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The Next Five Years

Peak Lite and the Current Oil Picture

A few years ago, after spending a lot of time thinking about peak oil, and then watching the price of oil break out of its historical trading range and head higher, the idea of Peak Lite came to me. Over time the price of oil had bounced between $10 and $30 a barrel, but about 5 years ago it broke from that pattern and started the steady climb that culminated in $147/bbl last summer. I had been having various debates about whether we were or weren’t at the global peak in oil production (I was taking the ‘not yet but soon’ position), but it started to become clear to me that we didn’t require a global peak before we started to feel the impact of peak oil.

I proposed the following to explain what I thought was happening. (Don’t get too fixated on the dates or prices as they are just there to illustrate the concept). Figure 1 shows the sort of price behavior if spare oil production capacity is constant. Of course spare production fluctuates up and down, as does price, but my thesis is that constant excess capacity should keep the price relatively stable – as long as the excess is large enough that several different producers have the ability to step up and fill shortfalls. This concept is illustrated by Figure 1, with a constant four million barrels per day (bpd) of excess capacity and an oil price of $25/bbl.

Figure 1. Simulated Oil Price Behavior at Constant Spare Capacity


Figure 2. Simulated Oil Price Behavior at Eroding Spare Capacity

Figure 2 illustrates the case in which demand growth is outstripping supply growth, leading to diminishing spare capacity. This is the mode that we have been in for the past few years. Spare capacity was eroded by several million barrels during the first half of this decade, and as a result the price of oil climbed higher, and became increasingly volatile. This was caused by a combination of stronger demand worldwide, and an oil industry that had not anticipated such strong demand growth. As a result, the global oil industry didn’t invest aggressively enough to meet demand, and while capacity did grow, it didn’t grow quickly enough to keep prices stable.


Figure 3. The Next Five Years?

Figure 3 illustrates a future in which world demand has collided with world supply, and then demand growth continues to stay ahead of supply growth. In the world of peak oil, this happens because supply is falling. In the peak lite world, it can occur even if supply is increasing. In the figure, I show an example of supply and demand colliding in 2010, then demand exceeding supply in future years. Of course demand as defined in Economics 101 won’t actually exceed supply, demand will just be destroyed by rising prices (as shown on the right axis) to keep it in equilibrium with supply. Figures 2 and 3 illustrate what Peak Lite is all about; that you don’t have to have falling supplies to start experiencing the effects of peak oil.

I created the original figures in mid-2007, and as we know by mid-2008 oil prices had risen much higher than the $95/bbl I illustrated on the figure. But circumstances have changed. As a result of climbing oil prices, new projects have begun to come online. Strong price signals from the previous five years had resulted in major investments into new oil production (but it takes a few years to bring new projects online); about 5 million bpd of new capacity was expected to come online in 2008 alone.

At the same time, oil prices climbed much too quickly for the economy to even begin to adjust, and this contributed to the overall economic collapse. The combination of high prices and the economic troubles have taken a bite out of demand (at least temporarily). So we essentially find ourselves back in the position of having perhaps three or four million barrels of excess capacity around the world, and oil prices back in the $40’s. Thus I think Figure 4 explains where we are now – and where I think we are headed.


Figure 4. When Do Prices Bounce Back?

In Figure 4, the year 2007 shows a world in which oil is at $80 and the demand has nearly caught up with supply. 2008 shows an example of no spare capacity, and the oil price sharply higher. Then 2009 shows the situation with reduced demand, some incremental capacity increase over 2008 (new projects scheduled to come online in 2009 will generally be too far along to cancel), and the corresponding price collapse arising from the largest spare capacity situation in several years.

So, where do we go from here? I think it depends on how quickly demand bounces back.

The Next Five Years

What might the next five years look like? Do we revert back to Figure 1, in which we see steady prices for years (except this time in the $40 region)? Or do we return to the eroding capacity case of Figures 2 and 3? I have reason to believe the latter is the case.

One reason for this is that the oil industry needs higher prices to warrant new projects. Sig Cornelius, the Chief Financial Officer of ConocoPhillips, recently stated that oil needs to average $52/bbl in order for the company to break even. The cost of finding and developing oil has gone up, and recently Eni CEO Paolo Scaroni said that oil prices would need to be $60 to keep up the needed investments. As a result of low oil prices, drilling rigs are being underutilized and projects are being canceled:

E&P Capital Expenditure Cutbacks

The International Energy Agency estimates that about $100 billion of worldwide oil production capacity expansion projects have been cancelled or postponed over the past half year. According to Barclays Capital, oil companies have cut worldwide exploration and production spending by 18 percent so far this year. Deutsche Bank estimates that U.S. energy exploration-and-production spending will drop $22.5 billion this year, a 40-percent, year-on-year decline.

Saudi Arabia has cancelled the development of several fields such as the Manifa and Dammam oil field, which would have added about 1 million barrels per day (MMBpd) of capacity. Refinery projects have also been delayed or cancelled while Saudi Aramco reviews cost estimates in the light of the significant weakening of oil prices. Saudi Aramco will consider re-issuing a tender for Manifa’s development at a later date, assuming bids from contractors reflect a reduction in raw materials to match lower oil prices.

Such cancellations come at a price, which the article summarizes:

New oil-and-gas projects usually take several years of development before starting commercial production. According to Cambridge Energy Research Associates, the scaleback in exploration and production could reduce future global oil supplies by up to 7.6 MMBpd in five years, or 9 percent of current production. If demand suddenly comes back as it did in 2003-2004, there could be a resulting shortfall of production and much higher energy prices. The International Energy Agency (IEA) also warns that the credit crisis and project cancellations will lead to no spare crude oil capacity by 2013.

The longer oil prices stay low, the worse the shortfall will be due to the project cancellations and increasing demand. Incidentally, these factors also explain a big part of why the oil industry is historically cyclical; in the good times producers spend money, and then when supply gets ahead of demand and the price falls, they slow down on investing. This eventually leads to tightness again, so the good times return. The steepness of the World Oil Price curve in Figure 4 could be much steeper if demand recovers sooner rather than later.

The prospect of sharply higher taxes on the oil industry is a second factor that threatens to slow the development of new oil projects. A recent study by the American Petroleum Institute concluded that this number is “at least” $400 billion over the next 10 years. That seemed quite high to me, so I wrote to the API for a breakdown. Jane van Ryan, Senior Manager of Communications at the API, responded:

The figure is, according to our tax experts, “at least $400 billion” and could be significantly higher.

Using EIA numbers, our tax analysts have examined the impact on the industry of the administration’s cap-and-trade proposal using five scenarios. The results indicate that about 60 percent of the administration’s proposal, which would raise $645.7 billion in “climate revenues,” would be funded by the oil and natural gas industry. This means the industry would pay about $400-450 billion. We have opted to use the lower figure.

The industry’s share of business-wide tax provisions as well as new taxes on the industry are estimated at $80-90 billion over ten years. Again, we have opted to use the lower figure. These tax provisions include the reinstatement of the Superfund Tax, the repeal of the LIFO provision, internal enforcement/reform deferral/related tax reform policies, an excise tax levy on federal offshore leases in the Gulf of Mexico, the repeal of the enhanced oil recovery credit, the repeal of the marginal well tax credit, the repeal of the expensing of intangible drilling costs, the repeal of the deduction for tertiary injectants, the repeal of the passive loss exception for working interests, the repeal of Sec. 199 for oil and natural companies, the increase of the G&G amortization period for independent producers to 7 years, and the repeal of the percentage depletion for oil and natural gas.

While I won’t get into all of the pros and cons of new taxes, higher taxes will provide a disincentive for projects which are projected to have a marginal financial return. If this further contributes to underinvestment, it will worsen the overall tightness in the oil markets, which will put more upward pressure on prices. Thus, high oil prices will likely again be a campaign issue in the 2012 presidential elections.

Conclusions

While the oil industry is historically cyclical, I believe we are approaching the point at which the industry will no longer be able to build out enough new projects to stay ahead of demand. This could manifest itself as peak oil, in which case the rate of depletion permanently overtakes the rate at which new production comes online. Or it could first manifest as peak lite, in which case new production still stays somewhat ahead of depletion, but can’t keep up with new demand. In either of these situations, I think the historical cyclicality of the oil industry will disappear. In early 2008 I thought we had reached that point, but it appears that we had at least one more cycle ahead.

While it is too early to tell with a high level of confidence just where we are on the depletion curve, the summer of 2008 provided of taste of life in an oil-constrained world. The current level of underinvestment and the prospect of higher taxes are setting up another situation in which spare capacity erodes, leading to higher oil prices and greater volatility. Add to this the prospect of a global oil production peak, and I have trouble seeing a case where oil prices will remain stable in the coming years.

As an investor, I use blue chip oil stocks as a defensive measure against much higher prices. I am not one who subscribes to the idea that oil companies are going to be put out of business by running out of oil, or by ethanol, algal biodiesel, or any other combination of alternative fuel technologies. In fact, I strongly believe that if an alternative technology begins to look attractive enough, oil companies have deep enough pockets to shift their business in that direction. But I think that’s unlikely to happen any time soon.

As a consumer, it would probably pay to evaluate just how much higher prices might impact your budget – and then take action. Can you sustain oil prices that return to $150/bbl or more? Even if you can, do you want that uncertainty hanging over your budget? If not, then it would be prudent to take steps to minimize the personal impact of high oil prices. Steps to consider include utilizing more fuel efficient transportation, public transportation, ride-sharing, and if possible locating closer to your place of employment.

Plan ahead and don’t get caught off-guard like so many did last summer. It is only a matter of time before history repeats itself. Here’s hoping our political leaders make policy decisions that won’t worsen the impact.

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March 24, 2009 - Posted by | oil prices, oil production, Peak Lite, Peak Oil

36 Comments

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    Comment by Bharat Book Bureau | March 24, 2009

  2. Excellent post. I have been trying to get people to look at excess oil capacity as a leading indicator of prices. Right now Saudi Arabia is pumping about 9 million BPD but has the capacity to go to 13.5 9 x $30/barrel = $270 13.5 x $20/barrel = $270 That sets asisde production costs, but it illustrates the point. On another matter, we’ve kicked around biodiesel for some time. Here is a report from the April 2009 Biodiesel magazine (certainly a pro-biodiesel source) that echos much of what we’ve discussed here: A Sober Look at Biofuels from Algae We told you so.

    Comment by KingofKaty | March 24, 2009

  3. Let me second King's motion — an excellent post, Robert.One other factor to consider is where the required new oil production projects are located — which is mainly where shareholder-owned oil companies cannot go. The consequence is that the near-term price of oil will be driven by political decisions (and political mishaps) in places like Saudi, Kuwait, Venezuela, Iran, Mexico, Russia. Bottom line is that the price of oil for the next few years is essentially not predictable at all.If Mexico and/or Venezuela melt down, we could see very high prices; if Saudi decides to open the spigots (as it did in the mid-1980s), Benny's $10/Bbl oil would be here.The scale of required new production (mainly to offset natural decline, as well as to meet growing demand) is staggering. Some years ago, an Exxon executive pointed out that about half the oil & gas the world will need in 10 years will have to come from projects which are not in production today. We need to start doing more than hoping for change.

    Comment by Kinuachdrach | March 24, 2009

  4. Tata introduces $2,000.00 car. Science and Technology is increasing the productivity of the world at a faster rate than it’s population is growing. It’s hard to make a case for anything other than “increasing demand.”Will we expand (greatly) Batteries/Hybrids, orBiofuels, orBoth, or Something else?Doesn’t look to me like there’s enough time for much of “something else.”

    Comment by rufus | March 24, 2009

  5. RR’s post is highly intelligent, but I think too gloomy. The price mechanism and the profit motive are wondrous things. In the brief window of higher prices (2004-2008) we saw enough new production come online to handle the “shortage,” the rapid advancement of hybrid and PHEV technologies, and the natural gas situation go from tightness to long,long,long-term glut (RR you should really do a post on CERA’s analysis that we have NG for decades upon decades, based on shale gas).Palm plantations hve been planted and are maturing, and we see CTL and GTL plants underway. I could sketch out a scenario very bearish for oil, including long-term declines in oil demand from the developed world, and flatlines from the developing world. I do not see oil demand recovering to 2007 levels for another 8-10 years, and then only if oil is relatively inexpensive. Indeed, I think if the USA and China mandate high mpg cars, we may see gluts for decades. We are but two national policy choices away not from Peak Oil Doom, but doom for oil markets.Kinu: My $10 oil prediction is looking a bit feeble at the moment. Maybe in the next cycle. I will just have to say it reached $12 a barrel, in Russia’s dubious sale of oil to China. Pretty weak, I know.Regarding PHEVs: Europe still may adopt the PHEV. It is a new technology. Give it a few more years. We may see the PHEV mandated in Europe, if consumers do not adopt it by choice.

    Comment by benny "centipede glut" cole | March 24, 2009

  6. “I do not see oil demand recovering to 2007 levels for another 8-10 years”OK. Let’s make a reasonable assumption — productive capacity of existing oil fields declines at 5% per year, on average. After 10 years of 5% per year decline, installed productive capacity will have dropped to 60% of its current value — a cumulative 40% decline.If in 10 years time demand is back where it is today and installed capacity has dropped to 60% of today’s capacity, the world will be hurting.The distressing thing is we already have nuclear technology which can ensure thousands of years of plentiful energy for the entire human race. Instead, the US subsidizes wasteful windmills and the Germans subsidize wasteful photovoltaics.

    Comment by Kinuachdrach | March 24, 2009

  7. In spite of huge plunges in the stock market, and declines in real estate values, YOY, gasoline demand in the U.S. is currently running a bit over 1% greater than this time last year. This at a time of increasing unemployment, and severe recession.Worldwide auto sales will still be in the range of 50,000,000 this year. Now, the stock market is looking like it might be coming back, home sales are rebounding, and the latest number on home values is a small tick up. It’s hard for me to see it taking 5 years for oil demand to rebound, much less 8 – 10 years.

    Comment by rufus | March 24, 2009

  8. Rufus:Go to the BP website, and look what happened to oil demand after the 1979 price spike. It took 10 years to recover. I fervently hope for a global economic recovery. But port traffic at the Los Angeles-Long Beach harbor was off 40 percent in Feb. y-o-y. We have a ong raod back.Gasoline demand in the US is flat, stuck at last year’s low levels, despite the price being cut in half. And new cars get better mpgs. Gasoline demand is dead in the US, probably forever. It will only go down from here. And we have a perma-glut of natural gas. CNG anyone?

    Comment by benny "centipede glut" cole | March 24, 2009

  9. Benny, 79′ doesn’t work. We were using a great amount of oil for electricity generation prior to 79′. After 79′ we went to coal, and nat gas. I’m not for sure but I believe that it was on the order of 6 million bpd, or so.Also, there was a significant improvement in mpg in the 80’s, as well.

    Comment by rufus | March 24, 2009

  10. Maritime traffic will be a lagging indicator. The closest real time indicator will be “retail sales.” They seem to have bottomed.

    Comment by rufus | March 24, 2009

  11. Rufus-There was some one-time switching, but more could still happen. (For some reason, Hawaii still uses oil-fired generators for electricity). And talk about switching: What if US car and truck fleets convert to CNG? Google “Haynesville Field” and read up on shale gas. (Or go to Ghawar Guzzler and read up on it) Gas will cheap for decades in USA. CERA just put out pretty good report. Fleet conversion could make power plant conversion look like peanuts. About $1 of gas equals a gallon of gasoline, in BTUs. Even at current prices, conversion makes sense. I think it wil take a few more motnhs, or year or two, for the reality of a long-term glut in NG to sink into marketplace, and for decision-makers to bank on it.It is very bearish for oil.

    Comment by benny "centipede glut" cole | March 24, 2009

  12. Worth noting:I decry the destruction, but as a reality, it means vastly increased amounts of palm oil on world markets—-ScienceDaily (Mar. 24, 2009) — Oil palm cultivation is a significant driver of tropical forest destruction across Southeast Asia. It could easily become a threat to the Amazon rainforest because of a proposed change in Brazil’s legislation, new infrastructure and the influence of foreign agro-industrial firms in the region, according to William F. Laurance, senior scientist at the Smithsonian Tropical Research Institute in Panama.Laurance and Rhett A. Butler warn in Tropical Conservation Science, that oil palm expansion in the Brazilian Amazon is likely to occur at the expense of natural forest as a result of a proposed revision to the forest code that requires landowners to retain 80 percent forest on lands in the Amazon. The new law would allow up to 30 percent of this reserve to consist of oil palm.Expansion may be driven by economics. As the world’s highest-yielding oil-containing seed source, oil palm is likely to offer better financial returns and to employ larger numbers of people than cattle ranching and mechanized soy farming, the dominant agricultural activities in Brazilian Amazon.

    Comment by benny "centipede glut" cole | March 24, 2009

  13. Benny, I, absolutely, do Not know enough about the gas business to dispute your opinion. However, I have read that these shale wells have a short lifespan (one or two years of Max production.) It would be great if nat gas could solve all (most of) our energy problems, but I’m a little hesitant to bet our entire Future Energy farm on it. We’ll see.

    Comment by rufus | March 24, 2009

  14. Benny, forests are “logged” for the Logs. The Brazilian hardwoods are extremely valuable.The most efficient way of planting a palm plantation is to use the abandoned (previously forested) lands in the Cerrado.This isn’t to say that some oil palm won’t be planted in the rainforest; but it will be a “secondary” effect.BTW, the latest report is that for every one acre of rain forest that is chopped down this year, 50 are growing in its place.

    Comment by rufus | March 24, 2009

  15. Rufus-glad to hear aboutr reforestation.You don’t need to trust me on gas; google CERA and natural gas, they put out a release lately.The decline in well volumes was scaremongering by PO types who cannot stand glut fossil fuel glut stories. The PO crowd is just looking the other way on this one. We have NG, we will have NG, our grandchildren will have NG. Once in a while, there is good news.

    Comment by benny | March 24, 2009

  16. “The decline in well volumes was scaremongering by PO types who cannot stand glut fossil fuel glut stories.”No, the decline in gas well rates is a fact, an unavoidable consequence of the physics of fluid flow in extremely low permeability shales. Typically, a shale gas well will lose 50% of its initial capacity in its first year, and then continue to decline more slowly after that.CERA does not have a good reputation in the industry for the quality or insightfulness of its predictions. Conventional wisdom is that the rapid initial decline rates pretty much mean the end of long term gas gluts (such as the "gas bubble" that afflicted producers & benefitted consumers in the late '80s/early '90s. When prices drop due to oversupply (as at present), drilling ceases and supply is expected rapidly to decline to the level of demand. That's the theory. We shall see.On the other hand, there is undoubtedly a very large volume of recoverable gas in US shales. But the US also has a government dead set against drilling in the US. Politics trumps geology, again.

    Comment by Kinuachdrach | March 24, 2009

  17. Kinu:50 percent of a huge flow is still great. These are the most prolific gas wells in US history. Even accepting that, it may be possible to “re-crack” the wells, and boost flow. Here is a quote from a Petrohawk employee: A good well in those (conventional) fields could produce 2 million to 3 million cubic feet of natural gas a day, Lasseigne said.”Obviously, the shale wells are up to 10 times better than the typical wells drilled over the last five or six years,” he said. “These are phenomenal wells. Even the major players are pleasantly surprised by the quality of these wells.”10 imes better!We have NG in spades. But it ain’t only in the US that NG is being found. “InterOil (IOC) is a Canadian integrated (exploration assets, refinery, near distribution monopoly) located in Papua New Guinea [PNG]. After having struck two earlier profusely flowing natural gas and liquids wells (flowing at 102 and 105MMcf/d respectively), they hit an absolute killer with Antelope1, whichflowed at a whopping 382MMcf/d.”This may be the biggest NG well of all time, I am still checking. Meanwhile, due to expanding LNG plants and shipping, we are entering a global NG market–while gigantic wells like those in New Guinea are being tapped. This is good news: The globe likely wil be glutted with NG for decades. What this meann for already weak oil demand is an interesting question. And stop listening to doomer-nuts at TOD. We are cooking with gas!

    Comment by benny | March 24, 2009

  18. The New Guinea-Interoil natural gas well may be the largest of all time. What I can find by googling is that there was a bigger well in Canada in the 1950s, but the new Interoil well is being limited to 30 percent of flow right now. If let free, it would rival and possibly exceed the biggest NG well of all time.This happens, even as shale gas floods to the US market for decades to come.We are entering the age of supergiant NG fields. Wherever NG can be subbed for oil, it might be. Depends on price. CNGs? GTLs? Power plants? Oil faces a dicey future. What if Chavez falls and a new regime says “Open up the Orinoco!” What is China and the USA mandate high mpg cars? What if Japan goes to PHEVs?And all the while, cheap n-gas everywhere all the time….

    Comment by benny "centipede glut" cole | March 24, 2009

  19. Great write-up, RR! I do miss one factor, though…Can you sustain oil prices that return to $150/bbl or more?Depends on a number of factors, including the state of the local economy: if it is healthy (my income is good, food is cheap, most other commodities is cheap) well, yes, I can survive $150/bbl.If the local economy is in the gutter (everything expensive) I’m gonna hurt. If I lose my job, I’m screwed.Of course, to further complicate matters, these things are all interrelated: $150/bbl means natural gas prices go up, and so does electricity. Before long a host of commodoties are also expensive.But let’s not put the cart in front of the horse: it is not the price of oil that determines whether we have economic growth or recession, it is a host of complex economic activities that determine it. The price of oil is obviously a factor, but it is one out of hundreds.A strong global economy can survive $150/bbl indefinitely, in part because a strong economy gives consumers the tools they need to deal with high energy prices, from more efficient energy alternatives to alternative energy sources.In a weak global economy, where protitutians have created huge deficits to bail-out companies that won’t survive in the long term, oil demand would be low and prices too.So I’m hoping for a strong global economy, with high oil prices. Now if only my hope could be turned into an expectation…

    Comment by Optimist | March 24, 2009

  20. Optimist-Well put. I am a lot more afraid of Peak Banking than Peak Oil.

    Comment by benny "centipede glut' cole | March 25, 2009

  21. Benny,Interoil is the biggest gas well I know of. But the peak flow (estimated, not metered) at the Lakeview gusher in the San Joaquin Valley was somewhere around 100,000 barrels of oil per day (Wikipedia says 90,000), bigger in BOE terms.The Interoil well looks huge, but it’s only one well. The flow is spectacular, but the reserves will also have to be world class to justify an LNG project… so a few delineation wells, some contract details to sort out (now that’s an understatement for you) … we’d be looking at first gas export in around 10 years I’d reckon. And that LNG won’t likely hit the market without some guaranteed price floor.Qatar has huge gas reserves that are relatively cheap to exploit, and first started to be developed in the mid-1990’s. Several LNG trains have been operating for years now. Reserves are estimated at 1000 TCF (including the Iranian side), enough to supply the US for about 40 years. Yet, gas hit $10-12 last summer. I think it’s going to take a long time before LNG starts making a big impact on US gas prices.

    Comment by armchair261 | March 25, 2009

  22. Armchair-Thanks for the perspective..but read the CERA report…seems we are in a happy circumstance in the USA, of being able to say we will have lots and lots of n-gas for a long, long time….and gas supplies globally are rising…they have shale in Europe too…This is good news. If oil does what RR says, there is a huge future in n-gas, subbing for oil wherever it can…the rel point is that oil is not critical to our future well-being.

    Comment by benny "centipede glut" cole | March 25, 2009

  23. Since our host titled his piece "The Next Five Years", let's focus initially on that time frame. It is fairly safe to assert that the impact of Natural Gas Vehicles or gasoline from Gas To Liquids is going to be small in the next 5 years — simply too many existing gasoline vehicles, too little gas conversion capacity. Therefore little impact on oil prices in this time frame.But let's look beyond 5 years. Over time, new NGVs could replace existing gasoline-fueled vehicles. A retail fuel-distribution infrastructure could be built. Back of the envelope, the impact of converting the entire US vehicle fleet to gas would be roughly to double US gas demand, from approximately 23 TCF/year to over 40 TCF/year. That would be a huge gas supply challenge for a country that is currently a net gas importer.The smarter approach to using this putative global gas bonanza might be to persuade industrializing countries such as China & India to build their infrastructure on gas instead of oil. But that would call for a degree of international leadership that seems absent these days.

    Comment by Kinuachdrach | March 25, 2009

  24. The amount of oil under the ground shrinks daily. The world’s population grows daily. That will be the trend until the last drop is gone. Changing our mode of transportation or switching to nuclear would slow the approach of nadanutherdrop oil….but nothing can stop it.

    Comment by Maury | March 25, 2009

  25. But Benny, gas is mostly a local market, so new European or any other foreign gas supply will not impact the US gas market very much in the next 5 years. Gas just isn’t easily transportable except by pipeline. There is a lot of gas in the ground to be sure, but a lot of it is high priced. Gas does decline quickly, and the number of gas wells drilled since last August has fallen by about 25%. So I wouldn’t be so sure of that glut. As of Jan 09, about 2/3 of US wells drilled are gas wells, so all those operators appear to have a different short term model. I have to admit I haven’t read the CERA report yet though!

    Comment by armchair261 | March 25, 2009

  26. Dear Robert, Peak Oil is not a geophysical phenomenon, but one of economics. When alternative energy sources become competitive with fossil fuels, then it’s all over for oil. This is the true “PEAK OIL” phenomenon. Peak Oil is an economic phenomenon. It has little or nothing to do with “How much oil is still left in the ground” It has nothing to do with Saudi Oil Production Schedules, world-wide reserves. un-tapped reserves in the Gulf of Mexico, or any other such non-sense. PEAK OIL is an economic phenomenon, pure and simple. Forget about production schedules, potential oil reserves, etc. When “alternative energy” sources begin to compete (without subsidies) with the fossil fuels, then, it’s all over.JMac

    Comment by Anonymous | March 25, 2009

  27. The amount of oil under the ground shrinks daily. The world’s population grows daily.That much is true.That will be the trend until the last drop is gone.And you know this how? Crystal ball?Changing our mode of transportation or switching to nuclear would slow the approach of nadanutherdrop oil….but nothing can stop it.More likely: we never get to the last drop: it simply becomes too difficult/expensive to extract. Regardless of whether we are in a Mad Max or Space Travel (I sense you’re leaning towards the former) version of the future.Anyway, we definitely won’t get to the last drop in the next five years, and regardless, it is not about the last drop: it is about getting enough oil to keep the economy going.My prediction: we’ll learn to use oil ever more wisely, as prices go up. And by up I mean consistently above $150/bbl and spikes? Who knows? Could be $500/bbl…Until the big up, we’ll just get more stupidity from the prostitutians: Pick one:(1) Drill, baby, drill!(2) Superprofit tax on Big Oil.In the end we need entrepreneurs to invent an alternative to oil. And that will only happen on the other side of $150/bbl. At $40/bbl, the entrepreneurs are finding ways to burn MORE not LESS oil. Bottomline kinda thing.If you think Capitalism sucks, wait till we talk about the alternatives…

    Comment by Optimist | March 25, 2009

  28. Dear Robert, How about an actual answer ??? Is PEAK OIL a geophysical phenomenon or is it a question of simple economics ? How about a “real answer” for once ? JMac

    Comment by Anonymous | March 25, 2009

  29. The answer is that it’s both a geophysical phenomenon and a question of simple economics. The geophysical helps move the economic model from that in Figure 1 to that of Figure 2. Why must things be either or? They are intertwined.

    Comment by Clee | March 26, 2009

  30. benny cole writesThere was some one-time switching, but more could still happen. (For some reason, Hawaii still uses oil-fired generators for electricity).True, true. But I was just looking at where petroleum gets used for energy in the US, and only 2% of the petroleum is used for electric power generation and only 5% for residential and commercial. Switching Hawaii off oil-fired electricity won’t make a huge dent in our overall oil consumption. 70% of the petroleum gets used for transportation. I wonder about conversion possibilities in the 24% used for industrial.http://www.eia.doe.gov/neic/infosheets/petroleumproductsconsumption.html

    Comment by Clee | March 26, 2009

  31. “Is PEAK OIL a geophysical phenomenon or is it a question of simple economics ?”You have not been reading too closely. The answer is neither.Most of the world's reserves of conventional & near-conventional oil are in sovereign states where political decisions control. Certainly, geology and economics put an upper limit on how much those states could physically produce. Whether they ever come close to that limit is a political decision.Technology in importing countries could also play a role in Peak Oil by moderating demand. But so does politics in importing countries — some countries would rather import oil than allow expanded use of nuclear & coal.In the "Next Five Years", politics reigns supreme.

    Comment by Kinuachdrach | March 26, 2009

  32. “And you know this how? Crystal ball?”Just logic Optimist. Oil has too many uses to not be used to the last drop,or at least the last practical drop. And barring an apocalypse of some kind,people will do what they do best until it’s standing room only….procreate.I’ve got a movie plot in mind. Set in the not too distant future,a group of entrepreneurs set off into the Amazon in search of the rumoured lost reservoir of oil. Hollywood isn’t ready for it just yet. But,that’s because Peak Oil is boring. Kaput Oil promises to be much more dramatic…..LOL.

    Comment by Maury | March 26, 2009

  33. Another factor coming up in the 5 year time frame, which most readers of this blog are aware of (but not the general public or politicians), is that the oil industry workforce is going to start declining pretty rapidly, and fairly soon, as baby boomers start to retire. There is a lost generation of professionals in the 30-45 year old age bracket. If the current low prices persist for much longer, we’ll start seeing more baby boomer layoffs and early retirements. I think this is going to have a fairly significant second order impact on supply 5-10 years from now, and perhaps sooner.

    Comment by armchair261 | March 26, 2009

  34. Robert,I don’t think your figures take inflation or the dollars’ value into account. We haven’t seen rampant inflation since the Carter years,but it’s on the way again. Oil inventories are at the highest levels ever,but oil prices continue moving up. Part of the reason is a weakening dollar,but inflation expectations are there too. BTW,your $50 oil price support was pretty damned close. You would have nailed it had you qualified it with the dollar trading at 1.50 Euros.

    Comment by Maury | March 26, 2009

  35. And barring an apocalypse of some kind,people will do what they do best until it’s standing room only….procreate.Apocalypse? Only if the prostitutians bring it along. Based on recent performance, the danger is REAL.We’ll never get to standing room only, we’ll just follow the Egyptian model: add another floor on top. Technology allows you to do wonderful things…And if you want to talk about a bad movie, I once saw a Peak Oil movie on TV that was particularly bad. Loaded with contradictions. It ended when the US won a bidding war with China for a single ship load of oil – how weak is that?

    Comment by Optimist | March 26, 2009

  36. I have always said that the precursor to peak oil will be a period of price instability that will last several years before the price begins a steady upward climb.http://www.biodiversivist.com

    Comment by Russ Finley | March 27, 2009


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