in way not previously anticipated. This throws another spanner in the works of previous stabilization scenarios for climate change. Methane is about 20 times as powerful as a greenhouse gas as CO2. 20% of land surface area is permafrost. There is a lot of methane down there.
  

So yes, let's pump more liquidity into the system. Let's turn interest rates negative. Let's bail out everybody. Let Fed/ECB/BoE start their on F-Bill lending. Hell, just accept Monopoly(TM) money now as legal tender.

We need to spend, spend, spend! That's the salvation, right? Right?

"Reality is that which, when you stop believing in it, doesn't go away."
-Philip K. Dick"

US Auto Bailout

Congress is playing hide & seek with the TARP money. They don't want to give it to Detroit. Not yet.

Treasury's TARP money is down to 15bn left. The big 3 auto makers need more. Approval for more money needs to go through congress.

Catch a pattern?

It'll take more than 18 months for GM to start producing real cars, instead of battle tanks and they are hemorrhaging at a rapid rate. Add a serious deflationary spiral on top of that, coming crash in auto-loans and almost complete stop of auto exports.

No amount of pumping will save the US car makers in their current form or with minor tweaks.

At best they'll start recovering in 2 - 2.5 years time, just in time for the next oil price break out and worsening availability crunch.

The future of US automakers? As the brits said about theirs: good riddance.

Global Trends 2025

U.S. government's National Intelligence Council recent report Global Trends 2025: A Transformed World states:

"All current technologies are inadequate for replacing the traditional energy architecture on the scale needed, and new energy technologies probably will not be commercially viable and widespread by 2025."

That was the optimistic official report.

The conclusion of the report is based purely on issues relating to geopolitical instability of oil delivery originators & routes, resource base issues, required energy investments against the growing demand. Yes, demand is slipping now. That gives us a breather.

The report has no mention of oil peak. Weird that. For something that is geologically indisputable and even dealt in Science. I guess politicians and policy wonks can ignore physical reality.

Or, perhaps one can imagine oil peak added to the report and one gets the pessimistic classified version.


Why is oil at $40?

We turn to John Maynard Keynes for the answer:

"The market can stay irrational longer than you can stay solvent."

FT is reporting the margincal cost of production for KSA is near $40-50. For offshore US and Mexican oil it's closer to $65 (new projects). So much for 'bubble'.

The current price level cannot sustain new investments.

Bank of England warned in May 2008 - when oil was still at $100+ - that a drop in oil price would worsen the energy squeeze once we come out of the recession, as not enough investments would have been made.

IEA has been saying the same now for a year. Simmons & International for a few years.

So when oil crunch hits and you are told "nobody could have seen this coming", you know you've been had.

Advertisement

Shamelessly ripped off from The Big Picture.

You are going to be seeing a lot of these

Not only from finance vehicles out of gas, but also from energy companies out of cash.

It's going to get a lot more uglier, before it gets better. Funnily enough neither industry's downfall - as deserved as it may be - is good for our energy infrastructure investments, which are being postponed left and write as this is being written.

If we ever come out of this slump swinging and with gusto, expect an energy crunch like no other (yes, including the 70s).

An explanation, a summary and a joke

The forced hiatus of The Energy Standard has been caused by the relentless stream of necktie damage flowing our way from New York and London financial centers.

Being forced to understand the alphabet soup and where the world is headed has not left much time for energy analysis not to mention writing energy posts.

That's the explanation. Now for the summary:

• Peak Oil is not dead - geological fundamentals do not change because world finance throws a fit.
  
  
• World consumption of oil will decrease for the first time in eons, say the forecasts. If this is true, buckle up, it's really going to be an ugly economic scenario unfolding next year and after. If that much wasn't clear to you by now.
  
  
• Oil prices? Yes, there was a speculative premium and yes, there's now a speculative depression in the price. It could go down to $40, but it won't stay there for long unless the whole world economy melts down completely. Lesson: do not use price alone to predict anything about geological availability of oil.

The joke?

I hear there is a new edition out of a risk management bible for the financial industry, 'Value & Risk Management - A Guide to Best practice'. Here's a summary of the contents in the update edition:

Past performance is not a guarantee of future profits.

Not laughing? Us neither.