R-Squared Energy Blog

Pure Energy

Presentations from the Orlando Energy Conference

The slides from all of the presenters at the recent Orlando Energy Conference are now all available online:

The Economics of Alternative Energy Sources and Globalization: The Road Ahead

Here is the link directly to my presentation:

An Overview of Global Energy Issues

Here are several of my slides, which give a flavor of my presentation:

The primary thrust of my message is that we are looking at a potentially serious energy crisis in the not too distant future as oil begins to deplete faster than renewables can fill the void. Globally, India and China will have a huge influence over the oil markets, driving prices eventually higher than where they were last summer. Times will continue to be very difficult for U.S. refiners as more refineries are built close to the source of the oil, but there will be occasional bursts of profitability. The last two slides talk about the platform that my new company is building.

The conference was heavily oriented toward agriculture, and there was a lot of discussion about the role for biofuels in agriculture. There were a number of high profile speakers, including Harry Baumes, an Associate Director at the USDA. I had the opportunity to speak with Harry one on one at dinner one night, where we primarily discussed U.S. ethanol policies.

December 3, 2009 Posted by | energy policy, Peak Lite, presentations, renewable energy | 57 Comments

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.

March 24, 2009 Posted by | oil prices, oil production, Peak Lite, Peak Oil | 36 Comments

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.

March 24, 2009 Posted by | oil prices, oil production, Peak Lite, Peak Oil | 54 Comments

Peak Demand Before Peak Oil?

There has been a lot of talk in the media lately about the possibility that oil demand will peak soon (or has peaked already), which will render a geologically-induced peak in oil production irrelevant. In other words, peak oil is a non-issue because people won’t be demanding as much oil as can be produced (which is true presently). In fact, I just did a Google search of my blog, and the phrase “Peak Demand” shows up 239 times over the past 2 years. Regular reader Benjamin Cole was beating the peak demand meme long before I heard the media start to pick it up. (Here he is arguing this point two years ago).

Over the weekend I saw a new article that argued this point:

Study predicts oil demand will peak well before supplies run out

I think calling this a ‘study’ is being very generous, and I have some big problems with multiple aspects of the article. Let’s have a look:

Management consultancy Arthur D Little has turned peak oil fears on their head with a report suggesting that the global economy will have begun to abandon oil well before supplies peak.

A bit of hyperbole, don’t you think? If anything has turned peak oil fears on their head it has been the collapse of oil prices – not the opinion of someone I never heard of. Hard to be concerned that there is a crisis around the corner when oil prices reflect a belief of an abundantly supplied market.

The Beginning of the End for Oil?, written by Peter Hughes a former executive at natural gas giant BG Group, address the prospect of falling demand for oil, rather than fears over dwindling supplies. It suggests that a mixture of drivers is forcing a broad policy change that will continue to reduce consumption. Fears over climate change, security of supply, and price volatility, will form a holy trinity to drive policy redirection, he said.

There are significant drivers for policy redirection, but working against those drivers is the issue of oil prices. They have already fallen to the point that they have spurred a recovery of demand. This is why I don’t subscribe to the peak demand > peak oil argument. We just don’t have anything that can compete with oil, especially at current prices. Crude oil is like a giant lake of underground energy that nature already did the heavy lifting on. Even though the lakes are becoming harder to access, they are still more economical than processes that require that humans do the heavy lifting (e.g., you have to input a lot of energy to turn straw into a liquid fuel). Peak demand is only going to occur if there are alternatives with low fossil fuel inputs that are competitive. Those are not on the immediate horizon, therefore demand is going to recover before it starts to shift to something else. Because I believe we will reach peak oil before anything is competitive with oil, I think peak oil will occur before peak demand.

Hughes also points to the Energy Information Administration’s (EIA) reduction of long-term oil consumption forecasts last year. It said the world would be using 10m barrels less per day in 2030 than it had predicted previously

Yet still more than we use today. And the current version of This Week in Petroleum reads “Under almost all EIA long-term projection scenarios, global demand for crude oil and petroleum liquids increases through 2030.”

But why does the EIA predict slower growth in petroleum demand? Because they are predicting that the ethanol mandates will result in production of almost 30 billion gallons of ethanol per year in 2030 – most of it cellulosic. (Less than two years ago the same agency was predicting less than a billion gallons of cellulosic in 2030 – amazing how effective mandates are at creating new technology!)

Despite the huge increase in ethanol production, they forecast a very modest rise in natural gas consumption. This begs the question “Where are all the energy inputs going to come from to drive production of 30 billion gallons of ethanol?” Because of the nature of ethanol production – which unlike oil does not comes to us as an underground lake that nature has largely processed – it takes substantial energy inputs to produce finished ethanol. That is not reflected anywhere in the EIA forecasts. It appears that the assumption is that it will take no incremental fossil fuel production to produce this much cellulosic ethanol. The problem is that no such technology has been invented, so the peak demand argument has to rely on new technologies yet to be invented. That is an incredibly weak argument.

Oil industry experts have predicted that any decline in oil demand in developed economies will be more than compensated by increased consumption in China and other BRIC countries as disposable income rises.

But Hughes argues that these emerging economies would be driven by the same desire to cut oil demand that is already being felt in developed economies. “The Chinese think very coherently and very long term,” he said. “They have identified the threat to the long-term sustainability of their growth path by relying increasingly on imported energy.”

I can’t make too much sense of this. China’s plan for long-term sustainability involves relying increasingly on imports? Wow, then the U.S. is really on their way to a sustainable future. We have increased our imports to something like 2/3rds of our liquid fuel needs.

The report has little in the way of numbers, and insiders admit it is more an opinion piece by Hughes based on almost 30 years in the energy business.

That’s pretty obvious.

But Hughes is not alone in predicting that fears over peaking oil supplies are largely unfounded, on the grounds that economies will find replacement sources of energy at a faster rate than the oil industry expects.

Amory Lovins, co-founder of the Rocky Mountain Institute, has been similarly outspoken on the subject of oil demand. “Oil is going to become, and has already become, uncompetitive, even at low prices, before it becomes unavailable even at high prices,” he said in a 2007 Newsweek interview. “So we will leave it in the ground. It’s very good for holding up the ground, but it won’t be worth extracting.”

Yes, Amory Lovins predicts the same. Now there is a great endorsement. As Robert Bryce pointed out in a 2007 article on Lovins, Lovins does not have a good track record with his predictions. Some of his past predictions:

1. Renewables will take huge swaths of the overall energy market. (1976)
2. Electricity consumption will fall. (1984)
3. Cellulosic ethanol will solve our oil import needs. (repeatedly)
4. Efficiency will lower consumption. (repeatedly)

Bryce systematically demolishes Lovins’ predictions in his article, and wonders why people still listen to him.

So I am firmly in the camp that we are going to see a peak in oil production before we see a massive move to alternatives. On the topic of peak oil itself, my current thinking remains as it has for several years. We are close, but not there yet. I have said several times that I expect oil to peak at around 90 million barrels per day (for ‘all liquids’ production). Christophe de Margerie, the CEO of Total, was recently quoted as saying he thought 89 million barrels per day will be the peak. Jim Mulva, CEO of ConocoPhillips, has expressed similar sentiments. After the IEA came out and predicted oil demand of 116 million barrels per day in 2030, Mulva said he didn’t see how we would ever get past 100 million barrels per day.

I do continue to be bemused by those who suggest that oil production peaked in 2005. When I was posting regularly at The Oil Drum, this was an issue that frequently found me at odds with many of the readers. I felt like there was insufficient evidence, and that many of the arguments suggesting an immediate peak were flawed. That didn’t stop people like Matt Simmons and Ken Deffeyes from making definitive statements that peak oil has passed. Both have been saying for several years now that we are past peak. Here’s Deffeyes in February 2006 saying that oil peaked in December 2005 and claiming “I can now refer to the world oil peak in the past tense. My career as a prophet is over. I’m now an historian.JD at Peak Oil Debunked points out that peak oil has been a moving target for Deffeyes. Here’s Simmons in early 2007 saying that the world has peaked. T. Boone Pickens called the peak in 2004. Here’s one of the TOD contributors calling “Peak Total Liquids of 85.52 million barrels/day on Aug 2006.”

So where do things stand? All of these guys were wrong. Per the EIA database, 2008 eclipsed 2005 as far as total oil produced, and the present monthly record is now July 2008 for crude production plus condensate. In the ‘all liquids’ category, daily production in 2008 was about a million barrels per day higher than it was in 2005 at 85.6 million barrels per day (and several months checked in just short of 87 million barrels per day).

If anyone can point me to a place where any of the “Peak Oil Historians” admitted to being in error, I would appreciate it. Prior to the credit crisis I thought we would see peak by 2012 at no more than 90 million barrels per day. With the crisis, it may delay peak by a year or so, but also make it less likely that we make it to 90 million barrels per day. We are certainly knocking on the door of peak oil (IMO), and if someone suggests that for all practical purposes we are there I couldn’t disagree. But I think it demolishes credibility to go on TV and make a claim like “Peak Oil occurred in May 2005.” I have advised people that no matter how sure you are about that, if you stick your neck out and are wrong, you are the boy who cried wolf and your message will lose any semblance of credibility.

At the present time, demand has been destroyed the point that there are several million barrels per day of excess capacity. I think that most of the rise in oil prices since 2002 can be explained by my Peak Lite scenario, which boils down to erosion of excess capacity. When prices got out of hand, significant demand was destroyed and we find ourselves with 2002-like spare capacity. I think going forward, we are going to see the gradual return of Peak Lite. The only question in my mind is when the climb begins. But since I am a long-term investor, I have the patience to wait it out.

February 23, 2009 Posted by | EIA, ken deffeyes, Matt Simmons, Peak Demand, Peak Lite, Peak Oil, Robert Bryce | 59 Comments

World Energy Outlook 2008 Released

Today the International Energy Agency (IEA) released their much anticipated (and previously leaked) World Energy Outlook 2008. The full report costs €150, but there is a lot of publicly available information on their website. They have a presentation for the press, an executive summary, and key graphs available. I will comment in more detail after I have had time to read through the report.

A preliminary look appears to me to be a full-fledged endorsement of the possibilities of peak lite. Reuters has more on that:

Credit crisis adds to risk of oil supply crunch

The agency’s World Energy Outlook for 2008 stopped short of sounding the alarm that oil supplies may have peaked, but highlighted obstacles to accessing new fields that include the increasing dominance of national oil companies.

The gap between what was being built in terms of new capacity and what would be needed to keep pace with demand was set to widen sharply after 2010, the IEA said.

More later, but for now here is the press release that accompanied the report:

New Energy Realities – WEO Calls for Global Energy Revolution Despite Economic Crisis

12 November 2008 London —

“We cannot let the financial and economic crisis delay the policy action that is urgently needed to ensure secure energy supplies and to curtail rising emissions of greenhouse gases. We must usher in a global energy revolution by improving energy efficiency and increasing the deployment of low-carbon energy,” said Nobuo Tanaka, Executive Director of the International Energy Agency (IEA) today in London at the launch of the World Energy Outlook (WEO) 2008 – the latest edition of the annual IEA flagship publication. The WEO-2008 provides invaluable analysis to help policy makers around the world assess and address the challenges posed by worsening oil supply prospects, higher energy prices and rising emissions of greenhouse gases.

In the WEO-2008 Reference Scenario, which assumes no new government policies, world primary energy demand grows by 1.6% per year on average between 2006 and 2030 – an increase of 45%. This is slower than projected last year, mainly due to the impact of the economic slowdown, prospects for higher energy prices and some new policy initiatives. Demand for oil rises from 85 million barrels per day now to 106 mb/d in 2030 – 10 mb/d less than projected last year. Demand for coal rises more than any other fuel in absolute terms, accounting for over a third of the increase in energy use. Modern renewables grow most rapidly, overtaking gas to become the second-largest source of electricity soon after 2010. China and India account for over half of incremental energy demand to 2030 while the Middle East emerges as a major new demand centre. The share of the world’s energy consumed in cities grows from two-thirds to almost three-quarters in 2030. Almost all of the increase in fossil-energy production occurs in non-OECD countries. These trends call for energy-supply investment of $26.3 trillion to 2030, or over $1 trillion/year. Yet the credit squeeze could delay spending, potentially setting up a supply-crunch that could choke economic recovery.

“Current trends in energy supply and consumption are patently unsustainable – environmentally, economically and socially – they can and must be altered”, said Nobuo Tanaka. “Rising imports of oil and gas into OECD regions and developing Asia, together with the growing concentration of production in a small number of countries, would increase our susceptibility to supply disruptions and sharp price hikes. At the same time, greenhouse-gas emissions would be driven up inexorably, putting the world on track for an eventual global temperature increase of up to 6°C.”

In addition to providing a comprehensive update of long-term energy projections to 2030, WEO-2008 takes a detailed look at the prospects for oil and gas production. Oil will remain the world’s main source of energy for many years to come, even under the most optimistic of assumptions about the development of alternative technology. But the sources of oil, the cost of producing it and the prices that consumers will have to pay for it are extremely uncertain. “One thing is certain”, stated Mr. Tanaka, “while market imbalances will feed volatility, the era of cheap oil is over”.

“A sea change is underway in the upstream oil and gas industry with international oil companies facing dwindling opportunities to increase their reserves and production. In contrast, national companies are projected to account for about 80% of the increase of both oil and gas production to 2030”, said Mr. Tanaka. But it is far from certain that these companies will be willing to make this investment themselves or to attract sufficient capital to keep up the necessary pace of investment. Upstream investment has been rising rapidly in the last few years, but much of the increase is due to surging costs. Expanding production in the lowest-cost countries – most of them in OPEC – will be central to meeting the world’s oil needs at reasonable cost.

The prospect of accelerating declines in production at individual oilfields is adding to these uncertainties. The findings of an unprecedented field-by-field analysis of the historical production trends of 800 oilfields indicate that decline rates are likely to rise significantly in the long term, from an average of 6.7% today to 8.6% in 2030. “Despite all the attention that is given to demand growth, decline rates are actually a far more important determinant of investment needs. Even if oil demand was to remain flat to 2030, 45 mb/d of gross capacity – roughly four times the current capacity of Saudi Arabia – would need to be built by 2030 just to offset the effect of oilfield decline”, Mr. Tanaka added.

WEO-2008 also analyses policy options for tackling climate change after 2012, when a new global agreement – to be negotiated at the UN Conference of the Parties in Copenhagen next year – is due to take effect. This analysis assumes a hybrid policy approach, comprising a plausible combination of cap-and-trade systems, sectoral agreements and national measures. On current trends, energy-related CO2 emissions are set to increase by 45% between 2006 and 2030, reaching 41 Gt. Three-quarters of the increase arises in China, India and the Middle East, and 97% in non-OECD countries as a whole.

Stabilising greenhouse gas concentration at 550 ppm of CO2-equivalent, which would limit the temperature increase to about 3°C, would require emissions to rise to no more than 33 Gt in 2030 and to fall in the longer term. The share of low-carbon energy – hydropower, nuclear, biomass, other renewables and fossil-fuel power plants equipped with carbon capture and storage (CCS) – in the world primary energy mix would need to expand from 19% in 2006 to 26% in 2030. This would call for $4.1 trillion more investment in energy-related infrastructure and equipment than in the Reference Scenario – equal to 0.2% of annual world GDP. Most of the increase is on the demand side, with $17 per person per year spent worldwide on more efficient cars, appliances and buildings. On the other hand, improved energy efficiency would deliver fuel-cost savings of over $7 trillion.

The scale of the challenge in limiting greenhouse gas concentration to 450 ppm of CO2-eq, which would involve a temperature rise of about 2°C, is much greater. World energy-related CO2 emissions would need to drop sharply from 2020 onwards, reaching less than 26 Gt in 2030. “We would need concerted action from all major emitters. Our analysis shows that OECD countries alone cannot put the world onto a 450-ppm trajectory, even if they were to reduce their emissions to zero”, Mr. Tanaka warned. Achieving such an outcome would require even faster growth in the use of low-carbon energy – to account for 36% of global primary energy mix by 2030. In this case, global energy investment needs are $9.3 trillion (0.6% of annual world GDP) higher; fuel savings total $5.8 trillion.

WEO-2008 demonstrates that measures to curb CO2 emissions will also improve energy security by reducing global fossil-fuel energy use. But the world’s major oil producers should not be alarmed. “Even in the 450 Policy Scenario, OPEC production will need to be 12 mb/d higher in 2030 than today.” Mr. Tanaka noted. “It is clear that the energy sector will have to play the central role in tackling climate change. The analysis set out in this Outlook will provide a solid basis for all countries seeking to negotiate a new global climate deal in Copenhagen.”

November 12, 2008 Posted by | iea, Peak Lite, Peak Oil | 91 Comments

Five Reasons Oil is Headed to $250

Any time I write about investing, I always stress the long-term. Short-term fluctuations don’t drive my investment decisions. I try to see 5 or 10 years into the future, and position myself accordingly. This is a big part of why I started to shift money into oil beginning in 2002; I felt like I could see the supply/demand handwriting on the wall.

My long-term strategy is why I don’t get too excited about oil shooting to $147 or correcting back to below $100. The only question for me is “Will oil be higher or lower in 5 years?” At no point since 2002 have I felt like the answer to that question is “Lower.” I can’t see any combination of alternatives making a serious dent in our consumption until prices are much higher. How much higher? Well, in the Netherlands this summer they were paying $10/gallon for gasoline. Sure, that’s mostly taxes, but consumers were still willing to pay over $400/bbl and alternatives didn’t ride in to the rescue.

Don’t get me wrong, I think alternatives can ride to the rescue – just not until much higher prices force people to cut way back on consumption. As I told someone yesterday, I could make the U.S. energy independent in 10 years. It’s just that it would be very painful. I may have to make oil prices rise to north of $500/bbl.

This morning I saw an article that laid out 5 reasons why the author felt like oil is headed toward $250/bbl:

Five Reasons Why the $700 Billion Banking Bailout Will Translate into $250 Oil

Unless I overlooked it, the author doesn’t give a timeframe, but I can see oil at $250 in less than 5 years. Here are the reasons the author provides:

First, global oil demand is still accelerating and, according to the United States Energy Information Administration (EIA), will reach more than 115 million barrels per day by 2030 – even with conservation efforts and high prices stunting demand.

Second, daily production has probably peaked right now at nearly 90 million barrels a day, or will peak in a few years at the very latest. While experts once debated the reality of the “Peak Oil” concept, they now accept it and only question when it will take hold.

Third, the world’s fastest growing economies, China and India, are still increasing consumption at double-digit rates, and that more than offsets any conservation efforts that are under way elsewhere around the world. And their governments want to buy oil at any cost – even if that means there’s none left for us.

Fourth, the world will learn one day – probably sooner rather than later – that Saudi Arabia’s vaunted reserves are nowhere near what it claims them to be, and those reserves are certainly not at the levels long held as “gospel” in the oil business. Matthew Simmons, chairman of the Houston-based investment bankSimmons & Co. International and author of the seminal 2005 book, “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” has been most vocal about this alleged shortfall, and I respect his work, especially since I’ve spoken behind closed doors with several OPEC figures who privately acknowledged that this may be their worst nightmare. Simmons recently predicted that oil prices would rally to $500 a barrel.

Fifth, Bailout Ben has dropped trillions into the system to stabilize the Wall Street while Paulson has broken out his bazooka which suggests that as much of 95% or more of oil’s price drop can be attributed to nothing more than the dollar’s rise since July. Nothing else has changed.

I put a lot of emphasis on the first two reasons above. As readers know from my ‘peak lite‘ arguments, I think long-term supply will lag demand growth, and it is only a matter of time before supplies start to decline. What we don’t consume in the U.S. is going to be consumed by developing 3rd world countries.

As I told someone last week at the ASPO conference, the future is uncertain. There will be Black Swan. But we have to plan based on best guesses for what lies ahead, and I am still betting on oil headed higher long-term.

October 1, 2008 Posted by | investing, oil consumption, oil demand, oil prices, Peak Lite | 279 Comments

Five Reasons Oil is Headed to $250

Any time I write about investing, I always stress the long-term. Short-term fluctuations don’t drive my investment decisions. I try to see 5 or 10 years into the future, and position myself accordingly. This is a big part of why I started to shift money into oil beginning in 2002; I felt like I could see the supply/demand handwriting on the wall.

My long-term strategy is why I don’t get too excited about oil shooting to $147 or correcting back to below $100. The only question for me is “Will oil be higher or lower in 5 years?” At no point since 2002 have I felt like the answer to that question is “Lower.” I can’t see any combination of alternatives making a serious dent in our consumption until prices are much higher. How much higher? Well, in the Netherlands this summer they were paying $10/gallon for gasoline. Sure, that’s mostly taxes, but consumers were still willing to pay over $400/bbl and alternatives didn’t ride in to the rescue.

Don’t get me wrong, I think alternatives can ride to the rescue – just not until much higher prices force people to cut way back on consumption. As I told someone yesterday, I could make the U.S. energy independent in 10 years. It’s just that it would be very painful. I may have to make oil prices rise to north of $500/bbl.

This morning I saw an article that laid out 5 reasons why the author felt like oil is headed toward $250/bbl:

Five Reasons Why the $700 Billion Banking Bailout Will Translate into $250 Oil

Unless I overlooked it, the author doesn’t give a timeframe, but I can see oil at $250 in less than 5 years. Here are the reasons the author provides:

First, global oil demand is still accelerating and, according to the United States Energy Information Administration (EIA), will reach more than 115 million barrels per day by 2030 – even with conservation efforts and high prices stunting demand.

Second, daily production has probably peaked right now at nearly 90 million barrels a day, or will peak in a few years at the very latest. While experts once debated the reality of the “Peak Oil” concept, they now accept it and only question when it will take hold.

Third, the world’s fastest growing economies, China and India, are still increasing consumption at double-digit rates, and that more than offsets any conservation efforts that are under way elsewhere around the world. And their governments want to buy oil at any cost – even if that means there’s none left for us.

Fourth, the world will learn one day – probably sooner rather than later – that Saudi Arabia’s vaunted reserves are nowhere near what it claims them to be, and those reserves are certainly not at the levels long held as “gospel” in the oil business. Matthew Simmons, chairman of the Houston-based investment bankSimmons & Co. International and author of the seminal 2005 book, “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” has been most vocal about this alleged shortfall, and I respect his work, especially since I’ve spoken behind closed doors with several OPEC figures who privately acknowledged that this may be their worst nightmare. Simmons recently predicted that oil prices would rally to $500 a barrel.

Fifth, Bailout Ben has dropped trillions into the system to stabilize the Wall Street while Paulson has broken out his bazooka which suggests that as much of 95% or more of oil’s price drop can be attributed to nothing more than the dollar’s rise since July. Nothing else has changed.

I put a lot of emphasis on the first two reasons above. As readers know from my ‘peak lite‘ arguments, I think long-term supply will lag demand growth, and it is only a matter of time before supplies start to decline. What we don’t consume in the U.S. is going to be consumed by developing 3rd world countries.

As I told someone last week at the ASPO conference, the future is uncertain. There will be Black Swan. But we have to plan based on best guesses for what lies ahead, and I am still betting on oil headed higher long-term.

October 1, 2008 Posted by | investing, oil consumption, oil demand, oil prices, Peak Lite | 34 Comments

Suggestions for ASPO Talk?

I have been asked to give a talk at ASPO this year in Sacramento. Ditto last year for the International ASPO Conference in Ireland, but I couldn’t make it (even though I lived in Scotland at the time, I couldn’t work it in). However, this time it looks like my schedule will allow me to attend. The theme is The Energy Challenge – The Future Starts Now. Here is the Agenda Overview.

As you can see, I got tapped to talk about fertilizer. I contacted ASPO and asked them how it came about that I got assigned to talk about fertilizer, and they said this was essentially a placeholder, and I could change my topic. So, I plan to.

The question is, what do people want to hear about? I have some ideas, but I would like to hear your ideas as well. Have a look at the agenda, see what isn’t being covered that I might be able to cover, and let me know. I don’t want to talk about something so highly controversial as food versus fuel, but I wouldn’t mind talking about Brazil, Peak Lite, U.S. Energy Policy, etc.

What would you like to hear about?

June 14, 2008 Posted by | ASPO, Peak Lite | 30 Comments

An Amazing Disconnect


Why Are Oil Prices Rising? The Picture Tells the Tale (Credit to Optimist)

The recent, rapid climb in oil prices has started to get everyone’s attention. In fact, when people use Google to search for information, and then link in here, I can see that information. Lately I have noticed a dramatic rise in the number of people searching for an explanation for why oil and gas prices are rising. It seems Congress is also searching for answers, as they once again hauled oil executives to Washington for a public whipping. This time, it was the Senate Judiciary Committee putting on the show:

Don’t blame us for prices

Reading through the testimony, it is amazing to me that these senators are so fundamentally ignorant of supply and demand. Some of the statements:

“You have to sense what you’re doing to us – we’re on the precipice here, about to fall into recession,” said Sen. Richard Durbin, D-Ill. “Does it trouble any one of you – the costs you’re imposing on families, on small businesses, on truckers?”

To me, that is a highly offensive question. Does he seriously think that oil company executives believe that these prices are good for the economy? I know – and I have personally heard one oil company CEO say this in a small private meeting with employees – that they want to see prices cool off.

Durbin is pointing fingers directly – “This is your fault” – and then implying malice. Durbin either believes that oil prices are going up because oil companies are making them go up, or he actually knows better and would rather throw these guys to the wolves than have a serious discussion on energy policy. I am troubled by either option.

Committee Chairman Sen. Patrick Leahy, D-Vt., likely summed up the feeling of many senators on the panel. “The people we represent are hurting, while your companies are profiting,” he said. “We need to get some balance.”

You have “just a litany of complaints that you’re all just hapless victims of a system,” Sen. Dianne Feinstein, D-Calif., told the executives. “Yet you rack up record profits … quarter after quarter after quarter.”

Not “hapless victims”, Senator Feinstein. Beneficiaries of higher oil prices, to be sure. But they are beneficiaries of a system that is the result of bidding in a global market. These executives have little power to influence that.

More comments from the L.A. Times:

“Consumers are angry, and they have every right to be,” Sen. Herb Kohl (D-Wis.) scolded the oilmen at the Senate Judiciary Committee hearing on rising oil prices. “You’re making more money than ever. It doesn’t seem fair, guys. It just doesn’t seem fair.”

But senators became incredulous when Lowe was unable to tell the committee chairman, Sen. Patrick J. Leahy (D-Vt.), how much he earned last year. “I wish I made enough money that I didn’t even have to know how much I made,” Leahy said.

Yet I bet if Leahy was asked that question under oath, he would have trouble answering it exactly. After all, most people can state their base compensation, but throw in interest payments and any other odds and ends, and you are suddenly at risk of perjury by stating the amount incorrectly. But hey, it makes for a good sound bite.

Leahy also made perhaps the most ignorant comment of the day:

“People we represent are hurting, the companies you represent are profiting,” Sen. Patrick Leahy, D-Vt., told the executives. He said there’s a “disconnect” between legitimate supply issues and the oil and gasoline prices motorists are seeing.

Why is that ignorant? Because it presumes to define how high prices should be given a supply/demand imbalance. Does he think – as I have seen some suggest – that a 10% imbalance in supply and demand should cause prices to go up by 10%? Here’s an analogy I have used before in this case. Imagine that everyone in the world requires a certain substance every day, otherwise they die. How high would prices go if there was a 10% shortage of this substance? 10%? You have to be kidding. People would be willing to pay literally anything to get the substance. In the case of such a substance, any shortfall is going to have a disproportionate impact on the price. And in the case that the substance is a diminishing resource, over time you would have the rich bidding against each other and driving the price far higher than might seem rational.

While oil is not quite in that category, it is a highly demanded commodity, and demand is pretty inelastic. Shortfalls are going to disproportionately impact price. Look at the graphic up top. Supply and demand are out of balance, and the price is rising to bring them into balance. That some of our fine senators are too ignorant to understand the implications does not bode well for the U.S. to ever have a comprehensive, consistent energy policy.

Finally, why are oil and gas prices rising? Gas prices are being driven by oil price increases (whereas last year they were driven by low inventories). Funny that the committee would focus so much on gas prices, when the refining sector has seen profits all but vanish. Presently, oil company profits are being driven by high oil prices, and most of that oil is extracted from outside the U.S.

So why are prices rising? I believe this is Peak Lite in action. For those unfamiliar, the concept of Peak Lite is that we will have shortfalls and huge price increases before oil production actually peaks. This is what we are seeing now. Even as we are setting new production records, demand has far outstripped new supply.

The concept of Peak Lite is explained here: Peak Lite Revisited.

May 22, 2008 Posted by | energy policy, gas prices, oil prices, Peak Lite, politics | 27 Comments

An Amazing Disconnect


Why Are Oil Prices Rising? The Picture Tells the Tale (Credit to Optimist)

The recent, rapid climb in oil prices has started to get everyone’s attention. In fact, when people use Google to search for information, and then link in here, I can see that information. Lately I have noticed a dramatic rise in the number of people searching for an explanation for why oil and gas prices are rising. It seems Congress is also searching for answers, as they once again hauled oil executives to Washington for a public whipping. This time, it was the Senate Judiciary Committee putting on the show:

Don’t blame us for prices

Reading through the testimony, it is amazing to me that these senators are so fundamentally ignorant of supply and demand. Some of the statements:

“You have to sense what you’re doing to us – we’re on the precipice here, about to fall into recession,” said Sen. Richard Durbin, D-Ill. “Does it trouble any one of you – the costs you’re imposing on families, on small businesses, on truckers?”

To me, that is a highly offensive question. Does he seriously think that oil company executives believe that these prices are good for the economy? I know – and I have personally heard one oil company CEO say this in a small private meeting with employees – that they want to see prices cool off.

Durbin is pointing fingers directly – “This is your fault” – and then implying malice. Durbin either believes that oil prices are going up because oil companies are making them go up, or he actually knows better and would rather throw these guys to the wolves than have a serious discussion on energy policy. I am troubled by either option.

Committee Chairman Sen. Patrick Leahy, D-Vt., likely summed up the feeling of many senators on the panel. “The people we represent are hurting, while your companies are profiting,” he said. “We need to get some balance.”

You have “just a litany of complaints that you’re all just hapless victims of a system,” Sen. Dianne Feinstein, D-Calif., told the executives. “Yet you rack up record profits … quarter after quarter after quarter.”

Not “hapless victims”, Senator Feinstein. Beneficiaries of higher oil prices, to be sure. But they are beneficiaries of a system that is the result of bidding in a global market. These executives have little power to influence that.

More comments from the L.A. Times:

“Consumers are angry, and they have every right to be,” Sen. Herb Kohl (D-Wis.) scolded the oilmen at the Senate Judiciary Committee hearing on rising oil prices. “You’re making more money than ever. It doesn’t seem fair, guys. It just doesn’t seem fair.”

But senators became incredulous when Lowe was unable to tell the committee chairman, Sen. Patrick J. Leahy (D-Vt.), how much he earned last year. “I wish I made enough money that I didn’t even have to know how much I made,” Leahy said.

Yet I bet if Leahy was asked that question under oath, he would have trouble answering it exactly. After all, most people can state their base compensation, but throw in interest payments and any other odds and ends, and you are suddenly at risk of perjury by stating the amount incorrectly. But hey, it makes for a good sound bite.

Leahy also made perhaps the most ignorant comment of the day:

“People we represent are hurting, the companies you represent are profiting,” Sen. Patrick Leahy, D-Vt., told the executives. He said there’s a “disconnect” between legitimate supply issues and the oil and gasoline prices motorists are seeing.

Why is that ignorant? Because it presumes to define how high prices should be given a supply/demand imbalance. Does he think – as I have seen some suggest – that a 10% imbalance in supply and demand should cause prices to go up by 10%? Here’s an analogy I have used before in this case. Imagine that everyone in the world requires a certain substance every day, otherwise they die. How high would prices go if there was a 10% shortage of this substance? 10%? You have to be kidding. People would be willing to pay literally anything to get the substance. In the case of such a substance, any shortfall is going to have a disproportionate impact on the price. And in the case that the substance is a diminishing resource, over time you would have the rich bidding against each other and driving the price far higher than might seem rational.

While oil is not quite in that category, it is a highly demanded commodity, and demand is pretty inelastic. Shortfalls are going to disproportionately impact price. Look at the graphic up top. Supply and demand are out of balance, and the price is rising to bring them into balance. That some of our fine senators are too ignorant to understand the implications does not bode well for the U.S. to ever have a comprehensive, consistent energy policy.

Finally, why are oil and gas prices rising? Gas prices are being driven by oil price increases (whereas last year they were driven by low inventories). Funny that the committee would focus so much on gas prices, when the refining sector has seen profits all but vanish. Presently, oil company profits are being driven by high oil prices, and most of that oil is extracted from outside the U.S.

So why are prices rising? I believe this is Peak Lite in action. For those unfamiliar, the concept of Peak Lite is that we will have shortfalls and huge price increases before oil production actually peaks. This is what we are seeing now. Even as we are setting new production records, demand has far outstripped new supply.

The concept of Peak Lite is explained here: Peak Lite Revisited.

May 22, 2008 Posted by | energy policy, gas prices, oil prices, Peak Lite, politics | Comments Off on An Amazing Disconnect