[R-G] [BillTottenWeblog] Wasting a Good Crisis

[Bill Totten]

Result: $200 Oil

by Jim Quinn

TheBurningPlatform.com (April 08 2009)


Rohm Emanuel's famous quote regarding the current financial crisis,
"Never let a serious crisis go to waste ... it's an opportunity to do
things you couldn't do before". was ignored last summer when oil prices
reached $147 a barrel. The Obama administration has taken advantage of
the financial crisis to ram through their socialist agenda which will
add trillions to the National Debt. It will stimulate unions,
bureaucrats, government employees, and defense contractors. It will do
nothing to address the looming energy crisis which will sweep over the
country shortly. Again, politicians and pundits will be shocked and
astonished when oil soars. They will vilify oil companies, OPEC, and the
dreaded speculators. They ignore the old fashioned supply and demand
equation that even a dimwitted Congressman should be able to comprehend.

Instead of addressing the crucial issues that have led to the US being
dependent on foreign oil to the tune of $500 billion per year, Congress
decided to spend your tax dollars on the following vital items
(compliments of Casey Research):

* $200,000 for tattoo removal for gang members in California.

* $98 million for a Coast Guard ice breaker closing an ice-breaking gap.
(What about global warming?)

* $950,000 for a bikeway in Kentucky.

* $2 million for astronomy awareness in Hawaii.

* $190,000 for a Buffalo Bill Historical Center.

* $650 million for the digital to analog converter box program.

* $1.8 million to study the effect of swine odor on the environment.
(Rumor has it the study will be conducted in the halls of Congress)


When oil prices collapsed from $147 a barrel in the summer of 2008 to
$35 a barrel in January, American drivers, Congress, government
bureaucrats, and the mainstream media refocused on other more pressing
issues like executive bonuses, Michele Obama's wardrobe, and the tax law
knowledge of Obama's cabinet. The attention span of the average American
is shorter than a gnat's. As they text and twitter through life, the
energy infrastructure continues to rust away, decades old wells are
closer to depletion, and alternative energy projects have been scrapped
by the thousands. Peak oil likely occurred between 2005 and 2009. The
production of oil will now embark on a long slow decline. The world is
not prepared.

The history of energy in the United States is really only 160 years old,
with coal being utilized starting in 1850 and oil only becoming a viable
fuel beginning in 1900. Essentially, the world has found lakes of oil
under the crust of the earth. If you pump 82 million barrels of oil from
a lake per day, the lake will eventually go empty. New lakes are found
every year, but the easy to get to lakes have all been found. The new
lakes are deep under the sea or in tar sands and shale deposits. These
sources take as long as a decade to reach and billions of infrastructure
investment. With petroleum in permanent decline, the US needed to have a
plan twenty years ago.


Figure 1. Energy Consumption by Source, 1635-2000 {1}
Source: Department of Energy


Matt Simmons, the brilliant energy analyst and author of Twilight in the
Desert (2005), recently told Reuters, "We are three, six, maybe nine
months away from a price shock. We are not talking about three to five
years away - it will be much sooner. These prices now are dangerously
low. The lower prices fall, the less oil will be produced and the
greater the chance of an oil spike."

In this scenario, low oil prices will continue to take oil fields out of
production and reduce exploration. Once prices recover, companies will
have trouble gearing back up due to the credit crunch, resulting in
production increase delays.

Simmons describes what will happen. "Unless oil demand falls by ten or
fifteen percent per annum, which it is not going to do, then we don't
need to wait for oil demand to come back before we have a supply
crunch". This is on no one's radar.

Peak Oil

When pundits on CNBC speak authoritatively about peak oil being a
fallacy, their misleading blather is believed by supposedly intelligent
people. They expound that we are not running out of oil. There are
billions of barrels left inside the earth. Peak oil does not mean that
we are in imminent danger of running out of oil. Peak oil is the point
in time when the maximum rate of global petroleum extraction was
reached, after which the rate of production enters terminal decline. The
aggregate production rate from an oil field over time usually grows
exponentially until the rate peaks and then declines - sometimes rapidly
- until the field is depleted. This concept is derived from the Hubbert
curve, and has been shown to be applicable to the sum of a nation's
domestic production rate, and is similarly applied to the global rate of
petroleum production. M. King Hubbert created and first used the models
behind peak oil in 1956 to accurately predict that United States oil
production would peak between 1965 and 1970.



Figure 13. Oil Well Productivity {1}
Source: Department of Energy

The depletion of existing sources is more rapid than any new sources
that can be brought online.  Production in the United States is in
relentless decline. The view of Alaskan oil production from 1975 until
today clearly shows how rapidly oil fields can decline. What has
happened in the United States is now happening on a worldwide basis. The
US Department of Energy published a report from some of the top energy
minds in the world in 2005. The lead author Robert Hirsch produced a
comprehensive report on the peak oil issue called, Peaking of World Oil
Production: Impacts, Mitigation, and Risk Management. The conclusions
were frightening. What has the U.S, government done in response? NOTHING

The overwhelming majority of industry petroleum geologists, scientists,
and economists who worked on the report projected global peak production
being reached between 2005 and 2010. The report's disturbing conclusions
are as follows:

* World oil peaking is going to happen, and will likely be abrupt.

* Oil peaking will adversely affect global economies, particularly those
most dependent on oil.

* Oil peaking presents a unique challenge ("it will be abrupt and
revolutionary").

* The problem is liquid fuels (growth in demand mainly from
transportation sector).

* Mitigation efforts will require substantial time.

..... Twenty years is required to transition without substantial impacts

..... A ten year rush transition with moderate impacts is possible with
extraordinary efforts from governments, industry, and consumers

..... Late initiation of mitigation may result in severe consequences.

* Both supply and demand will require attention.

* It is a matter of risk management (mitigating action must come before
the peak).

* Government intervention will be required.

* Economic upheaval is not inevitable ("given enough lead-time, the
problems are soluble with existing technologies".)

File: Hubbert peak oil plot.svg {1}
Source: Hirsch Report


Considering that global oil production peaked or is peaking between 2005
and 2010, we are destined for the third scenario of severe consequences.
Economic upheaval is now inevitable. It is the American way to not do
anything until it is too late. The Hirsch Report urges a crash program
of new technologies and changes in manners and attitudes in the US and
as well implying more research and development. The urging has gone
unheeded. The worldwide global recession is the only reason you are not
paying five dollars a gallon for gasoline today. Supply did not
increase, demand leveled off.

World demand "plummeted" from 87 million barrels per in early 2008 to 84
million barrels per day in early 2009, a full 3.5% decline. If the world
economy levels off and resumes growth, demand will immediately surpass
previous levels. The problem is that production has peaked and will
likely drop below eighty million barrels in 2010. When demand is rising
and supply is declining, only one thing can happen - higher prices.

The peaking of hydrocarbon supply is vital not just to our country's
future, it is enormously critical to our global economic conduct.
Optimists argue that oil has not peaked, and will not peak for decades.
They base this on widely held beliefs, including the extent of the
world's energy resource endowment, the ability of technology to recover
larger amounts of oil once left behind, the lag time between high oil
prices and the ramped-up drilling they kindle, the remarkable amount of
unconventional oil that has become commercially feasible because of high
prices, and undetermined technology advancements. Those who ridicule
peak oil, think the term means "running out of oil" instead of the true
definition: "oil production can no longer grow".

The optimists dismissed the fact that oil prices reaching $147 a barrel
had anything to do with constricting market fundamentals. Instead, they
argued that lofty crude prices were merely a by-product of a weak
dollar, hedge fund speculation, geopolitical trepidation, downstream log
jams, the Iraq war, Nigerian political turmoil and the craving for high
prices within OPEC, which kept enormous spare capacity shut in. When
prices skyrocket again, these optimists will produce new excuses. Facts
are facts. Easily found cheap sources of energy are in terminal decline.

Matt Simmons explains the long and winding road to our current predicament:

* Between 1970 and 1979, world oil demand grew from 47 million barrels
per day to 65 million barrels per day, a jump in ten years of an
astonishing eighteen million barrels per day. This is how we ate up the
world's spare capacity and at the same time caused US supply to peak.
Thus, the price of oil skyrocketed.

* From 1979 through 1983, demand fell four straight years, retreating
back to 59 million barrels per day. Most of this change came as oil
ended its role as a prime feedstock for power generation. This probably
would have happened even if oil prices had not gone so high, as the
world was finally rolling out nuclear fuel.

* Once demand hit bottom in 1983, it quietly began to grow again, though
the growth was masked by the beginning of a prolonged collapse of oil
use throughout the USSR. Nevertheless, total world demand grew from the
59 million base in 1983 to 69 million in 1994, an increase of ten
million barrels per day. This increase, interestingly, came at a time
when most of the oil pundits were wringing their hands, declaring that
oil demand was so stagnant that low oil prices were the new world order.

* In 1995, global oil demand finally edged over seventy million barrels
per day for the first time in history. Between 1994 (the last time it
was under seventy million barrels per day) and the end of 2008, demand
grew to 86 million barrels per day - a jump of sixteen million barrels
per day in thirteen years. This explains why we used up every last
pocket of spare productive capacity and ran out of drilling rigs.

Saudi Arabia is Lying

Saudi Arabia has been claiming that they are capable of ramping up oil
production from its many oil fields. The chart below tells a different
story. The largest Saudi fields have entered permanent decline. The
largest field in the world, Ghawar, was discovered in 1948 and peaked at
5.6 million barrels per day in 1980. It now produces five million
barrels per day. The third largest field in the world, Safaniyah, was
discovered in 1951 and peaked at 2.1 million barrels in 1998. It now
produces 1.3 million barrels per day. One third of global oil supply
comes from twenty large fields discovered prior to 1970. They have all
peaked. 94% of global supply comes from 1,500 wells. If Saudi Arabia had
the ability to ramp up production, they most certainly would have in
2008 when prices rose over $100 a barrel. They did not, because they
could not.

Saudi_oil_production_2 {1}
Source: Oil Drum


"World reserves are confused and in fact inflated. Many of the so-called
reserves are in fact resources. They're not delineated, they're not
accessible, and they're not available for production."
--- Sadad I Al Husseini, former VP of Aramco, October 2007.


Worldwide reserves peaked in 1980, when production first surpassed new
discoveries. Total worldwide reserves are reported to be 1,200 billion
barrels. Much of the increases in reserves since 1980 are lies. Al
Husseini argues that 25% of the proven reserves in the world are
speculative and not accessible. The following chart tells a fascinating
story. Amazingly, each of these OPEC countries had dramatic leaps in
their proven reserves, with Saudi Arabia having a fifty percent increase
in one year with no major new discoveries. These self reported figures
are not audited or verified in any way. Since production quotas are
based on total reserves, the higher your reserves, the bigger your piece
of the pie. Since 1988, Saudi Arabia has pumped at least 44 billion
barrels of oil, but still has proven reserves of 264 billion with no
major new discoveries. If you believe that, I have a package of 1,000
subprime mortgages that is rated AAA I'd like to sell you.


Declared reserves of major OPEC Producers (billion of barrels) {1}
BP Statistical Review - June 2008


Dr Ali Samsam Bakhtiari a former senior expert of the National Iranian
oil Company, has estimated that Iran, Iraq, Kuwait, Saudi Arabia and the
United Arab Emirates have overstated reserves by a combined 320 to 390
billion  barrels, and "As for Iran, the usually accepted official 132
billion barrels is almost one hundred billion over any realistic
estimate". Petroleum Intelligence Weekly reported that official
confidential Kuwaiti documents estimate reserves of Kuwait were only 48
billion barrels, half as much as their reported 101 billion barrels.
Essentially, the amount of oil reserves in the world is much lower than
people think. The good news is that OPEC may have less clout in the
future than they have had for the last forty years.

File: World Oil Reserves by Region.PNG {1}


Mexican Hat Dance

I'm sure that not many people in the US realize that we get more oil
from Mexico than Saudi Arabia. We are dependent on Mexico to supply us
with 600 million barrels of oil per year. Without this supply, there
would be shortages and much higher prices. Tijuana, we have a problem.
Within five years, we will be getting ZERO barrels of oil per day from
our neighbor to the south. Mexico has the distinguished honor of having
a government more inept and short-sighted than our own. Hard to do.


Top 15 Oil Exporting Nations to US - 2006 {1}
Source: Perotcharts.com


Virtually all of the oil supplied from Mexico comes from the second
largest oil field in the world, Cantarell. It was discovered in the
shallow waters of the Gulf of Mexico in 1977. It is run by the state
owned oil company, Pemex. It held seventeen billion barrels of oil. The
Mexican government took the oil revenues and funded their wish list of
programs in the country. Pemex has provided forty percent of all
revenues for the state. The state became so dependent they had Pemex
build a nitrogen injection project on top of the well to push the oil
out faster. It worked. In 2004, the well was providing 2.5 million
barrels per day. It is now in irreversible decline at a rate of fifteen
percent per year. By 2012, it will only be producing 500,000 barrels per
day.

File: Mexican Petroleum Production.PNG {1}


Mexico has ridden this pony hard. They have not done any serious
exploration in the Gulf of Mexico in thirty years. A newly discovered
deep water well takes ten years years and billions of investment to
bring on line. There is no doubt that Mexico's oil output will collapse
in the next five years. They will not be capable of exporting any oil to
the US. With the rest of the world having no spare capacity and demand
higher than 2008, prices for gasoline in the US will soar. In the
meantime, we will ponder higher gas mileage requirements, not allow
offshore drilling, and make no effort to convert our transportation
fleet to natural gas. Congressmen will be outraged and indignant at the
oil companies, when the writing was on the wall for a decade.


Crisis Part II

The flowchart below gives an extremely clear picture of what happened in
the last year and what will happen in the next few years. The financial
crisis and the energy crisis were intertwined and will continue to feed
upon each other. Worldwide oil production peaked between 2005 and 2009.
This, along with refinery shutdowns, hurricane related issues, and hedge
fund speculation led to oil reaching $147 a barrel. This was the straw
that broke the camel's back and helped accelerate a downward spiral for
consumers. The combination of plunging home values, retirement savings
being cut in half and gas prices doubling led to the worst recession
since the 1930s. The dramatic worldwide slowing caused by American
consumers not going to Malls reduced demand enough to make the
speculators go running for the hills. Oil prices plummeted 76% in a
couple months to $35 a barrel. Now we are about to enter phase two of
this comedy of errors. Again, the clueless leaders of our country will
be taken by surprise. They've learned nothing.

 It may sound like sacrilege, but prices below $50 a barrel are
dangerously low. The crash in gasoline prices to below two dollars a
gallon has led to demand in the US rising six percent above the demand
in September 2008. Our American twitter society has already forgotten
the four dollars a gallon prices. Hybrids are rotting on car dealership
lots. Everything that has happened since the price collapse will
contribute to Crisis Part 2:

* OPEC cut supply by 4.2 million barrels per day from levels in September

* Projects that were viable at $80 a barrel have been scrapped. Ethanol
and Tar Sands are only profitable above this level. Natural gas wells
are being capped as prices plunged from $13 to $4.

* Worldwide rig counts have plunged from 3,500 to 2,700 in a matter of
months.


Rotary Rig Count - World {1}


* Existing wells throughout the world continue to decline at ever
increasing rates.

* The Obama administration will restrict the expansion of coal powered
plants, construction of new refineries and new drilling in the US

* The enormous stimulus being rolled out throughout the world will
generate increased energy demand as supply remains restricted.

* The banking crisis has resulted in no financing for energy projects
that could relieve the long-term supply issues.

* Energy companies have been laying off skilled workers as their
business has plummeted. When demand resumes, these workers won't be there.


Most people do not understand that all prices are set at the margin.
There are 75 million houses in America. Only four to five million homes
are sold per year. Therefore, five to six percent of the homes in the US
set the price for the other seventy million homes. This same concept
applies to the last barrel of oil. When worldwide demand exceeded
worldwide supply in late 2007 and early 2008, those last barrels of oil
set the price. This explains why those last barrels of oil set the price
above $100 a barrel. It wasn't greedy speculators and evil oil companies.


World Oil Supply (million barrels per day) {1}
Source: International Energy Agency

It is clear that supply has stayed in the range of 86 million barrels
per day while demand has dropped to the range of 84 to 85 million
barrels per day. If oil demand rises by three percent, demand will
outstrip supply again.


World Oil Demand (million barrels per day) {1}
Source: International Energy Agency


$200 Oil Will Arrive

When I was ten years old my parents told me to never touch our stainless
steel sink and the electric light switch above the sink at the same
time. I couldn't resist. I tried it and got knocked on my ass. I never
did it again. Americans are a different lot. Last year we got knocked on
our ass by four-dollar gasoline. Instead of learning, we have sauntered
back to the kitchen sink and we're reaching up for the electric light
switch. I wonder what is going to happen this time.

Americans are used to making tough choices. They have made choices
between the Hummer H3 (13 mpg) and the Hummer H2 (8 mpg). They've made
choices between a BMW 650i (16 mpg) and a Mercedes S600 (13 mpg). The
coming energy crisis will lead to choices between food or fuel for many
people. The coming crisis is as clear as the housing bubble. Anyone with
half a brain could see that home prices would need to fall thirty to
fifty percent to get back to equilibrium. Therefore, no one in Congress,
Wall Street, or CNBC saw it coming. Total world oil supply is in a
permanent decline. Oil demand will continue to rise. Only a half wit
would argue that prices will not rise dramatically in the coming years.
Turn on CNBC to get the half wit view of oil prices.

United States Annual Oil Supply (1946 - 2007) {1}


Now the bad news for Americans; we make up 4.3% of the world's
population and consume 26% of the world's oil. Europe makes up 6.8% of
the world's population and consumes eleven percent of the world's oil.
After the oil shock of the 1970's Europe decided to dramatically
increase taxes on gasoline. The high cost of gasoline forced people to
buy smaller fuel efficient cars. Today in Germany, their cars average 44
miles per gallon, while in the US our cars average 22 mpg. Whether
Europe spent the taxes wisely is another question, but they did change
behavior. No crude oil refineries have been built in the United States
since 1976. During that time, hundreds of ethanol refineries have been
built. It requires more energy to produce ethanol than ethanol produces.
The United States has between 250 and 300 years of a coal supply. That
is more than the amount of recoverable oil contained in the entire
world. We will not utilize this resource because environmentalists say
it is bad. Congressman Gary Miller describes the US response to the
1970's oil shock.

In 1973, America imported thirty percent of its crude oil needs. Today,
that number has doubled to more than seventy percent. Gas prices are as
high as they are now in part because we've had no comprehensive national
energy policy for the past few decades.


Top 15 Oil Consuming Nations - 2006 {1}


The peak oil shock that is coming will affect the United States more
dramatically than any other country. Are you prepared for five dollars a
gallon gasoline? We are twenty years too late to stop this from
happening. The American way of kicking all tough issues down the road is
about to kick us in the ass, and no one is preparing Americans for the
result. Happy talk and confidence building exercises will not solve the
problem. We are not in control of our destiny. Our supply is drying up.
More drilling will not work. Higher fuel efficiency standards will not
work. Congressmen and TV pundits will posture, expound, skewer oil
executives on TV, and get red in the face, but they have failed the
American public again. The social upheaval that could occur from fuel
shortages and outrageous prices will be ugly. Most Americans live in
suburbs far from work. Our food supply requires trucks to deliver to our
stores. The US military consumes 400,000 barrels of oil per day and
spends $13 billion of your tax dollars per year to keep their machines
functioning. War for oil becomes more likely in that environment. Is
that a farfetched scenario?


World Population Growth Graph {1}


The population of the world will continue to rise. The United States has
no control over that fact. Developing countries will grow more
prosperous. People utilize more fossil fuels as they become more
prosperous. $2,500 cars are now becoming available in China and India
and the rest of Asia. In a Chinese car ownership survey, 96% of
respondents said they paid cash for their cars. How un-American like.
Imagine if GMAC could gain a foothold in China. More than 20,000 new
cars per day are being sold to Chinese citizens who have never owned an
automobile before. This is massive new demand being created for
gasoline. China now has a middle class estimated at nearly 300 million
people. 37% of people driving in China today did not know how to drive
three years ago.

Oil will continue to be discovered, just not enough to keep up with
demand. The pie chart below paints a disturbing picture. Only thirty
percent of total oil reserves are light sweet crude. The other seventy
percent is difficult and costly to bring to market. Few US refineries
can convert heavy crude into gasoline. Oil sands require massive amounts
of water and natural gas to convert it into usable oil. The oil
remaining to be discovered will be in deepwater wells. It takes at least
ten years to bring a deepwater well online. We are losing the race with
time.


World Oil Reserves {1}
Source: Wikipedia


The only two people sounding the alarm have been Matt Simmons and T
Boone Pickens. Mr Simmons warns that the best energy geologists and
engineers are now retiring, with no one to take their place. The global
oil and gas system infrastructure is rusting away and falling apart. The
cost to rebuild our global energy infrastructure would be close to $100
trillion and would require ten to twenty million workers. This would not
be wasted money. Mr Pickens argues that by investing $1 trillion to
build wind facilities in the corridor from Texas to North Dakota we
could produce twenty percent of the nation's electricity by 2020. This
would free up our vast natural gas resources to be used as fuel for
truck fleets and ultimately automobiles. The ideas of both men would
create jobs in America and make us less dependent on Middle East oil.

None of these ideas will avert $5 gasoline in our near future. They may
avert $10 gasoline and potentially a resource instigated World War
Three. The choice is ours.

Note {1}: All figures, charts, tables, and graphs are at
http://theburningplatform.com/economy/wasting-a-good-crisis-result---200-oil

http://theburningplatform.com/economy/wasting-a-good-crisis-result---200-oil


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