Thursday, May 22, 2008

More Connecting the Dots - Oil supplies down, prices up

The Bloomberg article below inadvertently makes clear that orthodox growth economists are now providing some of the best comedy relief available on this beleaguered planet. Despite all the evidence everywhere around them, they still insist on believing that the abstract concept of a market signal (increasing price) can produce a natural resource out of thin air (oil supplies). Now, it can be made to appear as if this were the case while the resource is both plentiful and the capacity to deliver it to the end-user can also be increased. However, neither case exists any longer.

A good friend of mine, with years of experience as an oil field engineer for ARAMCO, points out that we have reached Peak Refining Capacity -- the point at which the building and maintenance of crude refining capacity is limited by available raw materials (iron ore, energy, labor) and transportation and installation of the finished components to the refining site. No one is seriously proposing building more refining capacity anyway, no matter how sky-high the price goes. What Julian Darley pointed out in "End of Suburbia" regarding natural gas holds true for oil as wel; the oil majors all understand, even if their market forecasts for their shareholders don't reflect it, that they'll never recover their investment in additional refining or production capacity.

The two most important factors pertaining to this are the geophysical reality of Peak Oil itself, and the inevitable regulations that will soon curtail fossil hydrocarbon use due to its contribution to anthropogenic global warming. Peak Oil is not, as pundits on both sides of the political divide would have you believe, either an ideological ploy by environmentalists to save the Earth at the expense of humans, or a ploy by energy conglomerates to increase profits -- even though they are taking advantage of the opportunity for price gouging while the distractions are abundant to deflect criticism of their greed. Lack of fossil energy is going to bring the industrial growth economy to an end, but lack of a viable environment is going to destroy the possibility for having any type of economy, even a steady-state one.

It's also necessary to become aware that current political machinations regarding pump price are nothing more than sleight of hand. It takes 3 months to swing crude production by 1 million barrels -- in either direction -- so even if the Saudis can increase their production by the amount they've recently promised the shrub, price at the pump won't be affected until after the summer driving season in America is over anyway. And, there's much reasonable doubt on whether they actually can increase production by any significant amount.

Production at the largest oil field in the world, Ghwar, is down 500,000 barrels per day from it's peak over a year ago. While this is widely taken to be a normal indication of typical reservoir peak, engineers and geologists with actual experience with Middle East oil fields say a more likely explanation is reservoir collapse from overproduction in the 1970s to make up for the oil embargo. This is a geophysical phenomena that occurs when an oil field is drained too quickly. It decreases the overall amount of crude that can be realistically extracted from the reservoir.

This also points to another interesting fact that must be considered when trying to figure out how much oil we actually have left available to create any type of alternative energy infrastructure, regardless of catastrophic climate destabilization concerns. And, let's leave aside for the moment the discussion on whether or not we want, need, or even should create a replacement infrastructure of this magnitude.

One aspect of stated reserves is the (erroneous) assumption used by economists and politicians that extraction is a linear process and that any given oil field can be sucked dry (the geophysics of natural gas reservoirs are different, and not under consideration here). While this assumption isn't true even in the best of cases, when a field has been damaged by the abuse of overuse, even less of what's left after normal peak will ever be available for any use. The full amount of stated reserves (even on the off chance current figures are remotely accurate in the first place) thought to be available in Saudi Arabia (and this is true for all other oil producing regions as well) will never, ever, ever, become available -- they will never see the market and will remain exactly where they are. And this is going to remain true no matter how hard market fundamentalists wave their magic wands of supply and demand -- without quite literally taking a shovel and digging the entire reservoir by hand. Which I suppose might be a good job for these people when they find themselves out of work. I predict that stated global reserve figures are actually off by an order of magnitude in terms of what can actually be put to use, which means we actually have that much less time to figure out a different way of creating living arrangements on this planet.

It's going to take more than prices going to $5-$6 per gallon to reduce demand as mainstream energy analysts are stating, and recession would be the least of our worries at that price point anyway. $7-$10 per gallon is the proper domestic cost right now, not just for fossil fuels but for proposed agrofuels as well, to induce the reduction in North American transportation fuel use so that FOOD IS NOT USED FOR FUEL!

One response to both rising fuel prices and the need to quickly start using less was made by Myron Wlaznak in a recent column published in Bellingham, WA's Whatcom Independent newspaper. He's just quit driving on Tuesdays and Thursdays. While this is more than the purely symbolic gesture of not buying gas on a particular day of the month (an idea that gets forwarded around the Internet about once a year), the approach I'm taking is to reduce my personal fuel use to five gallons per month. This isn't exactly an easy task in a city like Tucson, AZ which has sprawled out to about 20 miles from side to side, and in the summertime 100+ degree heat made worse from the urban heat island effect, you simply can't get from here to there for most things on a bicycle when the sun's out.

Considering the systemic nature of what we're facing, if community leaders and politicians don't start implementing the alternative that relocalization provides to the status quo PDQ, the responsibility for the collapse, chaos, and suffering that will occur will lay entirely, and rightly, on their heads. It's time to drop the excuse of political feasibility to justify inaction (which includes undertaking further studies and other feel-good, high visibility, half measures to make it appear as if they're addressing the problem) and actually start doing things differently.

So, plant your backyard veggie gardens, and change your lightbulbs, but then spend the rest of your time camping out in front of their offices and _demanding_ that they start making the decisions that are necessary instead of those that are convenient for the special interests in order for them to retain a perceived power that is ephemeral at best.

For the Earth...
_dave_(this entire message is composed of recycled electrons)
Natural Systems Solutions
Sustainable lifestyles, organizations, and communities

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Oil Rises Above $133 on U.S. Supply Drop, Bank Price Forecasts
By Mark Shenk

May 21 (Bloomberg) -- Crude oil rose to a record above $133 a barrel as U.S. stockpiles unexpectedly dropped and banks raised price forecasts because of supply constraints and demand growth.

Inventories fell 5.32 million barrels to 320.4 million last week, the biggest drop in four months, the Energy Department said. Oil for December 2016 delivery rose more than $20 a barrel, or 17 percent, after Goldman Sachs Group Inc. on May 16 raised its outlook to $141 a barrel for the second-half of the year.

``What we have here is a situation where essentially higher prices aren't generating any more supply,'' Paul Sankey, an analyst at Deutsche Bank Securities in New York said in an interview with Bloomberg radio. ``What we have to do is keep pricing the commodity higher until demand starts falling,'' which ``is around $150 a barrel.''

Crude oil for July delivery rose $4.19, or 3.3 percent, to settle at $133.17 a barrel at 2:44 p.m. on the New York Mercantile Exchange. Oil touched a record $133.82 today and has more than doubled from a year ago. Futures, up more than 17 percent this month, are heading for the biggest monthly gain since September 2004.

Gasoline and heating-oil futures in New York also climbed to records. Gasoline for June delivery rose 9.21 cents, or 2.8 percent, to settle at $3.3965 a gallon, after reaching a record $3.41. Heating oil for June delivery rose 13.34 cents, or 3.5 percent, to close at $3.9084 a gallon, after touching an all-time high of $3.9304.

Higher Pump Prices

Pump prices are following futures higher. Regular gasoline, averaged nationwide, rose 0.7 cent to a record $3.807 a gallon, AAA, the nation's largest motorist organization, said today on its Web site.

An inventory increase of 300,000 barrels was forecast, according to the median of responses by 15 analysts surveyed by Bloomberg News before the inventory report's release.

The supply decline left stockpiles 0.9 percent below the five-year average for the week, the Energy Department said. Supplies were 0.8 percent above normal a week earlier.

Imports fell 7 percent to 9.24 million barrels a day, the report showed. Imports have averaged 9.86 million barrels a day so far this year, down 0.9 percent from the same period last year, according to department figures.

``In this high-priced environment we are seeing refiners cut back on imports,'' said Antoine Halff, head of energy research at New York-based Newedge USA LLC. ``High prices and credit tightness are making it much harder to build supply.''

Brent crude oil for July settlement rose $4.86, or 3.8 percent, to $132.70 a barrel on London's ICE Futures Europe exchange. The contract touched $133.34 today, the highest since trading began in 1988.

`Well Supplied'

The crude-oil market is ``well supplied,'' Libya's top oil official Shokri Ghanem said today, rejecting calls for the Organization of Petroleum Exporting Countries to increase production to curb prices. OPEC, which pumps more than 40 percent of the world's oil, isn't planning to meet before its next scheduled conference in September to review production, he said.

``OPEC is playing with fire,'' said Rick Mueller, director of oil practice at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``While they may be right from a fundamental standpoint about crude supplies, at this time it will take more than words from them to bring prices down. We will need to see more gestures like the Saudis made, to lower prices.''

Saudi Oil Minister Ali al-Naimi told reporters on May 16 that the kingdom is planning a 300,000 barrel-a-day output increase, to bring June production to 9.45 million barrels a day.

``Once prices hit $150 or $200 like our friends at Goldman are saying, we are looking at $5 or $6 gasoline, which will really hurt demand and cause a recession,'' Mueller said.

Goldman Forecasts

Goldman analyst Arjun N. Murti said in a May 16 report that ``the possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.'' Murti first wrote of a ``super spike'' in March 2005, predicting crude may trade between $50 and $105 a barrel through 2009.

U.S. oil-company executives told Congress oil prices should be between $35 and $90 a barrel. Representatives of the five largest publicly traded oil companies appeared before the Senate Judiciary Committee to testify on record energy prices. Appearing today were representatives of BP Plc, ConocoPhillips, Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell Plc.

The price of oil should be ``somewhere between $35 and $65 a barrel,'' John Hofmeister, president of Shell Oil Co., the Houston-based subsidiary of Royal Dutch Shell, said at the hearing today. Other executives said prices should be as much as $90 a barrel.

Strategic Reserve

Congress last week approved legislation to halt deliveries to the Strategic Petroleum Reserve in an effort to respond to record prices.

Airlines have been hit by higher jet fuel costs. The price of the fuel, the largest expense at many airlines, has climbed 88 percent in the past year and traded at a record $4.0592 a gallon in New York Harbor today.

AMR Corp.'s American Airlines, the world's largest carrier, said it will cut ``thousands'' of jobs as it responds to high fuel prices and slowing demand.

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