Showing posts with label peak oil. Show all posts
Showing posts with label peak oil. Show all posts

Wednesday, December 29, 2010

Oil at Ninety





An important item is covered here that lets us catch up on the present oil market.  Oil has recovered slowly back through to the $90 dollar mark as the global economy continues to recover back to pre 2008 levels of activity.  During this recovery, OPEC has been able to ship a million barrels per day over their so called quotas.  This all means that they are restraining supply to allow this price level to be reached while covering any shortfalls.

I suspect they have the capacity to keep the price in this particular range.  This is important.  Any higher and contraction begins to impose itself in the developed markets which is not desirable to anyone.

More important the investment to replace declining reserves is now in full swing because the industry must replace cheap declining reserves with new expensive reserves in the face of an expanding global economy.  Unsurprisingly the oil industry is spending everywhere they can.

Locking the price at $90 assures us that the development of North American shale oil reserves and restoration of depleted conventional reserves using the new petro fracking method is profitable and will turn into a massive land rush that will actually make North America completely independent of global oil.

Major alternatives are also emerging and I have no doubt that we will see the complete and rather abrupt end of the oil age quite soon.  Up until that is actually happening we have to keep the economy turning over and oil does just that.  You will be amazed over how fast the final transition will actually be.

All things indicate that peak conventional oil has passed and the present scramble should plausibly replace contracting reserves.

But keep in mind, this contraction is fast and happening across the spectrum of all our present production where any and all new production is expensive.  That is why oil is at $90 and why the alternative options are now holding up economically.


OPEC Caught Lying...

By Nick Hodge | Tuesday, December 28th, 2010



Now that the Peak has passed, all sorts of interesting tidbits are emerging.
Take the December 13th BusinessWeek article that declared OPEC is cheating the most since 2004...
Apparently, the oil cartel pumped 26.78 million barrels per day (mmbd) this year. Yet they have a production limit of only 24.845 mmbd, set at the end of 2008 in response to the recession.
So your friendly neighborhood fuel gang has been breaking its output limit by 1.934 million barrels — everyday, all year long.
With crude at its highest price in two years, overproduction allows OPEC members to boost profits without formally changing output targets.
An extra 1.934 mmbd at $80 works out to a nice “informal” $56.47 billion boost.
OPEC's been lying... That's nothing new.
What's important here is to note the willingness to extract as much as they can as prices rise.
Analysts, start your engines
If the price of oil creeps high enough, OPEC will officially raise its target to cash in.
$100 seems to be the obvious trigger to make that happen, and the consensus is that it will happen this year.
Oil's at $91.43 as I write this — up 30% from the year's low.
Goldman says it'll “average $100 in 2010 and $110 in 2012.” JPMorgan says we'll see $120 by the end of 2012.
Adding to the pricing fire, U.S. stockpiles declined by 19 million barrels this month thanks to intense cold and holiday travel. That's the biggest monthly decrease since December 2006.
I'm sure you've noticed gas station marquee numbers are back on the march.
Prices at the pump have officially broken $3.00 for the first time since October 2008. And they aren't expected to ease anytime soon.
John Hofmeister (former President of Shell, current Head of Citizens for Affordable Energy) is touring TV land this week with a new prediction:
We'll be paying $5.00 per gallon in less than two years, and sometime between 2018 and 2020 there will be another 1970s-style energy shortage requiring rationing.
And this guy didn't just jump on the bandwagon; he's been saying for years that “the last days of affordable gas are behind us.”
He's been attacking our national energy policy since the turn of the century,saying business as usual would lead us to an “energy abyss”.
And like an ever-increasing cadre of oil execs, he admits conventional oil production is in decline, and is convinced we must turn to unconventional sources to fill the gap — and avoid gas station rationing.
There's still time to put this trend to work for your portfolio. Oil at $200 per barrel implies a 122% increase from today's prices.
Buying an oil or gasoline fund like United States Gasoline (NYSE: UGA) or ProShares Ultra Crude Oil (NYSE: UCO) or top unconventional oil plays will ensure rising oil prices translate into personal profits...
Those stocks and funds are already marching in step:
It explains the future of drilling for hard-to-get oil, and the one company that will make shareholders rich as it unlocks billions of barrels worth of unconventional reserves.
Call it like you see it,

Friday, December 5, 2008

Brave New World

As we all know, the global financial system received a massive shock that has seen global equity shrink by forty percent. This has obviously put even quality debt underwater in terms of liquidity. We are now in a protracted period of restatement of values that will permit lending to consolidate and begin initiating new business.. This must take time.

In the meantime there is a bulge of credit problems moving through the manufacturing and carrying trade that will express itself as a nasty quarterly loss. This will be followed by a strong rebound in the following quarters as trade returns to some semblance of normality. This has and is leading to a lot of short term layoffs that should last for a fairly short time. It is still no fun for those on the receiving end.

Will the core economy recover fully? Of course it will, since it is driven by real needs. I expect it to be very fast since the financial failures have visibly abated. Manufacturing through the auto industry is now working to do a defacto chapter 11. It will be interesting to watch Congress support an automotive recovery plan that must include kicking union ass to be credible. After all, they demanded a plan when their real political interests would have been better served with a blank check. They now get to wear the result.

We are entering one of the greatest economic changes of course in Global history. We will exit the oil economy and transition to the solar economy at a cost of under $1.00 per watt. Everything has come together to support this transition with technologies in place or on the drawing board to make it all happen.

The autocart is coming and right behind it the long range autocart. At the same time, the Eden machine that I described early this week will also arrive providing an economic model for a third of the world’s population who will go to work and reforest the dry lands and deserts creating successful sustainable agriculture.

A third of the globe’s population are now in the middle class, or at least see themselves as such. This will let the rest aboard over the next twenty years.

These two devices with solar energy will completely unleash the Global Economy from its commodity strait jackets. The rest is a modicum of education and a lot of good governance.
This attached article brings us up to date on the condition of the quietly worsening oil supply situation. We have had the wake up price shock. W will soon be talking about rationing just as soon as we lose a couple of millions of barrels production and the lack of elasticity in supply becomes apparent.


Peak Oil's "Black Swan" Event

By Chris Nelder Wednesday, December 3rd, 2008

It seems like everyone but me has read Nassim Taleb's book, The Black Swan. The concept of unforeseen, highly unlikely events has wormed its way into nearly every conversation lately. (The title is a reference to the fact that all swans were assumed to be white until black swans were discovered in Australia.)

Aside from the fact that I have a too-long reading list, perhaps I haven't read it because it's something about which I've already thought altogether too much. I seem to be one of those people who are predisposed to look for the outlier events, the exceptions to the rules.

Peak oil is a classic case of a black swan event. Nowhere in our history of modern economic theory or industrial civilization is there such an event, so the past will be no help to us as a guide to the future. Still, we act as though our theories are gospel, and our markets are wise. New and unforeseen events like peak oil are never priced in.


Only the few people with a predilection to look out for such things will see it, at first, while the madd'ing crowd dismisses peak oil as a hoax, and disregards the mountains of science and data with blithe assertions about their faith in the markets and technology. They'd rather believe wacky tall tales from an itinerant preacher who spent a little time in Alaska's oil fields but apparently never learned a thing about oil production than look at the hard data on oil production we do have. And they will continue to do so until precisely the moment at which the whole crowd has seen the proof and knows that it's true; that is, when the peak is well in the rear-view mirror and nobody has any doubt that the End of the Oil Age is upon us, and it's far too late to take effective action.

Only when oil prices blew past $120 this year did analysts like me get a little air time to talk about the science on peak oil and not be simply dismissed as "
peak freaks" with some sort of presumed pathological desire to destroy the economy. And now, with oil prices dragging well below the trendline, our looming supply problem is no longer in focus at all, even as it quietly becomes more urgent. Nothing to see here, people, move along....

Unfortunately, as I discussed in my article last week, when the prices of oil and natural gas are as low as they are now, it no longer pays some companies to continue to produce it. The ones operating at the margin of profitability—the ones working the most difficult and marginal resources, with the highest cost structures—are simply getting priced out, laying down their rigs and cutting back on their expansion plans.

The contraction of new oil and gas development due to low commodity prices and difficulty in obtaining credit is setting us up for an "air pocket" in energy supply. When we hit that air pocket, somewhere around 2010, it will create an especially fearsome spike in oil prices.

A Massive Reality Disconnect

You wouldn't know that from watching the tape, though. Oil and gas, which are part of the very foundation of the real, physical economy, continue to get hammered by traders as if they were no different from any other wacky financial instruments we have invented. As oil finally dropped below $50 and stayed there, the whispers about $20 started going around. Vague fears of a reduced outlook for global oil demand, still not verified by the data, have caused oil prices to overshoot far to the downside.

It's as if traders either don't know, or simply don't care, that oil is already below the production cost in those marginal areas where essentially all of the growth in world oil production must come from (if any). If the chart says it could go back to $20, then they believe it could go back to $20.

Such thinking, confined by conventional wisdom and removed as it is from any sort of real world knowledge of petroleum geology, is not only wrong, it will also prove very costly to those to follow it.

On the other hand, one can go broke trying to tell the market what to think. If the market believes that oil's going to $20, then for a short time at least, it probably will. It doesn't pay to buck the trend.

What does pay is knowing when the turning point is about to happen, before the herd heads in a new direction.

We had one of those turning points at the beginning of 2005, when the decades-long growth trend in conventional crude oil production was finally broken. In 2005, oil hit the bumpy plateau at the top of its bell curve, where it has remained in the range of 74 mbpd. (Natural gas liquids, biofuels, unconventional oil, and other components make up the remainder that bring world "oil" production up to about 86 mbpd.) That's when oil prices sharply departed from their past trends, and shot from about $40/bbl to $147/bbl.

Now we have a situation where oil is trading for under $50/bbl, but we know that the global marginal barrel production cost is about $65, that OPEC is signaling it wants to defend $70-75/bbl, and credible forecasts suggest that $100/bbl is the minimum needed to ensure future supply.

That means we have reached yet another massive disconnect between the trade and the reality. Before long, the pendulum will have to swing back the other way, and will probably overshoot to the high side.

Put another way, the markets are currently pricing the tail risk of peak oil by 2010 at approximately zero. The lack of adequate substitutes is also priced at zero. If somebody wants to help me make a CDS-like instrument, we can price that risk correctly and make a killing. But short of that, a long position in oil doesn't get much more attractively priced than it is right now.

A World Too Complicated
In a
recent interview with PBS, Taleb noted that it only took a tiny bit more demand than there was supply to send prices skyrocketing this year for oil and agricultural commodities. Oil is priced at the margin of supply; the last, most expensive barrel essentially sets the price of the whole lot. That's what we should have been focused on, rather than engaging in a witch hunt for evil speculators.

Few seem to understand the deeply interwoven relationships between oil prices, oil supply, the value of the US dollar, and the health of the banking system and the broader markets. Taleb put it simply: "We live in a world that is way too complicated for our traditional economic structure. It's not as resilient as it used to be; we don't have slack; it's over-optimized."

It's is a point I have repeated often. With just-in-time inventory practices dominating every supply chain and every industry, an interruption in the flow of oil can have drastic consequences within mere days. Events like hurricane Katrina foreshadow what can happen: Power plants shut down, trucks stop rolling, shelves and tanks go empty. Much of our infrastructure is extremely vulnerable to energy interruptions, but that isn't priced in either.

What we build—or don't build—in energy has indirect but enormously important impacts on the financial markets. Without energy, we can't have economic growth. The feedback loop also runs the other direction: without a robust economy, we can't invest in the future of energy.

Monetary policy also has a huge but delayed effect on energy prices, and in time, energy prices feed back into monetary policy. It seems inevitable that the massive creation of money in response to the current credit crisis will eventually result in oil prices spiking again.

Only the next time that happens, totally contrary to conventional market wisdom and the very history of oil production, oil producers will not be able to increase production even with prices again at all-time highs. Simple depletion of mature fields, declining resource quality and quantity, an uncertain financial outlook, skyrocketing project costs, geopolitical tensions and the host of other factors I have documented in these pages will bring us to the peak of oil production sooner than our models projected.

Black swan events are far more common that we might think. The rapid unwinding of the enormous leverage in the financial markets this year was another black swan. The models never priced in everybody being on the same side of the trade in credit default swaps and CDOs, and they never imagined the sudden crash of the markets or the swath of destruction it would carve. History was no help in guiding us through the current crisis.

We also suffer from simple myopia. By focusing on the financial markets without seeing their connection to everything else, we have truly missed the point, which is that energy is the real economy, and money is merely an artificial representation of it. Consequently, twiddling with interest rates, and other measures that don't produce more energy or decrease demand for it, ultimately don't cure our problems at all.

Somehow, we have to start making our decisions on energy policy and the economy on a much longer time horizon, and with a much broader view of how all the parts fit together. It takes decades to make any significant changes in energy infrastructure, like replacing a significant portion of the vehicle fleet, or building electrified rail, or a long-distance transmission grid, or renewable energy systems.

Instead of focusing all our attention on how we might try to play the oil game into overtime, we need to start thinking about how we're going to cope with living on less than half our current energy budget by 2050.

If you only watch the rear-view mirror when driving, you're going to wreck. Yet that is exactly what we're doing with our energy supply planning, and exactly what the Street is doing with pricing future energy supply. It's time to put both eyes squarely on the road ahead, and watch out for that hairpin curve in 2010.
Until next time,

Wednesday, April 2, 2008

Chris Nelder on Current Oil Supply

It is timely to revisit the developing energy squeeze. This excellent survey report is by Chris Nelder in Energy and Capital. The original report has a few charts that I dropped for this report. Besides, I do not think that anyone has missed the very real fact that we are experiencing a repricing of our economic staples and that it hurts. And I live in the one place on earth that is able to dodge the bullet. As we speak, Canadian farmers are gearing up to plant the biggest wheat crop in years and this winter surely has loaded the soil with plenty of rain water.


I underlined the comment on the likely 2010 peak for all liquids. That is the growing consensus. In the meantime high prices are now shifting investment into every possible energy option that works in this pricing regime. The scramble is on.

On a more optimistic note, we have burned one trillion barrels of cheap oil. We have another one trillion barrels of similar oil in the ground to be winkled out. We have two to three trillion barrels of heavy oil in huge fields commencing exploitation and I would guess another two to three trillion barrels of heavy oil fields in smaller abandoned reservoirs. No one bothered to keep track of those turkeys.

We now have with THAI technology a low cost, low input, low footprint method of recovering close to eighty percent of all that oil. So the oil age is not going to end in the medium term, but it certainly promises to be bumpy in the short term.

And if we are determined to burn another eight trillion barrels of heavy oil, then we need every farmer on earth to produce terra preta soils in order to sequester all the CO2.

The Energy Debate Is Over

By Chris Nelder | Tuesday, April 1st, 2008

In Part 1 of this series, I'm Changing My Name to JPMorgan, we looked at the subprime crisis, the dollar, and how the financial landscape has affected commodity prices.

Today, we dig deeper into each major source of energy, and look at the fundamentals that are driving their skyrocketing costs.

Oil

Oil prices have been on everyone's mind, having spiked 76% over the last year, and 16% in 2008 alone:

The reasons for the huge rise in oil-and the reasons why gasoline hasn't kept pace with it, which we will get to in a moment-are complex and interrelated, but we'll try to sort them out.

Up until about mid-2007, oil prices were mostly about fundamentals: the ever-tightening supply situation that we have chronicled on these pages week after week, terrorist attacks and sabotage of oil facilities and pipelines, geopolitical tensions, and the skyrocketing demand for energy from the world's developing economies.

But in September, the market dynamics changed. The first Fed rate cut in four years on September 18 set off a flight of capital to commodities seeking a relatively liquid safe haven from the devaluation of the dollar. And oil prices began increasing at a far faster rate.

Most pundits were slow to recognize this key factor, and continued to point to Nigeria, OPEC, and so on. Only in recent weeks have I noticed the dollar cited as a primary reason for oil prices. Apparently, setting new record lows session after session got their attention.

Compare this chart of the dollar vs. the Euro to the oil price chart above. Note the way that both lines sharply change their trajectories in September.:

Oil had to increase in price just to maintain its value, since it is predominantly traded in dollars worldwide. In turn, this has led to price increases across the board (that is, inflation), since everything requires energy.

But the dollar's fall is only part-I would guess around half-of the impetus behind the rising cost of oil. The flight of speculative capital to commodities in general suggests that oil prices have probably gotten ahead of their proper value, as a purer market would find it. I wouldn't be surprised to see a correction in oil price some time in the next few weeks, particularly as the health of the U.S. economy becomes more dubious. Our main trading partner, China, is already moderating its growth expectations accordingly. Oil fell sharply on Monday and Wednesday of this week, from an all-time high of $111.80 to $102.49 as I write.

Discounting the speculative froth in oil, if the price were to return to the trendline of the last five years or so, it would still be around $85-90 a barrel:

That trendline truly is about the fundamentals, as the supply of oil continues to get tighter, and the world's already thin spare production capacity gets thinner still. It appears that the raging growth of the world's red-hot economies-China, India, Russia, and the Middle East-will more than offset declining demand from the U.S. and Europe.

So even if our economy continues to slump, I think oil prices will remain high. My estimated range for this year is $85-150/bbl, but untoward events could cause much higher price spikes, as we saw with Hurricanes Katrina and Rita.

For its part, OPEC has not been inclined to increase production, calling the oil supply adequate and pointing the finger at speculators for high prices. Even if they were to release more oil to the market, they say, it wouldn't lower prices very much.

In the current environment, I tend to agree with this view. But the amount of actual spare production capacity OPEC has is still shrouded in secrecy, and for all we know their ability to increase production now may be negligible. OECD crude inventories in December (the most recent available data) stood at 52 days of demand cover, which is near the bottom of the December range over the last 10 years.

Worldwide, there is very little reason to be optimistic about crude production. Higher prices for everything from oil to cement are continuing to delay and cast doubt upon the prospects of some impending oil and gas projects, particularly marginal projects like tar sands, and extreme technology projects like deepwater drilling. (See my article on this subject from last year, Receding Horizons Part 1 and Receding Horizons Part 2.) The economic axiom that higher prices always result in greater supply has begun to fail, as the physical realities of finite fossil fuel production trump economic theory.

For the next two years, according to recent forecasts by the IEA and EIA (which were typically optimistic about supply growth, particularly from non-OPEC producers, despite their similar forecasts having been proved wrong for several years running), we will increasingly depend on non-crude oil, primarily natural gas liquids, to fill the supply gap.

In sum, it seems increasingly likely to me that the Association for the Study of Peak Oil (ASPO) forecast of the absolute global peak of "all liquids" by 2010 will be just about on the money. If we should see a worldwide recession over the next two years, the reduced demand might bring us another year or more of production at 2010 levels, forming more of a short plateau of oil production than a sharp peak. But given the many years that it takes to bring new supply online, the production capacity story for the next five years has effectively already been written.

Among the analysts I respect (and more than a few oil company CEOs), the peak oil "debate" is essentially over. There is a growing consensus that we're staring down the peak within the next two or three years, five tops, and there is nothing short of failing economies that can change that.

The much-anticipated production from relatively new finds in the Gulf of Mexico, Brazil, and elsewhere (including the recent announcement about the potential of the Bakken formation in the center of the U.S.) are all likely to come online some years after the peak, and the production rates they will achieve are unknown. No doubt every last drop of it will be welcome, and fetch a pretty penny, but in terms of the big picture, they can only help to buy us a little more time-a year or three-before global production starts to drop off.

If we use that time to continue to invest heavily in energy after fossil fuels, it will be a good thing. But if we use it to merely crawl a little further out on the limb of petroleum dependence, we'll just fall that much harder after the peak. Given the recent efforts in Congress to use the occasion of today's high prices to press once more for drilling in ANWR, and their refusal to demand adequate improvements in fuel efficiency, I'm sorry to say that my money is on the latter scenario.

Gasoline

One of the strangest aspects of the huge run in oil prices has been the fact that gasoline prices haven't kept pace. The "crack spread," or the profit on refining a barrel of crude into saleable products, has collapsed from around $22 last spring to less than a buck (or in some cases, even a loss). For pure refiners, like my stalwart favorites Valero (NYSE: VLO) and Tesoro (NYSE: TSO), this has translated into crushing 30 to 50% losses in their share prices over the last six months-a selloff that I continue to believe is very overdone.

This phenomenon is ascribed to the refiners' belief that if they raise gasoline prices much further, buyers will go elsewhere, cutting into their market share. Integrated oil companies who have profits from other parts of their business are able to take some minor losses from their refining operations for a while and keep selling gasoline. Indeed, lower than expected demand for gasoline has built up inventories to the high end of the average range.

Still, nobody can operate for long at such razor thin margins, let alone losses. If the independent refiners substantially cut back operations in today's environment, it would lead to higher gasoline prices as the supply cushion is eroded, thus restoring their profitability.

So I do expect the crack spread to return back to a normal range, and along with it, I expect average gasoline prices to approach the $4 range by summer (although official summer prices forecasts have recently been reduced, to account for the economic slump).

Natural Gas and Electricity

Gas prices have been steadily moving up since last summer, pushing to over $10 per thousand cubic feet two weeks ago, with futures prices holding steady in the $9-10 range:

In part, the rise in natural gas prices has been driven by the rising cost of coal, as power plants search for the lowest cost fuel. It has also been supported by a reduction in liquefied natural gas (LNG) imports to the U.S. (as we'll discuss in Part 3). LNG imports fell to 0.8 Bcf/day in February, down from 1.5 Bcf/day in February of last year, and about 3 Bcf/day last summer. Gas inventories look poised to end the usual withdrawal season on April 1 right about 210 Bcf lower than last year.

Even so, relative to oil prices, gas has been cheap. The historical ratio of oil to gas prices (dollars per barrel of oil divided by dollars per thousand cubic feet of gas) is between 6 and 9, but in February it was over 11. On a BTU equivalent basis, gas is 6 times cheaper than oil. Most analysts expect the ratio to revert to the mean, but they expect the gap to be closed by falling oil prices, whereas I expect it to be closed primarily by rising gas prices. In addition to the abovementioned factors, my view is based on the fact that gas prices are now below that of residual fuel oil from petroleum, which is an alternate to coal and gas for power plant fuel. Power operators will likely take advantage of the disparity by switching fuels to gas, further supporting the price.

Since natural gas has been the fuel of choice for power plant operators for the last many years, thanks to its lower emissions, relatively low cost, and the ability to start up and shut down gas-fired plants at will, grid electricity prices tend to be set at the margin by the spot price of gas. Average electric bills in New England have approximately doubled since 2000, right along with the corresponding cost of gas.

Accordingly, my big three plays on gas, Encana (NYSE: ECA), Chesapeake Energy (NYSE: CHK) and Southwestern Energy (NYSE: SWN) have all gained around 50% over the last year, and from 47% to 106% over the last two years.

Looking a few years out, the outlook for gas is plagued with questions. If new LNG export capacity, particularly from Russia and Qatar, is developed over the next few years, we might continue to see gas prices rise at the relatively slow pace that they have in recent years. We may also see a somewhat significant increase in domestic production from unconventional sources like the Barnett Shale, which we have covered in these pages over the last few months.

On the whole, I expect production to continue to decline in North America, as it has since the 2002 production peak. Global LNG supply may increase, but it will continue to seek higher prices outside the U.S. as long as developing economies maintain their current red-hot growth rates, and as long as it is preferred over coal for its lower emissions. My bet is that gas prices will continue to rise steadily for the next several years, and that grid power cost will continue to keep pace with gas, at least until we have built a great deal more generation capacity from renewables.

Coal

Coal prices have varied little for the last three years:

According to the EIA, the rising level of exports reached its highest level since 1998 last year because supply in the world's fastest-growing economies has been limited, and the falling dollar has made it more attractively priced. Russia has halted its exports of metallurgical coal to satisfy its own needs, and Australia, the world's largest exporter of coal, has faced shipping delays. Global coal demand growth is primarily driven by the steelmaking industries of Asia and South America (particularly Brazil), and by the power plant needs of China. China is both the world's largest producer and consumer of coal, making it also the world's greatest producer of greenhouse gas emissions, and became a net importer last year.

The growth in U.S. coal imports, while less dramatic than exports, has been driven by relatively flat domestic production, as shown in the following chart. This caused power plant operators to draw down their inventories (which had been at an historic high) and to seek coal from abroad.

Having enjoyed two years of rocketing growth in their share prices from 2004-mid 2006, the stocks of major coal producers such as Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI) have moderated (with some notable price spikes) and now stand about where they were at the beginning of 2006. In part, this may be a reflection of the Street's growing concern about the future of coal usage in the face of increasing public pressure to control greenhouse gases.

While I enjoyed some nice gains from the coal producers during their run-up, I have remained mostly out of the sector for the last two years. There are occasional opportunities to make a quick 20% on the price spikes of these shares, but timing them is tricky, and the greenhouse gas issue adds a level of risk I'm not quite comfortable with.

More to the point, growth in domestic coal demand is primarily driven by electricity generation, which has grown very steadily:

However, the political climate is strongly in favor of meeting that growing need from renewables, rather than coal. Indeed, recently introduced legislation threatens to put the kibosh on new coal-fired power plants entirely unless they employ carbon emissions control systems. While coal-consuming power operators have been quick to point out that the technology exists, they have been so far unwilling to deploy it, citing cost concerns.

Renewables

In stark contrast to the increasingly discouraging outlook for the production of fossil fuels, renewables have been on an absolute tear.

The global solar industry has been growing at nearly 50% per year since 2002, effectively doubling global production every two years. The global market now stands at about $11 billion, with 12,400 MW of deployed capacity. In part, this amazing growth is due to increasing incentive programs, which are succeeding in driving costs down to the point where parity with coal-fired grid power is expected within the new few years.

Likewise, wind power has been growing at the rate of about 25% per year worldwide in recent years. Since 1990, wind generating capacity has doubled roughly every three and a half years. Wind power is already cheaper than power from natural gas, coal and nuclear plants in most cases, ensuring its continued growth. Global wind capacity currently stands at about 94 GW.

Although they are nascent technologies, geothermal and marine energy systems are quickly gaining ground as well, thanks to growing R&D budgets funded by the First World in pursuit of emissions-free power.

The trends are exactly as we have predicted: the cost of traditional fossil fuels is going up, and the cost of renewables is going down. We see no reason to expect those trends to change any time soon.

On the whole, investing in energy for the long term is a no-brainer, as long as the world's developing economies keep chugging along. The slowing demand of the First World isn't going to stop this train.

And the recent selloff in commodities presents some excellent buying opportunities.

Next week, we'll explore the interrelationships between food, energy, and weather, and perhaps illuminate why the price of bread is fomenting violence and protests worldwide.

Until then,


Energy and Capital

Thursday, September 20, 2007

Keith Kohl on Tightening Oil Supplies.

I am quoting Keith Kohl's newsletter here in full. Much as we are now looking at a clean out of the credit markets that is very dangerous, the real global problem is that a squeeze is developing in the supply side of the oil industry and there is little we can do to evade it. None of the analysts have the guts to tell us the truth. A fill up has to hit $500 to force the automobile driver off the road. It is in the process of happening in a sort of slow motion. I do not like to promote fear and panic, but we have time to share this knowledge with others so that it is not a surprise and folks can prepare for it.

Remember that in the 1970's, oil went up ten to fifteen fold. A comparable today would be for it to go to ten times $20.00 or $200.00 to $300.00 a barrel.

Don't you wish a national leader would just come out ant tell people to prepare for a world of $500 fill ups instead of this "I am all right Jack" attitude.

This is from the Energy and Capital newsletter usually advertised on my blog - thank you Adsense:)!

Tuesday, September 18th, 2007


From Desert Sands to Oil Sands
By Keith Kohl

Baltimore, MD--Oil prices today reached as high as $81.90 before settling back down, but the time to mourn the death of cheap oil has already passed. The real question is, "Where do we go from here?"

If you haven't noticed yet, oil is really on the move. But what's the problem? Shouldn't we be running around like crazy?

Don't hold your breath just yet.

The Oil Crunch

For starters, oil is still very cheap.

I know we're at record prices now, but I've said this before: "If you think $80 a barrel is expensive, wait until it breaks $100 or more."

The truth is that we can't predict how expensive oil will get once the peak global production sets in. But we can say one thing for certain: It's going higher.

I couldn't stop laughing recently after reading one oil exec predicting that prices would hit $150 a barrel within 20 years. Well, at least he narrowed it down to two decades. It made me want to send him my own ridiculous prediction that it would rain at least one day over the next three years.

Seriously, though, what's going on here?

Every meteorologist I've spoken to over the last year has been adamant that this hurricane season would be catastrophic. Even FEMA released a statement saying the 2007 hurricane season could be "nearly as destructive as 2005."

Okay, we should have known this season would be weak if FEMA said that, but then again, we still have more than two months left in the 2007 season.

At least we haven't bombed Iran yet. I can only imagine the price jump from that. Oil would go past $150 a barrel in a heartbeat.

So shouldn't oil prices should be decreasing because of the shortage of monster hurricanes and bombs over the last few weeks?

Here's what's happening . . .

The oil market is still tight. Over the last three months, US crude oil supplies dropped 10 out of 11 weeks.

Don't think it's all rainbows and sunshine from here on out, though.

This week, the EIA is expected to announce that stocks of crude will fall by about 1.75 million barrels. Last week, they dropped by 2.25 million barrels.

Now take into account that our demand (not just in the US, but the world as well) is going to keep growing. Global demand is expected to reach well over 88 million barrels of oil per day. My Energy and Capital readers know exactly how I feel about conventional oil.

But where does this leave us? Sitting on the sidelines, watching the oil prices go haywire, is hardly my idea of fun.

Our Oil-Stained Future

Let me show you where our future oil demand will be satisfied.

Numbers don't lie, unless, of course, we're referring to the dubious oil reserves that OPEC claims they have. Does anyone else remember this chart from my article last May?

opec reserves chart

When these OPEC members dramatically increase (and in some cases double) their reserves in just seven years, I can't help being skeptical.

But I don't want to focus on reserves. The truth is that we'll never know how much the OPEC oil fields are struggling until they release the data.

However, I know EXACTLY where the US will get its oil.

We know that US oil production is spiraling down the drain. That's no secret. As the world's largest oil consumer, we'll have to look elsewhere. And don't let people fool you, our savior will NOT be Middle Eastern oil.

According to the EIA, our petroleum imports have been rising steadily. From 2001 to 2006, they rose from 11.8 million barrels per day to 13.6 million barrels a day. That means our imports grew roughly 14.6% in that time.

If I asked you where we got most of our oil, I'd bet a number of you would immediately think of the Middle East. I mean, even Greenspan recently said our presence in Iraq is motivated by oil.

But you might be surprised to learn that our addiction to Middle Eastern oil is decreasing.

Consider the following from the EIA . . .

Between 2001 and 2006, our imports from OPEC countries dropped approximately 6%. Since the 1960s, OPEC's total share in our petroleum imports has dropped by about 30%.

In fact, three of the top five exporters increased their petroleum exports to us between 2001 and 2006--Mexico, Nigeria and Canada.

I won't get into the geopolitical mess that is Nigeria. And if we take into account the serious troubles at Cantarell, there seems to be no chance for Mexico to keep up production.

Canada, however, is a different story. During the last five years, petroleum imports from Canada have increased 25%. With the kind of growth the oil sands are experiencing (especially in light of $81.51 for a barrel of oil), there's no doubt in my mind where we'll meet our future demand.

More importantly, oil companies are realizing this too. There'll be trillions of investment dollars pouring into these unconventional sources. The problem for us, however, is finding the companies that are going to benefit from this surge of investment. On Thursday, I'm going to show you some of the things to look for, and (more importantly) some of the pitfalls to be wary of.

Until next time,

keith

Keith Kohl

Tuesday, August 7, 2007

Confronting Oil Production Decline.

Those who have been following this blog know that the removal of oil from the transportation equation is not the end of life as we knew it. In fact, the advent of algae derived oil and even ethanol will easily meet all our needs without significantly interfering with crop production.

Although the technology is in its infancy, it also promises very fast implementation. As I mentioned earlier, the idea of a field of large vinyl tubes holding the working fluid is something every farmer can relate to. And 10,000 liters of oil per acre is an awful lot of bio diesel fuel.

We can even imagine a few farms near every major city providing the local fuel needs. That is pretty efficient.

However, while we fiddle, the crude oil industry is steadily converging on the tipping point. And I want to describe what this means. We have had $60.00 oil for four years and every producer went full out to take advantage of this great price. This did not bring an oversupply that knocked the price down. It did in the early eighties.

In fact, supplies are now tightening. We can also easily see that new supply, particularly from the tar sands, face huge lead times. More importantly, this oil is replacing visible declines elsewhere. It is conceivable that North America may achieve oil security for a generation by use of the tar sands. This will not happen elsewhere. Brazil is looking like a genius now because they planned for this.

The problem that no one wants to address is that by squeezing production to maintain current levels, we set the stage for a precipitous decline. Try to imagine the production of Saudi Arabia disappearing over the next three years. It will hurt like hell, even if we have the solution.

My fear right now is that it will be far faster than we can imagine. All other declines were.

Any new production if found will suddenly become too valuable for a country to release it into the global market. Every country will start rationing.

As I posted earlier, we are going to suffer with a $200 to $400 fill up until we can bring bio diesel online.


Thursday, July 26, 2007

100 miles per gallon

The only short term fix available to us in the face of that $500 fill up is to convert to a automotive system that gets 100 miles to the gallon as a minimum. a huge effort is now underway to achieve just that. I am even getting feedback off the street that is even more optimistic.

A three to four times improvement in mileage in the face of a three to four times improvement in fuel prices is consumer neutral in terms of economic impact. And our current supplies are then easily extended for decades since we can then shift over to an ethanol blend over the next two decades. The ethanol can be produced as a derivative of algae production so that agriculture is not disrupted.

This is an apparently viable strategy and certainly the least disruptive. If however, we get a rapid shift to the high end in price, then I expect that we will see a forced conversion of the global automotive fleet over a very short time period. First downsizing to better mileage vehicles followed by a slow increase as general efficiency rises. Amazingly enough, that suggests that the automotive industry will enter boom times as everyone shortens their trade in cycle. I never though that I would be saying that about the most mature industry we have.

Buy Gm?





Wednesday, July 25, 2007

Oil Squeeze

I throw these little comments on the condition of the oil market in from time to time, because it will be impacting us all very seriously. We all have learned that we can handle a $100 fill up. Can we handle a $500 fill up? Hell no! And that is what is coming because the average citizen is about to be forced out of the gasoline market.

It is really very simple. We now have no reasonable way to even maintain current production levels and no amount of investment is going to change that fast enough now. It is already too late. The fact is that past levels of huge sustained investment has failed in keeping pace with demand and that demand has also accelerated.

The only option left is to let prices rise to a level that effectively rations transportation fuel to the highest and best use. %500 a tank should do it. We know that the economy will adjust very quickly, but we also know that we will have to restructure our lives toward a far lower usage of automotive fuel.

The only question now is if it will be slow and easy which is preferred or abrupt which is often ugly.

Wednesday, July 4, 2007

Aproaching panic over oil and gas.

As a long time student of markets, one sometimes develops a good sense of timing. The decline in the US dollar is inflating the value of non US assets at the same time US assets are retrenching. Since most large corporations are actually hugely diversified offshore, this is very bullish for stocks which are quietly advancing.

More importantly, industry has readjusted to the new price regime for oil and gas and certainly can do so again, particularly with the world awash in investment capital.

The stage is now set for a shift in oil prices to the $100 per barrel level with a possible brief high of $140.00. Gas will recover to its high of around $13.00 and will possible hit $20.00.

And that means folks that the automotive industry is in for a huge restructuring. And the majority of people will be sharply downsizing their automotive habit. This pressure will be maintained until the transportation industry figures out how to do without the use of oil.

The squeeze is on!

It is no longer possible to increase oil production fast enough to keep pace with expected demand, and the only fix is to price marginal uses of oil right out of the market. And someone is about to realize that the most marginal use of oil is for private road transportation. We can expect rationing like the second world war.

Friday, June 29, 2007

Transportation Energy.

One thing that I have not addressed is the looming reconfiguration of the global transportation energy regime. This is something that we are all now feeling at the pumps.

First, however, the global demand for non-transportation energy is also huge. Suppling it is not technically difficult. Our failsafe and most reliable source will be simply tapping the heat of the earth and pumping that energy to the surface and putting it through a converter. It has not been cheap enough as yet, or more precisely, there have been plenty of cheaper sources to use such as dams, coal fired power plants and the like. Accessing that energy is simply a matter of drilling deep enough almost anywhere which the oil industry has plenty of experience doing.

In other words., as long as we are not demanding portability, we have absolutely nothing to worry about.

That is not true for the petroleum regime.We have burned one trillion barrels of oil and we may have three to four times that ultimately recoverable at great expense. In other words. unlike geothermal energy, the resource is truly finite and finite inside a human lifespan, now that all the human race is modernizing as fast as possible.

One third the global population is comfortably middle class, another third will be there in the next twenty years and the rest can be there in the next twenty depending on their political masters. And they all need some access to personal transportation at some level.

A huge amount of effort has gone into developing other energy storage technology with marginal success to date. We cannot today depend on a breakthrough to help us.

The best available energy storage device is still the hydrocarbon molecule. It is compact, fairly safe and very portable. That is why we use it. The next best alternative is the ethanol molecule which is alcohol from fermented sugar. And the cheapest source of that sugar is corn.

The point that I am making is that a global corn culture combined with carbon sequestration of the waste is capable of supplying the maximum bio available fuel. I do not know if that could be enough to exactly satisfy our actual needs.

On the other hand, it is trivial to re engineer our life ways to minimize the demand on transportation fuels. Simply ensure that personal use of a car is not the first or only option. Over time, price alone will largely do that with the application of a little common sense by the planners.

It would not be surprising to discover that we can easily live within our ethanol fuel budget even with a global population over ten billion.