All the way to Trinidad for Henry Groppe...

A really good summary piece from Gwynne Dyer from the (hunh?) Trinidad Express, that amazing bastion of journalism (but it is a really good read...). Some snippets:
"We ran out of $2 oil in 1973," said Henry Groppe of Groppe Long and Littel, at 79 the oldest active oil consultant (and one of the most respected) in the business. "Then we ran out of $8 oil, then $15 oil. Now we're running out of $40 oil." It's a different way of looking at what is happening to the price of oil, and a much more useful one.

Last week the price of a barrel of oil reached $65. Oil has doubled in price in the past eighteen months, and oil industry experts freely speculate that the price might hit $80, even $100 a barrel before year's end, hugely depressing world economic growth.

But here's an interesting fact. Oil companies still decide whether a new field is worth developing by calculating whether they would turn a profit from it when the price per barrel falls to only $25. Do they know something that the rest of us don't?
Indeed. Good piece for the new folks.
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"Do they know something that the rest of us don't?"

Something like the "Prisoner's Dilemma", most likely.'s_dilemma

If the current price of crude is $60, and all the oil companies use a price of $60 to determine the profitability of prospective projects, then they are all certain to lose money.
The market will be flooded, and prices will plummet.

This is what happened in the late 80's/early 90's.

So, having learned that lesson the hard way, they're now trying to use a price such that if all producers use that price, the additional supply won't push the market below that price when the new production from all producers comes on line.

What a useful example of why we are in so much trouble. (warning: a rant follows)

According to Dyer, the global rate of economic growth has been 4.5%, (though I'd like to know where that figure came from). Which, according to him, is great!!!

3% growth would be OK.

1.5% global GROWTH and we are all hurting (which incidently is what the UNDP estimates for global growth for much of the past three decades). So, we not only have to fear recession, but we have to fear less the spectacular economic growth!!!

Then he blathers on about $40 oil, as if there is plenty of it to fuel that 4.5% annual global GDP growth. That is until the stockpile of $40 oil runs out, at which time we can simply switch to the supplies of more expensive oil. He then seems to completely contradict himself by mentioning peak oil and a 1mbd annual decline in oil production. (How can we fuel spectacular global growth when we have declines of 1mbd?)

Not to fear, he says, because "Developed economies are much less "oil-intensive" nowadays-it takes only half as much oil as it did in the 70s to produce the same amount of Gross Domestic Product-so oil price rises no longer lead to runaway inflation" ... This may be true on the face of it, but it is also misleading to a less than careful reader. We have established in this blog before that the developed economies (see, particularly the North America use more oil than ever before. And continued growth will require even more oil (or its energy equivalent in other resources)!! Where is this growing energy supply going to come from? (I know, I know, biodiesel!! -- too bad humans need to eat! Stupid sheeple!! (note sarcasm here) Wasting all that prime farmland growing food when it could be otherwise be used for more productive purposes like growing fuel for our large trucks and vans!!)

Like I said in an earlier post ... we need to examine the all-growth-all-the-time mindset. That is if we are to seriously expect to avoid being right and truly screwed as a global and growing population in the not too distant future.

That said, the price of $25 says more about the lack of transparency between producers than about the future price of oil.

If every producer could see all of the internal data for all of the other producers, the correct break-even price would be apparent to all players. The more uncertainty each player has about the other players' supply curve, the more each player has to adjust the break-even price downward for risk.

Tedman, here's a good picture for you:

If oil consumption per $ of GDP declines, GDP can grow at constant oil consumption.

What they know that we supposedly don't is that they have little desire or incentive to make the gigantic investments that these projects require. Short term greed will win over long term greed every time. If $25/bbl is what it takes to kill proposals, then that's cool.

I'm still not convinced that steadily rising oil consumption is necessary for economic growth. Rising oil consumption has been the result of relatively cheap oil prices, which still exist even today. Much of our oil use is merely discretionary waste. For instance people travel miles to visit malls and out of the way stores when they could easily find their products online. It's far more efficient for a delivery truck to deliver 100 products to online purchasers than having 100 people drive to various stores comparing prices. The same could be said for our workplaces where many jobs only require a computer, fax, phone, and printer, all common household products. Management could easily supervise its employees with our advanced communication systems available. It would be far more efficient for people to skip the commute and work at home, but our mindset is still stuck in the 1950's where work=office and adulthood=getting your first shiny gas-guzzler. Prices are still low enough that most Americans are avoiding carpooling, using mass transit, and basic conservation efforts. I honestly believe we could easily shave off 15% of our oil demand without a decrease in living standards.

Trust me on this (because I work in one of these organiztions) - International oil companies are slow, plodding, herd, creatures. The people running these organizations, especially the middle level managers on up, are more concerned with their careers than what the hell is going on in the global oil markets. The organizations as a whole are not prepared to recognize and react to sea changes in the marketplace.

Almost all of the people running these companies were "foot soldiers" in the 1970's and 1980's. They are now the "generals prepared to fight those wars", not the situation we are now in. They are the same kind of people who were running IBM back in the early to mid 80's when the PC first came out. They have no vision. They are prepared to take NO personal risk.

These companies are now using $25 price decks only because they were using $18 price decks up until last January (when the open market price was $50/bbl). Moving from 18 to 25 was considered almost radical at my company.

They are scared shitless that they will overforecast the price of oil (like in the '80's) the company will invest in unprofitable projects, the stock will tank, and they will be hauled into court for not being good stewards of the shareholder's money and for violating the Sarbanes-Oxley Act.

Now to be somewhat fair here, most of the projects that companies like Exxon, BP, Shell, Total, and Chevron are doing these days cost multibillion dollars each (BP-Thunderhorse, Shell - Sakhalin, Chevron - Gogon, Exxon -Erha) and could take 10 to 15 years from concept selection until the investment starts making a return. So these price forecasts need to be conservative for that reason alone. On the other hand, you couldn't get much more conservative than they are right now.


You are completely wrong here.

What they know that we supposedly don't is that they have little desire or incentive to make the gigantic investments that these projects require. Short term greed will win over long term greed every time. If $25/bbl is what it takes to kill proposals, then that's cool.

These companies, especially the engineers, geologist, project managers, and vice presidents work 12 hour days trying to make these mega projects work. Not only that, but these companies have obscene amounts of cash that they have to reinvest. On the other hand, though these companies risk billions of dollars of shareholder money on these very risky mega-projects, the people in these companies are some of the most personally risk averse people you will ever meet. This permeates the organization all the way to the top. They are more motivated by fear of failure than by a drive to succeed and do something new and different.

As far as "running out of $40 oil" goes, that's close but not quite right.

It is more accurate to say that we can produce a certain amount of $2 oil even today, a certain amount of $8 oil, a certain amount of $15 oil, and a certain amount of $40 oil. The available quantities at each price levels are declining with time. But as you go up in price, more oil is available. There's more $40 oil than $15 oil available, and more $65 oil than $40 oil.

Today, probably much of our oil consumption is actually $20 and $40 oil, oil that would still be produced even at that price level. But if the price were $20 or $40, that amount of oil wouldn't meet demand at that price. Going up to $65 increases the amount of oil somewhat, and decreases demand somewhat, and at that price point demand equals supply.

A question on this business of the US economy being less oil dependent (as nicely illustrated in Michael Robinson's linked graph). How much is due to increased efficiency per-se, and how much is due to shifting of certain oil intensive things (like manufacturing) to Asia? Is the world as a whole getting less oil intensive, or just shifting the burden? (I'm sure it's some of both, but what's the mix?)


Thanks to Bubba for his comments here as an energy company insider. His remarks tell me that as new unconventional oil sources come online in the future, the people in these companies are ill-equipped to deal with a brand new set of development and extraction issues.

This is probably why tar sand oil has turned out to be much more difficult and expensive to extract and produce than some optimistic reports envision (including CERA/Daniel Yergin). Not to mention that they have never been in the gas-to-liquid (GTL) or coal-to-liquid (CTL) business.

And also, I will not mention the non-existent liquids coming from those huge oil shale reserves (trillions of barrels)... but many of you have already read my rant on this subject and I will spare you that this time.

Back way up and look at the much bigger historical economic impact of cheap energy. GDP growth is in my opinion mostly driven by the huge inputs of oil. It is the reason transportation costs are so ridiculously low (how anything made in China can be shipped here), and why commercial agriculture produces such excesses of wheat & corn that we give the stuff away to other nations at Wal-Mart prices. Next to oil, the other big cause of GDP growth is growth in the money supply. Both are forms of artificial stimulus and cannot be sustained. Once the oil is burned - it's gone and will warm up our atmosphere, and once the money is in circulation with little of real value left for the money to chase, you will see hyper-inflation in real estate and money chasing money for it's own sake on Wall Street. Like the oil bubble, the GDP bubble will burst too... likely in synch with the decline in cheap oil. I think it will get ugly fast as energy costs increase and eventually ripple through the economy causing inflation, the real value of the dollar will plummet and there will be no where to run to or to hide.

Mixed Messages for Cinncinati:

Headline: Long-term oil outlook isn't all bad

First paragraph: "We ran out of $2 oil in 1973,'' said Henry Groppe of Groppe Long and Littel, at 79 the oldest active oil consultant (and one of the most respected) in the business.

Paragraph #3: But here's an interesting fact. Oil companies still decide whether a new field is worth developing by calculating whether they would turn a profit from it when the price per barrel falls to only $25.

Paragraph #5: The price of oil may hit $80 or even $100 this year, but if it does it will be an extreme market fluctuation, not a new average price. It will eventually fall back towards the $40-$55 band - but "eventually'' is the key word as far as the current global economic boom is concerned.

Which message does the layman filter in and which does a peak oiler spot?
We disreport, you decide.