The Oil Drum

I went to my usual Rotary Club meeting this morning, and one of my co-members asked where I was last week. “At a Peak Oil meeting in Houston,” I said. “What’s that?” this well-educated and generally well-informed lady asked me. To me this encapsulates the problem, not the problem we have, the problem that the general public has. They have no idea of either the size, or the immediacy of the problems that are now almost upon us. Debbie Cook and others this past week talked about the need to get administrative and legislative attention, but to tie it to some coming energy event. We talked with some dispassion about when this event might occur, and were encouraged to dream of some bucolic Houston, having survived the deluge. I don’t think that this is the way it is going to be.

It is the scale of the problem that defeats most imaginations, including mine. When we talk about the difference between the conservative estimate of oilwell depletion, say the 4% that Chris Skrebowski uses, this is 400,000 bd less per year than the 4.5% that the “optimistic” CERA has employed. The more modern wells are horizontal, and, when these start to water out, the decline in production has, in a number of places, already passed 10%. As the control of the majority of the world oil production has passed from the one-time Major Oil Companies, into the hands of National Oil Companies the investments to maintain and grow production are not being made and thus one can anticipate that decline rates will get worse, not better. Further the costs of doing business are getting higher, reducing the return on investment. One of the sponsors of the meeting, the World Oil magazine, had an article in their August issue questioning the potential return on investment for the current spate of wells being drilled in the Fayette Shale. And while this was partially rebutted in the current issue , the underlying point is increasingly becoming true. The energy and capital costs of development in the more marginal deposits that are the remaining reserve will not justify the cost of finding and exploiting them. No wonder that companies are buying back their own stock, instead of investing in other “opportunities.”

This is the fourth segment on the ASPO Conference and follows a report on the Workshop day, the first morning report, and the rest of Thursday. We pick up on Friday morning, which began with a talk by Peter Tertzakian on the impact of resource constraints. He began by showing the rate at which the electric light was adopted into American homes, noting that essentially 100% was not reached until the 1980’s from inception in 1890. Initially the rate of change was very slow. To make a change there has to be a compelling alternative at a cheaper price, and yet as energy consumption has grown there has been a pattern. First the economy grows, then pressure starts to build up, then there is a breaking point, with the introduction of “a magic bullet”, and the cycle restarts. We have reached a point where the cycle has reached the breaking point – and now we look for the magic bullet. He pointed out that this occurred early in Japan in the 1970’s, and that they made the switch and by adding LNG and nuclear they have been able to stabilize oil consumption.

Oil, however, has many attractive properties, so why should we now change from it? From the 1908 arrival of the model T car growth has led us to congestion, urban growth and commuting times that have increased more than 20%. And change is not necessarily productive, after buying fluorescent lights, he now leaves them on longer.

The problem is one of scale, with few realizing not only the size of the current problem but also that to come. In India Tata Motors are about to introduce a car that will cost a Lakh (100,000 rupees or $2,500) which can be anticipated to become an enormous success with their growing middle class, and concurrently a large fuel demand generator. Within the $65 trillion world GDP the largest growth rates are in the developing countries.

Wall Street's ratings agencies are starting to abandon their efforts to hide the real market value of the debts that are ironically still marked as assets in the books of countless institutional investors. To say unpleasant surprises will be revealed would be a tragic understatement. Credit markets are tightening in anticipation, and spreads are set to widen dramatically.

Hedge funds and banks are heavily exposed to the derivatives market, and losses will be colossal and widespread. Increasingly, pension funds look to be the biggest losers of all. The key-word will be 'leverage' - cheap credit borrowed to make 'easy' profits, that will now lead to hard losses.

On the energy scene, Americans are concerned about rising costs, labour constraints and environmental issues in the Alberta oil sands. Combined with increasing Canadian domestic energy demand, this could reduce energy exports to the US just as it was looking to Canada to fill its looming energy supply gap.

Resource ownership and control in Canada continue to be hot issues at the national, provincial, and territorial levels. Alberta looks to carbon trading and Ontario will have to get through a hot summer with a reduced electricity supply.

S&P May Cut $12 Billion of Subprime Mortgage Bonds

Standard & Poor's said it may cut the credit ratings on $12 billion of bonds backed by subprime mortgages, prompting investors to dump the securities....

...."S&P's actions are going to force a lot more people to come to Jesus," said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, California. "When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and reevaluate everything. This could be one of the triggers we've been waiting for." _{(emphasis added)}

S&P finally says subprime is mostly junk

S&P, one of the three main credit-rating agencies that served as enablers of the subprime-mortgage boom, announced Tuesday that it would lower its ratings on 612 bonds, a small portion of the mortgage-backed securities it had given its seal of approval to.

But the bigger news is that S&P isn't going along with the charade anymore. S&P said it would change its methodology for rating hundreds of billions of dollars in residential-mortgage-backed securities. And it would review its ratings on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans.
A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money. _{(emphasis added)}

It has been suggested, given the demands for electricity around the country, and the outages that are occuring for various reasons (St Louis and NYC being the two most obvious, although neither were due directly to demand apparently), that we get all the information together in a single thread. (It also might help those of us planning to go somewhere if we know that there won't be power when we get there). So, gentle folk, can we collect the stories here ?

UPDATE: 10:18 pm EST Courtesy of step back the California ISO is predicting a peak demand tomorrow of 52,336 megawatts, which is higher than Friday’s record 49,036 megawatts, as cyclelicious tells us. And as our Alpha Male just noted, Santa Rosa just had a power loss. (From comments brought forward).