Listening to the experts

As we move through this period of grace before the tightening oil supply situation becomes more clearly evident to more people, there are increasing numbers of statistics appearing that seem to confuse the issue. For example there was the recent revision upward of the US demand growth last year by 213,000 bd. Then there are also some conflicting views on what China plans on doing, some of which discussion is given in our earlier posts of this past week. There are questions about the state of Russian production, and exactly how much oil is coming, and from where in the Middle East. In addition there is the conflict over the actual amount that the British part of the North Sea oil is declining, is it the 17% that has been noted as occurring monthly for the past quarter by the Scotsman, or is it the 5.6% that the latest UKOOA report would have it.

Some of these issues can be explained. For example the current drop in North Slope production of 6.5% for June was due to pipeline maintenance . The recent short term drops in production from the Gulf, including Cantarell in Mexico, are transient ones caused by the need to ensure the safety of the platforms and crews.

Some issues, such as the amount of demand destruction in the poorer countries of Asia and South America caused by current high prices cannot be estimated yet. And it is too early in the year to see how some issues that will have a significant impact will be resolved. The Chinese, for example, have not indicated any change in their plan to start building a Strategic Petroleum Reserve in August. And if they do this, it is bound to have some effect on markets.

Given this rising cacophony of voices and numbers it is instructive to revisit a site from last year. On the 12th August last year MyDD carried the story (from and I quote:
I just finished canvassing the Street to see what analysts are using for the price of oil for 2005, the integral element of their estimates. The average of the whole Street is $31 a barrel. Nobody is higher than $35; many are still below $30. Here are the prices I have as of this morning from the firms that have helped:

• Goldman Sachs: $35
• Raymond James: $34
• AG Edwards: $32
• Merrill Lynch: $32
• Lehman Brothers: $30
• Smith Barney: $28
• UBS: $28
• CSFB: $27
• Bear Stearns: $30
At the time the price of oil was $45. Makes you glad you follow investment advice, doesn't it. (And in some cases I must admit I do).

Well it made me curious and so I went and dug into those old boxes that academics drag from office to office over the decades, and I found some papers and magazines that provide some additional grist for the mill. For example, we were at one time much more dependent on natural gas than we are now, and then we started to run out of domestic supplies.

In 1977 in the month Jimmy Carter became President the shortage of natural gas combined with the harshest winter in decades led to a serious problem. At that time natural gas heated half the nations homes and 40% of its industry, for a total of 30% of the nations energy. As the Newsweek of the time (Feb 7, 1977) reported:
Every school in Pennysylvania was closed, and 400,000 workers were laid off in Ohio alone. Nationwide more than 2 million were already out of work and the total mounted every day. Throughout the eastern half of the country thousand of factories were cut back to "plant protection" gas levels (only enough fuel to prevent pipes from freezing) and had to shut down. Eight states – Pennysylvania, Ohio, Indiana, Minnesota, Tennessee, Florida, New York and New Jersey proclaimed states of emergency.
There was a large switch away from natural gas following that year, but we seem to be heading back along that same track again. (The magazine stories of the time are worth revisiting to see how unprepared the general public was for a crisis that energy experts had been warning about for several years). Hmm! And here I thought that "The Oil Storm" was overdramatic!

Note that this was before the major increases in oil prices. One of those occurred in July 1979, and the stories in Time of that week (July 9th) tell of the problem which may sound familiar.
The (OPEC) cartel's 13 member nations are now pumping roughly 31 mbd of crude out of the ground each day, 2 mbd more than last year, but still 2 mbd less than nations want to buy in order to keep their factories humming. The shortage has set off a scramble that permits OPEC to charge almost any price its members wish: some U.S. officials fear that the cartel will ram through yet another 15% increase by year's end. The only way to head it off, say government leaders around the world (including OPEC leaders) is if for oil-importing nations to cut their consumption by 2 mbd."
The magazine shows pictures of gas lines in New York City, rotting cantaloupes in Yuma, Arizona rioters burning cars in Levittown, PA. and National Guard troops protecting gas deliveries in Florida.

To overcome these shortages, a number of predictions have been made over the years as to what needed to be done.

For example, a government panel on Energy Policy suggested that a program should be implemented that would change the makeup of the National Energy Supply as it was expected to double in the period from 1975 to 2000. This suggested that crude oil production would drop from 33% to 15% of the supply; 4% would come from synthetic crude produced from coal; 2% would come from oil produced from shale oil; natural gas, which made up 32% of the supply would be reduced in total volume and be cut to 12% of the supply; synthetic gas from coal would produce 4%; coal itself would increase production to meet 30% of the demand from 27%. Hydroelectric power would double in quantity but remain at only 4% of total supply; nuclear power would more than double, and increase it's share to 24% of the total, while the new sources of solar (at 5%) and geothermal (at 1%) would start to become significant. (They would then go on to more than double output in the years to 2010).

Well I could go on, but as you can see there is some risk in listening to experts.

On an Update note, the Thunder Horse platform is now reported righted , and sealed and further weather proofing is continuing. It had not yet been connected to the undersea wells that it will tap.

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The forecasts are never right because they are not pure forecasts. There is always an element of wish fulfillment; like a lot of economic forecasting, the players hope that saying something enough times will make it true. No one wants to be the guy who gets blamed for ending the party.

Great history lesson.

This is why local officials need to start preparing now to build contingency plans for much higher oil/gas prices and invest in the infrastructure that will help allieviate some of the nasty effects this will have.

Community civic institutions need to start preparing as well. People are going to need each other more than ever before.

I wonder if I might speak of another kind of uncertainty here. Aside from the maddening contradictions in oil supply and demand estimates and forecasts (I also agree with Tim), I was perusing the morning papers and found this stuff about ethanol.

Look at Fill 'er up on corn from the Denver Post, where we learn "there is debate about ethanol's energy efficiency". Here's the uncertainty:

Sheehan's [from NREL] research shows that ethanol production is energy-efficient, producing 100 British thermal units of renewable energy for every 75 units of fossil energy used in its manufacture.

One of the leading skeptics of ethanol's efficiency is Cornell University researcher David Pimentel, who said ethanol production from corn yields a 29 percent net loss in energy.

Switching over to the Rocky Mountain News, reading Anti-ethanol study roasted, we find

"Ethanol production in the United States does not benefit the nation's energy security, its agriculture, the economy or the environment," said the study by Cornell's David Pimentel and Berkeley's Tad Patzek. They conclude the country would be better off investing in solar, wind and hydrogen energy.....

But nine of the 11 other studies conducted - many of them sponsored by the U.S. departments of Agriculture and Energy - found the opposite. Those show ethanol produces as much as 60 percent more energy than what it takes to make it.

Looking at this, I didn't know what to think. There was a clue, however, in the Rocky Mountain News article:

Pimentel and Patzek included in the study such factors as the energy used in producing the crop, costs that were not used in other studies that supported ethanol production.

The study also omitted $3 billion in state and federal government subsidies that go toward ethanol production in the United States each year, payments that mask the true costs, Pimentel said.

So, the cost of growing the corn and the subsidy are not standardly included in the cost of ethanol as a fuel? I find these kinds of discrepancies in energy ratios for all sorts of alternative fuels. Drives me crazy. Anyone want to weigh in here?

Another link - AP - same story

My guess is there is too much by way of politics within the Department of Agriculture numbers; I tend to believe independent studies more than government sponsored studies since much in Agriculture is *hugely* political. Its a big country and a large number of reps and senators owe their seats to rural voters.

Not sure if this has been noted yet:

Gulf oil tanker rates may rise a fifth week
Published: Tuesday, 19 July, 2005, 12:20 PM Doha Time
LONDON: The cost of shipping oil on 2mn-barrel tankers from the Middle East to refineries worldwide may rise for a fifth consecutive week as the supply of ships dwindles, shipbrokers including EA Gibson said.
Thirty-six vessels, known as very large crude carriers, or VLCCs, will be available to load in the Arabian Gulf in the next 30 days, the broker said in a weekly report on Friday.
“Rates will certainly continue upwards,’’ a team of EA Gibson researchers headed by director Brendan Martin said.
Freight rates for VLCCs on the benchmark routes to Asia have almost doubled in the past month because of a surge of bookings for the end of July and beginning of August.
VLCCS loading in the Gulf are usually booked about four weeks in advance. Rates typically rise in the third quarter as US oil imports increase ahead of peak winter demand.
“Activity remains robust, while the list of available tonnage has been cut down sharply,’’ Oslo-based broker PF Bassoe said in a report. “Owners appear well positioned to achieve further gains.’’

I like reading old predictions, too. The lesson is how wrong, wrong, wrong they are. I used to work on financial software and we'd read the Wall Street Journal every day, then save them. It was so weird to look at the month-old papers, full of worries and wonders about what would happen next. In most cases the issue du jour was completely forgotten a month later.

So the moral for today? We don't know what's going to happen, and if you think you do, you're wrong. Peak Oil isn't going to happen the way you think it will, and it won't happen the way I think it will. We'll all be surprised.

Halfin -

It may not even be Peak Oil that precipitates the crisis. Peak Oil may simply be one item in the basket that tips the scale.