Weekend Open Thread...

Simply because it's threadalicious...
Interesting article from USA Today:

Can oil production satisfy rising demand?
By David J. Lynch, USA TODAY

WASHINGTON -- Energy Secretary Samuel Bodman has asked a high-level advisory board to answer one of the toughest questions dogging the U.S. economy: Can world oil production meet steadily rising demand?

In a previously unreleased Oct. 5 letter to ExxonMobil CEO Lee Raymond, chairman of the National Petroleum Council, Bodman asked for a study of the industry's ability to produce enough oil and natural gas at prices that won't cripple the economy.

"He's asked them to take a big-picture look out several years. ... He wants to get some definitive information," says Craig Stevens, an Energy Department spokesman.

The most noteworthy aspect of Bodman's request is a reference to the "peak oil" debate. At issue: the claim by a vocal minority of energy experts that the world is at, or near, maximum oil production....

[see link for the rest]
Thought for the day. Going the way of the dinosaurs...

It seems to be in our nature to think that bigger is always better which is, perhaps, why we end up consuming resources as fast as we can including oil. But is it? Here's the parable of the dinosaur and the mouse.

The dinosaur said to the mouse. Your nothing. You're not even a snack.
The mouse said that's your problem dinosaur.
And so it was. Which is why we have mice but no dinosaurs.

Of course the survivors of the dinosaurs, the birds, downsized until a mouse became a meal.

And that's the mouse's problem.

In case you haven't seen this:


    WND Exclusive Commentary Is abiotic oil a new argument for Creationism?
Posted: November 22, 2005
1:00 a.m. Eastern

© 2005 WorldNetDaily.com

Craig Smith and I wrote "Black Gold Stranglehold: The Myth of Scarcity and the Politics of Oil," without a religious argument in mind. We wanted to present the scientific arguments that oil was a hydrocarbon fuel of abiotic origin, produced deep within the Earth on a constant basis. We wanted to warn America that increased dependence upon foreign oil has serious economic consequences for the strength of the dollar and serious political consequences for reliability of America's national security.

While Craig Smith and I are both Christians who strongly believe in God, we presented in the book no arguments, proof or justifications that derived from or depended upon our religious beliefs.

Recently, "peak-oil" apologists - who support the "Fossil-Fuel" theory of oil's origins - have begun attacking us on the basis that the abiotic theory is really being advanced to support creationist or intelligent design religious beliefs. A forum on the "peak-production" Internet blog TheOilDrum.com recently ran a thread attacking the book. Two posters presented the charge as follows:

    LJR: I'm waiting for the "intelligent design" folks to link up with the "abiotic oil" guys. A marriage made in heaven.

    mikeB: Ab-so-lutely! Which is why I've taken to calling it "oil creationism."

How do I tell my friends I've been quoted by a kook?

Oh this is great.. I guess you've informed your friends here and we appreciate your efforts to debunk their "theory".
Here in NYC, we have a fascinating exhibit on Darwin, which made a direct reference to resource consumption and the physicial limits set by our natural environment. I wrote a summary of my thoughts here

I highly recommend the exhibit to all ages. Darwin's theories are complex and well argued and the implications of those theories continue to challenge us to see ourselves as apart of the natural environment as opposed to above or set apart from that environment.

What's wrong with this analogy by the Natural Gas Vehicle Coalition?? Does the US have a 9 year supply of natural gas or do we have more?? Inquiring minds would like to know.. If we only have a 9 year supply of natural gas reserves, this would have a bigger impact than peak oil, IMHO..

The level of natural gas reserves varies over time - downward when natural gas is consumed and upward when new natural gas reserves are identified. For the past decade, U.S. proven reserves have ranged from 165 to 170 trillion cubic feet (Tcf) -- although, in 2000, reserves increased to 177 Tcf. It is important to note that reserve levels are greater today than they were a decade ago despite the fact that 185 Tcf of gas has been consumed. Some naysayers still point to the fact that the U.S. used approximately 22.5 Tcf of gas in 2000, and argue, therefore, that if we only have 185 Tcf of reserves, we " only have a 8 or 9 years supply of natural gas left."

This is nonsense. It is similar to saying that we only have a 10-day supply of hamburger left. The level of natural gas reserves is critical to ensuring the balance of supply and demand in the very short term, but is irrelevant to any discussion of long-term supply.


In the graphs previously posted on TOD regarding where our natural gas will be coming from, a large component in the future years is always "to be discovered." And yet I can't find a link to any of the graphics... does anyone who knows where they are want to post a link to one for me? The article implies the argument:

We've been frequently discovering natural gas, so naturally it's safe to assume that we'll always continue to find enough natural gas.

That would be one fault of underlying logic. The other fault would be that it doesn't mention the likely costs to harvest the gas we find. Unless natural gas is an unlimited resource (do the abiotic oil people also believe in abiotic natural gas?), eventually there won't be any to find. Much more relevantly as we continue to drill for gas, the easy and large spots will all have been taken, and either we won't be able to supply enough (too few rigs to drill enough small wells), or it will become too expensive (the industry has to pass on the cost of the new rigs needed to drill more wells per year to keep up).

Natural Gas in North America has peaked. And just like when Texas oil peaked in the early seventies there's increasing drilling activity for natural gas. But all the wells are smaller, so there's less gas produced despite putting more effort into finding it.

Natural gas, just like oil, will not just disappear over night. However it will at the very least become more costly to find more as we harvested the cheapest gas first.

Your observation should be of concern yes, until it is put in context. The US only has a FOUR year supply of oil left. We use 20 million barrels a day which is over 7 billion barrels a year. Our reserves are 29 billion (source BP website). So, the presumption is that we will, as we did with oil, start to import natural gas in a large way. As has been discussed, this is dangerous and difficult but looks increasingly likely. Even more likely is a turn to coal, which the US has plenty of (27% of the worlds total of 22,700 Quadrillion BTUs =5,690 quads.

At 1 trillion barrels of oil left globally - that entire allocation is only 5,205 quads and the entire world natural gas reserves are 6,343 trillion cubic feet which equates to 6,507 quads.

So, the US has rooughly equivalent BTUS stored in its coal as the entire world has in oil or natural gas. Can you say Fischer-Tropsch in a big way? Hello, greenland ice sheet. (and I live in Vermont)

I think the point is that it is much easier to expand the imports of oil than of LNG. Oil can be safely pumped and stored with very primitive equipment that LNG is very difficult to handle and it is very difficult to expand the imports quickly.

Currently the US imports 300 billion cubic feet of natural gas a month (if I read the EIA site correctly) or which only 43 billion is LNG and the rest is by pipeline from Canada and Mexico. (Exports are 55 billion of which 5 billion are LNG - to Japan.)

Now current production is about 1,600 billion cubic feet.  The figures have trended up and down and there is no obvious trend to show that it has peaked greatly, that I can see. This is because, I suppose, you can't store natural gas.

If it is going to start decreasing rapidly, LNG supplies cannot be expanded to make up the short fall, as I see it.

A week or so ago I commented that I was beginning to get the feeling that there might be some sort of curious connection between the proponents of the abiotic theory and fundamentalist Christians. At the time, I thought my comment might have been a bit over the top and perhaps offensive to some. However, it now appears that this connection may be real and not just the product of my over-active imagination.

Something that I have also noticed (and I have no doubts whatsoever about this one) is that hardcore fundamentalist Christians for the most part dismiss global warming and believe that concerns over environmental problems are nothing more than propaganda by godless leftists.

As I have said before, the True Believer is largely immune to facts.

I think it's more complicated than this.  Check out www.whatwouldjesusdrive.org/ for an evangelical group that's getting it right.
Fundamentalist Christians have to explain why most of the oil is in muslim countries. If it is God's gift, why does it go to muslims? :-)
Actually if you through the history most of the oil was in Christian countries like USA, UK, Germany, Russia etc... But maybe because God loves us more, He let us use it up firstly :)
Has anyone ever heard of OPTI Canada, Inc.?

They claim to have a "proven, patented and low-cost way to upgrade bitumen without using natural gas."  If true, wouldn't they be a great investment?  They're publicly traded on the Toronto Stock Exchange.

Their website, opticanada.com, says that they're developing an oil sands project in a 50/50 joint venture with Nexen.

To me, the drawbacks are:  first, they're a start-up which isn't operating yet.  There's a lot of construction still to go, so they could have big cost overruns.  Second, they need to raise more money to provide their share of the construction costs.  Thus, current shareholders could get diluted if new investors got better terms.

The process, called OrCrude is covered in the excellant report 'Canada's Oil Sands Resources and Its Future Impact on Global Oil Supply' by Bengt Söderbergh written under the supervision of Professor Kjell Aleklett, President of ASPO and is available at the ASPO websiteand also also in more detail here

Basically they are getting the hydrogen needed using some of the heavier fractions of the tar, some to burn to give the required energy input, some to react with water to give syngas for the hydrocracking of the lighter fractions.

This lowers the yield and increases the cabon dioxide emitted per unit of sythetic crude produced but does eliminate the need for natural gas and does not produce the solid carbon produced by coking, the processes that raise the hydrogen/carbon ratio by removing carbon rather than adding hydrogen.

Yesterday's Los Angeles Times had an article about how Venezuela's skilled oil workers have fled the country:  


One article about Sect. Bodman of DOE suggests that Peak Oilers are a "vocal minority" in the oil community.

Is that true?
Is PO a "minority" view?
Do more than 60% of oil experts believe we have decades to go before hitting peak if ever?

I've always taken "vocal minority" to be a dismissive phrase. Too bad everything's got to have a little label attached to it.
It is dismissive, but I prefer to think of us as Margaret Mead spoke of vocal minorities.

"Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has."
Margaret Mead
US anthropologist & popularizer of anthropology (1901 - 1978)

Being my cynical self and reading between the lines, this appears to be an attempt by Bodman is to quash the whole idea of PO. The IEA had a go a few weeks and now it's the DOE's turn.

It won't stop the geology but it will stop the scrutiny. High prices will be blamed on speculation and above ground concerns as to supply. Irrational fears etc. Noisy PO minorities  etc. We have heard them all before.

Can we really expect the Exxon Mobil chief to say yes PO its real and it will affect us all profoundly?

The term vocal minority says it all.

I expect this will be one of many battles we will have to fight. Expect the full weight of the oil industry and the USGS and fellow travellers to be used, to muddy the waters and smear all in sight.

To me indicates one thing its game on and peak oil is real and is beginning to cause angst to the elites.

DOE Secretary Bodman's calling upon the oil industry for a study of the 'big picture several years out' is a classic example of a CYA non-study in which the real purpose of the study is to get the oil industry to go on record that things will be a bit tight but more or less OK.

 He knows the oil people can't say otherwise, lest they damage the value of their own stock. And he knows that if things go south in a bad way, he can always fall back and say, "Well, it's not my fault, because those bad oil people lied to me and said everything was going to be OK!"

It is also good PR, in that it helps demonstrate that our rulers are 'Doing Something.'  This is an exercise in producing fluff and consuming fluff.

Just a thought on the abiotic theory^H^Hlogy? --

The NAS paper mentioned an experiment (pnas.org) in which marble chips, ferrous oxide and some water were squeezed and heated, yielding a small amount of some hydrocarbon. Isn't marble ... or calcium carbonate generally, the product of biology? At least here on Earth?

And, even if supergiant fields (wikipedia) are waiting to be discovered, given this (reuters) kind of news, do we really want to keep exponentially increasing our carbon-burning activities?

I am familiar with the experiment you cite, and have commented on it several weeks ago.  It was done under high temperature and extremely high pressure. If the experiment and the associated chemical analytical work were done correctly, the results are intriguing. Mind you, those results in and of themselves don't prove abiotic oil, but neither should they be ignored. It is important to keep an open mind.

One thing to bear in mind is that even if oil has an abiotic origin, one is still faced with the very real problem of how, where, and how fast it migrates to the surface and whether we can get at it.  It will do us absolutely no good if this abiotic oil starts appearing at shallow depths a million or so years from now.

By the way, calcium carbonate can have both a biological and non-biological origin.  However, the vast majority of calcium carbonate is non-biological.

There's a good article by Jerome a Paris over at the Daily Kos in which he ends with the quote, "Let's stop worrying about energy supply, and worry instead about energy demand ". He almost gets it right here but he should have taken it a little further and defined what is really at stake and that would be
capitalism as we know it.
Cary - there are definitely two sides to the Peak Oil story - supply (technical) and demand (human driven). At its heart, the latter gets down to Jay Hanson-esque synopsis of our genetic drive for more. The key will be if we can 'feel' as if we have more but really dont. Currently, the average american doesnt get a dopamine rush from having the biggest sweet potatoes on the block but that is the direction we must head. "I am more sutanable than you", etc. Capitalism is nothing more than the combination of human nature and ginormous energy subisdy.
FYI: Matt Savinar over at lifeaftertheoilcrash.net has referenced what looks like a really good book-length study of limits on energy and other physical resources that came out in the mid-80s.  Glancing through it, it is reminiscent of William Catton's classic work OVERSHOOT, and of a similar level of quality:


In my opinion, older books like this one and Catton's - and also the Club of Rome study LIMITS TO GROWTH from the early 70s - are very useful in that they allow one to test the fundamental veracity of relatively recent peak oil predictions against longer range predictions emanating from the same basic set of assumptions.  In other words:  If longer range prophets going back 20-35 years were on the mark at least to a first order of approximation, there is then that much more reason to subscribe to the accuracy of more recent predictions - which may themselves then even be accounted correct to a second- and third-order of approximation, owing to refinements of methodologies, improved and more accurate data, etc.  But their fundamental utility hinges on the accuracy of their basic assumptions, which older studies help corroborate.

  Sasquach has it nailed.Until you change the paradigm
 that is used to judge worth in a society,a society is
  almost impossible to change.

    Remember Jimmy Carter? We had the type of leadership      
   that would have made peak a non-entity,had his program  
   been followed.

   Peak is going to hurt alot more due to our haveing followed the path of empire.I dont know how we now can change the culture at this point without major disrution and pain.I come into contact with many folks in my line of work.I speak the truth about peak oil,Tell the lists of sites,and try to raise public awareness,as much as I can.I even gave a presentation to the state legislature.{used the peakoil audiovisual from drydipstick}

    I now know how Cassandra felt....

    The only way out of this consumer consumption nightmare
  is for it to become "fashion" to consume less,as well as treating efficiency as the be all and end all of design criteria...This,in itself can drive some of the  change we will have to make.My only fear is that the powers that be have decided that the same sort of societal change that they initiated in Iraq would work here...and let"the market" design our new society,without such amenities as social security,worker safety ,and a whole bunch of other safety nets that have created our current lifestyle


well said snuffy!!

in the end I think nature and human nature will sort it all out, but it won't be pretty IMHO.  I view the rampant consumption in the U.S.  and elsewhere as a form of self medication.   Humans desperately trying to feed their soul through material consumption.  Trying to nullify the pain that comes from being separated from natural world we come from.   We perpetuate our psychosis  believing that more stuff, new stuff will fill the that empty place in our hearts and souls.  If only we could simple waking up and smelling the roses.......

Found this, from Hubbert testifying with regards to the
National Energy Conservation Policy Act of 1974, Hearings before the Subcommittee on the Environment of the committee on Interior and Insular Affairs House of Representatives. June 6, 1974.

At the time M. King Hubbert, was with the U.S. Geological Survey, Department Of The Interior.
M. King Hubbert on the Nature of Growth

By the way, it is a good time for us to review Al Bartlett's simple and excellent explanation of what unsustainable exponential growth is all about (ram file warning). Here's a quote--

"The greatest shortcoming of the human race is our inability to understand the exponential function".

enjoy, Dave
Articles like this bring to mind our discussion on whether WalMart would prosper post-peak:

The official holiday shopping season appears to have gotten off to a luke warm start, according to results announced Saturday by a national research group that monitors retail sales. Wal-Mart Stores Inc. was one bright spot in the crowd, reporting its sales exceeded expectations.


I and several others have reviewed WalMart: The High Cost of Low Price here:


What does this chart mean?  It shows the blue OIH (Oil Services ETF, a large component of which is the drillers) now outpacing the red XLE (the Energy SPDR ETF, which mainly includes the oil producers, eg. Exxon, Chevron, etc).  For the most part of 2005, the producers lead or matched the drillers in terms of stock appreciation, but they are now lagging the drillers.

My interpretation is that the money has decided that for the coming winter, we have enough crude oil and gas in the pipeline to see us through, but there will be no rest for the drillers.  Indeed when you contemplate the coming push for coal bed methane there will be no rest for the drillers for decades, since so many holes need to be drilled to tap this resource. Want to get rich? Invent a driiling rig to emulate a sewing machine.

http://www.khaleejtimes.com/DisplayArticle.asp?xfile=data/business/2005/November/business_November60 6.xml&section=business&col=

Khaleej Times

"New Technologies May Unlock More Oil" - in places such as Kuwait.

DOHA -- Recently developed technologies will help find and extract more crude from the Middle East, the world's richest-oil region, according to oil ministers and executives.
In an interview with Dow Jones Newswires at an oil technology conference here, Royal Dutch Shell PLC  Executive Director Malcolm Brinded said he is seeing "more usage of advanced technologies in the region than is very often recognised."
If their use gets extended it will mean in the "long term, more supply, no doubt about it," through "more exploration success and more recovery from existing fields," he said.
"Raising average conventional oil recovery from 35 per cent to 45 per cent" by using new techniques in the Middle East and around the world "could add some 20 years of current production," Brinded said during an earlier speech at the conference.

TOD bloggers may wish to look at this article and see what they think.

From the corporation that brought you the unexpected oil crash in Oman using modern technology?!!
This is big news.

From the EIA.


There has been much speculation about the year-on-year decreases in weekly petroleum demand data in the weeks following the production shut-ins and subsequent price increases accompanying Hurricanes Katrina, Rita, and Wilma. Total petroleum products supplied for the 4 weeks ending September 30, 2005 were 19,940 thousand barrels per day, almost three percent lower than the same four-week average last year.

However, EIA has cautioned that weekly data may have overstated somewhat the degree of decline in product supplied, due to its preliminary nature and reporting difficulties experienced by some respondents. In fact, it is not uncommon for EIA's monthly petroleum data to show higher demand levels than estimated from weekly data.

So, what do the latest monthly data tell us about current oil market conditions? For gasoline, it indicates that demand did not drop as much due to high prices as preliminary data may have suggested, and with weekly data now showing some growth compared to last year, it confirms EIA's expectations that gasoline demand is still growing relative to year-ago levels, albeit by less than previous trend rates.

<<<<<< SNIP

No real demand destruction at $3.00 a gallon makes one wonder what price it is going to take.

Another interesting thing is the difference between the monthly and weekly data.

Sounds like just another tactic to 'talk down' the markets!
I was at my parents over the Thanksgiving holiday, and while we're all a bunch of rotten liberals, a long time family friend was also there.  This is a gentleman is in finance and has owned several companies, one of which I worked for quite some time.  He is a conservative and he's done quite well for himself, but a fair man who took good care of his employees.  I had not talked to him in about a year.  The conversation turned to his interest in installing a PV system, and from there to PO and GW.  He was well versed on the topics.  He believes that there is a lot of money pouring into alternatives.  He had no use for the present administration or their policies.  I think perhaps he underestimates the amount of energy we'll need, and the size of the infrastructure problem, but these conclusions can be arrived at as long as the conversation can happen.  And I think that was the most heartening thing that I took from what ended up being a long discussion about some serious and scary topics - there are people who know what's happening, and believe these to be very real problems.  This understanding is not confined to liberals or conservatives (although we probably look at it differently), and there is a possibility for a real national dialog to happen.  The question is will there be time, and what can we realistically do?
peakearl mentioned earlier ....."unexpected oil crash in Oman using modern technology?!!"

Something I have pondered is: Is it possible that with new techology that we may better understand that we don't actually have the reserves that we think we have? Because I have read that new technology doesn't always mean more production or discovery.  

Which leads me to my second question. Proven reserves. How are they actually proven? Are the reserves proven in a several different ways? Are the reserves  more of an approximation?  With a tolerance of say plus or minus 100,000. Please explain in layman terms so that those visiting can understand.  

Bubba covered that a few weeks back.
i clicked the link, and got "permission denied". I would be interested in getting hold of it though. thanks.......
In the upper right column, locate Search the Oil Drum. Enter "proved reserves" and click Search. That will take you to Bubba's post. I got the same Permission denied. But if you go via the search path, it lets you in. Odd.
The path Stuart posted has an extra "/admin" in it, which probably works for Stuart but not for users in general.
Oops sorry - try this.
I have posted occasionally about my belief in the predictive power of markets, in particular the oil futures markets as a leading indicator of an upcoming oil peak, or lack thereof. Many readers object to this, largely because the markets  don't indicate a peak in the next five years. Oil futures prices are about the same as today's prices, and they aren't high enough to reduce demand by the levels that would be necessary to match the kinds production declines many here anticipate.

So why believe in markets? The first thing I would say is that it is not good to make your belief in the predictive power of futures markets conditional on whether it confirms your pre-existing ideas. If you only believe in methodologies that support your ideas, you will be incapable of learning new things. So you should believe in markets (or not believe) irrespective of whether market predictions confirm or contradict your existing beliefs.

Personally, the main reason I don't believe in a near term Peak Oil scenario is because of markets. If and when they start showing signs of such events, then I will believe in it. I will rely on the market prediction whichever way it goes, whether it is consistent with my earlier beliefs or not. We should all adopt this kind of philosophy towards prediction methodologies.

Why believe in markets? Markets act to bring people together who have information about the future course of events. By taking positions in the market based on their information, people affect market prices. The net result is that the market consolidates all the information available on the topic, and the result is reflected in prices. If there is high-quality information which shows that a market is mispriced, people will profit by taking positions in the market which take advantage of the disagreement. By doing so they will move the market price until the opportunity for profit disappears.

Markets even make use of private information. Anyone who has private (secret, insider) information which shows that a market is mispriced can profit by taking positions to exploit the difference. Even though they have no intention of doing so, their actions will move the market so that the market price incorporates their secret information.

Given the way markets work, it is illogical to suggest that there is high-quality, publicly available information which the market is ignoring. Yet this is exactly what near-term Peak Oil advocates are doing. They claim that public information about the future course of oil supply and demand amply demonstrates that we face near-term shortages. (Except, of course, that a number of Peak Oil advocates don't believe in near-term shortages.) Not only are they convinced that the data makes their case, they believe (mostly) that there can be little doubt about it. The data not only points to a near-term shortage, it essentially demands it. Any rational person looking at the data in an unbiased manner will, according to them, come to agree that near-term shortages are basically inevitable.

If data like this really existed, markets would not be predicting oil prices a year to five years in the future in the sub $60 range. The existence of this kind of information is theoretically impossible, given how markets work. The only logical possibility is that things are not as clear cut as near-term Peak Oil advocates make them out to be. The future is not certain and there is more uncertainty in the situation than near-term Peak Oilers will admit.

Note that I am not saying that markets are always right; merely that they do an excellent job of incorporating all available information in making their predictions. The fundamental mechanisms that make markets work automatically reward people who bring new information to the market, as discussed above. Sure, there are many cases where markets have been wrong. But in those situations, there was no credible, convincing information that things would go differently. That's different from the near-term Peak Oil situation, where advocates argue that the markets are simply ignoring information that is credible and undeniable in predicting a near term shortage.

In summary, markets incorporate available information; a near-term Peak Oil scenario would lead to a supply crunch that is not reflected in market prices; therefore, available information is not consistent with a near-term Peak Oil scenario.

I share with you a belief that the efficient markets hypothesis is a decent approximate model of the historical behavior of oil markets.  However, I find your view that the current level of the oil market is inconsistent with a near term peak strange.  CTL is supposedly profitable above $40.  Oil futures are higher than that as far as the eye can see.  So markets are saying "Bring on the CTL!".  We know that recent price levels have in fact caused US petroleum demand to be lower than last year (by 1.5% in September), and has also caused a collapse in SUV sales.  So the market has been saying "Lower oil demand!", though the recent pullback in prices suggests it is now worried about overshooting and lowering demand too much too soon.

Thus the recent market price history seems to me entirely consistent with a fairly near-term peak/plateau, though not with steep near-term declines, as you note.

This sounds right to me. Futures markets are clearly pricing in an expectation of continued high prices, which I believe supports the view the future oil supply will be constrained.

Kudos to Halfin, however, for continuing to defend his point about markets and the predictive value of futures against some fairly hysterical attacks. No one is saying that markets predict the future perfectly, so citing previous failures has little meaning. The future is inherently unpredictable.

However, most quantitative studies that I have seen show that compared to ALL other methodologies, markets are the least worst. Markets are not perfect, but they do provide very useful information. Anyone who chooses to entirely disregard all market signals is being willfully ignorant and thus pitching an ideology, not analysing reality.

The reality is that a large number of informed players are betting on a future that does not fature a short term exhaustion of resources. It is unreasonable to belive that government officials and the entire oil industry know that the peak is around the corner, but have not acted on it.

By the way, I do believe in peak oil, think we are at the end of cheap/easy oil, and think prices will increasingly reflect this.

i have observed and been part of markets, although not futures markets, for 25 years. in all due respect to the above posters, i haven't experienced a rational market in that time frame. eventually markets do regress to that mean, but often they seem to overshoot in one direction or another. i have talked to too many participants who act on gut instinct and herd mentality to believe in market rationality. oil, until further notice, is in a bull market dating back to 2003,but is a $60 futures price telling you something about future supply??...i dunno...but when demand does eventually start overwhelming supply, i would think that a 5 year contract will be valued quite differently.
Overshooting is not inconsistent with the efficient markets hypothesis.  It's just that there are a lot of lags in the system, so price changes have to be applied for quite some time before the effects become clear, by when too much change is in the pipeline and there is a need to furiously backpedal.

I think the effects of herd/irrationality are probably stronger in markets with a lot of consumer involvement (such as houses or broad stock indices).

Consider hedge funds. Well financed, the best minds, best computers, etc. But they frequently act more like a herd than individual investors because all the programs look for similar signals, amplifying existing trnds to large movements in large markets, such as oil, causing the market to overshoot, first on way and then the other. They don't think much about where oil should be in five years, they worry much more about the next five days.
I don't think anybody suggests closing the markets and starting to exchange rocks for oil.

What most of us object is this superstitious overrelience on market. Somehow some people think that the "market" is "smarter" than "us". So, let the "market" "decide" (whatever). This is equivelent to saying that two idiots make one smart man and two smart men make one professor. Oil markets are just a mechanism for settlement of expectations. They are not a consortium of oil geologists nor a bunch of Cassandras staring at their crystal balls. They behave like humans. If USA hockey team won to Canada yesterday that rafinery outage today will remain unnoticed. If they lost then we can have a major spike. That's what their "predictive" power is - simple psychology of greed + fear. Everybody knows that nobody can see the future - the result - market is practically unpredictable hence it is so hard to make easy money. I would not be too wondered if after 5 years oil is 40$. A price overshoot and severe recession can bring the price down to even 10$, who can know?

It's an interesting question whether current oil prices of $55-60/bbl are sufficient to bring demand and supply into balance in the face of a near-term plateau in supply.

It doesn't seem likely that much additional supply will be elicited in the near term, over the next couple of years, at this price. I could be wrong about this, though. Maybe thousands of little wells will start producing again and cumulatively produce enough to allow some supply growth. An example is described in today's L.A. Times:


(A nostalgic article for me; when I was in college I worked on those Orange County oil wells, and indeed some of them were right in the middle of housing developments. The neighbors complained about the smell and noise, but the wells had been there long before the houses.)

Absent new supply, the question is whether $57 oil can stop demand growth.  I'm skeptical about this but again I could be wrong. We've had oil in this price range, and quite a bit higher, since the beginning of summer, almost six months. If it was going to hit the economy that hard, I think we'd know about it. Instead the stock market is doing great (the S&P 500 hit a four year high Friday) and seems to expect considerable economic growth in the near term.

Granted, the S&P's success is mostly a prediction for the U.S. economy, and it's likely IMO that the first hit in demand will be in the third world. In general, poor people economize before the rich have to. The news from China is confusing, but maybe we could see a drop in demand from developing countries sufficient to allow the West to continue its growth.

But still it seems likely that if we can't increase oil production in 2006 we will see prices closer to Matt Simmons' $100/bbl oil than the sub $60 predicted by the futures markets. I can't see how these prices are consistent with a substantial probability of a production plateau, let alone the near-certainty which many Peak Oil advocates see.

But if today's prices do and will suffice to reconcile supply and demand, maybe Peak Oil won't be that bad after all, at least for the next five years.

Well, while I have certainly been an advocate of the strong coupling of oil prices to GDP, and the price inelasticity of oil, the latter is not zero!  Nor is the former exactly 1:1.  I think the first line of defense that an oil stressed economy takes is to start using more efficient vehicles.  That change has been very clearly set in motion (see the slide on SUVs about half way through Prof. Hamilton's recent talk.  We've also got a near curtailment of growth in VMT in 2005.  So I think there are definitely signs that the economy's powers of adaptation are cranking into action.  They may be limited, but they do exist.

I agree that supply adaptation is slow: the planning horizon for new projects is typically 3-5 years.

As to whether peak oil will be bad in the next 5 years or not, much depends on how long the plateau is, and how steep the decline afterwards.  Much depends on whether the generally stressed energy situation is exacerbated by geopolitical shocks.

I'm not sure if you guys understand supply and demand. It is not the supply, or demand, or price, or anything else that brings the market to balance. It is the balance that does this. That's why they call it balance. Supply, Demand, and price move up and down - only. They react to each other based on what the balance wants to do. Balance moves amongst them, balancing. If you don't understand this, you will never get it. Supply goes down, price goes up, but by how much? Only the balance knows. Price goes up, demand goes down, but by how much. Only the balance knows. Demand goes down, price goes down, but by how much? Only the balance knows. Price goes down, demand goes up, but by how much? Demand goes up, prices go up, supply(hopefully) goes up, but what if it doesn't - easy - prices go again. Until when? Until the balance decides to increase supply. When balance can't change anything - then we have a problem.
People with economics/business backgrounds tend to say things like this, but it isn't actually a very helpful way of looking at energy because everything is so damn inelastic.  Supply can change in response to price, but only extremely slowly because supply projects of any size take 3-5 years to develop.  Demand can change in response to price, but it takes a great deal of price change to produce a very little bit of demand change, and if a lot of demand change is required, the economy has to go in the tank to do it.  As long as the mismatch between supply and "business as usual" demand (which is pretty much linked to GDP growth) is small, adaptation is possible.  If it becomes large, much pain will follow.

See here, for example.

I'm not sure if you guys understand supply and demand.

In school they teach you there is a clean "supply" line on the Price versus Quantity plane and a clean "demand" curve of opposite slope. They meet at a precise intersection point.

Real world is not like that.

The intersection zone is a fuzzy mess. There is a spread of ASKed prices & quantities by so-called sellers (not all of them being ready & willing sellers). There is a spread of BID prices & quantities by so-called buyers (not all of them being ready & willing buyers). Then there is spread of deal closings within this mess at individually negotiated (manipulated) prices & quantities. Then there is the reality of how many buyers and sellers actually come through on their deals.

You sort of know this when you go shopping for a computer at Best Buy, Fry's, etc. Each store has a different price and then when you are getting ready to close on a deal, the salesman talks you into buying something else at a higher price, telling you he is your "friend". That's real world.

In oil we see the Saudi's telling us they are our friends and they have as much oil as we want, only not at this moment because of some conjured up technicality. We have Genral Motors telling us they are our friends and we should all buy SUV's because it is a once in a lifetime opportunity at distress prices. We have Toyota telling us we will save fantstic amounts of money by buying their hybrids, only that they are a bit more expensive than non-hybrids. The P & Q intersections are a fuzzy, messy set of affairs.

It is not the supply, or demand, or price, or anything else that brings the market to balance. It is the balance that does this. That's why they call it balance.

Can you say "tautology"?

The writer claims we might not understand supply and demand.

Some things we understand all too well.

It's a philosophical difference.
... my belief in the predictive power of markets ...

Personally, I believe in inhaling vaporous toxins while watching the latest Harry Potter movie. Soon I have incredible "visions" of the future to come.

If Harry's magic wand points upwardly, then good economic times are surely approaching. If it points down then expectations prognosticate a downturn of events that exceed irrational exuberance. In 2001, Harry's wand was pointing up to infinity and beyond.

I believe in the predictive power of Harry's Wand.
I therefore fully misunderestimate and appreciate your belief in the predictive power of "the markets". We are truly a rational collection of creatures. (Sorry, couldn't help it.)

Markets act to bring people together who have information about the future course of events. By taking positions in the market based on their information, people affect market prices. The net result is that the market consolidates all the information available on the topic, and the result is reflected in prices. If there is high-quality information which shows that a market is mispriced, people will profit by taking positions in the market which take advantage of the disagreement. By doing so they will move the market price until the opportunity for profit disappears.

Over and over, I've run across such idealized, conceptual descriptions of that abstraction, "The Market," with the underlying assumption being that this is how it actually works in the real world.

Can anyone direct me to any repeated, controlled experiments that have indicated that this is how it works?

How is this testable? falsifiable?

and please don't use the phrase "history shows" because history is not a testable, repeatable, controllable experiment.

I have more, sorry:

Then there's the post hoc fallacy.

On day 1, event A occurs. On day 2, oil stocks rise or fall.

On day 3, the pundits jump on event A's occuring on day 1 as the "reason" for the rise/fall on day 2.

How do you prove the cause-effect relationship between event A on day 1 and the stock price change on day 2?

I'm not done yet:

Further, how do you determine that this "cause" is not due to marketeers' perceptions that "when event A occurs, oil prices should probably fall; therefore, sell"?

When event A DOESN'T "cause" the expected rise/fall in stock prices, what other post hoc explanations come in handy to explain away the failure to predict it?

More working hypothesis of "market" right now is "a mutual perception system based entirely on access to cheap fossil fuels to power it."

Don't forget the dark side-manipulation,disinformation,and ignorance.

After all who would have thunk the DJIA would have risen on the same day GM announced their 30K downsize.

Corrupt guidance in all markets thru our ever expanding universe of derivatives has to be considered.

Something which I've been mulling over a lot recently, and I wanted to get opinons about it:  

If (as we've discussed) there were a serious national effort to address the social, technical, source, conservation, and infrastructure issues, what would the effect on the economy be?  I'm no economist, so it's not clear to me how all this could be funded to begin with, but it seems to me that this would have to be a better thing to base an economy on than borrowing Chinese money to build each other houses.  I'm imagining new products designed and maufactured, new infrastructure on a very large scale.  Whole new industries would be created, or at least an massive expansion of ones beginning now.  It might not be a net increase in jobs, but it would help to offset the decline in tradtional industries dependant on the oil infrastructure.  

personlly, i think this would be a great idea, but you would have to change the mentality of the business world to accomplish it. 20 years ago, i thought globalization and free trade was a good idea, and outsourcing was a logical but painful result of that idea. by now, we have outsourced our economy to the third world, and seem to be left with an economy of burger flippers and mortgage financers. outsourcing became the easy answer to dealing with increased costs and other assorted woes ,like labor relations.
 it would take an entirely different mindset by government and business to realize that hey, we don't have a workforce , and without a workforce we have a shell economy.to paraphrase menkin the easy answers to hard questions are usually wrong.
Twilight poses an excellent question, and I think it deserves a thread of its own.

I've been thinking about what it would take to bring back the hundreds of thousands of emigrants who have left Lithuania in the last 15 years. What kinds of jobs could they do? It's a massive-scale issue. In a country of 3.something million people, the emigration of 300-400,000 people punches some big holes in your workforce/population. Just read this morning that in the port city of Klaipeda (188,000 people), there are basically no working-age unemployed males who are not severely disabled, dependent on controlled substances, or otherwise difficult to employ in some meaningful way.

Just think about the opportunities that a national effort to deal with Peak Oil might present in the U.S., let alone any other country. And no, I'm not thinking of government, when I say national. Winning the Oil End Game points out plenty of ways the markets can be nudged with a not-so-invisible hand.

Administrators, maybe Twilight's question should become a separate thread?

If (as we've discussed) there were a serious national effort to address the social, technical, source, conservation, and infrastructure issues, what would the effect on the economy be?

Theoretically, any effort to divert the economy from its "natural" course will lead to a world that is poorer. We are taking food from the mouths of our children by such actions. Our capitalist economy will naturally respond to the threat of Peak Oil by developing alternative resources and increasing conservation, as oil prices rise in advance of foreseeable shortages.

However there may be cases where, for some reason, the economy is unable to respond effectively. Economists call this phenomenon "market failure" and it does occur in certain situations: for example, if people's actions impose costs on others that they don't have to pay for; or if there is a great deal of "friction" in the economy that makes otherwise profitable trades impossible.

The main possible market failure I would see with Peak Oil is if it is so far in the future that it is beyond the effective planning horizon of the markets, yet is so severe that mitigation efforts must begin far in advance in order to minimize the damage. If Peak Oil is in 2015 or 2020, markets today probably can't effectively respond. That is so far in the future that there is enormous uncertainty about the course of the world, even ignoring Peak Oil. We could face a Great Depression, or an enormous economic boom. There could be transformative new technologies like nanotech or A.I. which could force us to rethink the very foundation of the economy. We could have some kind of disaster like a new pandemic or some terrorist-caused megadeath. Peak Oil is almost just a blip on the radar when you are trying to look that far ahead.

If we were nevertheless convinced that Peak Oil was a serious enough threat that it should be addressed, and that starting 15 years in advance were necessary, then it might make sense to use government incentives to begin moving the economy in that direction. Probably the simplest approach, with the greatest leverage and producing the most efficient response, would be an energy tax on fossil fuels. This will simultaneously encourage conservation and development of alternatives. By merely raising the costs of fossil energy, the market is free to adapt as efficiently as possible. This measure alone would gently push the economy towards using less oil and would put us in a better situation if and when a Peak Oil scenario materializes.

It would be nice to share your faith in the markets as the best predictor and navigator of the future, but respectfully I cannot.  This view just does not match with what I see happening.

As an example, the government imposed CAFE and emissions standards on the auto industry, and the free marketers howled in protest at this interference.  But once they got past the denial stage, these requirements forces them to develop advanced engine control systems, which in turn caused the development of a whole class of microcontroller.  These devices have now found use in a huge variety of products and represent a large industry of their own.  Now, according to your comments, this government interference amounted to "taking food from the mouths of our children".  We can't go and examine an alternate world where this didn't happen, but I'm not buying it.  

One of the problems I have with the idea of the market the best predictor and navigator is that I don't believe there are many truly free markets, at least not on a large national scale.  What would the auto industry be like if the government had not built roads?  If the market is so good at forecasting, then does it still work the same in a market/industry as manipulated and distorted as the oil industry?  Beyond that, it seems to me that the oil futures market is about as diametrically opposed to a free market as you can get - the people involved in it are a relatively small, closed group of industry insiders, it is not something that most people can/will participate in.  I don't see much of anything about the oil industry that looks like a free market - so how is it that having what amounts to a relatively small select group steer the ship is more likely to be an accurate predictor than, say, having the elected government do it?  To my way of thinking, it isn't, it's only likely that one group may be trying to achieve different goals, and thus may steer in a different direction.  

I'll have to sit down and think of specific examples, but there are many times when the government has "interfered" in the markets, by sponsoring research, setting standards and rules, limiting prices, etc. - and often this intervention has lead to the growth of industries that would never have formed, or formed much later, without it.  The military is one such example, but with the disadvantage that the direct product - a weapon - is of no value itself (it only destroys, if it is ever used at all).  Only the secondary developments are of value.  Think of a program on that scale, where the direct product was beneficial!

However there may be cases where, for some reason, the economy is unable to respond effectively. Economists call this phenomenon "market failure" and it does occur in certain situations: for example, if people's actions impose costs on others that they don't have to pay for; or if there is a great deal of "friction" in the economy that makes otherwise profitable trades impossible.

Don't forget the bigger causes of market failure:

Imperfect competition. In many places, state-owned monopolies control all output. Arguably over 70% of the world's oil supply falls into government-owned monoply or limited oligopolies. And cartels like OPEC do little to improve market functioning.

Imperfect information. You insist that the markets are omniscient--but isn't it patently obvious that worldwide information on oil reserves, supply, and even demand is woefully inadequate? The fact that markets have come to a consensus opinion in the absence of good information doesn't mean that good information exists, or that the opinion is well-founded.

To your credit, you do mention externalities, but ignore the implication. The externalities of the oil market are huge: global warming, geopolitical instability, other pollution effects. These are not priced into a barrel of oil in any way. I don't expect that these externalities will ever be fairly priced into what we pay, however.

Brilliant commentary on marketeer voodoo:

This unique form of behavior -- idealization and absolutization of the free market -- is especially puzzling considering that inability of the market signals to reliably serve as a long term indicator of anything at all has been established beyond any controversy, as lakes of ink have been spilled over documenting the minutia of phenomena such as Enron and LTCM collapses, the hazards of the current real estate bubble and other market phenomena, and as the same breed of analysts who in 1999 were seen busily convincing the public that, say, the common stock of Intel Corp. had been a bargain back then at the price of $80 a share, were spotted in 2000 spreading the message that the same Intel stock had a long way to fall at a price of about $25 a share.


About $60 Oil Hitting the Third World.  I am an American currently living in Brazil.  We pay the equivalent of $3.50 a gallon for gasoline down here.  I have not seen any evidence of demand destruction.  Nada.  In fact there is a huge home and apartment buildout going on, a new mall, the largest in South America is presently being constructed.  Further, there is a Ford Factory here, and the roads, all day long, are busy, with traffic jams the norm.  

One last anecdotal piece of evidence.  After Katrina, the price of Gasoline rose 10% per gallon.  No body I know raised a peep.  

Demand Destruction, my ass!

Same in Thailand. After the fuel prices started falling a bit, big SUV sized car sales is back on track.

I have seen an increase in the number of new small Honda Jazz type vehicles, but the large pickups seem to remain the most popular.

Yes, traffic is the same as before and increasing. People talk about the high price of fuel, but we all still seem to drive the same amount.

Fantastic, thanks!!!
I would like to comment on proven/proved reserves:

Very interesting read indeed. thanks! I was on vacation during those days it was posted and somehow never saw it when i came off vacation and tried to play "catch up" on TOD news.
 That being said, i do have some questions about the concept of proven reserves.

It would seem that seismic testing and petrophysical tests (not sure what that is), and well tests information as well as numerical modeling to establish boundries would be a definitive source to make an educated guess that there oil in the field. It provides such hard positive data, to prove virtually beyond a shadow of doubt there is or isn't oil in the test field. because it's establishes definative and reasonable PROOF.

It just seems an oil company must provide positive proof of oil through exact positive data, in order to call it proven.

they do not allow any use of probabilistic modeling methods that stuff is like statistics, the #'s can be moved around to mask something else. and if someone has never even been schooled in Stats, then it becomes pretty much Greek.

And maybe the companies do infact do this, but to just arbritrarily pull a number out of the hat using fuzzy math with a touch of "razzle and dazzle" to quantify oil reverves sound really scary.

Economical recovery is one thing, which is really cut and dry: it's either worth it to extract or it's not.

Besides who wrote those rules? lawyers and CPA's? the SEC rules are about as dry as Death Valley. written only by laywers so as to be only read and interpreted by laywers? sounds like a sham to me.  

I stand corrected. after having read the SEC rules, and it is very dry yet informative, and i had to consume lots of fluid to continue the reading, i see that an american company does not use fuzzy math  much less baffle with B.S. but rather must prove oil exist with good data. thanks for the link for that! it was just what i was looking for!