Jan 23 Blog - High Oil prices caused by China's growth

[MarshAviator]

At the risk of an arcane discussion which John did clean up rather nicely,

There never was a shortage of oil in the market. Did you have to wait in line for gas? Did you hear about any real significant shortages world wide?

Actually There were shortages as well as entire countries priced out of buying such as Uganda.
Spot shortages did occur in parts of Georgia and Tennessee.

Three very short points:
1) I work in the Energy sector as an Engineer and have for 30 years, The basic point is the RATE of discovery is markedly less than the RATE of increasing demand.
At some point this will become the RATE limiting factor of future global economic growth.
We haven't found a significant new major discovery after the north slope and the north sea, both now declining.
When you finally see shortages at the pump they will be essentially permanent.
This does not by any stretch mean we are OUT of oil, only we are unable to grow the supply.

2) The easy oil both in terms of access and quality is a declining resource. Sour Crude cost more both in BTU's and in Currency to process than sweet crude.
200 FT wells in the Saudi Desert are less costly (in BTU's and $'s) than deep water 10,000 FT wells.
The low hanging fruit is picked.
I designed seismic equipment in the 1980's, we have better and more numerous techniques to look for oil and gas yet find less (a lot less, factor of maybe 10 times less than 1950).

3) Generational effects are going to compound the problem (IMHO) because projects for substitutes,alternatives and new discoveries are not economic given the current financial crisis.
The last great depression had the US as the Largest oil supply on the planet at the time.
We are in much worst shape this time around, China also is now a large competitor along with Asia and now India.
The main thing saving the US is China grew to rapidly (overshot).

And BTW I am not either a social or market fundamentalist, none the less sometimes market fundamentals do explain things (not often, but it does happen).

[tobyguy]

At the risk of an arcane discussion which John did clean up rather nicely,

There never was a shortage of oil in the market. Did you have to wait in line for gas? Did you hear about any real significant shortages world wide?

"Actually There were shortages as well as entire countries priced out of buying such as Uganda.
Spot shortages did occur in parts of Georgia and Tennessee. "

There are always spot shortages somewhere at one point or another - nothing new - often due to regional distribution, fire, natural disaster or other type of issue (and NOT due to lack of oil being produced or pumped out - which is what we are talking about). There were shortages after katrina and after the houston hurricane, however, oil came down in both cases, not up (I believe those are the shortages you're talking about above - after the hurricane, either way, they are local in nature and have nothing to do with a lack of oil in the world or because, as some claim, "China was using every last little drop").

Sure, with high prices, I'm sure many poor countries were priced out (however, we were talking about shortages here, not countries being pricing out). The claim is that demand and the lack of available oil increased it's price.

Tobyguy

[John]

Dear Higgie,

> There's another point in the discussion about marginal barrels,
> and that is the net energy extracted from the barrels on the
> margin. What I mean by that is those marginal barrels may have
> cost $80 to produce at the peak of the boom but since our
> accounting system is money based rather than energy based, there
> is no telling whether those marginal barrels were even produced at
> positive net BTUs. That's why I've thought for a long time that
> peak oil isn't actually needed to limit the economy--it can be
> limited before peak is ever reached. ...

> The way I think of it is there is a marginal energy producing
> "system", say the Canadian Tar Sands projects. It would be
> represented by drawing a boundary around the system and accounting
> for all the energy flows in and all the energy flows out. For
> example, if equipment is moved into the system to extract energy,
> then the energy used to produce and move that equipment would be
> an energy expenditure of the project. Likewise, any workers who
> travel to Alberta to work on the project. And so on. I don't know,
> but it may be that even though the project produces money profits,
> it may operate at an overall energy loss, in the sense that more
> overall energy flows into the project than flows out. Since the
> economy runs on energy, operating projects that operate at an
> overall energy loss would begin to grind down the economy without
> anybody realizing why. And I suppose there could be some threshold
> above loss where that would be the case too. Certainly, at
> constant production rates over time, replacing a barrel of easy to
> extract oil with a barrel produced in a marginal tar sands project
> is a net negative.

This is a very interesting insight, and I've never seen it expressed
before.

I speculated last summer that the world economy had reached some kind
of tipping point, perhaps a structural limit in the markets that can't
be cured in the short run.

Maybe what had happened was some interlock involving energy.

Sincerely,

John

[MarshAviator]

This is a very interesting insight, and I've never seen it expressed
before.

John,
It is interesting that most of the people on the oildrum.com have read you but you are apparently unaware of them.
They are mostly energy professionals who are concerned with the so called "Peak Oil" issue.
It's relatively technical in it's presentation.

BTW peak oil didn't seem plausible until I starting reading you in 2002 or 2003, because it didn't seem possible
that business and government could be so incompetent to allow a critical resource like oil to run low.
Now it's not only possible but likely.

[Higgenbotham]

This is a very interesting insight, and I've never seen it expressed
before.

I speculated last summer that the world economy had reached some kind
of tipping point, perhaps a structural limit in the markets that can't
be cured in the short run.

Maybe what had happened was some interlock involving energy.

Sincerely,

John

It's probable that the problem has not been fully expressed because it requires a rudimentary knowledge of systems theory to express it, and it requires an advanced knowledge of systems theory to model it. The world is not at the point of accurately modeling these kinds of problems.

Modeling would probably require that the modeler construct 2 worlds--the actual one in which the marginal energy project took place and one in which it did not take place. The world energy production and expenditures would need to be compared under the 2 scenarios and netted out to determine if the marginal project had net energy benefit. There are all kinds of complications in that. For example, if a single man is unemployed and living in Alabama, finds employment in Alberta, expends energy to travel there, lives in a housing unit that was built because the project came into existence, marries and has a family because he now has a decent wage, etc., how does his energy expenditure compare to the alternate world in which the marginal energy project did not take place? As I've generally implied before, this in my opinion is the kind of thinking/technology that will be required to move into a "real" information age and we may be several decades or centuries away from it. Doing a project because it has political appeal ("creates jobs"), money profits, and/or because the losses can be socialized will eventually move humanity backwards and that is what seems to be starting to occur across the board.

In this way, peak oil can be predicted as a complex system breakdown which has nothing to do with how much oil has been pumped out of the ground or how much is left to extract (in other words, the magical halfway point that the peak oilers point to), but instead whether systems theory predicts a net energy benefit to the project vis-a-vis an alternate world in which the project is not undertaken.

PS Modeling this problem also has a time dependency associated with it because the energy expenditures to do a project are done up front before any energy flows are obtained from it. Therefore, in theory, a project that grows slowly in the absence of a credit boom, and does not generate huge expenditures of energy up front before any is produced, is less likely to generate system lockup. For example, in the simple extreme that can be easily visualized, if Keppel is building 5 million rigs and using a lot of energy to do it, the energy expenditures to build the rigs could lock up the economy before the rigs are utilized to produce the energy.

[Higgenbotham]

John,
It is interesting that most of the people on the oildrum.com have read you but you are apparently unaware of them.

Marsh, if you could point to any articles on theoildrum that discuss modeling of complex system energy flows as mentioned in the post I made above, it would be appreciated. I don't read any peak oil sites, but am aware of the general theory from reading Jay Hanson's dieoff over a decade ago.

[MarshAviator]

Marsh, if you could point to any articles on theoildrum that discuss modeling of complex system energy flows as mentioned in the post I made above, it would be appreciated. I don't read any peak oil sites, but am aware of the general theory from reading Jay Hanson's dieoff over a decade ago.

I will look into it some more, in the mean time a simple query has this subject mater.

http://www.theoildrum.com/tag/complex_systems

http://netenergy.theoildrum.com/node/4678

http://europe.theoildrum.com/node/3550

it's really interesting that "Peak Oil" is so much more complex than simple supply - demand price of equilibrium of macro economics.
My real concern is that we are going to have trouble in the regeneration phase of generational dynamics, if the physical resources
are in limited supply, As I alluded to earlier.

[Higgenbotham]

Marsh, if you could point to any articles on theoildrum that discuss modeling of complex system energy flows as mentioned in the post I made above, it would be appreciated. I don't read any peak oil sites, but am aware of the general theory from reading Jay Hanson's dieoff over a decade ago.

I will look into it some more, in the mean time a simple query has this subject mater.

http://www.theoildrum.com/tag/complex_systems

http://netenergy.theoildrum.com/node/4678

http://europe.theoildrum.com/node/3550

it's really interesting that "Peak Oil" is so much more complex than simple supply - demand price of equilibrium of macro economics.
My real concern is that we are going to have trouble in the regeneration phase of generational dynamics, if the physical resources
are in limited supply, As I alluded to earlier.

Yup, I did a google search and came up with the exact link you referenced at

http://netenergy.theoildrum.com/node/4678

This article was written January 2 and expresses the idea quite well:

Therefore it is possible that the energy “break-even” point has been approached or even reached for finding new oil. Whether we have reached this point or not the concept of EROI declining toward 1:1 makes irrelevant the reports of several oil analysts who believe that we may have substantially more oil left in the world, because it does not make sense to extract oil, at least for a fuel, when it requires more energy for the extraction than is found in the oil extracted.

Bingo.

[MarshAviator]

This article was written January 2 and expresses the idea quite well:

Therefore it is possible that the energy “break-even” point has been approached or even reached for finding new oil. Whether we have reached this point or not the concept of EROI declining toward 1:1 makes irrelevant the reports of several oil analysts who believe that we may have substantially more oil left in the world, because it does not make sense to extract oil, at least for a fuel, when it requires more energy for the extraction than is found in the oil extracted.

One more thing to add, Large Fields like Ghawar are huge and cost less to develop, pump and manage (again both EROEI,BTU's,$'s) than 500 smaller (the size we are finding presently).
Sadly there are theoretical reasons to expect we will not find larger ones any more.

You would prefer a single large field of a given production rate,reservoir size , than an aggregate of smaller fields geographically dispersed with the same system properties.

We haven't found anything like it after 1950. Even the north slope, north sea and so on are a fraction of the size.

Peak Oil is credible and comes at a time in our Generational Cycle which couldn't be more unfavorable.

[Gordo]

Wow - thats your only response?

...OK, how about your oil article?

You claim once again "He has to be able to store the commodity for a while, to allow prices to rise" - why do you keep repeating the same lie over and over again on your blog? Commodities speculators DO NOT have to store anything to drive prices up, as long as supply/demand are reasonably tight, which they were before the crash. I have no idea why you don't understand this.

I saw the 60 minutes piece, I think they did a decent (although incomplete) job as hardly anyone else in the media had been explaining the role of speculation in the commodities bubble and many (like you) were completely ignoring the role of the speculator on prices. No one said speculators were the ONLY cause of the run up in prices, but they certainly stretched things to new extremes.

Its ridiculous that you think 60 to 70% of the contracts on a given commodity can be purchased by speculators without impacting the price at all.

"That never made any sense anyway, because the spike in oil prices coincided with similar spikes in copper, iron ore, wheat, and other commodities. But no one was claiming speculators were driving up the price of copper -- just oil -- so the whole claim was silly."

No one???? Gee, LET ME GOOGLE THAT FOR YOU!

p.s. Off topic, but your previous article says "more people speak Chinese today than any other language on earth.".
This is NOT true. More people speak English than any language on earth. And technically I don't know if you can even call "Chinese" a language considering it has many dialects (Mandarin, Wu, Cantonese, and Min) that are NOT mutually intelligible.