# Ready for $262 bbl oil?



## wayneL (23 April 2006)

The apocalypse cometh:

http://money.cnn.com/2006/01/27/news/international/pluggedin_fortune/index.htm



> Ready for $262 a barrel oil?
> Two of the world's most successful investors say oil will be in short supply in the coming months.
> FORTUNE Magazine
> By Nelson Schwartz, FORTUNE senior writer
> ...




Meanwhile, back at the ranch:



> Texans Forced To Pawn
> Shops To Get Extra Gas $$
> CBS 11 News
> 4-22-6
> ...


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## professor_frink (23 April 2006)

that's gotta translate to at least 3.50 a litre for petrol- would love to see the look on the face of someone filling up their 4wd at that price!
You'd think if you had to pawn your crap to put fuel in the car, then maybe it's time to by a smaller car. Or a bike. Or some skates. Or a bloody horse.


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## crackaton (23 April 2006)

Most people who drive gas guzzlers lease them and just right the fuel costs of on tax. It's the average joe who will suffer big time, they will get hit with fuel bills travelling to and fro work, and then increased food etc. Sad state of affairs.


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## Bobby (23 April 2006)

Hello Wayne.,

The apocalypse cometh ?, 

Then the four horsemen do ride again !.
When that happens Armageddon cometh too.  

Bob.


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## wayneL (23 April 2006)

Bobby said:
			
		

> Hello Wayne.,
> 
> The apocalypse cometh ?,
> 
> Bob.




Just a bit of poetic licence


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## Bobby (23 April 2006)

wayneL said:
			
		

> Just a bit of poetic licence




Wayne,

I did like it, you never know what can become real.   

Regards Bob.


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## Smurf1976 (23 April 2006)

I maintain my view that at some point in the future, quite probably within 10 years, energy will become _the_ issue in Australian politics. The likes of health and hospitals, tax, child care, defence, the environment, interest rates etc will be all but forgotten when that day comes for they will be trivial issues in comparisson. And come it will.

Quite simply, we are on a completely unsustainable path and, with a few exceptions, everything we've done as a country (and planet) since around 1990 has been to make the eventual situation worse. Prior to that we did actually have some progress with moves away from oil and gas for power generation, improving vehicle fuel efficiency and so on. But since then it's all been downhill in the name of doing whatever is easiest today and worry about tomorrow when it comes.

To list but one example, natural gas. Quite often we hear that "there's enough for over 100 years". That's not true - it's about 60 years - and then you need to factor in a doubling of consumption as a partial replacement for oil. And then of course "normal" demand growth. So much for gas being abundant. A child born today is likely to be just completing university or TAFE studies when worldwide production of gas peaks. 

As for oil, suffice to say that discovery has been trending lower for the past 43 years and this has been a well established fact for about 30 years. No amount of scientific, political, military or economic effort has even halted the trend of decline, let alone actually reversing it. Drilling to find trivial oil fields in response to rising prices doesn't fix the problem even though it may be profitable for the company concerned. Meanwhile, we have an outright explosion in the global population of gas guzzlers.

Judge for yourself how it will end but oil and gas are clearly not being used at a rate which is sustainable for even one human lifetime. This clearly can't go on too much longer and it won't be pleasant when the growth stops and then turns to decline. 

IMO worldwide demand for uranium and high grade coal will soar when the trouble hits so they too will be expensive. Hence my frequently expressed view that Australia ought to rely as much as possible on hydro, geothermal, other renewables and brown coal. They are not subject to conflict, pricing cartels, nuclear hazards or massive price increases and are quite reliable with proper design and operation.


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## nizar (23 April 2006)

professor_frink said:
			
		

> that's gotta translate to at least 3.50 a litre for petrol- would love to see the look on the face of someone filling up their 4wd at that price!
> You'd think if you had to pawn your crap to put fuel in the car, then maybe it's time to by a smaller car. Or a bike. Or some skates. Or a bloody horse.




Trust me if price of oil gets to >usd100, then petrol would be the least of our worries

Inflation would mean costs spiral out of control for everything, so demand would be surpressed as a result - then ultimate chaos, companies lose profitability, global equity markets collapse, unemployment shoots up, etc etc...

Lets hope it doesnt come to that


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## clowboy (23 April 2006)

Nizar,


All that from a mere $25 a barrel increase?

Ill admit that $100 a barrel oil will have some serve and widespread ramifications but ultimate Chaos?


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## mime (24 April 2006)

$100 a barrel? I don't think that will happen this year unless something major happens. I heard that 2 of the 5 major Iraq oil fields are operational. Sanity will come back soon.


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## Smurf1976 (24 April 2006)

mime said:
			
		

> $100 a barrel? I don't think that will happen this year unless something major happens. I heard that 2 of the 5 major Iraq oil fields are operational. Sanity will come back soon.



The best estimate that I can come up with at present is that Iraq seems to be producing about 1.8 million barrels per day in smoothed "trend" terms. It's all over the place, hence the smoothing, but that's my best estimate of where it's at. It's been slowly increasing on a trend basis for quite some time now. I'm using US government data which, while dubious in a lot of areas, is generally considered reasonably accurate when it comes to actual oil production (though their data is widely regarded as rubbish where the question of reserves is concerned).


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## wayneL (24 April 2006)

mime said:
			
		

> $100 a barrel? I don't think that will happen this year unless something major happens. I heard that 2 of the 5 major Iraq oil fields are operational. Sanity will come back soon.




Well who the hell knows? But "Sanity" is long odds and the real roughie of the field.  "Something Major" is the odds on favourite in my book  

Place yer bets


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## tech/a (24 April 2006)

Hmm so why are bears not screaming.

Overpriced,crash in oil prices just around the corner?

Supply and Demand??

Are rescources so different?


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## noirua (24 April 2006)

The average cost of petrol in Europe today is A$2.30 per litre for unleaded.

As to the future, oil will weaken in the longer term as new - mixed bag of... - technologies gradually increase their percentage of the power market. The States have a 20 year plan that will eliminate the purchase of foreign oil.

It will be interesting to see what happens when Arab oil eventually falls in price rapidly. The US may abandon it's support for Saudi Arabia and leave them to the wolves.


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## wayneL (24 April 2006)

tech/a said:
			
		

> Hmm so why are bears not screaming.
> 
> Overpriced,crash in oil prices just around the corner?
> 
> ...




Tech you seem to be looking for support for your view.

It's OK to be a bull. You've stated your case and your reasons for being a bull, go ahead and be one and bugger everyone else! You don't have to continually snipe.

As I and others have said... bears are bulls and bulls are bears.

The most classic instance of this is in the interest rate/bond markets. To be a interest rate bear, you MUST be a bond bull, and visa versa.

An economic bull, must (well usually anyway) be a gold and oil bear. Because oil, in particular, will take out the economy if it keeps rising. This is in fact what seems to be happening, and it will take out the economy....bearish.

BTW There are commodity bears as well.


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## tech/a (24 April 2006)

Wayne I understand that and no that wasnt my motive.

Oil has increased 400% and gold 250% not hearing cries of over priced yet hearing that in the rescource sector--just wondering?


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## bullmarket (24 April 2006)

Good morning everyone 

Imo a fairly significant contributor to the price of oil atm is obviously the 'fear' factor....ie....the threat to continued global oil supplies due to ever simmering and slowly increasing geo-political tensions in various parts of the world.

Sure, oil looks expensive when converted back to the price of petrol at the bowser *but oil could also still be very cheap atm* given the combination of global demand for oil (especially China) and the threat to future supplies.

But China stated last week they are now looking at ways to slow down their unsustainably high economic growth and so we'll just have to wait and see how successful they will be and what affect it will have on commodity prices.

More food for thought 

cheers

bullmarket


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## ducati916 (24 April 2006)

With regards to oil;

The decline in the ratio of energy recovered, to the amount of energy expended has been falling consistently.

In 1916 the ratio was 28:1
In 1985 the ratio was 2:1
Currently, it is almost 1:1

In certain geographic locations, the ratio has turned negative.
GDP growth brings forward the "Peak oil" scenario, while recession will delay peak oil. With China's growing demand, and the sustainability, or growth in US demand + the rest of the world argues sooner rather than later.

The higher the price, the later peak oil as the ability to purchase the required quantity is curtailed.



> Wayne I understand that and no that wasnt my motive.
> 
> Oil has increased 400% and gold 250% not hearing cries of over priced yet hearing that in the rescource sector--just wondering?




Gold, unlike oil has very limited practical useage. 
It is therefore almost by definition a speculative medium.
Currently, the speculative component of the gold price is circa 40%

Oil by comparison fuels economic growth, and without it, GDP will stall.
Gold is a a luxury item, oil is currently a necessity (to the industrialized nations)

jog on
d998


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## wayneL (24 April 2006)

ducati916 said:
			
		

> With regards to oil;
> 
> The decline in the ratio of energy recovered, to the amount of energy expended has been falling consistently.
> 
> ...




Duc, or somebody else,

Could you explain this a bit further please? What does this mean?


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## mime (24 April 2006)

I just watched the doco Enron: The smartest guys in the room and listened to the energy traders talk during the California energy crisis(they forced the price of energy up and down when ever they wanted). I wouldn't rule out speclators pushing the price up to make quick profit. I'm on a knifes edge whether to sell my energy or not. If the price gets to $80 a barrel I may move.


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## mime (24 April 2006)

wayneL said:
			
		

> Duc, or somebody else,
> 
> Could you explain this a bit further please? What does this mean?




I think it means we are burning all the energy we are getting.


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## bullmarket (24 April 2006)

Hi wayne



			
				wayneL said:
			
		

> Duc, or somebody else,
> 
> Could you explain this a bit further please? What does this mean?




I think he means that, for example, in 1916 there was 28 times as much energy recovered as there was used.

But are those numbers reliable or accurate I have no idea since he didn't quote the source of his numbers or how they were calculated.

The unit of energy is the Joule and power = rate of using energy = joules per second = Watts - so I'd be interested to see where he got those numbers from and how they were derived.

cheers

bullmarket


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## Bobby (24 April 2006)

wayneL said:
			
		

> Duc, or somebody else,
> 
> Could you explain this a bit further please? What does this mean?




Wayne I think it means that for every drop of oil known to exist in the ground that drop has already been figured for demand, hence (Peak Oil) is here now Uck !  .

Bob.


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## wayneL (24 April 2006)

bullmarket said:
			
		

> Hi wayne
> 
> I think he means that, for example, in 1916 there was 28 times as much energy recovered as there was used.




OK this is what I don't understand.

That means for example that for every million bbls used, 28 million bbls were sucked out of the ground. That means there was 27 million bbls sitting around somewhere, accumalating every year.

Surely that couldn't be it, could it? Where was it stored?


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## mime (24 April 2006)

wayneL said:
			
		

> OK this is what I don't understand.
> 
> That means for example that for every million bbls used, 28 million bbls were sucked out of the ground. That means there was 27 million bbls sitting around somewhere, accumalating every year.
> 
> Surely that couldn't be it, could it? Where was it stored?




I think so. Not accumulating just showing that demand was not exceeding supply.


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## wayneL (24 April 2006)

wayneL said:
			
		

> BTW There are commodity bears as well.




http://www.businessweek.com/ap/financialnews/D8H60BHG6.htm?campaign_id=apn_home_down&chan=db



> OPEC head predicts oil prices will fall
> 
> 
> APR. 23 6:54 P.M. ET OPEC President Edmund Maduabebe Daukoru predicted Sunday that oil prices would fall from their current high of just over $75 a barrel to stabilize in the "upper fifties to lower sixties" as political tensions ease.
> ...


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## bullmarket (24 April 2006)

Hi wayne



			
				wayneL said:
			
		

> OK this is what I don't understand.
> 
> That means for example that for every million bbls used, 28 million bbls were sucked out of the ground. That means there was 27 million bbls sitting around somewhere, accumalating every year.
> 
> Surely that couldn't be it, could it? Where was it stored?




I'm not sure he was referring to bbls of oil, cubic metres of gas or whatever.

As I mentioned earlier,  energy is measured in joules regardless of its form and he clearly mentioned 'energy' and not specifically oil, gas, electrical, solar, wind or hydro - all of which are forms of energy.  

Maybe he's still trying to find out for himself what he actually meant   but I'll be interested to see if he comes up with a source for his ratios and how they were derived...........time will tell I guess   

cheers

bullmarket


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## Smurf1976 (24 April 2006)

wayneL said:
			
		

> Duc, or somebody else,
> 
> Could you explain this a bit further please? What does this mean?



It works like this.

It's the energy return on energy invested. How much oil is consumed in order to produce a barrel of oil counting everything from vehicles used in exploration, running the drilling rigs, building platforms and pipelines and so on.

If it's 20:1 then that means burning one barrel of oil in order to produce 20 barrels. Scale that up and you have a large net production of oil. A net 19 barrels for every barrel expended in extracting it.

I'll use a financial analogy to make it easier to understand. Suppose that you invest $1K and get back $20K. You've made a profit of $19K. Keep doing that and you end up with a lot of money.

But if it drops below 1:1 then you're getting back less than you put in. If it's 0.9 for example, then you spend $1000 to get back $900. NOTHING you do in terms of scale or effort will make that profitable. The more you do, the more you lose. Negative expectancy.

In oil terms a ratio below 1:1 means using more oil to find the oil fields and extract the oil than is actually extracted from those oil fields. Burning 1000 litres of oil to produce, say, 900 litres. A completely pointless exercise.

Once it reaches this point oil ceases to be a useful bulk source of energy. It would be taking more to produce it that it is worth. This is not a financial limit but a physical one. $1 million per barrel doesn't change the reality of needing to use more than one barrel to produce a barrel. At that point it just doesn't stack up at _any_ price no matter how desperately the oil is needed nor how much remains in the ground. It is no longer a viable bulk energy source.

Once this day comes the use of such oil is limited to a means of converting some other form of energy into oil. For example, if the energy to produce the oil comes from coal then, even though it's a net loss in terms of energy, you've effectively swapped a quantity of coal for a smaller (in energy content) quantity of oil. Since cars and aeroplanes don't run on coal, that would still be useful but it would make no sense whatsoever to then use the oil for a purpose that coal could be directly used for. To do so would mean extracting the oil for a negative benefit - more coal burned extracting the oil than saved by using it.

This is why, for example, batteries aren't a useful large scale energy source but they have niche applications. It takes far more energy to manufacture a torch battery (around 50 times as much) than the battery will ever produce. But on a small scale (batteries are a very minor energy source) it's tolerable due to lack of alternatives. A coal-fired power plant inside a torch isn't exactly practical.

As for the actual figures, I don't believe that the average of present oil production is actually that bad but it's certainly in a declining trend and heading for the inevitable less than 1:1. Even approaching 2:1 means burning half the oil produced from a field just to produce that oil which diminishes the real usefulness of the oil in the field rather a lot.

Canadian tar sands have a ratio of about 3:1. Extract 3 barrels and use one of those barrels of oil to run the process leaving a net 2 barrels. Hence the 175 or so billion barrels in quoted reserves is really a bit less than 120 billion barrels of oil that can be sold on the market.

All energy production uses some of what is produced. For some sources, for example a hydro-electric scheme, it is very low (typically 0.5%) of the energy produced is consumed in building the scheme. For others it is higher. Typical coal-fired power plants consume 6% of the electricity they generate to run the plant itself - there's lots of motors, pumps etc to run. And that doesn't count mining the coal. Add that in and it comes to around 8% for a brown coal plant with an open cut mine (as done on a large scale Victoria). And that doesn't count the energy needed to build the mine and power station in the first place. 

If the coal is transported then that's another loss. Refining oil also takes energy, about 5% of the oil is used in the refinery (4 - 7% depending on the plant in question). *Nuclear also involves huge amounts of energy to extract and process the uranium - if the grade drops sufficiently then it goes negative in terms of energy yield and ceases to be a useful large scale energy source*.

The need to expend large amounts of oil in order to build alternative energy sources is often overlooked. It is for this reason that the cost of alternatives rises when oil prices rise. 

IMO it would be a very sound policy to (1) as rapidly as possible phase out the use of oil and gas for applications (escpecially electricity generation) which can be done with more abundant resources (coal, nuclear, renewables) and (2) use the opportunity provided by the remaining oil to build alternative energy supply infrastructure. It will be a LOT harder and more expensive to build this once cheap oil is gone. 

That said, things can be done without oil. The first big hydro scheme in Tasmania (and the world's longest transmission line at the time) was built with manual labour to build the dam and dig the canals and horses to move heavy items (pulling carriages along timber rail tracks - steel tracks just weren't an option...). Likewise Victoria's first brown coal plant used animals to haul coal (mined with pick and shovel) from the mine to the power station. They were trained to do the task without human help although apparently the odd one encountered trouble, lost the coal wagon etc. But it's a LOT easier to build these things using machinery powered by oil so it makes sense to do so while we still have it rather than waiting until we have to do it the hard way. And of course it would be virtually impossible to have built 30 hydro schemes in Tas or be mining 60 million tonnes of coal each year in Vic with only manual labour and animals. Use the remaining oil wisely for lasting benefit IMO.


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## wayneL (24 April 2006)

Smurf,

Thanks, that makes perfect sense. 

Cheers


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## bullmarket (24 April 2006)

Hi smurf1976 

thanks for that - that all makes sense but you are talking about comparing the cost (in equivalent barrels of oil) of producing a barrel of oil  to what a producer can sell that barrel of oil for. So obviously if it costs more to produce a barrel of oil than what you can sell it for then you may as well shut down the production facility.

But I don't think we are anywhere near that.  I spent nearly 20 years in the oil and gas exploration industry up until Jan 2002 and back in the 80's the cost of producing a barrel of oil by the company I was employed by was in the $2-5/barrel range.  In 2001, although with a different employer then, the cost to produce a barrel of oil was something like $7-10/ barrel.  These costs include all the exploration costs from drilling dry-holes (non hydrocarbon bearing wells).

Even allowing for inflation I can't the see the cost for any producer nowadays of producing a barrel of oil being anywhere near the price of a barrel of oil atm....assuming that is what he meant with his 1:1 ratio.

Anyway, I suppose your clear explanation could be bent, hammered, massaged or whatever to fit into what ducati said  but imo his general use of the term energy when I suppose it could be argued he was talking about solely oil was misleading and confusing.

Finally, I'd still like to see what source he used for his ratios because here in Australia at least, I doubt very much we are anywhere near 1:1

cheers

bullmarket


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## nizar (24 April 2006)

Smurf1976 said:
			
		

> It works like this.
> 
> It's the energy return on energy invested. How much oil is consumed in order to produce a barrel of oil counting everything from vehicles used in exploration, running the drilling rigs, building platforms and pipelines and so on.
> 
> ...




Well said smurf

conventional reserves are in decline; >80% of todays oil supply comes from oil fields discovered

of course we also have unconventionals, canada alberta tar sands, 175billion barrels reserves, but these are very hard to extract, and cost around us$20/barrel as opposed to middle east oil at <us$2/barrel to extract and bring to the market...

also we have another unconventional in US oil shale, US Department of Energy concluded that ultimately 750billion barrels could be recoverable.

for alberta tar sands, even if all current expansion plans come to fruition, production will be 3million barrels a day by 2012...

for oil shale, even less, aggresive production targets are around 2.2million barrels a day

global demand currently is 84million barrels a day, 20million of those from the US

the point is, this supply is many years away, us$100/barrel may still coming in the meantime

(all figures from Jeremy Leggett's Half Gone (2005) a good read on all those interested in peak oil)


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## Smurf1976 (24 April 2006)

bullmarket said:
			
		

> Hi smurf1976
> 
> thanks for that - that all makes sense but you are talking about comparing the cost (in equivalent barrels of oil) of producing a barrel of oil  to what a producer can sell that barrel of oil for. So obviously if it costs more to produce a barrel of oil than what you can sell it for then you may as well shut down the production facility.
> 
> ...



It's _energy_ cost not financial cost that counts here (ie replace the $ in your post with BTU's, MJ, kWh, BOE or whatever energy measurement you prefer) but basically agreed there. I don't have figures at hand but at an educated guess it's still 5:1 or greater for marginal oil production so we're not at that point yet. I'll see if I can find some proper data.


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## mime (25 April 2006)

Oil dropped $3.50 a barrel last night to around $70 a barrel. We'll wait to see what happens next.


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## michael_selway (25 April 2006)

mime said:
			
		

> Oil dropped $3.50 a barrel last night to around $70 a barrel. We'll wait to see what happens next.




yeah the thing is there still alot of supply out there atm esp US

atm people are just worried over Iran which may affect supply if the decision is bad

thx

MS


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