Wednesday, June 21, 2006

The Peak Oil Crisis: Recognizing the Peak

Falls Church News-Press

By Tom Whipple
June 15, 2006

It is conventional wisdom among students of peak oil that worldwide peak oil production will not be recognized, and certainly not "officially" certified by some organization or other, until some years after the event has passed. The exception to this, of course, is if some natural or man-made catastrophe shuts down a lot of oil production in a manner not likely to be restored for many years.

Without such a catastrophe, recognition of peak oil will be gradual, with month after month of volatile production statistics trending downward. At some point, even the most optimistic prognosticator will be forced to admit it is unlikely that world production will ever again climb above the highest production record previously achieved.

The world is currently producing somewhere around 84-85 million barrels a day of oil. Pessimists say the current production rate is beginning to look a lot like a peak. Maybe another million or so a day, but that’s it. Moderates on the issue will allow that another five million barrels per day looks possible and see a peak around 90 million barrels a day. Until recently, the optimists were talking 120 million barrels day, 20 or 25 years down the line, but numbers like this are appearing less frequently

Currently, there is a fair sized discrepancy regarding total world oil production between the world's two major production compilers, the International Energy Agency in Paris (IEA) and the Energy Information Administration in Washington (EIA). The IEA says we are currently producing 85 million barrels a day while the EIA says it’s closer to 84 million.

Now, I am not privy to the methodology used by these two agencies to compile their worldwide production statistics each month, but even from the outside, some problems are obvious. There is a distinction between those countries that make every effort to publish accurate and timely production statistics and those who, for a variety of reasons, want to give out a false (usually higher) impression of their actual production.

In the former category are North America , Europe , Russia and China and countries where most production is carried out by the major international oil companies. Here the statistics are, given the complexities of compiling such data, reasonably timely and accurate. Corrections are made promptly when new information is acquired. Production numbers from these countries shows that they jump up and down on a month-to-month basis. Old wells dry up; new ones are drilled; equipment breaks down; storms or extreme temperatures appear. By their very nature, oil production numbers are volatile. It is the trend that counts.

Then there are a group of countries where a state run oil company controls production and the local government feels it is in its interest to keep a tight reign on any official release of production statistics. The most prominent of these are Saudi Arabia , Venezuela and Iran , although a couple of other Middle East producers, such as Qatar and Kuwait , do not appear to be particularly forthcoming.

The non-cooperating countries are easy to spot, for their purported production remains the same month after month in the tables produced by the major compiling agencies. Rock steady production numbers means that even organizations with major resources behind them cannot come up with better numbers (at least that they can publish openly) and are forced to make educated guesses or go with the previous month's production number.

In a number of cases, the IEA and EIA are forced to use the estimates of "tanker trackers." These are private organizations maintaining contacts in the major oil exporting nations who simply note whenever a tanker leaves, where it is supposed to be going, and how heavily loaded it appears. As most of these ships are hard to miss, one can assume that counting departing tankers is about as an effective way as any of tracking country's exports.

In response to many complaints about the production data, a database called the Joint Oil Data Initiative was set up about a year ago. This is a public online database to which all producing countries are supposed to submit their production statistics. A quick perusal of the web site shows that it has many critical gaps and that the concept still has a ways to go.

You may wonder why we should really care if a country's production is going up, going down, or remaining flat. The answer of course is that, until recently, it really didn't make much difference to anyone, but the Saudis, if they produced 8 million, 10 million, or 12 million barrels of oil in a given day. If they didn't fulfill demand for their product, somebody else would. As long as there was sufficient oil to fulfill demand without forcing up prices too much, that was all that mattered.

As the worldwide oil supply and demands tightens however, the need for timely accurate production statistics becomes increasing important— so much so that at some point, timely and detailed knowledge of world energy supplies may become a matter of critical importance.

The reason behind this assertion is simple. As oil depletion nears, we are all —from the highest levels of governments to the individual citizen— going to have to make many, many decisions as we rearrange our lives and our livelihoods in response to cope with life in a world with declining availability of oil and all deriving from it.

To get through this transition, good and timely information as to when and how fast the energy situation is changing is going to change will soon become vital to all of us.

Sunday, June 11, 2006

The Peak Oil Crisis: One Year in Review

Falls Church News-Press

By Tom Whipple
June 8, 2006

As the world oil situation is rather quiet at the minute, it's a good time for a review. The price of oil continues to bounce around $70 a barrel and shows no sign of moving very far in either direction until the next big development occurs. The Iranians are busy trying to decide how much they really want an atomic bomb (or at least the ability to make people think they have one). The wrong decision by either side could impact world oil supplies and prices for years to come. Finally, the Nigerian militants have managed to abduct and probably ransom a group of foreign oil workers from an exploration platform 40 miles offshore.

The most obvious-to-everybody development in the past year is that the average US price for gasoline has managed to climb by 77 cents a gallon. So far the economic damage has been well below what many observers had thought $3 a gallon would do to the economy. However, there are signs of trouble ahead. Sales of large SUVs are on their way down, inflationary numbers are starting to appear, and Wall Street is having bad days. While for many people $3 a gallon is something one gets used to, many others are rapidly on the way to maxing out their credit cards or hocking the family heirlooms to get to work.

The other hard-to-miss events of the past year were the big Gulf of Mexico hurricanes. Whether you believe in global warming or not, the waters in the Gulf and mid-Atlantic have gotten a lot warmer in recent years resulting in two consecutive seasons in which Gulf oil production was badly torn up. Last year's hurricane season resulted in the permanent loss of some 200,000 barrels a day of oil production. While no one knows as yet if this year's hurricanes will do damage comparable to the last two years, all the climatological prerequisites for another bang-up hurricane season are in place. Gulf oil and natural gas production has grown into a mighty big target.

During the past year, a pair of internal company documents were leaked in Mexico and Kuwait . The Mexican document suggests that production from the giant Cantarell oil field from which the US imports 1.6 million barrels a day is about to collapse catastrophically. In the case of Kuwait , the leaked study claims that the country's oil reserves may only be 25 to 50 percent of the official number. In the meantime, Kuwait has announced that production from their giant Burgan oil field has started to decline.

The status of Saudi oil production, which many believe to be the key to any further growth in world oil production, remains a well-guarded state secret. Here too, however, there are tantalizing hints of trouble ahead. Riyadh continues optimistic claims about future production capabilities and has embarked on major new onshore and offshore drilling projects, paying top dollar to lease the required equipment. For most of the last year, Saudi oil production has been steady at 9.5 million barrels a day at a time when world oil prices and presumably demand has increased. Recently a firm of "tanker trackers" announced that it looked to them as if Saudi production had dropped to around 9.1 million barrels a day in April and May. The number for April has been confirmed by the Saudis who claims they simply can't find buyers for their oil.

It may be perfectly true that the Saudis can't find a market for some of their oil. A lot of it is difficult to refine and a growing share of the world's oil consumers simply can't afford the going rate these days, even as the richer countries continue to grow nicely. A number of outside analysts are saying that it is just about time for Saudi production to go into decline, perhaps catastrophically. In a year or so, we should know who is right.

Also, keep in mind that stopping Saudi oil production is still Al Qaida's top objective. They failed in an attempt to blow up a key chokepoint a few months back, but they are still out there and not getting any friendlier.

We all know where the Iraqi situation is going and that it is only a matter of time until oil exports, which are doing nicely at the minute, are drastically reduced or come to a complete stop. The Iranian situation is in limbo at the minute. Decisions in the next few weeks should settle whether exports and further oilfield development continue or the situation deteriorates into any of several possibilities that will increase to price of oil or perhaps markedly reduce the amount of oil coming out of the Middle East .

A major phenomenon of the past 12 months has been the scramble for secure oil supplies that has been taking place around the world. The Chinese have been particularly active in seeking out new deals and signing contracts for oil. Close behind China in the search for bilateral agreements have been the Japanese and the Koreans who are faced with the problem of growing industrialized economies and no indigenous oil. There appears to be a trend getting underway from market-based oil sales, where “he who pays the most gets the oil,” to a situation where exporters are selling to customers under direct bilateral agreements.

Thanks in part to the hurricanes, US oil production thus far in 2006 is down by 400,000 barrels a day (7.3%) as compared to 2005. Our net imports of crude and finished products are up by a comparable amount. This means that roughly two thirds of US oil consumption is now being imported and therein lie the seeds of a problem more serious for the US than the peaking of world oil production: peak US oil imports.

Let's face it, during the last year, the popularity of the US around the world has not been doing too well. Many see a way to do us real harm through cutting or slowing our access to oil. Nationalism is on the march in many places. A few countries led by Venezuela are saying that as soon as they can figure out how to stop exporting oil to the US , they will.

It is gospel that when an exporting country goes into depletion they will keep supplying the domestic market first so that their exports will drop much faster than their total production. Moreover, we are starting to hear talk about cutting back on exports just to save it for another day. The message of rapidly rising prices is that an exporter can earn growing revenues and keep more of his oil safely in the ground too, simply by slowing exports. The only obstacles to deliberately slowing exports are long term contracts, other trade relationships, security guarantees, and the fear that they could end up like Baghdad .

So what does the past year tell us? First of all, world oil production has moved up very little. While new wells and new oil fields continue to be drilled, this increased production has been largely offset by hurricane damage, insurgencies, and general oil depletion. The year of peak oil production will be determined by the balance of how fast the drillers can open increasingly more expensive and difficult to drill wells vs. mother nature, insurgents bent on closing down production, and increasing rates of world oil field depletion.

The US and other industrialized countries, most of which are, or soon will be, major importers, are facing the double whammy of rapidly reducing supplies of oil available for import. In the meantime, and for the moment, the worldwide demand for oil, even in the US , continues to increase.

Monday, June 05, 2006

Invest in Silver, Oil

Over the last few days, I have been looking into various investments I could make.

Invest in the silver ETF (Exchange Traded Fund), which runs under the symbol SLV, or in the oil ETF which runs under the symbol USO.

The silver ETF works like this:

The investment firm/bank buys a certain amount of silver, and stores it. They then sell "shares," equal to 10 oz bars of silver. Instead of having to physically store it somewhere, you own the silver on paper. The value of one share is the spot value of an ounce of silver x 10.

The oil ETF doesn't work exactly the same, but runs in a somewhat similar manner, based on the price of a barrel of oil.

Or, you could just go to your neighborhood coin dealer or jeweler and buy the physical bullion itself.

With inflation, Iran fears, and a weakened economy, now is the time to invest in the energy sector or in precious metals.

Silver is extremely undervalued, based on what I have read.

"Today, for less than $20, anyone can get into the silver speculation game. On top of that, silver is easy to buy and somewhat liquid. All you have to do is find your neighborhood coin dealer and start trading.

My question is: Do you understand silver? Do you know why silver is a good investment? Do you also know why it's a bad investment? If you don't know the answers to these questions, I would recommend that you stick with what you understand.

Although not a silver expert, I'll share with you the reasons why I'm bullish on the asset:

1) Silver is a consumable precious metal. Unlike gold, which is hoarded, silver is used industrially. For years, before digital photography, it was used in film for cameras and movies. Today, silver is used extensively in electronics.
The reason this is a good fundamental reason to get into the metal today is because silver stockpiles are dwindling, so its price is driven by supply and demand.

2) It's a precious metal. Silver has been used as real money for centuries. We humans have an ancient fascination with this metal, as we do with gold. For years, I have visited gold and silver mining sites all over the world. That's something that has always amazed me, regardless of whether I was in China, South America, Mexico, Africa, or Canada.
I still remember standing on a mountaintop in Peru, doing my due diligence on a gold mine and looking at tiny caves dug into the side of a mountain. The caves were the mines of ancient Incas who were seeking gold, long before the Spaniards came and stole their wealth and country from them. Standing on a 14,000-foot mountain, where I could hardly breathe, I wondered what motivated those ancients to live in such an arid and hostile environment and delve for gold. Then I realized I was there for the same reason, only centuries later.

3) The primary reason I'm in real estate, oil, gold, and silver is because the U.S. dollar has become the peso the world. It's becoming more and more worthless as the U.S. is the world's biggest debtor nation.
Just how badly is the U.S. borrowing money? According to the Treasury Department, America's first 42 Presidents (from George Washington to Bill Clinton) borrowed a combined total of $1.01 trillion from 1789 to 2000, Between 2000 and 2005, President George W. Bush has borrowed $1.05 trillion -- and he's got a few more years left to go.
I'm not confident that our political leaders have the guts to do what's required to put the U.S. back on a sound economic footing. This is not to blame either Republicans or Democrats. I blame Americans for wanting their Social Security cake and Medicare ice cream, too. It's the entitlement mentality that grips the U.S., from the President on down, that needs to be changed. Too many Americans have come to expect the government to solve our personal problems (see "Why Many Aren't Securing Their Financial Future").
So if you think America's politicians and citizens are willing to make the changes necessary to strengthen the U.S. dollar, then don't buy silver. But if you're like me and don't expect us, as a nation, to take our medicine, then short the dollar -- and the way you short the currency is by going long on gold and silver.

4) Equities (stocks) and commodities (gold, copper, oil, and silver) are counter-cyclical. On average, equity prices go up for 20-year periods, and commodities go down. Then they reverse directions. Looking back in time, equities (stocks) began their run-up in 1980 and imploded in 2000. In 2000, commodities began their run-up, and equities headed down. In other words, around 2016 to 2020, start getting back into stocks and out of commodities.

5) A silver exchange traded fund (SLV) was launched on Apr. 28. That means silver, the commodity, can be traded as a paper asset. This makes silver easier for the masses to buy. They don't have to take delivery of the physical metal. Millions of pensions can now hold silver as a paper asset. The ETF will have to actually buy the silver and store it for the investor. This should add to the scarcity of the metal, which should reduce supply and increase prices.
So that's a simple explanation of what I understand about silver -- and why I'm bullish. I'm not buying silver because the price is going up, I'm buying it because I believe I understand why its price is rising.
I could also be wrong -- but at under $20 an ounce, silver is a good buy, in my opinion. I believe it's the last great affordable investment for the masses. And when the masses find out, another bubble will inflate and, of course, at some point burst." (Excerpt from

More links:{9E4F204C-FD45-40D4-B648-AD5953F5264D}&print=1&siteid=mktw

I'm not an expert (obviously), but I have enough common sense to get in the game while I still can.

Good luck.

Friday, June 02, 2006

The Peak Oil Crisis: Dividing a Growing Pie

Falls Church News-Press

By Tom Whipple
June 1, 2006

In recent weeks, there has been a spate of stories about oil-producing countries either nationalizing their oil industry or unilaterally announcing new contract terms for international oil companies (IOCs) operating in their countries.

As the price of oil increased rapidly in recent years, exporting nations that had foreign oil companies operating within their borders looked at the unprecedented profits being earned by IOCs and began asking, “Why aren’t we making that money; it’s our oil?”

This is not a new issue. Nearly 70 years ago the Mexicans asked the same question as they nationalized their oil production. In the decades after World War II, most Middle Eastern producers took control of their own oil resources, either peacefully as with Saudi Arabia or accompanied by turmoil as in Iran and Iraq .

The current wave of nationalization/renegotiation began in 2004 when the Russian government moved to bring its giant Yukos oil company, that had been in private hands since the collapse of the Soviet Union , back under state control. This of course was an internal matter for the Russians.

This year has seen more pressure on the IOCs as Venezuela, Bolivia, and Ecuador either announced nationalization, in the case of Bolivia’s gas fields, or new contract terms that would bring the government more control and a greater share of the profits.

Last week the spotlight swung back to Russia when Moscow floated the notion that it should have 51 percent ownership in three of the biggest foreign oil projects in Russia — Shell's Sakhalin-2 field, Exxon's Sakhalin-1 and the Kharyaga license held by Total. The Russians claim these projects are all behind schedule, over budget and short on Russian involvement.

Although there has been no movement as yet, there is speculation other oil producers with a significant foreign oil company presence will be either announcing or asking for contract renegotiations.

The reason the foreign companies are present at all is because they alone have had the resources and technical expertise to find, produce, and market the oil. In many cases, the host government’s major function is to collect and spend the revenue check. Now, the tightening world oil supply and spiraling prices have brought a whole new dynamic to the revenue sharing question.

Most of the relationships between producing nations and the IOCs go back many years if not decades. Production and revenue sharing contracts were written back in the days of $10 or $20 a barrel oil. Contracts usually provided for the IOCs to make all the investment in return for some share of the profits. If the deal were for a 50-50 split, and the oil sold for $10 a barrel, then each partner might make a couple of dollars a barrel after a expenses.

The problem came when the value of oil quickly rose to $70 a barrel with little increase in perceived expenses. Then the IOC and the host government could each be making $30+ per barrel. From the host government’s point of view, the question became why should the IOC that was satisfied with a couple of dollars per barrel profit be entitled to a profit of $30 or more.

The question shifts to one of how much leverage the producing government has to demand more of the revenue pie. This, of course, requires a careful analysis and a lot of luck on the part of the government seeking a bigger share of the revenue. Given that most oil companies are making money, in some cases a lot of money, from their foreign operations, it is obvious that they have a lot of give. Naturally, they want to continue profitable production contracts and they already have made multi-billion investments in their projects.

In many cases, there are other factors to consider besides the profitability of the IOC. What other economic or political relations does the host government have with foreign oil importers? Should the government feel that its national security rests on good relations with Washington or some other importer, then it is going to be reluctant incur the problems of breaking existing contracts in hopes of gaining more revenue. The size and potential for a nation’s oil production would enter the equation. If oil production is minimal by world standards, an IOC could easily close up shop and leave the host country on its own.

Another new factor in the equation may be technically competent countries such as China , Japan , and South Korea who are becoming concerned about the future of their energy supply. In many situations, these countries would be more than happy to assist exporting nations with their oil production in return for access to the product.

Yet another complicating factor is that most new oil production is coming from deep-water fields these days. Finding and producing oil from beneath deep waters is a difficult task that requires huge investment, many years of effort, and much technical expertise. Losing access to the money and know-how of the IOCs is something a country that wants to continue in the oil production business should not take lightly.

Much debate is taking place as to whether recent grabs for a bigger piece of the profits will pay off in the longer run. Venezuela , which is currently producing about 2.7 million barrels a day but has large reserves of hard-to-produce heavy oil, is the most interesting. Having unilaterally announced major increases in their share of the revenue and control over heavy oil production, Caracas is awaiting a response as the whether the IOCs will acquiesce in the unilateral breaking of long-term contracts.

If the IOCs pull out or reduce their efforts in Venezuela , at stake are US imports of 1.6 million barrels a day plus long-term access to large quantities of geographically close heavy oil. If there is a break in the oil relationship, both countries are likely to suffer for an indefinite period.

Most observers hold that Bolivia and Ecuador have made mistakes in breaking their contracts with foreign oil companies. Their production is relatively small and they lack the capital and expertise to increase production without outside help.

Are any other nations likely to succumb to the lure of more pie and seek revisions to existing contracts? In reviewing the list of major producers, most such as China, Mexico, Norway, Canada, and Saudi Arabia either do not have production sharing agreements or are unlikely to get into the contract-breaking business.

There are others in the world such as Nigeria and Angola who might be tempted but in these cases other overriding factors could come into play.

As oil depletion sets in and the price of oil moves up, pressures on producing nations to get all they can, while they can, will increase. In this situation there is much opportunity for miscalculation. This would probably come in the form of the IOCs either pulling out of a country under pressure or a reluctance to make major new investments while under threat of expropriation. In either case future oil production will suffer and the day of peak oil will move a little closer or worldwide depletion will be a little faster.

The Day After Peak Oil

By John F. Sugg
May 31, 2006

Will we die in our cars or retool our communities?

You know that place alongside I-85? Or was it I-75? Maybe State Road 400? Could have been I-20.

Well, it doesn't really matter what stretch of concrete because the environs are all the same. Mass-produced cul-de-sac subdivisions are surrounded by cookie-cutter malls, all laced together with endless ribbons of car-clogged roadways.

Sprawl. We know that. Been there, got the "sweltering on the expressway" T-shirt. But to understand what sprawl really means -- for your future -- we need to connect a few dots.
We have sprawl because ... well, because of gasoline. The internal combustion engine created in the last century this phenomenon called the suburb. Hundreds of millions of Americans suffer from the mass delusion that they live (sorta) in the "country" because they have a 3,000-square-foot, incredibly-cheap-construction manse and bit of grass, and their subdivision boasts a name like Fox Run or Oak Creek. Those not intoxicated with gasoline fumes have noticed that such names are historical markers recording what once was on the land before it was bulldozed.
As industrial and commercial urban centers became noisome and noxious, the car allowed people to move into the burbs. The commuter was born (and is slowly dying), with the interstate as an umbilical cord.

So, if a gasoline glut giveth sprawl, will paltry petroleum production taketh it away?

You haven't heard a lot in the mainstream press about something called "peak oil." The Atlanta Daily Newspaper of Declining Circulation -- whose marketing and news orthodoxy is that sprawl is splendid -- has mentioned the term only four times. Ever. Those items include one letter and, oh, one column from the pro-sprawl, pro-more-roads Georgia Public Policy Foundation. That column labels peak oil as a "belief" that's foisted on the public by "snake oil" salesmen.

"That's really stupid," says Richard Heinberg, author of two books on peak oil, and a guy who practices what he preaches. He's converted his California suburban home into a mini-farm where he raises food on once-manicured lawns. Through solar panels, he has cut his energy bill by 80 percent.

"The public policies that encourage sprawl are insane," Heinberg says. "Peak oil isn't a hypothesis. It's an observation. We're writing history, not predictions. And policies that don't recognize that are creating a tragedy that our children and grandchildren will pay for."

Sometime in the next 30 years, the world will have exhausted oil supplies to the point where production will rapidly diminish. A 2005 U.S. government study (clearly ignored by Bush & Cheney Inc.) called the Hirsch Report concluded that peaking "without timely mitigation" will result in "unprecedented" social, economic and political chaos.

How do you mitigate the affects of peak oil? As the Hirsch Report underscores, the old blather about "market forces" doesn't apply. True, rising prices will eventually prompt conservation and promote the search for alternative energy. But that won't happen soon enough to skirt disaster. The study found it will take 20 years to recalibrate American society for a future of diminishing oil. If we've already hit peak oil, which might be the case, we're facing two decades of horrendous crisis. Or, if the peak is still 20 years off, we'd better start preparing today.

Many cities -- Portland, Ore., San Francisco, Bloomington, Ind. -- have passed peak oil resolutions that call for sensible public policies.

In Georgia, meanwhile, our Republican leaders are headed in the opposite direction. Last legislative session, they slipped a transit-killing poison pill into the state budget. And rather than vetoing that anti-commuter provision, Gov. Sonny Perdue is backing a new wave of road building funded by "public-private partnerships," which means the public will bleed billions and "private" pals of legislators will cart away the money.

Jim Kuntsler, a peak oil author who lives in New York, says Georgia's policies are creating "a public realm that has been reduced and impoverished into a universal automobile slum."
There are smart people who live here, and they're thinking about the problem. Joe Allen heads a community improvement district at the aging Gwinnett Place Mall. He's picked up on the themes of transforming sprawl into new cities, places where people can work, live and play with minimal reliance on cars.

"We have a great infrastructure here," Allen says. "It needs dusting off and a new direction. In 1984, the mall forever changed the face of the area. New concepts that transform this into an urban center will again change Gwinnett for another 20 or 40 years."

Gwinnett County's planning director, Steve Logan, quips, "I've long seen all of those huge parking lots as a way to land-bank property for future use. We'll see sprawl areas congeal and intensify. Five-dollar-a-gallon gas will make it happen a lot faster."

The idea is to carve out scores of cities in metro areas -- real centers of commerce and housing. Instead of 90 minutes in the car, you spend nine minutes strolling to your office. Or, if you commute, it's a couple of miles on a trolley or train, not 30 miles in the SUV.

What's at stake is the future. Good public policy is the key. Kunstler calls for programs to rebuild America's train system. Others favor jacking up gas taxes and using the money for transit -- a good idea if provisions are made so that the burden won't disproportionately fall on the poor.

In the near term, reconfiguring suburbia into new cities -- like the plans for Gwinnett Place -- could transform sprawl into communities. While we're at it, we should retool the nation's agriculture and retailing -- returning to local farms and neighborhood shopping. It's a better way to live -- and we could escape the worst of the day after peak oil.


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