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Empty Holes and
Black Swans |
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A ten-to-one bet
we reached Peak Oil in May of 2005,
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Demand for crude
leaves production in its wake,
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Blasphemy
from the world's oil windpipe and plenty more...
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Joel Bowman, from
the Arabian Gulf...
It may be blasphemous to
ponder in a region that produces a good deal of the world's
hydrocarbon-based energy, but what if Peak Oil has already occurred?
"My opinion is that it's
increasingly likely that we actually set an all-time record in May 2005
of 74,252,000 barrels per day," states Matt Simmons, founder and
chairman of the world's largest energy investment banking company,
Simmons & Co. International.
"And for the first three
months of 2007," Simmons continues, "we were almost a million barrels
per day behind that, and we're dropping fast. If that record still holds
a year from now, I'll bet someone ten-to-one that we set peak oil in May
2005 and it's now past tense."
Not one to shy away from a
bet, Bud Conrad, chief economist at
Casey Energy Speculator and fellow Peak Oil enthusiast, plotted the
following slightly more inclusive chart to give us an idea of where we
stand today.
As the graph clearly
illustrates, world production has been on a rather unimpressive plateau
for the past couple of years. Part of this stagnation in global output
growth stems from the coughing, spluttering "chokepoints" that we read
about in the news every other day.
Just this past weekend we
saw crude shoot up about four bucks on the back of threats made by
Venezuela's head honcho, Hugo Chavez, that he may sever export lines to
the thirsty U.S. Then there was a decline in production in
Nigeria...troubles in the North Sea...ongoing issues in Iran...the
"problem with Putin"...the list goes on.
The thumbscrews are
tightening for net oil importers. As we explained in yesterday's Rude,
"The American SUV driver was a tad sluggish in his gait this morning.
Once again his pocketbook has been pinched. The hefty drive from his
suburban McMansion to work in the city and the heating in his
Connecticut vacation home just became a little more expensive."
But the issues that face
net-importing nations around the world may soon be felt by the
net-exporting nations too. Oil, as a finite commodity, will one day dry
up. The impetus for economies with a heavy oil hand to diversify,
therefore, is rather serious.
Consider that Abu Dhabi,
capital of the UAE and one of the Middle East's largest crude exporters,
has just pumped $15 billion into their Masdar Green City initiative and
one begins to understand just how seriously even the crude rich nations
are taking the issue of ultimate depletion.
In the following column,
Bud sits down with Matt Simmons to root out some of the grim realities
emerging at the tail end of our petroleum age. This may hurt a
little...but we hope it also helps. Enjoy...
-------- Energy &
Scarcity Investor -------
A California
Energy Site So Secret, You Can't Even See it Without a Top-Level U.S.
Navy Clearance...
But a former Navy 'insider'
is now ready to disclose the names of five 'secret' energy companies
that could make you $372,340...
The Navy has already
collected $194 million from this discovery.
And CNNMoney.com reports
that 'Investments in [this 'secret' energy sector] jumped nearly
four-fold over the last two years, to about $100 million last year...
Because it's [still] so small, there's large growth potential here...'
Read Byron's Report Right Here .
--------------------------------------------
Empty Holes and
Black Swans
Bud Conrad interviews Matt Simmons
Bud Conrad (BC):
Let's jump right into it. The Peak Oil issue certainly looks ominous,
and should be scary to more people than it seems to be.
Matt Simmons (MS):
It ought to be. I don't know if you read the National Petroleum Council
study that was released just last year...
BC: The
IEA report too!
[Ed. Note:
Matt Simmons is referring to the National Petroleum Council report
"Facing the Hard Truths about Energy," released in, 2007, which was
roundly criticized as glossing over all the hard truths and replacing
them with the delusions of a Pollyanna mentality.
Bud is referring to the IEA
mid-term report that came out around the same time, claiming that oil
demand will outstrip production causing a supply crunch starting in 2010
that will worsen until 2012. The graph below shows the IEA conclusions,
with increasing demand growth represented by lines, and diminishing
supply growth represented by bars.)
MS: The
IEA thing, basically, was good news. That's the first huge change in the
mood of the IEA of finally being realistic that we have some
unbelievable problems. But you know what the major oil companies got
wrong in this NPC study? They basically didn't understand that the peak
oil people were talking about flow rates. They thought we were talking
about the ultimate resource base, which is the funniest concept in the
world.
BC: Let's
discuss that for clarification. We know that flow rates are what we
measure to understand whether we're at peak or not. In M. King Hubbert's
work, peak oil is calculated using the total resource base, but your
point is that we may still have oil that we're just not able to produce
in an economic way.
MS : If
it's in the ground and you can barely get it out, it's as irrelevant as
me looking out over Penobscot Bay and saying "There's a vast amount of
hydrates about a thousand miles from here, a thousand feet underwater."
Well, so what? That's not useful energy.
BC: If it
takes more energy to dig up that last barrel of oil than it produces,
then there's no sense in trying.
MS: And
another important concept is that if you're lucky enough to find a
highly pressurized field and it turns out to be condensate, which is
sometimes called natural motor gasoline, you can literally bypass the
refinery - because it's been baked in the ground - and put it right in
your car. It doesn't run perfectly, but it runs. With the heavy oil out
of Canada, you have to expend energy to make it ooze out of the ground,
and once it's oozed out of the ground, you still have totally unusable
oil.
BC: You
still have to go through a fairly hefty process...
MS : ...of
upgrading, and then finally diluting it with high-quality oil before it
can flow. So one is total junk oil, and the other is the Rolls Royce of
petroleum.
BC: The
world needs to understand that we've been using up the Rolls Royces
first because they're more available. The harder-to-find and
harder-to-refine stuff is what's left. I think that's misunderstood.
MS: Oh,
it's totally misunderstood. Sour, heavy oil is really not worth very
much.
BC: We're
probably in more serious a situation than most people would realize, and
it's no better with natural gas. Switching gears for a moment, do you
think the rise of LNG will be enough to keep up with declines in natural
gas discovery and subsequently in natural gas production?
MS: Well,
first of all, the problem with LNG is that if we try to develop a spot
market out of LNG, the odds of it ending in bankruptcy are about 90%.
BC: Who
goes bankrupt?
MS: All
the players. The cost to produce and distribute LNG is so high that to
make LNG work in any sort of financial reality, you would need a 25- or
30-year guaranteed supply. And then you can amortize it over 25 or 30
years. If you're going on a spot supply, you've got to write it off over
10 years and then you'll need $40 per million BTU to make the economics
work. The other thing is that about 35% of the hydrocarbon value gets
chewed up in the process of cryogenically freezing natural gas,
transporting it, and then re-gassing it.
BC: In
your opinion then, LNG is not an economically viable solution. We won't
do it.
MS: We
shouldn't do it. But it turns out that high-quality natural gas – sweet,
high-quality natural gas – is just like sweet oil. It's basically in
decline.
BC: And
therefore also harder to find, despite our original hope of about a
decade ago. Clean energy was going to fix everything through natural gas
for electricity and everything else.
MS: Yes,
and using natural gas for electricity turned out to be an unbelievably
stupid decision. Using electricity for heat was equally stupid. Natural
gas should be refined to one use and one use only, and that's creating
instantaneous and high-efficiency heat.
BC: In one
of your presentations, you have a very memorable clip of a ration book
from World War II. Are we headed towards rationing and if so, between
here and there, what are your estimates on what the price of energy
might do, especially if we're hit by any ugly political events?
MS: I try
to stay agnostic about political events because they're unpredictable.
If you took a blackboard and filled it up with every political event
that could impact the supply of energy, not a single one of them is
positive. All political events are just unforeseen black swans.
[Joel's Note:
Stay tuned for Part II of Bud's interview with Matt Simmons in
tomorrow's edition of your Rude Awakening. Matt shares some insight as
to what he sees as the major investment themes and opportunities looking
to squeeze some profits out of the great global energy crunch. If you're
interested in learning more about how you can be on the RIGHT side of
the next wave of energy-related trades, you could do much worse than
checking out the
Casey Energy Speculator . They've got a 3-month risk free
trial going on at the moment, so it's well worth a look.
In the meantime, send comments and questions along to us here and we'll
catch you tomorrow...
Joel Bowman
Rude Awakening
aussiejoel@the-rude-awakening.com |
