Global Energy Crisis

End of Cheap Energy threatens global economy.

2008 August

[Aug/27/2008]

Prepare for HIGH OIL PRICES !

Mexico supplies over 20% of the oil used in the US (EIA table).

The largest portion of Mexico's oil production (~35%) comes from its Cantarell field.

Cantarell has been in decline and that decline is now accelerating rapidly!

As reported by Bloomberg Mexican oil output had fell 12% in July:

Petroleos Mexicanos, the third- largest supplier of oil to the U.S., said production fell 12 percent in July from a year earlier as output declined at Cantarell, the world's largest offshore oil field. 

The primary cause was a 36% decline in Cantarell output:

Daily production at Cantarell, which first began pumping oil in 1979, plummeted 36 percent in July to 973,668 barrels from 1.526 million, according to an Energy Ministry Web site.  

 

[Aug/17/2008]

Well, we've seen oil go to $145/bbl and now it is back to the $115/bbl range (as in my last entry - April - below).

So, how have things changed?  Very little if at all(!) on the energy front.

There have been BIG effects in the marketplace - Mattel is now worth more than General Motors(!).  There have been almost no responses by the political system in terms of coming up with new, long term, programs that will deal with our energy situation.

There is lots of talk about offshore drilling, as if that would 'cure' our energy problems.  Some politicians acknowledge that it is NOT a cure but 'will buy us some time' to come up with a 'solution' - yet they propose NO programs to use that time wisely!

Jack Ganselle, in his Embedded Systems column "The Real National Security Issue," points out the simple fact that oil is a finite resource:

The facts are simple: Oil is a finite resource. The world's appetite for it is increasing yet it isn't being replenished. New discoveries are lagging. Therefore we will exhaust the supply at some point. But long before that happens the immutable law of supply and demands means it will become very expensive.

At some point, prohibitively so. Oil will pass the $140/barrel figure again. It will someday cost $500/barrel, and then $1000 and more. That's an economic certainty.

And Jack points out how our dependence on imported oil is the primary National Security Risk we face as a nation:

Then there's the problem of our biggest export: shiploads of greenbacks. As T. Boone Pickens has been recently pointing out, we send some $700 billion overseas in exchange for oil. Though Canada and Mexico, both currently friends, are the number one and three providers of foreign oil to the US, most of the other nations we rely on have little love for us. Some would be happy to see the country collapse.

Too much of that $700 billion bankrolls regimes hostile to us. We've used sanctions against countries for various political ends in the past; will these nations, faced with plenty of eager customers in the developing world, use oil sanctions against us?

And all of that $700 billion is part of our unsustainable trade deficit that continues to decimate the dollar.

Even if you don't believe oil supplies will dwindle, it's surely logical that exporting so much money to hostile regimes is a national security risk. 

It no longer surprises me that engineers and scientists 'get' the nature and magnitude of the problem AND that politicians will do anything to avoid it!

The nature of science involves dealing with hard reality, what is true rather than what is comfortable.  

Politicians on the other hand build careers on talk that "feels good" and focus their efforts on "spinning" stories so as to avoid difficult or unpleasant aspects of them.  

Reality will not be denied its day.  So much the worse for us whose leaders choose to "fiddle" away the time we could have been using to prepare for what is certain to come.


2008 April

[Apr/21/2008]

Oil prices continue climb, over $117/bbl 

Some analysts expect oil prices to reach $125 a barrel this year.

OPEC won't increase production  

Oddly enough, word came from International Energy Agency that emerging market use of oil had passed use in the US for the first time. No matter how great the farce, the power of reason cannot change the cartel's attitude.
 
Oil at $150 is only 30% above today's price. At the current rate of increase, crude will be there by Fall.
 

Mexican oil output falls 7.8%

Petroleos Mexicanos, or Pemex, has struggled with falling reserves, especially at its main Cantarell oil field, and lacks the money and expertise to launch new drilling projects. Pemex only has enough proven oil reserves to last nine years at current production rates.
 
Mexico supplies over 20% of the oil used in the US (EIA table).  With Mexican output declining as they move beyond thier "Peak Oil" output level it will be difficult for the US to maintain its import levels, despite increasing oil prices.
 

Refiners slow production as profits drop 

U.S. refineries operated at 81.4% of their operable capacity in the week ending April 11, the Energy Department's statistical arm said last week. The last time the utilization rate fell below 80% was in October 2005 after hurricanes Rita and Katrina devastated refineries along the U.S. Gulf Coast.

 

[Apr/15/2008]

Oil reached a new high of $114/bbl today. Time reported one possible cause of the surge:

Traders honed in on a report by the International Energy Agency that said Russian oil production dropped this year for the first time in a decade. The report raised concerns about whether the key oil-producing nation will have sufficient supply to help meet increasing global demand.

With Saudi, Mexican and other producers reporting decreased production is it still possible that governments can deny that "Peak Oil" is not only true but is now been passed?

 

[Apr/7/2008]

Crude production from OPEC continues to fall, by 0.3% last month, says Bloomberg.

OPEC output dropped 0.3 percent to an average 32.35 million barrels a day last month, according to a Bloomberg News survey of oil companies, producers and analysts.

The government of Kazakhstan, holder of 3.3 percent of the world's oil reserves, will consider introducing a duty on exports of crude oil and refined petroleum products starting next month.

The fall in OPEC output and the rising duties on exports by Kazakhstan are part of a global trend resulting from a combination of factors:

  1. Peak Oil has passed and output cannot be maintained.
  2. Growing populations are increasing domestic demand. 
  3. Rising global prices are causing social unrest.  Producing nations are trying to minimize this unrest by restricting exports and thus insulate their local markets from rising global prices.  To the extent these moves take additional production off the world market the make the global price increases worse and leave other nations fewer options other than to seek their own methods to retaliate in self-defense.  The same actions seen in oil are taking place with food staples such as rice as can be seen here

Perhaps the greatest risk from these actions restriction international trade is that they will result in a sustained depression similar to the 1930's.  As one writer points out:

Structurally, what made the Great Depression last for more than a decade from 1929 until the US entry into World War II in 1941 were the 1930 Smoot-Hawley tariffs, which put world trade into a tailspin from which it did not recover until the war began.

 

2008 March

[Mar/13/2008]

Crude climbs:

  • Oil surges to a new trading record price of $111/bbl.
  • Gasoline and Diesel also Break Records
  • Natural Gas supplies still declining
  • OPEC Production Fell in February   

Perhaps the most interesting aspect of the current oil price surge  is quietly noted in the article:

"When you look at numbers like this - soaring prices accompanied by minor increases in output - it's a sign of very strong discipline but with a significant mix of the apparent inability of many of these member countries to put more oil on the market. For most of them, they are simply tapped out."

OPEC has been making excuses as to why it won't increase output.  The truth appears to be that, "peak oil" has passed.  OPEC can't increase production - and in fact - it can't maintain production levels, even in the face of surging prices.

 

At the same time that gas supplies are declining there are increasing demands upon gas supplies for electricity generation due to the NIMBY effect relating to siting coal power plants and global warming concerns.

A new report from Moody's Investors Services says demand for electricity could grow at twice the rate of new electricity generation over the next decade, leaving the sector with some tough choices for expanding generation capacity.

Moody's points out that new coal-fired plants were expected to provide much of the new generation needed. But public opposition to coal plants and pending greenhouse gas emission controls have raised questions of cost and use of other energy sources.

"The most immediate impact of an inability to add significant coal generation will be an increased reliance on natural gas," says Moody's Vice President Michael Haggarty. "This reliance on natural gas as a fuel source is likely to reduce fuel diversity and increase fuel cost volatility at some utilities," he said.


 

2008 February

[Feb/18/2008]

Exxon reported that, despite an increase of 5% in its capital expenditure budget for 2007, it was only able to replace 76% of the oil that it produced last year.

This failure to replace oil removed from its "proven reserves" indicates that depletion of existing fields is greater than discovery of new reserves and that we have passed the "Peak Oil" point.

The world's largest oil producer said on Friday afternoon that it unearthed proved reserves of 1.2 billion barrels of oil equivalent during 2007, or 76% of production.

[Steve Goldstein; Exxon Struggling to Replace Reserves]


[Feb/12/2008]

Two recent corporate announcements caught my attention:

#1  Exxon reported profits for 2007 of $40.6 Billion

#2  GM     reported a loss  for 2007 of  $38.7 Billion

Exxon turns oil into gasoline, GM makes (predominantly?) LARGE vehicles that turn gasoline into travel and CO2.   It seems to me that the common element is the high price of oil...   These two companies profit/loss almost exactly cancel - what will be the overall effect on the economy?


2008 January

[ Jan/9/2008] 

Oil remains high, at $96/bbl today, while the Energy Information Agency of the Department of Energy reported another large drop in oil inventories.  The agency has a chart on their web page showing a dramatic, near straight line, decline in oil inventories, for the past 8 weeks.  This decline is approaching a 75 Million bbl drop in US oil stockpiles.

A natural question is: what would oil prices be if the US were purchasing enough oil in the world market to maintain inventory levels?   What will happen when oil purchasing moves up to the replacement level.  What if purchases increase to not just maintaining current low inventory levels but increase an additional amount to rebuild inventory levels?  The current high prices were reached without the US purchasing at a replacement level.  The prices are likely to surge higher when the US can no longer meet its needs by "drawing down" its stocks but must go into the market for additional supply.


 2007 December

[12/27/2007] 

Oil inventories fell, by double the amount expected, and the price of oil has advanced above $97/bbl.

Crude and heating oil supplies have declined more than expected for several weeks running, exacerbating a perception that supplies may be inadequate to meet winter demand.

[12/9/2007]

Oil producing countries have young, rapidly growing populations. Flush with money from oil exports their internal consumption of energy is already  beginning to reduce the amount of oil they have available for export!

Internal oil consumption by the five biggest oil exporters — Saudi Arabia, Russia, Norway, Iran and the United Arab Emirates — grew 5.9 percent in 2006 over 2005, according to government data. Exports declined more than 3 percent. 
 ... 

Perhaps surprisingly, though, some producing countries have surpassed the United States in oil consumption per person. They include Bahrain, Kuwait, Qatar and the United Arab Emirates.

Particularly in oil-producing countries with large populations, like Indonesia, Russia and Mexico, a rapid rise in car ownership is a big factor driving consumption increases. Russian farmers are replacing horses and carts with gas-guzzling four-wheel-drive vehicles, while urban consumers are snapping up BMWs even before they learn to drive.

“Most of the producing countries have young populations entering the driving age and can more readily afford to buy cars because the price of fuel is low,” said Charles McPherson, an oil expert at the International Monetary Fund. “It’s certainly pulling product off the international markets.”

[New York Times: Oil-Rich Nations Use More Energy, Cut Exports] 

asdfasdf

2007 November 

[11/14/2007]  

The decline of the dollar, combined with declining supply of and rising demand for oil is pushing the price of oil in the U.S. upward at a very rapid rate.  The market price today surged over $3/bbl to exceed $98/bbl.  Countries with stronger currency find their cost dropping as the dollar falls they have much less incentive to reduce their consumption than U.S. consumers and companies do, thus helping to maintain demand for oil.

The dollar touched $1.482 today, the lowest since the 13- nation currency was started in 1999. In U.S. dollars, West Texas Intermediate, the New York-traded crude-oil benchmark, is up 61 percent [in US $] so far this year. Oil is up 43 percent in euros, 52 percent in British pounds and 48 percent in yen.

[article at: Oil Rises as Dollar Drops]

[11/14/2007]

The decline of oil makes creation of alternative energy supplies very difficult.  Oil is highly concentrated energy created by nature.  Alternative energy sources are not as concentrated (pure) and need extensive processing to be useful as fuel sources.  Building large industrial complexes to process these alternative forms (oil sand, ethanol, ...) or large collection complexes (solar, wind, tidal,...) requires huge amounts of energy and capital.  With the decline of oil and the deep indebtedness of the US consumer and government such huge projects may be impossible to achieve on the scale needed to sustain current energy consumption levels.


Not to worry however.  Humanity has dealt with this problem before and we know how to manage with reduced energy availability:

 History of transportation: 1850, 1950, 2050.

---------------------------------------------------------------

The Saudi Arabian Oil Minister, Ali Naimi, dismissed earlier reports (see below) that Saudi Arabia might increase its oil output at the coming Riyadh summit of OPEC ministers:

"There are very pessimistic views, that we do not share, about supply, adequacy of supply, and there are also pessimists who keep saying that we are going to run out of fossil fuels, especially oil"

 [Marketwatch: Nov 13, 2007]

(Saudi Arabia remains firmly in denial about Peak Oil)

---------------------------------------------------------------

Saudi Arabia has indicated they may start pumping more oil due to the current high price ($94/bbl).  Saudi Arabia is faced with a dilemma however since their largest oil field, Ghwar, is now pumping out more water than oil and pumping faster will make the situation worse!

[Econobrowser: April 1, 2007]

Another way to demonstrate that 'Peak Oil' has been passed is to observe that the price of crude oil has risen sharply without any dramatic change in demand.  In other words the problem is that supply can't grow any further, and in fact has started to decline, so market forces cause prices to soar:

  [current chart at: CL07Z]

For those who want a more specific date for Peak Oil Professor Ken Deffeyes, geologist and professor emeritus at Princeton, offers the date at December 16, 2005 (6 months after my pick):

[read more at: JOIN US AS WE WATCH THE CRISIS UNFOLDING]

2007 October

The Chinese are going through their own version of the 1973 US oil crisis

The Chinese are lining up to buy gas... 

Shortages have caused long lines at filling stations and disrupted trucking in export-driven coastal provinces.

 [reported in Forbes; Oct 31, 2007]

Forbes says the Chinese plan on solving the problem by increasing imports:

Sinopec said it would import more oil in November to "stabilize the domestic market"

Since the price of oil jumped $4.15/bbl to $94.53/bbl today it seems likely that further price increases are ahead of us.  Especially since OPEC doesn't even believe pumping more oil would help:

The Qatari Energy Minister, Abdullah bin Hamad al-Attiyah, spoke even more bluntly about what he described as the futility of pumping more oil into the market to bring down prices.

"To increase by 500,000 or one million barrels, do you believe today it will bring back the price?" Attiyah asked. "I don't think so," he said, emphasizing his view that the price of oil had become almost wholly decoupled from supplies.

 [reported in International Herald Tribune: Oct 30, 2007]

Their stated belief that pumping more wouldn't help, seems to me to be a diversion from the fact that they apparently have found they can't pump more - yet are afraid to admit it publicly.  In truth I would restate his case by saying that: the supply of oil has become almost wholly decoupled from its price.

 

The Guardian reports on a Steep Decline in Oil Production. (Oct 22,2007)

"The world is at the beginning of a structural change of its economic system. This change will be triggered by declining fossil fuel supplies and will influence almost all aspects of our daily life."

Oil production by Saudi Arabia was down 8% in 2006 and continues to decline this year.  It appears that despite the wishes of both the House of Saud, and all of the industrialized world, Saudi Arabia's oil output is constrained by inability to pump more oil from its declining fields:

                               (from: http://www.theoildrum.com/node/2331)

It was only 3 years ago that Saudi Arabia, head of OPEC, promised to increase production to provide relief from high oil prices - over $40/bbl at that time:

          (from: The Economist May 27, 2004)

But it is increasing demand and declining production, not Osama bin Laden, that has pushed oil prices from $40/bbl to $80/bbl (and rising).  Production will continue to decline so prices can only be affected by reducing demand going forward - which means continually increasing prices for this desierable and increasingly scarce resource. 

 

2007 September

The price of oil continues to climb, over $80/bbl now.  

The explanation: supply/demand, is easy to demonstrate:

DEMAND - INCREASING (Chinese motor vehicle use for example):  

SUPPLY - DECREASING (falling world and middle east oil production):


 

 

 

 

 

 

 

 

 

 

 

 

 

 From the "World Crude Oil Production" graph (above) you can get a feel for why I believe "peak oil" occurred in 2005.  We're not out but we'll have less to share from now on, and more users to share it with.

 

2007 August

The US became dependent on imported oil after 1969 when US oil production peaked and began declining.

The US now depends upon imported oil for more than 75% of its consumption.

The bulk of US oil imports come from Canada, Saudi Arabia, Mexico, Venezuela and Nigeria.

Oil produced by Mexico has been declining since 2004 and that decline has accelerated as Cantarell, their main field has experienced much more rapid depletion than expected.

 Saudi Arabia has rushed huge numbers of oil rigs into exploration in the past two years as Saudi oil production stagnated, and now, has begun to decline.  Ghawar, the world's largest oil field, has been the mainstay of Saudi oil production and now appears to have moved into rapid depletion.

As demand for energy grows in China and India, with increasing prosperity, and as internal demand for energy grows from growing populations and prosperity inside Saudi Arabia and Mexico, there is greater competition for and lower quantities of oil available for export (net of internal consumption) as the world moves into Peak Oil. (a simple and brief introduction to Peak Oil is here, a more detailed and technical introduction is here).