Thursday, May 22, 2008

So This is What Peak Oil Looks Like

The price of oil has been getting a lot of media attention in the last couple of days. $10-$14 a gallon gas is just over the horizon! People will starve because they're pouring all of their money into their gas tanks! American Airlines wants to charge $15 for carry on luggage to help offset fuel costs! It's all big oil's fault! The speculator's are driving up prices! This is probably just a bubble that we have to figure out how to pop! There has to be an answer! We've all seen this coming for a while but now that it's getting to the general public they're demanding action. Realistically, there's only one answer. I'll get to that later, though.

Whether or not we've hit peak oil there are a few things that we've got to realize. Production isn't going up. Whether or not OPEC can pump more oil they're not doing it. They've demonstrated that they're perfectly happy keeping production at the current level or even a bit under that as long as people keep paying more and more for it. The longer they can keep that up the better for them. I guess they're not as dumb as we thought?

Oil is a commodity. The market dictates the price. It wouldn't be this expensive if people weren't willing to pay for it. The price is certainly extremely volatile right now but it's not going to settle down until we hit a price that's more than people are willing to pay or can afford.

We aren't the only ones in the mix, though. The demand in India and China just keeps going up and up and up. If we decide that we don't want to pay anymore then OPEC will just start selling to them. Then what do we do? We can start using our own reserves but first our government has to let us drill. Even if we could start drilling tomorrow it would take time and money to get to the point where we could extract a meaningful amount. Even if things went perfectly and we started production tomorrow our supplies wouldn't hold out for long. Eventually we'd end up right back where we're at now.

It's obvious to me that we're living through peak oil. There are still plenty of reserves out there. We'll continue to discover new wells with a few billion barrels of it here and there. We might even start drilling in old wells that we'd previously closed because it wasn't cost effective to keep them open. There may be plenty of oil left but ol' Jeb aint gonna become a millionaire while he's shootin up some food ever again.

The cheap, easy to get to oil is gone. The oil wells that we've been "discovering" recently are extremely expensive and difficult to get to. It wouldn't surprise me a bit if the oil companies have known about them for years. Why bother even acknowledging them if they weren't cost effective? What's left is just so expensive and difficult to extract that the price of oil has nowhere to go but up. That's why it's becoming expensive. If we keep using it then it will eventually become prohibitively expensive. It won't go away until we find a better energy source, though. It might cost $12 a gallon to fill up your tank but if you've got the money you'll be able to fill up if you can find a gas station with inventory.

Everyone is looking for an answer that allows us to maintain our standard of living. It aint happening folks. The economy is going to suffer. Businesses will have to cut jobs. People won't be able to afford to drive 50 miles one way to work every day. We'll have to trade in our SUVs for rice burners. America is going to suffer. There's just nothing else that can replace oil right now and when it becomes too expensive we're all going to notice it. The end of cheap oil isn't going to bring civilization to it's knees. It's just going to shake things up for a while. Then again that's probably what the smart Romans were saying during the transition to the Dark Ages.


John said...

OK I will bite.
First, it is not supply and demand when OPEC, a cartel, meets a few times a year and agrees how much they are going to charge for a barrel of oil and how much each country is going to produce. That is the same as Safeway, Albertsons and Kroger comparing notes and agreeing what to charge for a pound of hamburger this week.
Next, we don't know how hard it is to get oil from some places in the U.S. (ANWAR, east and west coasts) because our envirogovernors won't let us find out. They block our efforts with court injunctions.
Finally, we have not hit the final nail because there is gasoline available at the stations still. When everyone stops buying gas, the price will go down. And if and when gasoline is no longer readily available, gasoline prices will only increase. We are not there yet.

Anonymous said...

Thank you for posting your thoughts. I check in every evening hoping you will add to the information.

I think T. Boone Pickens, in the calm manner of one who knows and has accepted the truth, said it best and simply:
There is a supply of roughly 85mbpd. There is a demand of roughly 86mbpd.
If his numbers are accurate, it sort of says it all doesn't it.

The Urban Survivalist said...

Your right John. But what can we do about OPEC? Obviously begging and groveling isn't working. War won't work. Just look what the war in Iraq did to the price of oil. It went from $25 a barrel to $135 a barrel since the start of it.

I don't think it matters how much oil we've got. There are huge deposits under the Gulf of Mexico. Unfortunately it's miles under the ocean's surface and then through miles of rock under the floor. People talk about things like oil shale but you don't get much oil per unit of energy. I heard about some huge deposits recently discovered in South Dakota (I haven't seen any official sources on this) but at the same time they were talking about how difficult it would be to extract. We aren't going to run out of oil. It's just going to get really expensive.

Anonymous said...

The South Dakota find is more oil shale and has been known about since the late 1950's. It's been uneconomical to mess with up until now, mothballed.

Anonymous said...

Btw, oil shale has the energy density of a baked potato.

Anonymous said...

It's not speculation. Investors are looking for a safe haven because US Treasury Bonds are contaminated with worthless collateral from the banks.

The banks offered up subprime collateral, hidden as level 3 assets, in exchange for short term loans. Level 3 assets are assets whose value cannot reliably be determined. In other words, properties that the bank has overvalued, and which they refuse to sell at a proper market value.

These loans used to be overnight only and required real cash as collateral. Over the past year, these loans grew to span longer periods of time, and then the Fed chose to allow banks to give non-cash assets as collateral. The end result is that the treasury market is contaminated with countless amounts of suspect collateral. The same changes were made in the UK and it hit their news last week that their version of the Fed caught on to the games being played.

Thus investors need a place to throw all this excess liquidity besides the bond market. The alternative is commodities, especially oil, as a way to preserve wealth at a time when the fate of many US banks and investments is not clear.

The proper thing to do is to let capitalism run its course and to let investment banks who made bad investments fail, instead of trying to bail out everybody and contaminating the entire system. The end result isn't just that the average taxpayer is screwed, but that the whole world economy is destabilized.

More information here.

Also, the oil available in ANWAR and off the coasts is not of sufficient volume to meet growing world demand. At the most it can dampen decreasing production, but this only means that oil prices will grow at a slower pace. They will not fall. Without the discovery of a field on the scale of Saudi Arabia's reserves, there is nothing to halt the peak. I strongly recommend this site that dispels all the myths about drilling in other areas, oil shale, alternative energy. The era of cheap oil is over.