<DrumBeat: February 27, 2008 The Oil Drum North American Natural Gas Production and EROI Decline>

35 comments on This Week in Petroleum 2-27-08

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GreyZone on February 27, 2008 - 12:39pm Permalink | Subthread | Comments top

Robert,

Previously, I had said that the oil companies (generally all of them) appeared to be comfortable with prices in the $80-$90 range. This was based on my observing that crude inventories would increase during periods when prices were in that range. Further, the oil companies previously were not comfortable above $90, attributing those prices to "speculation" and not building inventories at that higher price range.

Now, however, we see inventories building in the $90+ range. Does it appear to you that the industry is reaching a consensus that $90 oil is now "normal"? And how much of that is demand driven versus the fall in the dollar? The dollar fell to $1.50 per Euro yesterday, reaching a record low which shows that the global value of the dollar continues to decline. As best I can tell we've moved from $1.39/Euro a year ago to $1.50/Euro now - close to a 10% drop in value of the dollar. At the same time, we've seen oil company willingness to build inventories rise by roughly 10%, from the $80-$90 range to the $90-$100 range.

What this says to me is that the oil companies don't necessarily yet believe we are at peak but they can see that supply is tight, demand globally continues to rise, and total liquids production continues to lag behind demand (with crude production being flat or slightly falling for 3+ years now). This appears to fit both peak and peak lite scenarios so there's still no obvious indicator one way or another about peak yet.

This brings me to my final question to you - you have consistently expected at least one additional break out in production. It appears that we may be seeing that breakout beginning to occur but where do you expect (a) total liquids to peak and (b) crude oil to peak? I separate those two issues because it is becoming increasingly clear that, at least for a little while, we could have increases in total liquids with flat or even declining crude oil production.

Thanks in advance for any insights.

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Robert Rapier on February 27, 2008 - 2:04pm Permalink | Subthread | Parent | Comments top

Does it appear to you that the industry is reaching a consensus that $90 oil is now "normal"?

Yes, slowly but surely they are coming around to the realization that things are different this time around. There won't be a return to $50 oil. I am having fewer of those arguments these days. I did have this very discussion today with an Iranian engineer in my team. He said he couldn't understand what's going on with oil prices. I showed him my graph where the slope of oil production is up, but the slope for demand is even steeper and eventually intersects with the production curve. That is enough to explain what's happening with oil prices. But I told him if we are at a peak, he is soon going to look back on the time that oil was only $100 a barrel.

where do you expect (a) total liquids to peak and (b) crude oil to peak? I separate those two issues because it is becoming increasingly clear that, at least for a little while, we could have increases in total liquids with flat or even declining crude oil production.

And that's exactly what we have been seeing lately. Since total liquids production was at 85 million bpd, I have been predicting that we could add another 5 million bpd. The early indications are that we have closed about half that gap. But I am sticking with my initial 90 million bpd. For just crude, I thought we could add another 3 million bpd. So far, we haven't added anything there. If prices remain at these levels for a couple of years, and we don't add 3 million bpd, I think we are done. There is a huge economic incentive right now to bring production online. But it can take years to bring some of these projects from the drawing board to production. But by 2010, we will have likely had 5 years of very high oil prices – and that is sufficient time to have brought some of these marginal projects into production.

From where I currently sit, I view it as a 90% probability that we peak by 2012. We could be there now, and I think we will know before too long if new production doesn't come online at these prices.

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shargash on February 27, 2008 - 2:26pm Permalink | Subthread | Parent | Comments top

But by 2010, we will have likely had 5 years of very high oil prices – and that is sufficient time to have brought some of these marginal projects into production.

The longer it takes to bring those projects into production, the less likely it is they will be able to counter depletion. I'd say if they take until 2010, they will just slow the rate of decline rather than bring the extra 3 million barrels online. IMO, if it can't come online quickly, it can't postpone the peak.

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GreyZone on February 27, 2008 - 6:52pm Permalink | Subthread | Parent | Comments top

Crude production (independent of all liquids) has been on a jagged plateau since May 2005 with a couple of spikes back near the May 2005 peak and most of it sitting in the 73 mbpd band. This year's megaprojects should definitely show an impact if most of them arrive on time. If we don't begin to see that impact this year then it's not going to appear, in my opinion. 2008 will be the 4th year of prices above $38 per barrel. We should begin to see the leading edge of this promised oil and if it doesn't appear now, after 4 years of $38+ per barrel oil and after 8 straight years of oil price increases, then its not happening.

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GreyZone on February 27, 2008 - 6:48pm Permalink | Subthread | Parent | Comments top

Thank you, Robert.

People have attacked you in the past because you didn't subscribe to the "peak is now" theory but in 100 years, someone will look back and see that some people thought peak was in 2005 and some thought it was 2010 and they were all pretty close to being right. I also agree with your observation that economic incentives to bring new production online now are there and that if we don't see a bump up in crude by 2010 then we're probably on the downslope for crude. Personally I am still holding to that May 2005 peak for crude, at least til the data says otherwise.

A final thought for you (and others) - if we do see new projects come online but crude production either does not rise or rises only very slightly between now and 2010, would that then concern you about the underlying rates of decline? That's one of my biggest concerns - will rate of decline exceed the rate of our ability to adapt?

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Magnus Redin on February 27, 2008 - 5:21pm Permalink | Subthread | Parent | Comments top

I am not sure OPEC is getting more value for their oil, it is probably to a large degree the dollar inflating.

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memmel on February 27, 2008 - 10:15pm Permalink | Subthread | Parent | Comments top

Since most OPEC members maintain large reserves of dollars each time the dollar declines they loose quite a bit of real purchasing power which is a lot of incentive to with hold more oil to regain the store of value. Eventually of course they will decide to convert out of the dollar and are probably diversifying as much as possible given the dollar peg of the regions currencies.

So its sort of a arms race to the bottom. As oil goes higher the dollar is devalued which lessens the incentive of these large dollar holders to pump more oil.

I have to think that by the end of the year we may see a lot of these contries depeg from the dollar move off the dollar as pricing for oil and fully diversify their dollar holding.

Since a big part of a fiat currencies value is simple faith in the creator of the currency that they will ensure interest rates and inflation of the currency are inline to make it a store of value this movement should be a serious blow to the dollar.

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creg on February 27, 2008 - 9:56pm Permalink | Subthread | Parent | Comments top

RR [& GreyZone]

thanks for u'r work;as 'reading between the lines' is so needed [hell we don't even have lines].
as i attempt to maneuver me & mine [& a few listeners] thru the decisions today that will increase our odds in the upcoming minefields the info matters.As Matt Simmons says the data is the prerequisite for mitigation.

Thanks again.

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35 comments on This Week in Petroleum 2-27-08

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