There were 248 rigs operating in the Middle East in August, the most since November 1988 and 100 more than the average during the 1990s, according to oil services company Baker Hughes. Opec's news came as consuming countries sought to deflect the blame for high oil prices from their own lack of investment in refining capacity and slow progress in curbing demand for large, fuel-inefficient cars.

Gee, let's see if we can blame the Man in the Moon.

This summer's world oil crunch adds new significance to Monday's national elections in Norway, where most last-minute polls show the sitting government trailing a leftist coalition looking to curb oil and gas exploration.

At stake is whether Norway, the world's third-largest crude exporter, can replenish its dwindling oil reserves with fresh exploration in the frigid Barents Sea and around the Lofoten Islands in the Norwegian Sea, Norway's most sought-after acreage...

Two of the three parties in the left coalition are opposed to development in the Barents Sea and in the areas around the Lofoten Islands for environmental reasons. Environmentalists say both regions are extremely fragile ecosystems, some of the last pristine waters in Europe.

"The Barents Sea is Europe's food chamber for fish, and you don't want to gamble on that," said Hallgeir Langeland, Socialist Left, or SV, energy spokesman and vice chairman of Parliament's environment and energy committee.

Langeland said SV, the member of the leftist coalition most opposed to exploration, doesn't want any more activity in the Barents, and will even negotiate to prevent the 19th licensing round - already announced and expected to be awarded in early 2006 - from going forward...

http://www.rigzone.com/news/article.asp?a_id=25194

Guess what! The centre-left won the elections!

Same [fruit] goes for oil. It's relatively cheap to poke a hole in the ground and extract the big pools of oil. But as stocks deplete it requires more and more investment to extract the deeper, harder to find stocks. What creates the incentive to extract these tough to extract oil stocks? Higher prices of course.

People need to realize that this is a drilling boom for the oil patch. Rig utilization is hovering at 90% of available rigs or even higher. We can draw up all the plans we want, but in the end, drillers are limited by rig and material availability. Prices are still not high enough for everybody to pile on in wild abandon - the threshold is probably around $100-$125 a barrel sustained. That will draw money into the industry via the stock market, and these companies will have to spend it or return it as dividends.

The remaining oil on this planet is in difficult to reach places - geologically, politically and geographically. This means the risk is higher for these areas, and in many cases, new technology is required to get the oil out of the ground and into production. Oil prices will not only need to be high, but to remain high for these areas to be drilled.

Couple of interesting articles in the Energy Pulse

The Impact of Oil Supplies on World Peace

and

Insidious Inflation

Thanks for the great discussion.  I didn't know I could get so many people world up with simple post.  Anyway, just wanted to address a couple of points from Dave's comments.  

"It must be nice for Tim Haab to live in such a conceptually simple world."

My world is conceptually simple and I like to keep it that way.  The amazing thing about economics is that conceptually simple models have amazing explanatory power.

"Does he know discoveries peaked in the 1960's? What does he think of the fact that the oil companies spend more time consolidating than exploring? Has he ever listened to an oil geologist talk about new prospects? Does he know that we use roughly 4 times as much oil as we discover year to year?"

Yes, Yes and Yes.  But that's not the point of the post.  The point is simple.  Higher prices create incentive to try to get at that hard to reach oil.  As the article suggests, that is exactly what oil companies are doing.  I said nothing of whether they would be successful or whether this was an efficient long-run solution.  Just very simply, we would expect that higher prices would generate profit opportunites for oil companies if they invest in exploration and lo and behold the prediction is right.

"I suppose I should comment on Haab's own blog but maybe he'll take the time to read over here at TOD where he might actually learn something."

Come on over (www.env-econ.net).  I do read the oil drum and have learned a great deal.  Maybe if more people came over to read Environmental Economics, we might be able to start to develop a solution together.  Understanding the science and the incentives seems to me would go a long way to providing feasible solutions.

Thanks again for the great discussion.  Glad I could provide fodder.

"Economists think that if you roll up to the cashier's cage with more money, God will put more oil in the ground."

No economist I know thinks that (and I know a lot of economists, we're funny that way).  In fact, I don't know of a single economist who finds fault with the argument that eventually oil will be depleted to the point that it is economically infeasible to continue to extract.  The difference between what most economists believe and what I am reading here is that we believe that increasing prices will smooth the transition to alternative sources of energy.  

Higher prices create incentives for both consumers and producers to react.  In the original post over at Environmental Economics (http://www.env-econ.net/2005/08/energy_research.html-- more shameless self-promotion) I list the following predictions from the conceptually simple (and glib) economic models:

--INCREASING OIL PRICES creates the incentive to invest in transitional technologies...
--PRICES OF ALTERNATIVES FALL with investment...
--CONSERVATION OF EXISTING STOCKS will ease the transition...

In the latest post I added:

--Higher oil prices create the incentive for existing producer to INVEST IN EXPLORATION.

Nowhere do I argue that we will find more oil (although that is entirely possible) or that oil is unlimited.  We economists really are reasonable people with a grasp of the science.  Speaking for myself, I believe that a knowledge of the science combined with a knowledge of what drives producers and consumers to act (greed--yep I said it) can lead to solutions, not panic.  We just have to get the incentives right.  What are the right incentives?  HIGHER PRICES.

As for Valium--no need, I'm perfectly calm.  I just right in caps for emphasis.  

Deffeyes explained pretty clearly (at least in "Beyond Oil") that we should expect increased price volatility as oil peaks, not necessarily continuously higher prices. The oil companies likely know this too - that's why they're being very cautious about expanding to more expensive fields: those investments may never produce any profit if the oil price drops again. I heard elsewhere that they are only considering drilling where it will pay out with oil at $25/barrel right now. If they thought they could make big profits with more costly oil, they'd be doing it.

    I called 6 different people last month, with 6 different companies. We all work in the oil field as drillers or geologists or petrophysicists. We all operate in various domestic and international areas. Everybody has the same outlook, and Bubba summed it up, but let me explain it once more for those new to the site.

    We have basically spent the last 20 years honing our business model for maximum efficiency due to low oil prices. We are very efficient at finding oil and gas, very efficient at drilling no matter where it is, and very efficient at extraction. New technology is something we deal with on a daily basis, often inventing on the fly as circumstances dictate in new areas or for unforeseen problems.

    Over the last 20 years, we have produced almost no replacements for the curent gray haired oil field engineers and geologists. Nobody wanted to enter an environmentally challenged industry (per the MSM) or enter a depressed industry. Infrastructure expansion was limited by this same oil price, and thus for every 3 retired rigs, we built one new modern one. Instead of building our own pipelines, we rented or leased existing ones. We cut every corner we possibly could to maximize efficiency in the face of low oil prices.

    We have run satellite and aerial gravimetric surveys, used chemical sniffers, 3-D visualization, 4-D interpretation, shot uncounted miles of seismic surveys, and put our people in harms way in West Africa and other politically difficult areas. Everybody knows somebody that has lost his life working in this industry. We are a very close-knit group, because there are so few of us. I don't know who Bubba is, but I bet I have heard his name or already know him anyway. That is how under-staffed we are.

    We have found almost everything there is to find of consequence. What we are doing now is scraping the bottom of every known reservoir, and drilling almost any prospect that might have a shot. Our dry hole rates are all rising in spite of the new technologies. The real warning shot to the world should have been the mergers of the majors - the only logical reason to do this is because it is easier to buy reserves than to find them!

    The only areas we haven't been able to explore heavily lie in US coastal waters. But even these areas were looked over in the 1970's, albeit rapidly. What we saw wasn't anywhere close to what we have in the Central and Western Gulf of Mexico, so we remained there. The Eastern Gulf of Mexico is structurally disconnected from the West - the geology is totally different. The Atlantic Coast has some prospects, but the wells already drilled there were ALL dry. The Pacific Coast has oil, but also has the single largest concentration of environmentalists and NIMBY'ers in the nation, and the highest drilling and production expenses in the country. This offsets the marginal amount of oil there. ANWR is a total joke - the structures are not big enough to be of consequence globally.

    Is there more oil to be found? Yes, but not enough to prevent Chevron and Texaco from buddying up, or Exxon and Mobil or BP and ARCO. Those facts, in and of themselves, should make any thinking person realize that this industry has limited extraction options. When we got to places like Colombia (1992), where we have to fence in rigs and put up razor wire around the perimeter and hire mercenaries to secure a drilling site - it means this is the most economical field we can find, and THAT should tell people the state of exploration. When we go to places like Angola (1995), where you can have your throat slit for being the wrong color or because someone is having a bad day, THAT should tell people how difficult it is becoming to find oil.

    The response you are seeing today is it. It is all we can do, as rigs and competent, trained people are the issues. The price of oil can hit $150 and we will not be doing anything differently, because we simply cannot. $200 a barrel oil WILL NOT MAKE OIL MAGICALLY APPEAR in the world market - anybody espousing something along those lines is a complete idiot.

    If you want to get real about the reserve picture, subtract 20% from it and you may be close to the truth. It is in the interests of oil companies, Reserve Bankers and entire governments to OVERSTAE PROVEN RESERVES! At every step, proven reserves are inflated. Take these numbers to the bank at your own risk. Oil people know this intuitively, as we buy and sell properties every day and have to wade thorugh all the smoke and mirrors.

    As far as depletion is concerned, the UK is the best model. It used all the new extraction and reservoir technologies available in the last few decades. Other areas using the same technologies should follow similar curves, providing reservoir characteristics are basically similar. And as the UK has both sandstone and carbonate reservoirs, it should be a reasonable assumption.  --J

To choose instead to believe a university research publication or a report from a think tank that is paid for by some special interest group rather than OUR OWN CONTRIBUTING OIL INDUSTRY PEOPLE...well, it's kind of like choosing to believe the moon is made of cheese when the astronauts are sending rocks back....

I don't see `Peak Oil' as a problem.  `No Oil' would be a problem--a very solvable problem if prices rise high enough.  Sorry for being glib.

Secondly, in response to Eroie's comments that there are many reasons why major oil companies are using price forecasts in the mid-20's.

1. They don't want to scare the shit out of everyone.  The price premises that companies use are supposed to be company-proprietary.  But in fact they become open secrets very quickly.  The financial press knows them almost as soon as they are issued.  If these major companies jumped there price forecasts to $40/bbl from $25 that would send a shock wave through the finanical markets.
   
2. Companies like Exxon, ChevTex etc. are cognizant of the hyper wage, service, and supply inflation that happened in the late 70's and early 80's the last time prices skyrocketed.  They are having enough time right now retaining staff and dealing with rig shortages.  If Exxon jacked up their premise then Shell and BP would follow and the bidding wars for staff would begin immediately.
   
3. Although these companies supposedly have planning premises in the mid-20's, look at where a lot of the money is going.  There is no way that all that capital would be pouring into Alberta for oil sand mining projects if the people running Shell, ChevTex, ConocoPhillips, and Exxon (through Imperial) truly believed in $25 oil.  
   
4. For new projects, in my company, we are being told to bring them forward even if they are not profitable at the planning premise price.  

The response you are seeing today is it. It is all we can do, as rigs and competent, trained people are the issues. The price of oil can hit $150 and we will not be doing anything differently, because we simply cannot. $200 a barrel oil WILL NOT MAKE OIL MAGICALLY APPEAR in the world market - anybody espousing something along those lines is a complete idiot.

I don't see `Peak Oil' as a problem. `No Oil' would be a problem--a very solvable problem if prices rise high enough. Sorry for being glib.

A thought puzzle, because I side with Bubba and J on difficulty in finding more CHEAP oil.

Assume we have only extracted 40% of all the oil contained in the earth.  But that oil was in the largest contiguous fields.  Was the thinnest flowable oil.  Was in the shallowest fields below surface.  Was under the highest pressure when initially drilled into.  A lot of assumptions I know, but having read the excellent posts by HO, Bubba, J and others it seems like this is what happened over the past 100 years.

Now assume that consumption is at an all time high of around 84 mbd.  Supply needs to meet this or go up significantly and there is still 75% of all the oil known still in the ground (based on my model above).  Does this mean there is no barrier to matching and increasing supply over 84 mbd for the next 50 years?

I agree that economic incentives will empower the removal of a lot of that oil.  But it seems to me that the limit is not on how MUCH oil is still in the ground, the limit is on how FAST that oil can be removed per day.  If all the technology and money that can be brought to bear can not remove the remaining oil as fast as the previous oil, supply will go down on a daily basis.  This will occur on ALL old wells.  Only new wells will produce at the highest rate expected regardless of iincentive price.

I have not seen enough discussion here about the technical hurdles involved in maintaining production rate from existing wells in regard to cost to maintain that rate.  Maybe this is an assumption in all the depletion models.  Rates go down so improved technology (CO2, water, horizontal drilling, etc) is used to maintain as high a rate as possible.

My thought puzzle is that on a well by well basis doesn't the EROEI goes down pretty quickly and continue to go down forever?  But I don't know if this is a linear line or exponential drop.  

And isn't this why deep wells decline so much faster?  As soon as the initial pressure drops the costs go up much faster than shallow wells.  Lots of oil left in those deep fields but getting it out of the rock AND to the surface takes more and better technology.