148 comments on Is Oil In a Price Bubble?
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148 comments on Is Oil In a Price Bubble?
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Two comments. On Professor Hamilton's website Econobrowser, there is a 30 minute video of a speech he gave at the American Enterprise Institute. In it he goes into detail about price I highly recommend it.
Second, Bloomberg reported yesterday that oil inventories in the US were the highest since 1998. This seemed significant to me and seemed to be evidence that in the short run at least Robert Rapier's analysis(and my own, and to a certain extent that of the Saudis) in regard to what is going on is correct.
Take Nigeria and Iran out of the equation(but leave Iraq in) and you have $50 oil tomorrow - a price entirely consistent with an overall higher production cost due to a smaller portion of LSC in the mix and the higher level of demand from developing nations in the last 5 years.
It seems to be inconclusive. It would have to be conclusively lower and trending that way to be viewed as evidence that there was a problem or that the current supply, demand, and price were proof of "Peak Oil Now."
As these inventories themselves are trending higher, then there is the distinct possibility that with stalled demand, number-of-days-inventories will rise. We will have to see.
Given my confusion at your conclusion, can you clarify then? Or did I read you correctly?
If you look Stuart's original post here you will see that at the very top he references a TOD thread from about a week ago in which there is an alternate explanation of a plateau. Stuart quotes somebody, I'm not sure who, but also contained in that thread is a hypothetical devil's-advocate question that I posed. There was some lengthy discussion that followed and I believe you read it all since you posted towards the end of it.
There has also been much debate here between Westexas and Robert Rapier regarding related issues.
For me it all boils down to this: Does the current situation with supply, demand, and price point to or verify the existence of "Peak Oil Now?"
If you look at the graphs that Stuart and I have done, you will see that there were two plateaus previous to this one in the last decade. Much of the debate surrounds what is different in this plateau that makes this one the peak, where the other two were not.
My view is simple - I don't know. And I don't think I'll know until I'm looking back.
The opposite point of view(expressed in this debate/discussion) is that we can in fact see the differences and they clearly mean this plateau is the peak.
What may be true, but a position I choose not to defend is that what we see is proof of this current plateaunot being a peak. This may be part of the confusion.
Others are arguing that this is the peak, I am simply arguing that we can't be so sure. I see any inconclusiveness as conclusiveness that we can't be sure :)
One thing I do know, is that if oil ever falls to $55, Saudi Arabia pumps so much as a single barrel more than they are now, Cantarell's production doesn't decline by more than 5% in the next year, or we hit 86 million barrels per day - then there are going to be a bunch of people here who are going to have to seriously re-think things.
I tend to agree with Stuart's position - we can't be sure but there is an interesting body of evidence suggesting that we are at or very near peak. And ultimately, you (and others who have said the same) are right on this issue - we'll really only know for sure in hindsight.
The Saudis have admitted to a 5% decline since December, so a mild increase in their reported production, especially given their large stockpiles, would not be totally unexpected; however, Ghawar, the largest producing oil field in the world (found 68 years ago), has produced more than 90% of its 1970's estimated URR.
Cantarell, the second largest producing oil field in the world, has a remaining oil column of about 825', which is thinning at the rate of about 300' per year. The longer they keep production at relatively high levels (with horizontal wells), the sharper the final decline will be. This is simple physics, which is the same problem that Ghawar has (we have seen what happens when water hits horizontal wells, in the Yibal Field).
Daqing and Burgan are also declining.
What amazes me is that anyone has doubts about our proximity to Peak Oil given the fact that the four largest oil fields in the world are almost certainly declining.
I'll be the first to tell you if you're predictions turn out correct. But for me "almost certainly" doesn't cut it. It has to be "are declining" with numbers to prove it.
Robert has used the line recently,"What is it going to take to convince you..." Well, I will tell you what it will take to convince me. Year-to-year drops in global conventional crude production of greater than 2% for twelve consecutive months(or something roughly equivalent).
If Cantarrell has a catasrophic collapse, you take the cake.
For myself, I don't see THE PEAK as a month, a day or even a year. I see it as more of a process as described by getting on a plateau which shows monthly and yearly fluctuations within certain limits until permanent decline sets in. This plateau could last 3 to 5 years - I don't know. If the current plateau is the "peak plateau" then we rounded the shoulder around the end of 2004. If we get bumps up to perhaps 86 mbpd but not consistently exceeding that before decline sets in, I will consider us to have been "within" the peak at this time. To consider us not at the peak, I would want to see sustained production for a year or more exceeding 86 mbpd.
If we are in the peak at present, it could go on another 2-3 years before the consistent drop you are referring to, so likely both of our criteria will remain unanswered for at least 3 more years even if we are peaking now - which is fine.
I think we can't make too much of short-term fluctuations in either direction, but society needs to be preparing now either way.
I would suggest that this indicates that the 1970s estimates were too low. What is the typical production of a field relative to its peak production when 90% exhausted and what is the production of Ghawar now relative to its peak production numbers from the 1980s?
While we cannot rule out the possibility of a sudden, severe collapse, I believe it cannot be taken as a given either.
The vertical wells in Ghawar started watering out long ago, so the Saudis responded by drilling high tech horizontal wells into a thinning oil column. This has the effect of prolonging the period of high production, but it probably does not increase ultimate production.
When the water does hit the horizontal wells, the resulting production collapse can be dramatic, e.g., the Yibal Field.
I can't think of any other producing region that has been quite so dependent on one field complex. It is not "if," but "when" the oil production in this 68 year old oil field, accounting for about half of Saudi production, starts rapidly declining. It may be happening right now.
(2) Speaking of someone else doing the heavy lifting. Bradshaw, acting on a suggestion I made, posted a graph showing Saudi oil production and oil prices. The most recent oil price increase of 15% to 25%, since December, coincided with the recent reported decline in Saudi oil production.
We have seen panic selling in the Saudi stock market and panic drilling in Saudi Arabia as they reported a "voluntary" 5% decrease in production. Saudi Arabia is incredibly vulnerable to a decline in Ghawar's production, which has already produced about 90% of Aramco's 1970's era estimated reserves.
Mathematically, Saudi Arabia, based on the HL method, is at the same point at which Texas started its so far terminal decline in production.
So, perhaps the simplest explanation is the best?
The Saudis are claiming an ability to boost their total production by 25% or more. Oil prices are at around $70 for years out, which would suggest very strong cash flows in the years ahead.
The HL method says that Saudi Arabia is at the same point at which the prior swing producer, Texas, started declining, and the Saudis have admitted to a 5% production decline since December.
So, what have Saudi insiders been doing regarding their own stock market? They have been selling. As they say, "Actions speak louder than words."
The other problem is the Export Land model. With rapidly increasing domestic consumption and falling production, it may be a challenge to keep the cash flow up, even with higher prices, as net exports fall sharply. A restless large population of resentful young people, combined with declining oil production does not suggest a stable future ahead for Saudi Arabia, which would be a strong reason for selling Saudi stocks.
It is not in the interest of either opec members or oil ceo's for news of limits to get out... the former could easily loes their grip, and maybe their heads, while the latter could face windfall profits taxes, lower earnings and options.