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Trading Lessons

The Old Faithful Peak Oil Debate

Commodities / Crude Oil Aug 24, 2011 - 03:33 PM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleIt is a well known refrain: Peak Oil is always now ! The problem is that nobody noticed, because oil prices are so high and demand growth is almost zero. The ongoing and real economic recession in almost all OECD countries more than "trims" oil demand in these countries, still taking about 45 million barrels a day (Mbd) on a world total demand of about 89 Mbd, depending on estimates, which easily range through + or - 2 Mbd, and vary even more than that for seasonal variations.


These demand and supply variations, in turn, are where the biggest problems lie. If or when Peak Oil really arrives, and supply really falls away, we would have the situation that the quickest glance at the IEA chart, below, indicates. That is a sort of "break in series", which this chart from the IEA places at right now - starting by 2010 and becoming ever more powerful by 2020.



Figures and charts from the US EIA (Energy Information Agency) are sometimes similar, but are usually not, underlying the subtle war of influence going on between the IEA and EIA. The EIA is resolutely anti-Peak Oil. The IEA sometimes responds to US pressure, but also tends to go it alone by publishing charts like the above, which can be called squarely in the Peak Oil camp.

The question remains whether US pressure on the IEA is due to a legitimate difference of opinion or whether the US actually believes the "no shortage" line it tells the IEA to adopt. To be sure, the basic result of "no shortage" is lower oil prices, which are so intensely traded that good news on insurgent victories in Tripoli can send day prices down - but for several years and increasingly, oil prices are well correlated with equity prices. The new reality is that when oil prices rise, so do equity values, because both are signals the economy is growing.

Reading The Charts
The IEA graph above shows "all liquids" continuing to rise slowly through 2030 in a "new normal" of very low annual growth, but growth all the same. While Peak Oil predictions, as noted above always say it has just happened or is imminent, this is a play on definitions. The first peak oil event occurred in the 1860s, when oil was still mostly collected from declining natural seeps, particularly in Russia and the USA. This was followed by major technology and industrial changes, and major finds of extractible oil, but on that basis of past experience we could say that one day or someday predictions of physical shortage will be right.

This above IEA chart, which is not EIA approved, is however already outdated by demand change. OECD oil demand is falling, or only growing very slowly, as the few countries with continuing economic growth are outnumbered by OECD countries in sharp recession: the European PIIGS have shown near collapse of their oil demand - with typical falls of 15 percent or more in 2 years. This makes the current situation particularly confusing, because high oil prices and the OECD-wide recession have cut oil demand so sharply. Because of this, global oil production probably reached its peak in summer 2010, or slightly before. At present we cannot say when or if it will be exceeded.

This reality of "peak oil is already here" is presently not a supply-side phenomenon, but is demand driven, and the above chart can already be trimmed on likely future "all liquids" demand and therefore supply needs. In addition and on top of OECD oil demand reduction we have OPEC curtailing supply, both by design and because of increasing domestic consumption and falling export surpluses, with the net result of oil prices rising, except in outright recession. The "previous paradigm" of effective and real non-cooperation between OPEC members, with Saudi Arabia doing the dirty work and drying up supply to bolster prices, while the others cheated, is less and less necessary to keep prices high. In turn, and possibly but not surely, OPEC may now be "Peak Oil friendly" and would like us to believe that declining supply is due to natural shortages - and not due to OPEC oil market manipulation.

But why would the IEA join in this "conspiracy" ?

Wheels Within Wheels
As usual with the oil business, the future remains murky. In the short term we define as 3 years ahead, we can be almost certain oil prices will both track - and anticipate - any trend or sign of economic recovery. OPEC can if necessary cut back on supply, in fact more and more easily, as ever rising costs for developing additional capacity, and rising domestic demand reduce or limit the growth of net export surpluses. OPEC will make a killing whether there is a natural shortage, or they are causing it.

The Gas Bubble is the only solution, due to oil substitution by the renewables being so painfully slow and expensive. This is recognized by the IEA - but "political correctness" makes it impossible to say this outright. High oil prices are probably considered by the IEA as the best way to change attitudes.

"Stranded" gas and unconventional gas are abundant. These are the two rational fossil energy great hopes. Oil will stay expensive, in all probability, but gas will certainly get cheaper. New gas resources and supply are given massive coverage by the IEA - and the EIA has no ideological problems with this particular IEA policy stance !

The real world shows no hint of looming peak gas. Supplies have gone through the roof, only since 2008, due to increasing development of massive "stranded" or gas-only fields such as Russia's Shtokman field and Iran's Pars field, and particularly because of new technology for releasing gas trapped in tight shale formations. Shale-based gas production, usually from resources located more than a mile underground, uses hydro fracturing to release the gas - to be sure with relatively frequent but controllable waterbody pollution of  "frac job" chemicals and wastes.

Due to at least 40 percent of world oil being used only in transport (and most of this in land and ocean transport), gas substitution is the clearest, simplest, most rational energy policy change that is needed. To be sure it is not happening. This shifts the subject to other "conspiracies", including the Global Warming conspiracy, where gas is treated as "unclean" in the same way as coal and oil, due to CO2, but above all due to outdated geopolitical images of gas dependance on Russia's Gazprom and unstable or unreliable OPEC and non-OPEC gas exporters. The marks of that former crisis - restricted supplies of gas, and gas prices tied to and linked with oil prices - still exist, but they are totally unrelated to the Gas Bubble. We are therefore in a period of policy drift.

In the short term, as already noted, oil prices will remain high and unlinked with gas (in fact increasingly de-linked with gas in markets like Europe and Asia), spelling major problems for the last gasp of the high price gas era - the LNG boom. This particular high cost and capital intensive energy subsector is facing agonizing and dangerous times, as previous demand forecasts and capital spending plans are slashed.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

MrEnergyCzar
24 Aug 11, 20:56
Future fields?

Where are the future fields left to be developed? Under the ice caps? The moons of Titan?


Graham Mewburn
27 Aug 11, 05:15
peak oil

If you look carefully at the graph above you will see crude is in decline. All the other colours are not crude oil. Google IEA PEAK OIL

The IEA says peak oil occurd 2006

Google CATALYST OIL CRUNCH

Catalyst is a tv program. They aired a program called OIL CRUNCH

I RECOMMEND YOU WATCH IT

All civilizations come and go. Our end is near

INVESTIGATE

Make an informed decision

Gray

Graham Mewburn


it's laughable
28 Aug 11, 11:23
peter

it's laughable that the oil still to be discovered increases from almost zero to 20 million barrels a day in 2030. It's appropriate that they chose the color pink to represent that in the chart; they are definitley looking through some pretty rosy colored glasses.

We are not replacing the oil we are consuming...oil output is beginning to decline and can decline rapidly. Look at Iraq, Iran, Libya, they are not ever going to get back to producting what they used to. The oil fields in Saudi Arabia of a type that can dry up almost overnight when they get to their exhaustion point. Nobody knows when that day or week or month will come but it will.


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