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May 16, 2008

De facto if not de jure

Friedrich von Blowhard writes:

Dear Blowhards,

In a previous post, I asked what plans our presidential candidates have to address the sheer financial drain implicit in importing $120 a barrel oil. In the resulting comments, the discussion quickly turned into a debate over the reality (or unreality) of the Peak Oil hypothesis. Given that most oil reserves are now held by national oil companies that prefer to keep their production and reserve data secret or announce figures that cannot be independently verified, I know of no way to prove or disprove this hypothesis. (The whole question has become awfully metaphysical.)

But there is some publicly available data that would seem to provide us with guidance here. As the blogger Hellasious remarks:

Exxon is the world's largest non-state oil company and the largest publicly traded corporation by market capitalization ($478 billion). If anyone has both the incentive and the resources to find and sell more oil, it is them. But they can't. In the last five years, as the average price of oil more than tripled, their production has been flat[:]

Data: Exxon Annual Reports, NYMEX
And it's not as if they haven't been trying: their capital and exploration expenses for upstream operations have nearly doubled in recent years.
Data: Exxon Annual Reports

What do I take from this? Well, de jure peak oil may or may not exist, but de facto peak oil looks like our current reality.

Some additional confirmation of this comes from a story by Ambrose Evans-Pritchard from the Daily Telegraph, "US-Saudi oil axis faces day of truth":

When President George Bush went to see Saudi Arabia's King Abdullah in January to plead for higher oil output, he was politely rebuffed.The rematch is likely to be a great deal more strained.

If the Saudis deny help once again, they risk incalculable damage to their strategic alliance with Washington. The price of crude has rocketed by over $30 a barrel since that last fruitless meeting, briefly touching the once unthinkable level of $127.

Why would the Saudis alienate their prime military protector? Well, maybe they aren’t increasing production because…they can’t. The article goes on to quote a source who is not exactly a raving extremist on the subject of peak oil:

Chris Skrebowski, Editor of Petroleum Review, said the awful truth is that Saudi Arabia cannot raise oil output much even if it tries. "The myth of Saudi spare capacity is convenient for everybody: it gives OPEC leverage, and it gives the West hope.

"But Saudi reserves are secret. They have never been verified," he said.

Mr Skrebowski said oil is soaring because output is falling in Mexico, the US, and the North Sea. Russia stunned the markets with a 1pc fall in first quarter in Russia. "We are running the system flat out," he said.

Could there be other explanations? Sure. It’s possible that producing nations are afraid that if the world tips into recession the price of oil may take a large tumble, and they’re reluctant to invest significant sums in raising production volumes. But, again, who cares? The result is (de facto) peak oil.



posted by Friedrich at May 16, 2008


That's a nice distinction between Peak Oil in the abstract and Peak Oil in the here and now. I'd like to see that one make its way into the mainstream discussion, it might prove helpful. Hey, it reminds me a little of my attempt to discuss the distinction between the ideal and the here-and-now. The blog has a theme, whee.

Does anyone else giggle over the idea of the US President going to the Saudis and pleading with them to increase production?

1) Who's holding whose short hairs now?

2) Why should the Saudis do anything but look out for their own interests, in however a manner it pleases them to do so?

Who knows? Maybe they're withholding trillions of barrels just for the sheer fun of doing so. And really why shouldn't they?

Posted by: Michael Blowhard on May 16, 2008 8:51 AM

Drive less.
Problem solved.

Posted by: Peter on May 16, 2008 9:26 AM

well we know oil is a finite resource, it is critical to the entire world economy and we have been using and increasing our use of oil for a hundred years. yes there is more oil out there that is not the point, the point is we are using up most of the easily and inexpensive to extract oil. nevermind also that most oil is in the hands of people we do not like so we have the added benefit of being dependant on our enemies and giving them lots of our hard earned money. whats interesting to me is that the people sounding the biggest alarm about peak oil are long time oil geologists and people in the industry.
i would like to see us at least start to use oil more efficiently as the first step in phasing in alternatives. luckily the market is doing that right now as high prices of gas encourage reduction. but there are few alternatives available since our country is entirely built on an economy based on cheap abundant oil.

Posted by: poncho on May 16, 2008 12:59 PM

Yep, Bush went hat in hand to the Saudis again yesterday and again they told him to basically piss off:

Posted by: Steve on May 16, 2008 2:08 PM

"Peak Oil" is crap. Here's an interview with Rex Tillerson, CEO of Exxon-Mobil, who definitively states that there's plenty of oil for a long, long time. He says that the big oil companies aren't allowed to drill and produce in a lot of areas. He also states that the primary purpose of the company is to deliver "shareholder value" over the long term, not to produce so many millions of barrels. Oil companies are there to make money, not to make your life easy by giving you low-priced gasoilne.

The oil business is a cartel. They only lower prices to put independents out of business and get their projects for pennies on the dollar. The world is corrupt, and the corporations will bleed you dry if they can. That's what centralization is--control for extortion.

Did it ever occur to you that having so many state-run oil companies would also lead to supply restriction and super-high prices? What incentive is there for them to give you cheap oil, or increase production? Zero, that's what. You can also factor in a lot of bribes and corruption money into that exploration budget, and see that amount going to the moon as the national oil companies and countries have the majors by the balls.

Posted by: BIOH on May 16, 2008 5:26 PM

Why would the Saudis want to pump more oil? They are earning enough, they don't know what to do with all the money, pumping less will make their bonanza last longer. So, I'm not sure that they cannot pump more, maybe they aren't interested.

As for Russia - they practically re-nationalized the oil industry, so the drop in production is the unavoidable result. Maybe that (expectations of farther drops) drives the price of oil up.

Posted by: Jacob on May 16, 2008 5:49 PM

BTW Friederich,

You need to adjust those exploration figures for constant dollars. The US dollar has declined drastically over the last 5 years. I think when you do, the picture will look a bit different.

Posted by: BIOH on May 16, 2008 8:04 PM

Within our borders, there is little difference between the assertion "worldwide oil production cannot increase" and "worldwide oil production WILL not increase." We still have to make the same adjustments stateside.

And now Congress voted to suspend shipments to the Strategic Petroleum Reserve. For six years we've sent eighteen year olds to fight for something or other, and without demanding the slightest sacrifice on the homefront. But now, to compromise our national security for the sake of a penny or less on the gas station marquis, this sellout. I am horrified.

Posted by: Omri on May 17, 2008 12:24 AM

Excuse me? There's no differnce between "there ain't no oil" and "there's plenty of oil, we're just trying to rip you off"?

Hey guy, our economy runs on oil! Lots and lots of people are going to get laid off and suffer with high oil prices. Crime is going to skyrocket. Food prices are going to skyrocket.


Posted by: BIOH on May 17, 2008 11:49 AM

Wait a minute -- I thought that's what Kunstler was saying!

Posted by: Michael Blowhard on May 17, 2008 6:03 PM

Nah. Kunstler's saying that there is no oil left and we built an unsustainable lifestyle.

There's plenty of oil. We're being jagged.

BTW, if people think that any kind of alternative energy wouldn't face the same sort of monopoly, then they don't understand reality. Kissinger siad that if you control oil, you control a country. And if you control food, you control the people.

I guess the US is in for the third world treatment now.

Posted by: BIOH on May 17, 2008 6:22 PM

You're being teased. You said:


That's pretty much what Kunstler says, and you're saying it in pretty much a Kunstler-esque tone.

You differ not on the "big deal" thing, you differ on explaining what has caused the big deal.

(You're a bit off in your description of Peak Oil, btw. It's not that we've run out of oil. It's that its production is starting to tail off just as worldwide demand is shooting up. The space between those two curves is what'll lead to huge price increases and geopolitical stresses.)

Anyway, and just curious: Assuming your version of things is the accurate one, and plentiful oil is out there, it's just being held back or locked up ... What would you do about it policywise? If anything, of course.

Posted by: Michael Blowhard on May 17, 2008 10:26 PM

I'd just open the areas up, MB. Then push to decentralize energy production away from oil to other types. The big oil companies are sitting on lots of technology that they bought up and suppressed. The oil industry is 30 billion barrels a year. That's a 3 trillion dollar/yr business--a great reason to suppress the competition.

I may sound just like Kunstler. I don't know, because I turned off from him a long time ago. If my tone is a bit harsh, well, I apologize, but I get passionate about being lied to and where the country is going.

Posted by: BIOH on May 18, 2008 12:04 AM

1) Part of the oil spike is the decline in the dollar. The price has increased 1/3 less in Euros.

2) There are several major producers that are running their production into the ground by neglecting reinvestment. These are state-owned (or de facto state-owned) oil sectors where all the cash generated by oil sales is being diverted. Some is looted by the ruling clique; some is soaked up by the state oil sector payroll; some is used to finance politically attractive state spending or state subsidies. The countries in question are Mexico, Venezuela, Iran, and I think Russia. (Mexico has an especially powerful and rapacious oil workers' union. Venezuela is the opposite: Chavez broke the union and fired most of the workers, so the oil sector has been stripped of expertise and refilled with cronies.)

Posted by: Rich Rostrom on May 18, 2008 12:32 AM

As with global warming and many other topics BIOH is RIGHT and anyone holding a differing view is WRONG! There is no honest debate, just evil liars or useful idiots. At least that's BIOH's position and anyone who disagrees is, by definition either a liar or useful idiot. And we know his position is true and correct because ... because ... oh, yeah, because he tells us so in ALL CAPS, BOLD, ITALIC!!!

Posted by: Chris White on May 18, 2008 9:29 AM

One problem with the graphs is the 8 to 10 year lag time between upstream finds and putting barrels of oil on the market. Oil got down to 8$ a barrel during Clinton's Admin and Upstream dried up as producers were using R&D monies for current reservoir management techniques. It's all market driven. If the U.S. were to develop the known reserves we already have we could effectivly become energy independent. Open ANWAR, drill off California and Florida, allow oil shale development and pray for the day that the fascist hippy residue from the 60's finally dies off.

Posted by: WTF O'er on May 18, 2008 10:53 AM

pray for the day that the fascist hippy residue from the 60's finally dies off

They've spawned. We're doomed.

Posted by: Scott on May 18, 2008 12:22 PM

BIOH wrote: "The big oil companies are sitting on lots of technology that they bought up and suppressed." It's the magic carborater rearing its head again. Years ago it was the argument that someone invented a carborater that'd let an average sized car get 50 miles to the gallon but Big Oil bought up the pat. rights so they could maintain their income....then the oil boom busted in the mid 1980's and the carb. was forgotten.

BIOH, from the mid 80's oil crash there was a exoduce of experience workers, from rig hands to ph.d petroleum engineers and geologist. Rigs and rig equipment was not longer built new. Aging equipment was bought and sold in auctions. I know cuz I was there. My family owned 3 drilling rigs up to the 2002. And in that time universities closed their petoleum engineering and geological departments. So today there isn't enough experienced rig hands or experience technical knowledge. What you have is a gap between so old oil guys ready to retire and some really young ones just getting out of college. My nephew is one of those who just graduated with degree in petroleum engineering. Because of that shortage he now makes $150K per year

Posted by: Scott on May 18, 2008 4:40 PM

Hey Scott, if the big oil companies aren't buying up alternative energy technology, then why are they so heavily investing in alternative energy technology? You can clearly see that if you took a look at their investment portfolios.

Why wouldn't the big oil companies buy up said technology? They have a 3 trillion a year market to protect. And decades of exploration and hundreds of billions of dollars spent on reserves. No way they'd sit on the sidelines and let that slip away with new technology. That would really be great for shareholder value! They are trying to monopolize the energy sector. How much more obvious does that have to get?

And yes I know about the big oil dump in the 80's. There's only one big problem with the "they just up and abandoned exploration because of the low oil price" theory--it can take 5-10 years to bring a big field online. And the majors have the money to keep exploring in the downtimes (Lee Raymond even admits this in the video I linked in the other post). All the majors keep exploring. But not so much in the US anymore!

Sure, the little guys went belly up, but why did the majors stop looking for oil here? Because they are not allowed to look for oil in most places, because of politics and enviros, that's why.

I mean, if what the "peakers" say is true, that domestic barrels found were dropping since the 60's, a downturn in the oil price wouldn't mean anything for the big boys--they have to keep replacing reserves, or they go out of business. The "peakers" say no oil was to be found, the oil price dropped too low, but the CEO's and geologists say otherwise. Just watch the links I provided in the other post, that tells the story.

BTW great news for your nephew.

As far as Chris White goes, I like to argue from a position of strength--having the facts. I'm sorry if the facts don't align with your baseless opinions. But until you back up your opinions with facts, I will gladly irritate you and argue for the truth. Thanks for the input.

Posted by: BIOH on May 18, 2008 5:52 PM

BIOH, why are YOU trying to teach ME about the oil business. My dad bought his first rig in 1950. I was brought up in the business and am still investing to this day. My blog has data links. And it has expert opinions from both the EIA and the IEA and both say they believe that the cheap oil is over. Conventional oil reserves are not growing even though prices are up. And BTW FASB/SEC accounting reserve growth doesn't impress me since only 27% of the estimated reserves booked in SEC regulated oil companies isn't represented by the other 73% of the world's estimated oil reserves. OPEC doesn't follow SEC FASB accounting.

Once again the IEA estimates that 5.4 trillion $s have to be spent on new production to meet 2030's est. demand. The see an oil crunch coming after 2010. The 2008 World Energy Outlook will be quite interesting to say the least.
The second reason ...?
Birol: ... is, that we see a sharp decline in production from the existing oil fields, especially in the North Sea, the USA and many non-OPEC countries. Even here money should be invested, to slow down that decline. The third reason why we expect a risk for overall production is, that we looked at all oil exploration projects around the world: 230 altogether, in Saudi-Arabia, Venezuela, the North-Sea, everywhere. Even if all those projects which are already funded will be implemented, the overall capacity they can bring for new oil production is too little.

How much is missing?
Exactly 12.5 million barrel a day are still missing, about 15 % of the global oil demand (the current global oil consumption is 84 million barrel a day, note from the editor). This gap means that we could face a supply shortage and very high prices during the next years.

You write that 5.4 trillion dollars have to be invested to meet the global oil demand. In which countries should this money be invested?
In the Middle Eastern countries with a large oil supply - but I am not sure that those countries and their oil corporations will invest as much as would be necessary. They might think that it is not in their own interest to raise the production that much, to keep the oil prices up. A further part of the investments has to go to the non-OPEC countries, to the USA and to the North-Sea, to prevent the decline of the oil production there.

In the WEO 2007 it is mentioned that the rapid decline of oil production will be between 3.7 and 4.2 percent per year. Is that right?

This decline is even steeper than the one predicted by the Energy Watch Group!
I can already tell you that in our "World Energy Outlook 2008" which will be published in November we will deal in depth with the prospects of the oil and gas production. We will take a look at the 350 most important oil and gas fields and explore how much production rates are sinking and what that means.

What do you mean by that?
As far as I know this will be the first profound public study in which we verify and revise our knowledge about how much oil and gas is going to the markets. Many people will come to new conclusions about this.

Posted by: Scott on May 18, 2008 11:11 PM

Yes, exactly what I said. A sharp decline from existing oil wells. Completely predictable. Yes, from existing wells.

Are you ever going to answer my question as to what kind of reserves are there that are off limits to drilling? How much oil is in those places? Give me a number. Give me some data. I don't want an interview with politicians, or investment bankers or analysts. I want some hard data on the oil that is off limits.

Where is your inside data on the big oil companies? Where is your inside data from the state run oil companies? Where is your data for all the areas that are off limits to drillling?

Where is it? No data? Gosh, I guess I'll have to regard the tall tale of "peak oil" with skepticism.

I can question or correct you if I want. I don't care how long you or your family have been in the business. I want data, I want it from somebody who knows, a credible source. I'll take the CEO's of the big oil companies knowledge over your speculations, thanks.

I don't understand how you discount these CEO's and the obvious fact that a huge portion of the US (and probably elsewhere too) are off limits to drilling. Its a stated policy--its a documented fact. you don't even allow for the possibility of oil as a geopolitical weapon. How incomplete is that picture?

Good luck selling the "Peak Oil" baloney to the gullible and lazy. I'm sure you mean well, but good intentions are little recompense for being misled.

Posted by: BIOH on May 19, 2008 5:33 PM

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