<p>Are any of you supporters of the Peak Oil theory? I’ve been an interested observer of this theory for some years now. In 2006, I attended a presentation by Kenneth S. Deffeyes, a geologist and Princeton professor who worked with M. King Hubbert. (Hubbert is the scientist who accurately predicted that US oil production would peak in the early 1970s. His model has also been used to accurately predict production peaks in other countries.) </p>
<p>Professor Deffeyes believes world oil production peaked on December 16, 2005. In the presentation I attended in 2006, he used charts and graphs to attempt to prove his theory using the Hubbert’s Peak model. He said that in the next few years, we would see spiraling demand (especially from countries like China and India), a leveling-off of supply, and skyrocketing prices for oil.</p>
<p>Matthew Simmons is another expert who has been sounding the alarm about Peak Oil over the past several years. He believes the world’s largest oil field, Ghawar in Saudi Arabia, will soon peak (if it hasn’t already). Mr. Simmons made the same predictions as Professor Deffeyes regarding oil supply, demand, and prices.</p>
<p>Based on what’s been happening over the past several months, I have to wonder if Professor Deffeyes’ and Mr. Simmons’ predictions about Peak Oil aren’t right on the mark. Earlier this month, Goldman Sachs analyst Arjun Murti predicted oil prices could hit between $150 and $200 a barrel over the next two years. (Goldman Sachs was the first investment bank to predict $100/barrel oil back in 2005). This morning, I woke up to the news: “Crude oil rose to a record above $127 on speculation China will need to increase diesel purchases for its power plants, straining limited supplies.”</p>
<p>This is an astute group on CC, so I’m wondering: what are your thoughts on Peak Oil?</p>
<p>I’ve been concerned about this for a couple of years, too. I thought that the general concensus on Ghawar is that it peaked a while ago. One telling sign is that OPEC quietly did away with the quota system about a year ago. </p>
<p>I’m also interested in what other CC posters have to say.</p>
<p>Improving technology should enable oil companies to recover more oil from existing wells…High oil prices encourages investment in oil recoery technology.</p>
<p>IMO, I think technology improvements will keep oil and the internal combustion engine moving our vehicles for decades to come…with much greater efficiency and less environmental impact.</p>
<p>I also believe the high oil prices are a part of an irrational bubble brought on by speculative investors…2-3 years from now, I think we’ll be back down to $40/bbl oil…when that happens, watch the economy take off.</p>
<p>UCB, many people agree with you. I just can’t seem to get my head around $40/bbl oil in the future. Even if we improve oil recovery technology, the oil that remains isn’t easily refinable light sweet crude, but is instead medium and heavy crude. Recovery of heavy crude is expensive.</p>
<p>Regarding your comment about the economy taking off: Even if oil prices ease, refiners currently lack the complex refinery capacity necessary to refine heavy crude. Boosting complex refinery capacity would require billions in investment, so wouldn’t that affect gas prices?</p>
<p>Another way to look at the info StitchinTime posts, is that the price of oil is as much about politics and hysterics (think what will happen if we get a Katrina in the Gulf this summer) as it is about the actual cost/value of the product.
Does this mean that in order to get lower oil we have to wait until Saudi supplies are nearly exhausted so that Canadian oil profits will be stable enough for investment?? Will the Canadian government still be stable at that point??</p>
<p>mapesy, it is true that heavy crude is more expensive to recover but technological improvements may eventually reduce this cost. </p>
<p>For the economy, high fuel prices are like an additional tax. When fuel prices fall, large sectors of the economy will flourish. It may be bad for the environmentalists and integrated oil production companies, but it would be great for transportation, agriculture, and tourism. </p>
<p>I work for a “supermajor” oil company. I will say that even though the industry has not built a new refinery in over 30 years in the U.S., the industry is investing heavily on refining technology and increasing capacity - mostly to process heavier crudes. Exxon-Mobil is a leader in processing heavy crudes…their refineries turn the nastiest crap into liquid gold. High oil prices help provide money for this investment…as well as investment for alternatives. </p>
<p>Currently refining margins (the difference between gas prices and oil prices) are about $5/bbl…and they keep going down with higher oil because the margins are being absorbed by the refiner and not passed onto the consumer. About a year ago, refining margins were about $30/bbl. Refiners like Valero are struggling today because the margins don’t pay for their costs. Integrated oil companies are still making money because they are pumping $125/bbl oil. </p>
<p>Oil is a cylical business…currently it’s boom times for the industry…but I think oil may have a bust like it experienced in the '80s and '90s. It could be different though, I don’t have a crystal ball. The low oil prices during the '80s and '90s allowed the economy to boom, but it also led to weaker investment in the U.S. energy infrastructure and we’re now witnessing the consequences.</p>
<p>Economics, markets and technology will always be in the driver’s seat…However, I think the U.S. needs to come up with short-term, medium-term and long-term strategies to encourage the right investment for cleaner energy independence.</p>
<p>Even if there are larger oil fields to be discovered, even if we create new and more efficient technologies to get at existing oil without harming the environment, two very large countries (China and India) are using ever-increasing amounts of oil. It’s a losing game, folks.</p>
<p>UCBChemEGrad: Too bad we didn’t come up with those strategies in the 70’s during the first “oil crisis.” We’d have efficient vehicles (made in the US), wind farms, and solar panels on the roof of every building built since then.</p>
<p>Too much discussion about peak oil focuses on the existence of oil. It is not the existence of oil that is the issue, it is the existence of cheap oil. We have plenty of oil but the cheap oil is rapidly disappearing when compared to increasing world demand. It’s not speculators were taking the price of oil up, its good old-fashioned supply and demand.</p>
<p>^ Razor, even oil executives testified that only supply and demand doesn’t account for the current pricing…if it did, oil would be around $60/bbl. Hedge fund managers are looking to make a quick buck…it’s a speculative bubble…</p>
<p>There is so much investment money floating around hunting for the best returns and commodities are where it’s at right now. The tech bubble turned to a real estate bubble due to the low interest rate envrionment which turned to a commodities bubble…</p>
<p>Once investors start to get scared that oil has become too “frothy” - look out below! It’s gonna happen, the only question is when…
My guess is when the Fed starts raising interest rates again.</p>
I am not talking specifically about you UCBChemEGrad, but it amazes me that no one seems to believe oil executives when they say they are not colluding, but so many are willing to believe them when they blame hedgefunds (a worse enemy than oil executives). </p>
<p>Oil executives have an incentive to blame someone else (hedgefunds) to get the media, government, etc. off their backs. </p>
<p>The problem with arguing that speculators are behind the move in oil, is that there are just as many speculators who can make money if the price goes down as there are if the price goes up. They pretty much cancel each other out. Many speculators make trades by the hour, not by the year and thus have little influence of the long term price of oil.</p>
<p>UBChemGrad, Isn’t the problem with extracting the oil that is left after the easy pickings are gone the cost, not only in dollars, but in energy required to extract and process it? Unless it takes significantly less energy to get the oil out of the ground than the oil provides, extracting it doesn’t make sense. Do you see technology on the horizon that addresses this?</p>
<p>UCB, I’d be interested to hear what you think about the following article. Fatih Birol, chief economist at the IEA, says in the article: “According to normal economic theory, and the history of oil, rising prices have two major effects: they reduce demand and they induce oil supplies. Not this time.”</p>
<p>According to NPR, there are currently only 2 million barrels per day of excess capacity of oil worldwide. Most of that excess capacity is in Saudi Arabia. If all of that excess capacity were to be released in the market, it would simply be absorbed (because of high demand) and wouldn’t affect the price of oil at all. </p>
<p>Let’s say we do come up with less expensive and improved recovery technology. Is it really feasible to believe such technology can result in the production of enough oil to satisfy demand, especially given the fact that many oil fields in the world are in decline? It’s also troubling that older oil recovery technology has irreparably damaged oil fields in the past. </p>
<p>With demand rising and supplies leveling off, it seems to me that we’re stuck with high oil prices for the unforeseeable future–unless there’s a deep worldwide recession. In that case, all bets are off.</p>
You have a point Razor. I agree that my industry does not have the best public image. I’ve worked in this industry for a about 7 years and the competition among the companies for best performance is very intense. The notions that people have that oil executives are sitting in smoke-filled boardrooms setting prices is totally wrong…oil companies don’t have that power. Oil is a commodity and the price is set in a world marketplace by what the producers are willing to sell it for and what buyers are willing to pay.</p>
<p>Regarding speculators, it is true that you can make money when the price goes down…how much money are you willing to bet to place a put option on an oil futures contract? Be careful on losing your shirt if prices keep going up…lots of hedge funds bet wrong and went belly up on mortgage backed securities - no one knows.</p>
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You’re right. High oil prices do create incentive for extracting the remaining oil. I don’t work in the upstream division, so I’m not that familiar with current drilling technology, but the company has a whole research group looking into the issues.</p>
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I agree that we’ll have issues if the world population starts consuming energy resources at the rate Americans currently do…but, we as Americans are in no position to deny other countries these resources. </p>
<p>High oil prices are actually working…demand has decreased 4% in California compared to a year ago, investment is strong in alternatives, etc…this is the right direction given the current pricing. The U.S. needs to develop alternatives as well…oil is a finite resource…it will eventually decline and new energy sources will take its place…fortunately, the market has a feedback circuit - high prices signal low supply/high demand therefore curtail usage…</p>
<p>You can project current supplies and determine how long it will last at current consumption rates, but these vary due to new technological discoveries and new energy sources (and no one knows what discoveries are on the horizon)…we’re entering a transition period - especially with greenhouse gas/global warming -but, I don’t think we’ve seen the last of oil and the internal combustion engine…lots of improvements are being researched…it will be part of the global energy portfolio for a long time… </p>
<p>It’s a great time to be an engineer working for the energy sector.</p>
<p>We need a comprehensive energy policy in which ordinary Americans actually have to make sacrifices for our future.</p>
<p>No one is saying a comprehensive energy policy will solve our problems. It will just make our transition to alternative energy sources less painful.</p>