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Dave my face is pretty blue today - not sure if that is Pictish genes or the fact that I woke last night with a pair of hands clenched round my throat.
I just want to plant a radical idea here and that is that historic production data = demand
When we are past peak, production will = supply
So do you think it is possible that the "plateaus" are demand related?
(this must be about the 100th time I've suggested this and so imagine that I will soon be ejected as a Troll)
Very good question! in particular if you look at Saudi Arabia, is the recent drop demand related (not enough demand + high inventories) or a supply problem?
In order to answer you need side information about reserves, new projects, depletion, etc.. In case of KSA, we have only very partial information.
IMO, the only way to decide between a demand or a supply plateau, is:
1. High prices for a long period
2. Steady oil demand (no economic recession)
3. Lower inventories
4. Drilling frenzy
Regarding KSA projects, I note that the new Khursaniyah development (claimed 500,000 bpd Arab Light) has been brought forward by 6 months from Dec 2007 to June 2007.
On the face of it this seems odd considering the Saudis already supposedly have ample spare capacity and they've been voluntarily cutting back on production. However, the decision regarding this may have been taken at a time when the global demand/supply balance looked somewhat different, and there were concerns regarding supply disruption from Iran, hurricanes etc.
One to watch out for later this year.
Perhaps Khursaniyah provides better economics? - allowing the Saudis to rest tired reservoirs?
Good point, Euan. Mind you, if Simmons is right about Khursaniyah that doesn't say much for the rest of their fields :-)
IMO the litmus test will be falling production correlated with rising price
And I'm not convinced that oil prices are actually that high yet - oil is probably still cheaper than bottled water.
This is where the historical models come in--especially the Lower 48 and Texas. Nothing has reversed the long term declines. And nothing has reversed the long term North Sea decline after it crossed the 50% of Qt (C+C) mark.
The world and Saudi Arabia, in 2006, were at the same stage of depletion at which the Lower 48 (also the North Sea) and Texas started their long term declines, and by most measures (all but total liquids for the world), world and Saudi production are declining as expected.
Hello WT, It also seems that we are entering uncharted territory with respect to increased drilling costs. After the 50% mark for the Lower 48, we were able to continue to drill as much as we wanted to because our drilling costs were supported by imported cheap oil. The market was unable to increase the price of oil in the US to reflect the decline in US production. After we hit worldwide PO (which I believe has already occurred) there will be no cheap outside supply of crude to keep drilling prices down (or the price of crude, either).
So, higher drilling prices after PO will cause many feasible drilling projects to be abandoned, even though we may know the oil is there. This is happening now. The US is reducing its GOM drilling and the rigs are going to the Middle East. We are even sealing GOM wells that we can't afford to restart (after the hurricane damage).
This will steepen the downside slope of PO. We can't determine how much the slope will increase, but it could be substantial, as the limited exploration funding appears to be being eaten up by deep offshore drilling costs. We could find the world giving up on the search for new oil quite quickly, no matter the price.
There is just a slight problem with a "demand" plateau : for 2006 and 2007 EIA forecasts that demand will exceed supply, and that stocks should diminish. For me it is not compatible with a "pure demand destruction" hypothesis.
Nevertheless demand destruction must play a role in the peak date. The cornucopian argument that the higher the prices, the more investment are possible, and so more production will follow, is not totally stupid - but there is a point where high prices destruct so much demand that investments are simply useless, and this point is not very far from the geological limit of "easy oil". So IMHO there is not much difference between demand destruction and supply disruption.
If you look at the IEA forecasts (International Energy Outlook, 2006), they considered three cases: low prices, high prices and the reference case. The production forecast is much more lower for the high price case (see charts in my comment above).
It seems that there are two main feedback mechanisms:
1. High prices => lower demand => lower supply
2. High prices => more investment => more spare capacity or more supply
The second mechanism is probably a long term feedback (> 2-3 years).
of course the price measures only the balance between demand and supply - it doesn't say anything about the reason why each of them is high or low. IEA cases are thus ambiguous!
I just wanted to stress that if the main reason of price climbing is the decline of easy oil production, high prices would indeed help finding new resources, but also destroy demand, and that's the combination of these two factors that will eventually determine the peak value. After all, conventional oil has most probably already peaked, and cheap oil is really over. Now we are just at the point where we can produce a little bit more-but at which cost and who will buy it ?
-duplicate post-
Also, in the longer term, the product mix fundamentally changes in the EIA's high-price case.
In 2030:
Reference case = 90.2% conventional, 9.8% unconventional
High-price case = 79.3% conventional, 20.7% unconventional
Much less is expected of KSA under the high-price case.
Hi Gilles, Hi khebab.
Your assertions that higher prices ultimately lead to greater production is surprising: Has not the rate of discovery been declining since the early 1960's? Colin Campbeel, IIRC, has shown that the rate of discovery, and real petrotroleum prices are uncorrelated. He has also demonstrated the "creaming curve" (essentially an assymtotic limit) in the world discovery rate.
What sort of data makes you think-
"High prices => more investment => more spare capacity or more supply"
is a real relationship?
I have no data but it's a frequent claim in the mainstream media: "we have maybe run out of $20 oil but not of $70 oil". I know also that small fields judged uneconomical a few decades ago are being reopen now.
Except for unusual circumstances large fields would be brought online almost regardless of the price of oil as long as they can make money.
So the high price increasing demand is a bit of a red herring since your talking about fields that are small/marginal brought online. It takes a huge number of these fields to create 1mbpd of production. And of course they need to compete with work overs of larger fields for equipment.
I would say that low prices does suppress work overs of larger fields and production plans for a few large producers such as KSA that have or probably had a large number of undeveloped fields. So as far as overall production goes its really the ability of a few countries that have known underdeveloped reserves to bring them online during high price regimes.
Other development that may be lucrative financially probably does not have a significant effect on either prices our overall production.
A measure of the production from small fields over time would be interesting to verify how much of a effect they have.
Centuries of economic research provide evidence that higher prices will lead to increased profits, assuming inelastic demand. Current market participants earning those higher profits will look to invest their increased profits where they will get the greatest return on their investment. In many cases, this will lead to existing participants using their increased profits to invest in new production in order to try and grab more market share. According to standard theory higher than average profits will also encourage new players to enter the market.
I believe this is exactly what we are currently seeing. There is major investment by existing market participants and new entrants offering substitutes (i.e. Tar Sands, Biodisel, Ethanol, etc.)
Whether or not this actually leads to increased spare capacity or supply is a whole other matter, of course.
Euan Means: historic production data = demand
When we are past peak, production will = supply
This looks like a theory of pricing: What is the difference between your statement and the paradox of value, proposed by Adam Smith: Why is water, which is needed for life, inexpensive while diamonds, which are frivolous, very expensive. http://en.wikipedia.org/wiki/Paradox_of_value Adam Smith could not solve this problem, but later economists used it to come up with the marginal utlity theory of pricing.
Oil is an inelastic good like water -- perhaps not as inelastic as water but close.
Actually, Adam Smith did resolve the paradox of diamonds and water. He did not use the term "marginal utility," because it had not yet been invented.
Little known fact: Adam Smith was a professor of Moral Philosophy and taught logic (among other subjects) for many years. I have yet to find anybody who has found a lapse in logic (a fallacy) in either of Smith's two great works--"Theory of Moral Sentiment" and its sequel, "Wealth of Nations."
Smith had an answer (see the Wikipedia article above), but it's a different one, not just the absence of the term "marginal utility." He ascribed it to the difference in difficulty to acquire, a labor theory of value.
When I sell something to you, I am sure you don't care whether I worked a little or a lot, whether it was difficult or easy, but only whether you want it enough to meet my price. Roughly speaking.
Similarly, society is willing, at present, to pay higher prices for oil, not because it's harder to acquire, but because they want it (inelastic demand) and insufficient alternatives. Oh, well.
Ok -- also I think what's getting some people is that the demand for oil only goes up by 2.2% or a year and the price goes from $30 to $60. "Demand and supply are only different by a few percent, and therefore it is ridiculous the price changes so much"
Well think of it in terms of economic growth -- econ growth of 1.5% (as in the US last quarter) is not "2.0% lower" than 3.5% economic growth -- it's 57% lower (3.5%/(3.5%-1.5%)
Euan, we don't have to look back that far for a demand driven plateau brought on by an aisan flu hangover and clinton's recession:
1999 74.5
Y2k 77.1
2001 77.3
2002 77.0
2003 79.8