The Oil Drum

I'm publishing this chart as a reference, nicely closing the regional oil market for 2007.

The record petrol prices in Australia and New Zealand over the last few weeks are the result of Asian unleaded prices reaching AUD$118/barrel, which is itself a function of the international crude oil price and regional influences (which pushed TAPIS over US$100 on a few occasions), plus the refining margin and variation in exchange rates. As local currencies have fallen over the last few days, the price we pay for oil and oil products has risen even as the international oil price weakens.

Thanks to Rex in Sydney for these charts comparing Asian oil and product prices to WTI.

Note the varying differential between TAPIS oil and WTI. The delivery point for WTI is Cushing, Oklahama, which is landlocked, so delivery and supply is constrained by the availability of pipeline and/or storage capacity. Stocks are now high at Cushing so there is a constraint on how high the WTI can be bid up. However, OECD stocks are lower in other areas, so other traded oil prices are again opening up a differential above WTI price, as happened in the first half of 2007.

Also note the varying margin of the product prices against TAPIS crude oil price. This is the refining margin which determines how profitable it is to run a refinery to produce oil products. This margin has been quite volatile over the last 12-18 months. Unleaded had a huge margin over oil in the first half of the year (reflecting the US demand for gasoline imports to resolve their low stock levels), which then fell to near zero later in the year, but is now starting to open up again.

Click to Enlarge

Click to Enlarge

I thought I would mark this occasion in TOD ANZ history:

Today, Wednesday 7th November 2007, the price of TAPIS oil produced in Malaysia and used as the Asian regional benchmark hit $100 per barrel, as published by Upstream Online:

http://www.upstreamonline.com/market_data/?id=markets_crude

Here is how the table of oil prices looked at 3:40pm Australian Eastern Summer Time (AEST):

You can also see the run in prices that has occurred over the last four weeks (this chart in Australian dollars):

http://www.aip.com.au/pricing/marketwatch.htm

Now we wait and see whether WTI reaches the same milestone this week. Will the world react or will we keep sleepwalking into our future? No doubt this would be more of an issue in Australia and New Zealand if the local currencies weren't so strong.

This is how the story has been running lately:

Figure 1 - Oil prices in United States Dollars

Following is the same story in other important currencies around the World.

The first question asked by those hearing about fuel depletion is usually: "How high will prices go?". The attitude is almost always that one will just have to pay up, as the fuel is essential. This is of course a recipe for extremely high prices, but just how prices will vary as the depletion process unfolds remains to be seen.

We already have an example of a (nearly) isolated market that has definitely gone over the top of production, and that is the North American natural gas market. Production peaked several years ago, and a slow decline has begun, in spite of record drilling. This phenomenon has occurred at very close to the same time for almost all the major basins on the continent. If we look at the NYMEX wellhead gas price for the last 75 years, we can see that the price was very low indeed until about the time of the first production peak in 1970, and then rose to an reasonably steady $2US per thousand cubic feet, which held until about 1999. During this period, it was relatively easy to meet any production shortfall by drilling new deposits. (One thousand cubic feet of gas has very close to one million BTU of heating energy, which is also close to one gigaJoule.)

[Ed: This is a guest post by Solarfan] One of the most challenging aspects of why we are all here discussing Peak Oil and its ramifications is to try to drive forward while looking in the rear view mirror. It’s very difficult to predict the future, so we attempt to develop tools to hopefully give us a glimpse of that to come. No one tool or method will always give an accurate result, so we have to look for a “consensus” of indicators to help us feel confident about what’s to come. I offer the following as but one of such tools, for examining the future price of oil and all that that entails. This uses a very simple analysis that boils down to linear extrapolation, affected by three main parameters: demand growth, production growth, and demand elasticity. I would not put any credence in anything long term, and even in the short term there is substantial variation possible. Finally, I’ll add my own personal disclaimer – I’m an engineer by training, not an economist. (lots of plots and extrapolations under the fold...)

On December 28th, the Energy Bulletin included a link to a paper called Technology and Petroleum Exhaustion: Evidence from Two Mega-Oilfields (pdf) by two economists, John Malcolm Gowdy and Roxana Julia, from the Rensselaer Polytechnic Institute in New York. Here's the abstract.

In this paper we use results from the Hotelling model of non-renewable resources to examine the hypothesis that technology may increase petroleum reserves. We present empirical evidence from two well-documented mega-oilfields: the Forties in the North Sea and the Yates in West Texas. Patterns of depletion in these two fields suggest that when a resource is finite, technological improvements do increase supply temporarily. But in these two fields, the effect of new technology was to increase the rate of depletion without altering the fields' ultimate recovery - in line with Hotelling's predictions. Our results imply that temporary low prices may be misleading indicators of future resource scarcity and call into question the future ability of current mega-oilfields to meet a sharp increase in oil demand.

The paper is fairly standard fare for the peak oil community but what turns out to be of interest is the application of the work of Harold Hotelling regarding the Extraction of Exhaustible Resources and their discussion of the economic view of resource scarcity as regards oil. Examining the use of EOR technology in the historic production of Yates (West Texas) and the Forties (UK North Sea), Gowdy and Julia conclude that temporary incremental production gains are offset by later steeper decline rates in the tail end of production without increasing the overall URR. Their main conclusions are essentially that 1) oil is not being treated as a finite resource as the oil field analyses predict and 2) temporary production gains mask real scarcity and result in misleading low oil prices. Let's look at the work of Hotelling in the context of peak oil and see where that goes. This post runs a bit long so I hope you'll bear with me here.

let's discuss...