Timing is everything
Posted by Heading Out on April 28, 2005 - 9:37am
There were two possibly significant energy events over the past couple of days, Crown Prince Abdullah's trip to Texas, and The Oil Depletion Conference in Scotland. Unfortunately it does not appear as though much that was new transpired at either.
The news stories on the Crown Prince's trip to Texas did not tell us much more than that the Saudi Government will invest more money in order to increase production by 2009. Which really does not initially appear to help a lot, if we are going to be short of oil by the end of the third quarter.
And that is part of the current problem. If I can make the analogy of the sandwich shop to our current situation. At 10:30 am you can wander into the shop and the assistants are making sandwiches and stocking the shelves. You are one of only a few customers, and you think that they might lower the price a bit for your custom, but they don't. If you wait around you'll see why. About 11:30 the place starts to fill, and soon the assistants are working flat out and all the spare stock of sandwiches are disappearing until, hopefully, as the shop drops back to lassitude after 2 pm, there are still a few sandwiches left.
In the course of a year oil demand goes up and down with the seasons. You can see this in the chart that EIA has on quarterly demand and supply. (For this year the demand is projected at 84.6; 83.1; 84.6 and 86.8 mbd for the four quarters). We are currently in the second quarter of 2005. The second quarter, as you can see from the column totals, is the one with the least oil demand. We are, you might say, at 10:30 am. Saudi Arabia rightly points out that they have loads of sandwiches available and there are not that many current customers to sell them all too. But folk are already phoning in their orders for lunch, so they know demand will be high and they keep the price up.
Soon it will be summer, and then fall, and demand is going to go up. Exactly how much we don't know but predictions are that it will be around 2 to 2.4 million barrels a day over last year (the table shows 2.2). The problem is that we don't think that this year the Saudi have made enough sandwiches in the slack period, (i.e. drilled enough wells ahead of time and connected them up) and the only additional supply they have for this year may be less than another 1 mbd. Which, when put together with the rest of the increased supplies from the other sandwich shops in the neighborhood (OPEC) will still not be enough to go around, and somewhere around Thanksgiving people might start bidding silly amounts of money to make sure they still can have lunch this year.
In a way it is hard to criticize the Saudi Monarchy for this. They have always held, what they consider to be a reasonable reserve in hand in case demand went up a little (such as for example the odd tourist bus visiting our sandwich shop). What they are not prepared for is the fact that some of the other sandwich shops are cutting back, and more buses are planning on stopping by on a regular basis, and so they need to rapidly increase production. And the reality is that in the short term (say the next two years) they cannot. In the entire Middle East there are only perhaps 185 drilling rigs, and each is tied to a different objective. To have an increased impact they need to get some additional new rigs that first have to be built, and thus the delay in the impact of any new Saudi moves. I am just surprised that somebody put President Bush in the position where they had to know he would be turned down.
In regard to the meeting in Scotland, I had originally thought of going, but realised that in the relatively short time interval for the speeches that it would be unlikely that there would be any new information given. We are still in the mode where the majority of the world does not understand the topic, and thus this was largely a repeat of what has gone before, and as such, is not getting a lot of press either.
And since we are in the quiet season of the four it is unlikely that much will get done in the next couple of months, until demand starts to pick up again. I hope the weather is nice, it was in 1914.
Technorati Tags: peak oil, oil
The news stories on the Crown Prince's trip to Texas did not tell us much more than that the Saudi Government will invest more money in order to increase production by 2009. Which really does not initially appear to help a lot, if we are going to be short of oil by the end of the third quarter.
And that is part of the current problem. If I can make the analogy of the sandwich shop to our current situation. At 10:30 am you can wander into the shop and the assistants are making sandwiches and stocking the shelves. You are one of only a few customers, and you think that they might lower the price a bit for your custom, but they don't. If you wait around you'll see why. About 11:30 the place starts to fill, and soon the assistants are working flat out and all the spare stock of sandwiches are disappearing until, hopefully, as the shop drops back to lassitude after 2 pm, there are still a few sandwiches left.
In the course of a year oil demand goes up and down with the seasons. You can see this in the chart that EIA has on quarterly demand and supply. (For this year the demand is projected at 84.6; 83.1; 84.6 and 86.8 mbd for the four quarters). We are currently in the second quarter of 2005. The second quarter, as you can see from the column totals, is the one with the least oil demand. We are, you might say, at 10:30 am. Saudi Arabia rightly points out that they have loads of sandwiches available and there are not that many current customers to sell them all too. But folk are already phoning in their orders for lunch, so they know demand will be high and they keep the price up.
Soon it will be summer, and then fall, and demand is going to go up. Exactly how much we don't know but predictions are that it will be around 2 to 2.4 million barrels a day over last year (the table shows 2.2). The problem is that we don't think that this year the Saudi have made enough sandwiches in the slack period, (i.e. drilled enough wells ahead of time and connected them up) and the only additional supply they have for this year may be less than another 1 mbd. Which, when put together with the rest of the increased supplies from the other sandwich shops in the neighborhood (OPEC) will still not be enough to go around, and somewhere around Thanksgiving people might start bidding silly amounts of money to make sure they still can have lunch this year.
In a way it is hard to criticize the Saudi Monarchy for this. They have always held, what they consider to be a reasonable reserve in hand in case demand went up a little (such as for example the odd tourist bus visiting our sandwich shop). What they are not prepared for is the fact that some of the other sandwich shops are cutting back, and more buses are planning on stopping by on a regular basis, and so they need to rapidly increase production. And the reality is that in the short term (say the next two years) they cannot. In the entire Middle East there are only perhaps 185 drilling rigs, and each is tied to a different objective. To have an increased impact they need to get some additional new rigs that first have to be built, and thus the delay in the impact of any new Saudi moves. I am just surprised that somebody put President Bush in the position where they had to know he would be turned down.
In regard to the meeting in Scotland, I had originally thought of going, but realised that in the relatively short time interval for the speeches that it would be unlikely that there would be any new information given. We are still in the mode where the majority of the world does not understand the topic, and thus this was largely a repeat of what has gone before, and as such, is not getting a lot of press either.
And since we are in the quiet season of the four it is unlikely that much will get done in the next couple of months, until demand starts to pick up again. I hope the weather is nice, it was in 1914.
Technorati Tags: peak oil, oil
“My father rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel.”
—Saudi saying
Contact
- Content: editors at theoildrum dot com
- Tech support: support at theoildrum dot com
License
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 United States License.
This post started making me hungry -- and then I got to the part about 1914 and started not being hungry and then glanced down to see the line about the flaming dog poop and just got sort of sick.
:) sorry G. go have a good lunch and try not to think about the flaming dog poop.
(1914 had something to do with an energy peak or something didn't it? that is, if I remember correctly, that was in one of HO's early posts on his old blog...true HO?)
Er! No, actually! What I was referring to is that in the early summer of 1914 if you had gone around Europe you would have found virtually no-one that would have predicted that there would have been a World War starting in August.
It has (because of the changes that that war brought around the world) been referred to as the last summer of the old epoch. This summer may mark the end of this particular era in history, but maybe I was stretching the metaphor a bit. (And over-dramatizing, but who knows?)
after this post, I'm not sure that you're wrong...
Like the site, BTW...
With respect to the Middle East being able to get us out of this mess, there are several key reasons why this is not likely to make any real difference. I work in O&G exploration, and have been involved in drilling wells since 1974. 1)We haven't built any additional refining capacity since the 1970's. What capacity we do have is split between 7 or 8 different types of fuel (regular, regular plus, premium, CA regular, CA regular plus, CA premiunm, diesel 1, diesel 2). This reduces our ability to respond to anything quickly. 2)EPA regs and trial lawyers have virtually eliminated the profitability from refining. No oil company wants to build another refinery - the liabilities and low profit margins make them poor businesses even with these higher prices. 3)Most of the wells drilled in Saudi Arabia have been changed to horizontal or other types of "fast producing" options. This means more rapid depletion, IF they can actually pump more(not so, according to what happened in Crawford, TX). See Matthew Simmons articles for more.
Compounding these Middle East issues: 4)We have gone to "just in time" supply inventories. We only get oil to the refineries "just in time" to meet "expected demand". When China and India get hungry, spot prices surge. If any company has to buy from spot to meet contracts, they are royally screwed. 5)Drilling rigs are at nearly 100% utilization today - we cannot drill any faster than we are right now - period. 6)The average age of your typical petroleum engineer is around 53-57....who is going to go into this field as it declines? What will we do for brainpower to keep finding oil in 10 years? 7)Un-talked about is a new philosophy among the exploration companies - rapid depletion. Drill it, sell it, then forget it. Projects are paid out more quickly, profits are quick to the bottom line, corporate values soar with big earnings, and shareholders are all smiling. This is the quickest path to profits, not the path to maximum extraction volume. But here in the heart of capitalism, nobody looks beyond the end of the fiscal year. 8 )Most of the world has already been explored - regardless of what DOE or any pundits say. The low oil prices of the last 2 decades drove all players to reduce costs and risk, while increasing efficiency. We know fairly well where most of the oil is - and where anything resembling a giant field might be. Those places are off-limits (West Coast, East Coast, Florida, Arctic, Antarctic) so we have looked over the rest of the world already, and you will note that there hasn't been anything resembling a new world-class oil field announced in decades.
And this is the way it has to be for one simple reason: governments, corporations and societies do not respond to anything less than a crisis when systemic change is required. History is littered with evidence of this - and we wrote that history.
How we respond to this crisis will be the crux of the matter. Based on what
As to how we respond to the crisis, I think the answer is already in: We haven't. We are dancing on the peak now.
There isn't anything particularly outrageous about that,
unless you have no idea about peak oil to begin with,
in which case...welcome to the crowd.
Thanks J for telling it like it is. The only variant I have seen is on 7 where I have listened to debates as to whether it is better to sell it before drilling or after (there are arguments both ways).
HO - you misunderstand me here. We cannot sell it without drilling it. The reserves must be "pipelinable" before we can negotiate a delivery contract.
I am talking about corporate directives to maximize production rates "at every turn". This is not the best way to maximize production from an oil field. The slower you produce from it, the more oil migrates to the producing wells, and the more TOTAL BARRELS can be extracted.
Oil companies are forced to compete with unrealistic ROI's for their shareholders in the stock market. A mining company (oil = mining)is trying to attract investment in a market where investors are used to seeing double digit returns in other fields. How do you attract investors?
By pumping and producing as much as you can as quickly as you can, regardless of the long term effects. You simply sell the field to another, smaller company when you have maxed out the production.
But this now means that the reservoir may be permanently damaged, and require higher costs to produce what is left. Instead of being in a nice pool near your well, the oil is scattered throughout the sandstone and with high water concentration, which requires huge investment in separation equipment and even more drilling of new wells. So the remaining oil costs EVEN MORE to get out than it had to, simply because the reservoir was overproduced.
This is most definitely NOT a long term business strategy, yet it has been adopted by many companies to attract investor capital for exploration.
I'm not sure petroleum associated jobs are going to be on the decliine after peak oil.
Certainly excess refining capacity will have be standing still -- but those working in exploration, reservoir science (biodegradation, recovery, continuity, fractures, fluid flow, etc,), secondary recovery, etc. will be in demand. The number of workers per barrel of oil should increase at a slightly slower rate than the price per barrel.
Except for the HUMONGOUS GAP in the exploration industry from the last downturn. In my office, there are 10 engineers working in drilling. I am the youngest (48). There are 5 employees working in drilling/geology/production that are under age 30. There are zero (none, zip, zilch, nada) between the ages of 30 and 46. Half of the colleges teaching petroleum engineering and geology CLOSED THEIR DOORS over the last two decades. My friends, once the boomers retire, the oil patch will be in very dire straits. Right when more people and ideas are needed, decades of experience will disappear almost overnight.