DrumBeat: June 27, 2006

Update [2006-6-27 9:27:24 by Leanan]: From the Wall St. Journal: Challenges Stifle Norway Crude-Oil Output.
OSLO -- Norway, the world's third-largest oil exporter, is battling to stem falling crude output as high costs, maturing resources and labor disputes threaten to undermine near- and long-term production goals.

For years, the Nordic country has been a top supplier of crude to world markets, particularly Europe and the U.S. Despite record oil prices and investment, however, government and industry officials say oil-union strikes, a tight rig market and a dwindling number of big-field discoveries may accelerate the inevitable decline in crude production and prevent the country from meeting its output targets.

This is labor dispute they are talking about: Oil industry to strike in Norway
OSLO, Norway, June 25 (UPI) -- Norwegian oil industry workers may be preparing to go on strike, Aftenposten reported.

Leif Harald Halvorsen of the oil industry's national association told reporters that drilling activity and exploration is being halted, and about 30 drilling operations may be affected if no solution is found. A strike among members of the oil services branch has already closed operation on two oil rigs.

Matthew Simmons has posted a new peak oil presentation, The Energy Crisis Has Arrived, to his site.

Energy literacy - what you don't know can hurt you.

David O'Reilly, CEO of Chevron, says Corn is not the answer.

African countries struggling with high oil prices

Kuwait wonders, How much oil do we really have?

For quiet some time Kuwait's official oil reserves have remained static, hovering around an agreed figure of 94 to 99 billion barrels of proven oil, although some sources put it as high as 101.5 billion. However, in a series of controversies revolving around the oil industry and its global implications, it has been revealed through certain individuals that the official figure is a mockery, since what has actually been accounted for is way below the official figures.

In what seems to be a phenomenon that not only affects Kuwait but the entire oil industry, people are starting to wonder how much longer can we sustain oil, especially as demand from emerging countries is constantly increasing. Oil is a limited resource and its depletion date seems to approaching rather fast.

Russia to quadruple natural-gas price for Belarus in 2007

MOSCOW, June 26 (RIA Novosti) - Russia plans to export natural gas to Belarus in 2007 at about four times the current price, a deputy industry and energy minister said Monday.

Andrei Dementyev said in a letter to the lower chamber of parliament that the price would be around $180-200 per 1,000 cubic meters in comparison with current $46.68.

The deputy minister said the price would be calculated under the same formula as the price for natural gas deliveries to Ukraine, including a zero rate customs duties for Belarus.

The Folks over at 321energy.com have an interesting article

Energy Price Explosion Not a Short Term Event

The topic of natural gas was quite interesting...

Natural gas prices dropped like a stone last winter when an unusual mild season created a substantial back-up in reserves. One observer said this morning the reserves are 41% over normal when in fact it's more like 20%. What they are not watching is the terribly hot summer coming quickly which will cause natural gas power plants to burn up that reserve in a flash. Traders are very smart about price and value consequently they have already priced next winter's supply at 11 when today it just moved near 7. A report this morning regarding Canada's power plant usage of natural gas was issued as a warning. They expect their burn rate to be 10% above last year which is considerable. Since Canada exports gas to the USA in large amounts, that 10% is that much less available for export.

A little off-topic but interesting none the less...

A Cup of Gasoline per Apple?

Do you like the taste of juicy organic apples from Washington?  They're not bad, but they could taste sweeter if each one didn't involve a cup of gasoline.


And a little bit more...

Europe fears new energy crisis as Russia gas row flares

LONDON (Reuters) - Europe could be heading for a new energy crisis as Russia and Ukraine trade blows in an escalating price war that threatens to trigger a re-run of January's cuts in Russian gas exports to the continent.

Some tidbits...

"It seems like all the makings of a perfect storm," said Jeffrey Woodruff, a director of the energy group at ratings agency Fitch.

"Any of the events in isolation could be enough to spark new supply interruptions in Europe, but all of them colluding near the beginning of the G8 summit on energy security seems unbelievable."


Like I said yesterday, the European Union is in worse shape than the US energy wise.

They have less resources of their own to rely on, the guy at the other end of their pipe is a former KGB agent who is hugely pissed over the fall of the USSR empire and is going to extract revenge on anybody he can for it, and on the opposite end of that same pipe is a rising empire that is fighting like hell for access to resources.

Here is a question - which currency have the Russians announced is their preference for purchasing energy?

Everybody depending on energy imports to support their current lifestyle is in big trouble - the thing is, that is what, around 80% of humanity?

The question is, what happens after the energy available is reduced?

There, I place my bets on Europe in comparison to the U.S. - Europe will quite likely return to its standard traditions - the harvest is going quite well out my window and throughout this region, the sheep are doing their annual trek, a lot of people made strawberry jam from local strawberries using sugar made from sugar beets grown in the region, and the cherries are looking quite good. This will be followed by apples and grapes.

How does it look from your window?

If you mean Germans will be doing worse because they aren't going to be tearing down the autobahn, I agree. If you mean the trains connecting the cities and towns will stop running, I disagree. And if you mean that countries with with positive trade flows are in a worse position than the world's largest debtor nation, I think you are very mistaken.

No one, absolutely no one, is likely to enjoy the next several decades - but I prefer living in a place with local agriculture and high technology and long term perspectives in planning.

I think the U.S. will have to work very hard to even come close to achieving European 'disadvantages' like inefficient local agriculture, social services and essentially universal health care, essentially zero population growth, and a perspective which covers generations not quarterly reports.

Unlike 40% of Americans, wwho I have read expect to end their lives among the top 1% of the wealthy, Europeans are people who tend to have a realistic view of what life offers. This seems to be the essential handicap you are describing.

Unlike 40% of Americans, wwho I have read expect to end their lives among the top 1% of the wealthy, Europeans are people who tend to have a realistic view of what life offers. This seems to be the essential handicap you are describing.

Expat, I enjoy your unique perspective and I realistically plan to die in Europe.  I prefer the Danish, but that's another topic.  I'd like to point out something about your quote above.  Those 40% who believe they will die in the top 1% is the entrepreneurial spirit that has driven this country from the bottom to the top.  I'm not saying Europe lacks this, but historically the risk takers left Europe to come here.  Those who wanted to just deal with what life gives them, stayed.  

I don't see this as a handicap either because this spirit drives people to compete and attain what they want.  Now 40% believing the top 1% is a stretch, but I still believe I will be well of financially, just not THAT well off.  I've opened businesses that have failed, I know what failure feels like, but I still grind out a living and think of HOW to get myself out of the race I'm in.  If I were "realistic" as you say, I would just kowtow and lack any motivation to change my life for the better.  I'll end this by saying there is a definate difference between those who BELIEVE they will be rich, and those who WORK to becoming rich.

I'm not sure I would call it a result of the entrepreneurial (what a mouthful that word is) spirit, but more a result of the American public being mislead about the true state of our society.  We like to believe that we are so resourceful, innovative, etc, and that is why we "rose to the top".  Everyone who lives here likes to think they are going to hit it big.  

In reality, we have been steadily moving towards a system of taxation that favors wealth over work.  The middle class has steadily been shrinking for many years.  We have moved into a mindset that consumption is the central goal of all our lives, and in the process have ended up augmenting our lifestyle based on going deeper and deeper into debt.  

I think it's a mistake to think of the United States as being somehow more exceptional than Europe or anywhere else.  We're different, certainly, but not necessarily better.  I doubt there is any significant difference in personality type based on people leaving Europe to come here.  You can use that sort of thinking to make almost any argument.  For example, you could just as easily say that "only those who couldn't cut it in Europe came to America."  It would have just as little validity to it.  

Europe right now is grappling with the opposite problem that we are.  Their society is designed to be more egalitarian, so that even those who are poor are better off.  For example, European poor can still go to the doctor, poor here don't have that luxury.  Now, the opposite side of that is that in ensuring stability and economic fairness, that their economies are a bit less fluid and able to quickly react.  Clearly they have problems, but they are also relatively overblown by the U.S. financial press.  

I don't disagree, especially at the end about work being necessary.

My point was essentially based on the delusional idea that 40% becomes 1% - not only won't it happen, it is not possible.

And yet, Americans believe it. There are a lot of beliefs which seem fairly unique to America, if only in part because no other society had the chance to live in such luxury that they could ignore the world around them for a generation or two. (And for those Americans who believe Europe is living in a dream world - sure, they are, in part because they also know very well what a nightmare world looks like too - they worked hard to achieve the dream.)

Sort of like saying global warming isn't true, because it is just raining for a week in DC - I should trademark something along such lines as 'Cold rain means no global warming' for the oil companies.  

Good points. The US has made some serious mistakes post GBII, particularly with respect to internal tax and external belligerance. However, the US system is far more malleable than the EU's. We will respond better than most to changing conditions, just as we did in bringing the two world wars to successful conclusions. Note that in both cases we had done little planning or preparations before hand.  And, it was US leadership (pre GBII) that finally ended the shameful events in the balkans that could, and should, have been easily nipped in the bud by europeans years earlier.  

EU countries do not look to be able to resolve even simple internal issues of employment - students riot to protect young people's wages and guarantees of lifetime employment that prevent them from being hired, resulting in high unemployment that then creates dissatisfaction and more riots among immigrants.  The US, for all its recent mismanagement, remains a far better place for a poor person to rise to middle class or above, to say nothing about a person with a 'different' background to get a job.

THe US could do without any oil imports by car-pooling, converting to prius/diesel technology, plus moving from trucks for long haul to trains - that is, adapting to Europe-level energy consumption. And, we will soon begin converting from fossil fueled generating stations to nuclear ones, something not likely to come soon to Germany, the EU's largest economy, where we will see more brown coal consumed instead. Europe is addicted to russian gas, and the price is rising fast. As for oil, the EU is becoming less self-sufficient by the day.

As an aside, the world may well be moving towards less trade and more local product, not least agriculture. But, globalization has brought higher living standards to many, not least in asia but in many others too.  Many at this site decry trade and its more visible entities, such as walmart. Probably many of these proudly think of themselve as liberals. There was a time when US liberals, and "trade" unions too, supported free trade both as helpful to the world's poor and as usefully providing markets for our exports.  Trade still mostly helps the world's poor while competition does, in the end, help everybody. Restrictions to trade would reduce jobs everywhere today, just as they did do in the thirties, whether caused by policy or higher energy costs.

I'm definately for free trade due to my strict economic outlook on the benefits, however at times I do see some who are better off at the expense of another and there is little done to correct it.  This is a problem b/c economics stresses making someone better off without making another worse off.  On net the US has transformed into a service economy and these jobs DO pay less.  Those who suffered are provided little to transform into another career.  On net we haven't "lost jobs" to other countries, we've just switched and added more people to the payrolls.

I disagree about our leadership though.  I'm not liberal by any means, I'm for a small small national govt.  States should have a bit more power, but that's for another discussion.  People keep saying we did this before, so we'll rise to the occasion.  I think this is flat wrong.  We will do something about, albeit too late, but it can't FIX this problem.  It's easy to build crap and destroy even more crap with big metal bombs.  The people of those generations were used to sacrificing and dealt with rationing of common goods for the war effort.  Can you imagine that now?  

We are different people than just three decades ago.  We haven't faced a major crisis that required a national effort since WWII.  Vietnam, Korea, & the middle east conflict are NOT even close in national scope.  We transformed entire sectors of our economy into wartime mode.  We couldn't do that now and part of it has to due with the flight of all the equipment, plant & property we used to make these wartime machines.  

So much has changed especially the consuming public.  We consume like no one on this planet and we gloat on top of that.  Generally speaking we have transformed into a "me, now" culture and have little room for sacrifices.  Add on that our representatives do not represent us, rather corp america and what will motivate these people?  Personally I'm getting rid of any incumbant that I can, but the replacements don't look a whole lot better.  The business interests of this country do not jive with the personal needs of America.  However the average American will tell you different due to the success of the machine know as marketing.  

Not to mention Science is being repressed.  Does that sound like another time European history?  Science is being tarnished by this Administration and who knows what the next leader will have to say about this.  Most people are asleep at the wheel, the leaders are sleeping, and the few of us that are awake are screaming to slam on the brakes.  The only way out is reduce demand.  As a politician you will not get elected telling everyone to stop doing what they are doing.  

Nothing on this planet benefits "everybody". Look, real wages at the median are far higher in Germany, so if you are the average schmuck you will have a better life there. If you are an employer, live off investment income or speculation, or if you are in the top 20% of employees you are better off in the USA. All this liberal/conservative stuff is sheer bullshit.  
Numbers are misleading.  When I lived in Germany, I had the feeling that I was in a wealthier country.  Maybe that was because,in part, there weren't any what we would call slums.  When I came back to the U.S., the first thing I noticed was trash everywhere. It was there all along, I just hadn't noticed. What a culture shot.

Maybe things have changed.  I haven't been there in 20 years.  


Still trashy as you noted.  Canada has a $2,000.00 fine for littering which keeps it very clean( I was impressed!)   Being American probably means that we have the highest quantity of plastic in our landfills compared to the rest of the world.  Our resource of the future?
I meant I hadn't been in Germany in 20 years.  
We started talking Euro vrs Dollar, or European Union versus the US, now you seem to be focusing on Germany.

Things may look nice outside your window, but in terms of the European Union, times are generally good right now and we see:

  • Truckers blockading ports and cities when gasoline prices get too high.

  • Students rioting (and the government give in) when labor laws are changed.

  • Sizeable minorities (Muslims, Turks) who are widely disaffected.

  • Huge agricultural subsidies keeping those local farmers in business, and when those laws are threatened, they threaten to riot too.

  • Several countries have already had their populations refuse to ratify articles of the European Union.

So clearly there's already some tension under the surface there. And yes, some of those things are also true of the US.  But the US has the advantage of an American identity.  When things get difficult, say a recession, do you think the Germans and the Italians are going to agree on interest rates?

And notice - whenever worldwide markets decline, what goes up?  US Treasury Bills.  That says something, namely that there is still an underlying faith in the US.

I won't argue with you though that Europe in general has significantly better transit systems.

   well, it is a problem of focus. I grew up in Fairfax County near Washinton, DC - if you think a neighborhood in Anacostia has anything to do with Fairfax, then you will see quickly how the averages paint a very different picture. The same is true of West Virginia compared to Northern Virginia. But Fairfax in the 70s was a very good place to live.

America has extremes which are pretty much unacceptable in a European context. And America has thrown away things which Europeans consider important to the long term.

And Europeans tend to want to keep what they have - what you see as social disorder (and which it is, at times) most people here see as standing up for their rights - and yes, they have a broader definition of 'rights' than being hired and fired as a privilege of participating in a free market where the rich are certainly getting richer, and the poor are to blame.

There are a number of ways of looking at the future, of course - personally, I prefer a place already living many of the suggestions Americans are still dimly aware of as a response to declining liquid fossil fuels. European societies existed long before fossil fuels, and they are likely to exist afterwards. The same is much harder to seriously suggest about the U.S.A.

Local agriculture, for example, is a social question, not a technological one. Technology is only a part of peak oil, though the one Americans tend to focus on it almost obsessively, either pro or con. How much farmland did the last couple of decades of suburban development cost the U.S.? And in a decade or two, do you think anyone will find that a good bargain - giving up farm fields for the hour commute to pay for the mortgage?

Europe has made different long term choices - we will see how they play out.

As far as Austria is concerned roughly 25% of our primary energy consumption are from renewable sources already. Our rail network is functional and largely electrified, urban sprawl exists but is contained by mother nature ( in valleys you only have two directions to sprawl to begin with) and tight land use regulations. Farm land can only be bought by farmers. At present, farmers get about half their income from public subsidies, but that kept local agriculture intact. Public transport is efficient. Streetcars (tramways) exist in Graz, Linz, Vienna, Innsbruck. My home town of 4000 inhabitants is served by 32 bus connections per day and a railway line. My kids walk to school. A car is taken for granted by most, with car ownership at 500 /1000 inhabitants, but in the end it is  a luxury  not a necessity.
The Austrian energy companies run hydroelectric reservoirs in the mountains, where off peak surplus energy is stored, by pumping water up into these reservoirs. Base load often from nuclear plants is traded against peak load from these reservoirs. Just as Switzerland or Norway we aren´t dependent on coal or natural gas in our electricity generation.
Hello Mh497,

North America should be the world leader in natural sustainability and biosolar Powerup, but sadly we are the worst.  I have posted below my just written reply to Magnus Redin in an old thread for debate by other TODers:

Hello Magnus Redin,

Good for you to live in such a proactive country.  =D  Hopefully other global leaders are watching and learning.

I agree with you that universal Peakoil awareness would be better than denial and ignorance.  Once worldwide awareness of possible Smallpox elimination by 'ring encirclement vaccination' was achieved-- everyone cooperated and mobilized towards this end.  I consider this the greatest example of worldwide cooperation and achievement in our entire history!

Thus, the entire world should be treating Peakoil as just another Smallpox [Small-thoughts] outbreak.  Proper 'ring encirclement vaccination' requires widespread Peakoil Outreach education, and every leader from local to the national level needs to be encouraging everyone to 'vaccinate' themselves with conservation and lower birthrates.

The US, with the highest/capita energy consumption rate; or the worst 'conservation Small-thoughts' infection rates, should be the worldwide leader in Powerdown to help reduce infectious detritus consumption elsewhere [like China's desire for cars].

The gradual proactive encirclement of high consumption areas by 'innoculated' outsiders spreading Peakoil Outreach 'vaccinations' will finally defeat the terribly harmful infection of ignorance and denial.

To achieve this 'ring encirclement' end, I would not be averse to the President, in cooperation with the AZ governor, to temporarily declare AZ martial law and close the statewide borders to any people ingress or outgress with Earthmarine forces, gradually impose $10/gallon equiv gas prices on all energies, 24/7 TV broadcast of Peakoil Outreach info, and mandate a gradual multi-year shrinkage of shared carry-capacity with outside states to proactively drive ELP Powerdown and biosolar Powerup.  This would rapidly reduce infectious ignorance and denial in our Asphalt Wonderland, and instantly jumpstart mutual cooperation to hopefully prevent Nature's Overshoot cull.  

When AZ has reached sustainability; is finally clear of Small-thought infection, then 'ring encirclement vaccination' at the next state.  Lather, rinse, and repeat till the US is energy infection free.  Strength thru Detritus Powerdown and Biosolar Powerup!

Obviously, this is very controversial, but should be considered preferable by all versus having the 'last man standing scenario' and Mother Nature batting last.

Bob Shaw in Phx,AZ  Are Humans Smarter than Yeast?

Hello TODers,

slight proof-reading oversight: "Lather, rinse, and repeat till the US is energy infection free."

should read: "Lather, rinse, and repeat till the US is detritus energy infection free."

In other words-- we can harness all the truly sustainable biosolar energy we want by PV, wind, tide, hydro, alt fuels, etc-- Biosolar Powerup as far as is naturally sustainable.

I picked Az as the first state because we should be the world leader in PV [endless sunshine], but our cheap energy infrastructure has suppressed this PV growth.

Bob Shaw in Phx,Az  Are Humans Smarter than Yeast?

Few ever saw smallpox as desirable. Most do see cars as highly desirable. Persuading chinese and other that cars are not appropriate for them may be difficult.

Why not let the market decide who gets to have or keep cars? Once peak oil is widely accepted prices will rise. Many chinese exporters might be able afford a car while many US importers relinquish theirs. (Many think we are rich and they are poor - but, they hold the mortgage. Generally it is the banker who is rich, not the borrower.)

Hello JKissing,

Thxs for responding.  Letting the collective market decide is exactly the method used by all past societies to suboptimally collapse into violence and mayhem; the typical Thermo-Gene Collision.  As mentioned before by me: Our Genes are not our friends.  Can we collectively outwit our instinctive impulses?  This is the true test of our vaunted intelligence.

Reg Morrison already has posited that GAS and other genetic drivers are already whittling away at our numbers.  Mother Nature has an insurmountable arsenal to rapidly decrease a plague specie.  No need to go into the details.

If we collectively are to be Smarter than Yeast then proactive mitigation must be driven worldwide to optimize our monumental numeric decline and retain some vestiges of civilization and other lifeforms.  Historians like Diamond, Price, and Tainter, and Geneticists like Reg Morrison, Dawkins, and Darwin strongly doubt our grey matter overcoming our ancient lizard brain.  I think we have no choice but to try our proactive best.

Of course, all my various hypothetical scenarios may not be the best answer-- I make no claim for any above average intelligence.  But I sure wish some true Einstein genius would propose a plan that the whole world would agree is the best grey-matter path forward.

At least lizards can lose their tails, then crudely consider their next option as the tail regrows.  Can Humans afford to lose their collective asses?

Bob Shaw in Phx,Az  Are Humans Smarter than Yeast?

I sure wish some true Einstein genius would propose a plan that the whole world would agree is the best grey-matter path forward.

This is symptomatic of a culture meme that runs deep in our society --the ISEP excuse (it's somebody else's problem -- it's einstein's problem).

I'm not blaming you. We all suffer from this cultural embed. There is no Einstein. It's you & me. That's all there is going to be. So we have to figure how to edge the universe towards a new direction. -one yeast cell at a time if it has to be that way :-)

If this charicature had any bearing on reality Russia would be demanding $450 per tcm of gas from the EU and not subsidizing it with $230.  But the EU is certainly trying to act as a consumer cartel and force Russia through hysterical propaganda to not dare raise prices to market levels (i.e. $450).  

Too bad for the EU, Russia's days of being desperate for foreign cash are over.  Russia is about to pay off the remaining $22 billion of its Paris Club debt after cutting it by $15 billion last year.  Easing off on fossil fuel exports will help Russia lower inflation.

Current prices for oil and gas are still heavily influenced by the myth that we have decades of easy sailing ahead.  I believe Simmons's prediction of a severe production decline  in the next 15 years.  Realistic prices should be in the hundreds of dollars per barrel of oil and thousands for a thousand cubic meters of gas.  There are no substitutes that will arrive in the next 15 years so it is time to get real.  

to add a little to the  discussion on US  vs. Western Europe maybe  some of you have  the  British  study on health in UK vs. US


Apparently health of richest Americans  about as good as that  of poorest Brits. I would suggest this can be extended to most of EU countries and not just UK. they did the study only on white US residents to keep it neutral. I would guess it has  to do with instability and change resulting in heavy  stress in the  individual. we all know that death of spouse, changing jobs or moving cause  stress and stress reduces immune system response which reduces health. USA is flexible that is very true and therefore achieves lots of interesting solutions and fast growth but as people having fewer internal cultural barriers to change(like language, geography and tradition) accept almost any change as normal regardless. These changes however are easily imposed/influenced through commercial interests quickly on a continental scale which is elsewhere impossible except possibly in China(which has a historical tendency to switch from isolation to reform every generation or so). If you believe what was written in the book 1421 about the Chinese discovering the New world and everywhere else 71 years before Columbus then going immediately back into isolation you can see that such a quick flexibility has its disadvantages long term. Europe with its competing centers was able to develop through its competition into the center of world culture  although China had long before made huge  steel ovens, paper, gunpowder and moving print. Competing centers of ideas will remain in Europe despite EU centralist  tendencies. This encourages  development of new ideas, which will then be copied by others after experimentation or even not. Freedom is relative. When you have no freedom to stop a certain trend like chain stores, mass immigration or whatever you might feel like moving abroad. In USA this is hardly possible. In Europe the national units are small enough so that people feel a bit more connection emotionally, historically, culturally and ethnically to the whole and no reason to change just for its own sake(ss in USA) as they have no inner roots in local culture.

Which should come first, the technology or the alternative fuel source??? I am puzzled by those that claim that all we need is a technology to help us with peak oil, yet I'll claim that since an alternative energy source hasn't been identified that will replace oil, are we not putting the cart before the horse??
What moron says that all we need is technology?  Technology advances will surely help, but no one who knows anything at all about our energy situation thinks they'll magically deliver us from the pain of peak oil and peak natural gas.

We will never find a single alternative energy source that will replace oil.  We will, though, find ways to use a collection of energy sources, technologies, and conservation measures to replace oil.  E.g. personal motor vehicles running on electricity generated by wind and solar, large trucks running on biodiesel, and substitutes for oil in making things like plastics will all contribute.

Sadly, there is no substitute for oil in making plastics/fertilizers, and no substitute for fertilizer in making bio anything.

Imagine making plastics from scratch - split water, combine the freed hydrogen with carbon. This is what algae, fueled by sunlight, did way back when.

What we want here is very efficient solar collectors, more nukes, or both.

"Sadly, there is no substitute for oil in making plastics/fertilizers, and no substitute for fertilizer in making bio anything."

Oh, that's not true at all.  Plant carbohydrates can be used to make plastics/fertilizers.  Heck, it's mostly our odd obsession with corn that makes fertilizers a big deal in farming.  Feedstocks for plastics are not the big deal.  It's the big things, the things that take 80% of our oil/gas use, that are the hard part.  That's transportation and heat, for which electricity from wind and solar (and solar thermal) will work just fine.  In the long run...it's just the transition that's the problem.  That's what Simmons is trying to scare us into dealing with.

While I believe that alternative means of plastic and fertilizer production are possible, I seriously doubt that the relevant industries are readily prepared to utilize alternatives at large scale, and industrial food production truly has a similar relationship with corn.  Hence, a rough transition is likely in store, especially as the cornucopians continue to hold sway over the MSM.  
Actually, we do a horrible job of recycling organic wastes that could provide much more of our fertilizer requirements.

Not only do we flush fertilizer down the commode on a regular basis, but also we waste huge amounts of food and vegetable products.

There is research going on that may make it possible to extract NPK from sewage and animal wastes for recycling.  We also could do much better in recycling grey water to crops that are not destined to be consumed by humans, like switchgrass, tree plantations, soilseed and fiber plants, and even corn not intended for human consumption.

With some effort and known technologies, I believe that we could reduce the amount of chemical fertilizer usage by quite a bit.

the silver bb theory reminds me of a rube goldberg device combined with a perpetual motion machine..
Posted this earlier at end of "E3" but more relevant here.  Looked at Matt Simmons' presentation here:  
He's really waving the red flag.  On one slide is "By 2020, the current 80+ mb/d base could be reduced to 25 mb/d."  Below it says this is based on a 8% p.a. decline rate, presumably starting in a year or two's time.  Am I missing something or does he expect total liquids production to fall to that level by 2020?  What is the justification for this - terrifying - prognosis?
... or is it a typo intended to mean "80 Mb/day down to 25 Gb/year" - would make more sense and fit the ASPO depletion curve.
He said "peak energy."
He said "peak Earth energy", by which I understand him to mean peak fossil fuels.
Using his assumptions, I get:

Starting in 2007 (8% decline),  2020 24.60 mmbpd

I guess in this presentation he is assuming PEAK in NOW - 2006.   I don't think he has ever openly said this before, but the numbers he put out there do.      

I just did a simple 8% year over year reduction, no curve or other fancy math.  (Forgive me if it is too simple)

80    8%    2006  Using 80+ figure from Simmons.
73.6    6.4    2007
67.71    5.89    2008
62.30    5.42    2009
57.31    4.98    2010
52.73    4.58    2011
48.51    4.22    2012
44.63    3.88    2013
41.06    3.57    2014
37.77    3.28    2015
34.75    3.02    2016
31.97    2.78    2017
29.41    2.56    2018
27.06    2.35    2019
24.90    2.16    2020

On another note,  Cheney's famous "Peak" speeches seems to indicate that he thinks it will be this bad as well.

I don't presume to have the technical knowledge or graphing expertise of many on this forum.   Just thought I would take a stab at it.

It's all about population!

Oops, couldn't figure out how to edit once posted.

Starting in 2007 (8% decline),  2020 24.60 mmbpd

Should read:

Starting in 2007 (8% decline),  2020 24.90 mmbpd

from the table.

It's all about population!

I take it to mean that the current fields will see their production drop to that level over that time, so that total production will equal that plus whatever new production comes on line. However, he notes that new production is likely to be limited due to ongoing declines in discovery.

In this presentation it seems he is stating more firmly than ever before that he believes we are essentially at peak right now.

If he does think we are in for anything like 8% p.a. decline from next year on - compared to many peakniks 2-3% from 2010 or later - then even with input from new finds surely that is outside the scope of reasonable adaptation?  His "hunch" figures for production decline in the Middle East - which he would have right to claim are better than anyone's - suggest a several million bpd shortfall in supply by 2010.

Rather worrying that the man who you might expext to know the most, is so pessimistic.

I think those who are calling peak oil imminent are jumping the gun. Particularly those who seem to think the middle east is about to peak. A Hubbert Linearization of Middle East production using BP's data show it to be at ~35% of its URR

Q = 288 Gbb
URR 828 Gbb
now at 35% of URR

The 35% figure seems too low considering the figures for Saudia Arabia and Iran.
Laherrere Link
What is the extent of your inputs? I suspect they are incomplete and fail to account for the early years of production in many Middle Eastern states.
  Its a horrible truth that in a famine most people don't suffer. They have the assets to buy food or move. In the Irish Potato Famine Ireland exported people and food. The landlords didn't suffer, the poor people whose only asset was a spade starved.
  The same is now true in Africa. And it will only get worse as prices for kerosine and gasoline get higher while the rich and their assets flee overseas. And while they starve they cut down every tree and bush for fuel while destroying the topsoil with pitiful, futile attempts to farm the spreading desert. This is intolerable but I have no suggestion or solution. May God have mercy on all of us, its a horror that will be repeated all over the world unless we conserve and use birth control and encourage others to do the same.
Meanwhile, in Russia a slow die-off is happening.  Great article by Kurt Cobb.  Note that outright starvation or war is not necessary for a significant increase in death rates and a significant reduction in population.  Plenty of human misery involved anyway, mainly disease.
Russia's problems did not derive from a lack of energy, or higher costs. MOre like africa's, they are about gross mismanagement of the economy.  Tough times are coming, but free markets and the hidden foot will move all of us towards much higher efficiency.
Similar problems in, e.g., public health can arise from various reasons, and costly energy will be one.  Meanwhile I am so glad that "mismanagement of the economy" is something that only happens in Africa and Russia, and not here in the USA.  :-/
The US has made serious mistakes recently, not least allowing public debt to climb to dangerous levels. But, this represents mismanagement over only the past 6 years, and could be reversed in the same period. Russia diligently kept digging themselves deeper for 6 decades. And, it is hard to be optimistic that africa will ever turn itself around.

The most energy "efficient" human being is one who is dead and decompsing.

I'm so thrilled that our Magnificent Management Machine (the hidden foot) is guiding us all towards this "efficient" outcome.

"Meanwhile, in Russia a slow die-off is happening."  Meanwhile an item on BBC news website today said Moscow has become the world's most expensive city - presumably in real estate terms.  Presumably starvation outside the doors of million $ penthouses.
Even in the U.S., the poor suffer first:

Late credit card payments tick higher

First-quarter increase seen affected by gas prices

WASHINGTON - Late payments on credit card bills climbed in the first quarter of this year as elevated gasoline prices and rising borrowing costs squeezed some family budgets and made it hard for them to pay bills on time.

Here in New York, the energy task force has come back with it's recommedation- Basically paying folks to trim peak demand levels so we don't have to build another power plant and other ideas at conservation! We are already pretty energy efficient in the city, with one of the lowest per capita electricity demand in the Country.
Perfect timing; some friends just got this together.

Come join

'The Light Brigade'



Most lighting in U.S. homes is produced by inefficient incandescent light bulbs or moderately efficient fluorescents. A switch from incandescents to compact fluorescent (CFL) bulbs can result in up to a 75% decrease in energy use. A typical CFL will save over $50 in replacement bulb and electricity costs over its lifetime.

The best targets for conversion to CFLs are 60-100W bulbs used several hours a day. In addition, CFLs eliminate the cost of buying and installing at least a dozen ordinary bulbs. CFL bulbs now come in a wide variety of sizes and shapes making it possible to replace almost any incandescent bulb. Some newer CFLs are also capable of producing a warmer light which is closer to the light produced by incandescents than that produced by some earlier CFLs.

Each CFL can prevent the emission of between 1,000-2,000 lbs. of carbon dioxide from entering the atmosphere, and between 8-16 lbs. of sulfur dioxide (the cause of acid rain). CFLs run cooler than incandescents and halogens, minimizing fire hazards and reducing the cost of cooling in summer. CFLs also last up to seven years, which saves you the expense and hassle of frequent light bulb replacements.

Compact fluorescent bulbs are widely available and can be purchased at Home Depot and most hardware stores (where rebates and/or coupons are often available) or online at:

Energy Federation Incorporated

Real Goods

Noli Control Systems

In order to further maximize savings on lighting, make sure that lights are turned off when not in use. While this sounds simple, it can be difficult to manage. Therefore, you should consider installing motion sensors (activated only when someone is in a room), dimmers and timers on lights.

It's kind of surprising nobody figured out how to do automated lighting by now; detecting if a human is in the room seems harder than it should be. Otherwise replacement of manual incadescents with automatic energy efficienct bulbs seems like the perfect target for legislation.
Such IR sensors are of the shelf technology and fit in standard wall mounts, the single unit cost is about $20 including VAT in Sweden. The bulk cost is probably a lot lower.

They are for instance used instead of light switches in manny of my universities toilets and other types switch off the lights in lecture rooms if nobody is present.

A switch from incandescents to compact fluorescent (CFL) bulbs can result in up to a 75% decrease in energy use. A typical CFL will save over $50 in replacement bulb and electricity costs over its lifetime.

That reminds me that I have to get some more. I have converted most of the house. I just moved into it a bit less than 2 years ago, and have been converting as bulbs have burned out. I always buy mine from Ebay. You can get them in bulk for 25% of what you pay at Home Depot.


Stay away from the Home Depot bulbs - they are cheap chinese junk. They either fail prematurely (which is no savings) or they get dim way too soon. I have had better luck with Lowes.
I have good luck with these:



I went ahead and bought some. I have a few bulbs out around the house.


Good to hear, aside from Mr. Waltons Club (membership required) that's the cheapest I could find anywhere.


Not so fast... It depends on where you live IMHO. I doubt that these light bulbs "save" you much at all.  If you live in NW Oregon for example then you use light mostly during winter when you are (quinkydink) also heating your home.  I suggest that there is very little returned energy savings at all.  All the energy you save by not "creating wasted heat" of a standard bulb is then replaced by burning nat. gas or something to make up the difference.  All that "wasted heat" ends up inside your home. In NW Oregon I estimate that this is approximately 9 months of the year.
Obviously outdoor light don't fit this thinking.  
I find this to be one of the biggest fallacy's in the whole energy savings marketing game.  Right behind it is electric water heaters- if they ar located inside the heated living space of a home then it adds heat to the living area and is not "wasted".
Have you read this anywhere?  Obviously NOT at Home Depot.
There may be something to what you are saying, but the reality is the "waste heat" created from a lightbulb is not especially efficient either.  Electrical heating in general is grossly inefficient.  

You're better off burning the natural gas for heating yourself, rather than having a power plant burn the natural gas to convert it to electricity, only to then inefficiently convert it back to heat.  

CFL bulbs do save a LOT of power.  I don't know about the money figures involved, as personally I care more about using less power, not what it means to my bottomline.  I assume the end result is superior to incandescants due to the lower power usage.  

Agreed nat gas-->electricity-->heat is not the best use of gas.  Here in the NW we have alot(not all) hydro.  CF are good I just question how much the save in the big picture for our location only, not the SW where air conditioning is used alot
I missed that you had mentioned electrical water heating.  Electrical heating really sucks.  It's not about "waste heat".  There's no more waste heat from an electrical water heater than a gas one.  It's about conversion inefficiency.  At current, relatively low electricity prices, you'll still pay much, much more to heat using electricity than using gas.  Natural Gas could go back up to $10-$15 and it would still be much more efficient to burn it for heat rather than use standard electric heating.  

I understand that there are things like heat pumps which run on electricity and which are fairly efficient, but the average toaster-style electric water heater is not the slightest bit.  

Water injection into Ghawar, it's now up to 9.5 million barrels per day.

USFilter installed, last year, 20 new 125,000 barrel per day seawater treatment filters for the Ain Dar and Shedgum seawater treatment plant. This plant treats seawater, removing sand and other solids from the water before it is injected into the oil reservoir. Water injection is used to keep the pressure up on the reservoir. Ain Dar and Shedgum are the two northernmost fields in the super giant Ghawar field in Saudi Arabia. They are the most productive areas of Ghawar and consequently where most of the injection water is used. However it is likely that this filtration plant supplies injection water for the rest of Ghawar as well.

This adds 2.5 million barrels to the already 7 million barrel capacity of the plant. What this means is that 9.5 million barrels per day of seawater are now being injected into the Ghawar reservoir.

Those of us who follow Saudi oil production closely read often that 7 million barrels of seawater is being injected into Ghawar every day. Well, now that figure is 9.5 million barrels per day. I don't know what the water cut is up to right now as I don't think there is any direct correlation between water injected and water cut. But I have heard from other sources that it is above 55 percent and rising. But the fact that they have increased the water being injected into Ghawar by 35 percent tells us that that the world should take notice about what's happening in the Saudi oil patch. Things are not looking good.

Here is the URL. The part about the newly installed 2.5 million barrel per day filters is in column 1 of page 4.

Ron Patterson

Move along. No problems here. Everything's fine, folks. Keep it moving. Hahahahaaa.


Didn't M. Simmons state in his book (twilight in the desert) that the Saudis were encountering problems when water cut was hitting mid 30's?  (I don't have the book here in front of me so I'm going from memory...)

I recall that they were able to hit mid 30's on water cut for a while but had to back off due to risk of damaging the fields, correct?


Bradshaw, yes it was 30% but this was 2003 and no, there was nothing about "backing off". 30% will not damage the fields but overproducing will damage the fields. Also, you can only control the water injection, there is no way you can control the water cut. Once it is 30% there is no way you can possibly back off from that. Anyway there are fields that are producing way in excess of a 90% water cut.

The extra water injection went on line in mid 2005, so their water cut must be way in excess of 30% now. Well, that is just my guess but you cannot increase the water injection by 35% without increasing the water cut as well. Not for very long anyway. But remember, you cannot back off the water injection without decreasing production. You inject water for two reasons. The first is to try to "sweep" the oil toward the wellhead. The second is to keep the pressure up in the reservoir. The higher the pressure, the more oil is forced out. Decrease the pressure and you decrease the oil extraction.

He reported that an Occidental Petroleum official told him that they're in the business of producing "brine stained with oil."

"Brine stained with oil", now that is a pretty heafty water cut. Of course I think the Occidental Petroleum official was speaking of Oman here, he did not say, but that is pretty much the case in a lot of places in the Middle East.


thank you for clarifying.  I surely meant water injection  as well, apologies for stumbling on the terminology.

I must be loosing my mind, I could have sworn Simmons said they "backed off" on the water injection to keep from damaging the fields.  I've loaned the book at to a friend, once returned I'll have to re-review :-/


Well as you can see from the USFilter link, they have not backed off their water injection but have increased it from 7 mb/d to 9.5 mb/d instead.

I read Simmons' book and do not remember anything about the Saudis backing off their water injection. I loaned the book to my son who took it back to Saudi Arabia with him last August. He will be back, with the book, in July and I will check it again. He said there was always a waiting list to read the book. I think about 8 people over there have read my copy of it. But they all have had their expat leave by now and should have their own copy now if they want one that bad.

By the way Simmons does express the idea in the book that the Saudis are damaging their fields by overproducing. He talks about "coning" in several places. He also discusses the problem of water coming up to a horizontal well pipe. I don't remember the term but it would look more like a wall instead of a cone. At any rate, too much water injection definitely can damage a well. As others have pointed out, coning, or walling, (not the word he actually used) can cut off oil to the well wellhead.

Simmons also talked a lot about the fracturing, or rather the fractured condition, of the Ghawar reservoir. What this does is create shortcuts for the water to penetrate and dramatically cuts down the "sweeping" effect. At any rate I cannot wait to get my copy back. I am going to read it cover to cover.....again.

"I cannot wait to get my copy back. I am going to read it cover to cover.....again."

-- Same here!


I'm missing my 'Long Emergency' but not my 'Twilight' :)
From Ghawar the King of Oilfields

"As the world's thirst for more oil dissipated in 1982 Saudi Aramico quickly throttled back Ghawar's output to let this great field 'rest' in the hope of bringing the rising water cuts back under control. In the field by field production reports in 1982 Ghawar's total output has already dropped by almost 2 mbpd.... then it's production in 1985 may have dropped to as low as 1 mbpd. This badly needed 'resting' no doubt worked to push back the declines the 1979 Senate Staff Report predicted would arrive by the early 1990's. It most likely postponed this event for a decade or more."

"Mothballing 50 to 70% of Ghawar must have brought genuine relief to he field's reservoir engineers who had grown concerned that the area was being overproduced. This large southern area then lay fallow until 1990 when Iraq invaded Kuwait......An Aramico team had been carefully monitoring (and welcoming) a steady rise in both the pressure and temperature through most of the resting part of the field.  The pressure buildup was purely a natural phenomenon; no water injection was being done and no oil was being produced. When Haradh (southern Ghawar) was put back into production the reservoir pressure rapidly declined."  

"When Iraq invaded Kuwait SA was suddenly forced to raise it's total output to from around 5 mbpd in 1990 to over 8 mbpd by the end of 1991. This rapid increase led to a doubling of water cut. Ain Dar/Shedgum (north Ghawar) jumped back to a level of 2.2 to 2.5 mbpd. As horizontal wells began replacing verticle wells the water cut soon stabilized but it was now a steady 35 to 36%."

"From 1993 to 2003, Ghawar's production averaged between 4.6 and 5.2 mbpd, increasing slowly from 1993 to 1997 decreasing sharply from 1997 to 1997 then increasing again in 2000 and 2001 and then jumping to 5.2 mbpd in 2003. The water cut increased from about 26%  in 1993 to maybe 29% in 1996, and then accelerating sharply to a high of over 36% in 1999, coinciding with the two year oil production decline. The water cut then declined steadily to 33% in 2003 as production began to increase....... Abandoning the verticle wells and replacing them with horizontal configuration  would allow Aramaco to place the completion zones above the oil/water contact and minimise water production for several more years."

Most relevant passages I could find.

Someone else said it. This chapter is more sobering the second time through.
Water breakthrogh then closing lower parts of verticle wells ,more water then advanced drilling, then more water then advanced mapping, reloating wells, avoiding the fissures, now more water.....

if this were musical chairs I'd say the music has been playing a long time while we run around, I'm telling my friends better start looking for a good place to land.

Thanks for digging out your twilight book and finding this xxxburb!

I really wasn't loosing my mind :)

As the world's thirst for more oil dissipated in 1982 Saudi Aramico quickly throttled back Ghawar's output to let this great field 'rest' in the hope of bringing the rising water cuts back under control.


Oh no I wasn't worried. :) The question forced me to plow through that chapter again. Well worth it for me, thanks.
Some feedback on the assertions made so far

> overproducing will damage the fields (-- Darwinian)

Broadly true, but you'd have to suck REALLY hard to do any lasting harm to something like Ghawar. Deliberately producing beyond the ability of artificial or natural energy sources to maintain reservoir pressure will eventually hit your productive well capacity, but that is more akin to the battery running down than damage to the fabric of the reservoir.

> there is no way you can control the water cut (-- Darwinian)

You can control field watercut by shutting in the wettest wells. You would normally do this only if your surface water handling facilities were fully utilized (could this be the case in G.?). Some of the shut-in oil will migrate updip and be produced elsewhere, some will be lost for good - it's never a certain thing. Within individual wells you can intervene in various ways to shut off production from layers which have watered out, which buys you some time and may or may not cost you oil. In the case of those "bottle brush" wells, you are supposed to be able to turn off just the wet branches.

> You inject water for two reasons. ( -- Darwinian)
> The first is to try to "sweep" the oil toward the wellhead.
> The second is to keep the pressure up in the reservoir

This is what some REs will tell you, but if they were being honest they'd only mention the second reason. You inject water to replace what you take out, ie to maintain pressure. Period. You HOPE that it gives pressure support to producers but won't move faster than the oil (fingering, channeling, coning, cusping, wedging - different verbs for different physics and geometries) and so make your producers water out before all the moveable oil (another technical term - sorry) in a given sector of the reservoir has been produced. These two objectives (pressure support and no early breakthrough) are incompatible to a certain extent - the only way to guarantee no breakthrough would be a barrier of some sort between injector and producer, and then you'd get no pressure support. So in practice this is impossible to get 100% right, but you can help things by appropriate choice of injector well location, what layers you inject in, injection and production rates, interventions in producers when they start watering out (see above), and a bit of luck.

There's a third reason for injecting water i.e. to dispose of produced water. Not always possible as oil mist, scale and other grunge can clog up your injectors - filtration may or may not improve matters - but if water is scarce (e.g. in the desert) or the regulator won't let you dump produced water then you're going to want to give it a try. You'll be wanting to put the volume back one way or another anyway.

> Whichever way you shake a stick at it, if ( -- Mudlogger)
> ultimately you have to pump 9.5mB of water per
> day to get 9.5mB oil

See my comments on formation volume factor (FVF) elsewhere e.g. http://www.theoildrum.com/comments/2006/2/8/233314/5260/52#52 - you ALWAYS have to inject more water than you produce oil, just to stay standing still.

+++ MY TAKE ON THIS (stop reading now)

There's a production profile for Ghawar here http://www.searchanddiscovery.com/documents/2004/afifi01/index.htm

And some more technical data here http://www.gregcroft.com/ghawar.ivnu where did that come from? Any of these data may be made-up, of course.

The former paper gives a recent production rate of about 5 MMb/d and a watercut of 33% so that's about 2.5 MMb/d produced water. The latter paper gives an FVF of about 1.32 so reservoir conditions production is (5*1.32+2.5)=9.1 MM reservoir barrels per day so 7 Mb/d water injection means about 7/9.1 = 77% voidage replacement so reservoir pressure will be dropping.

So it looks as if they are upping their water injection capacity to go back to 100% voidage replacement or so. Should have done it earlier, but a reservoir that size can take it. Of course, more recent production data would be helpful here. Somebody upthread mentioned 55% which seems rather a sharp increase from 33% in 2003 when compared with the historical trend - would certainly qualify as a "collapse". Hard to believe but scary-exciting if true.

ARAMCO-watchers are the Kremlin-watchers of the 21st Century. I think I'll hit POST now as this is going on far too long!

These structures in the Ghawar field look like evaporation ponds (think: dry desert air) so maybe they're not reinjecting produced water


http://maps.google.com/?ie=UTF8&t=k&om=1&ll=25.179874,49.340522&spn=0.013613,0.01978 4

Scale bar at bottom left. Don't know how big a pond would have to be to evaporate 2.5 MMb/d though! Or maybe it's just the ARAMCO executive club boating lake.

Those 6 little sections about a half mile square?
Great pics. Looks like a giant 'skimming' operation.
Just guessing - could be something else entirely but my second link shows a few that look like they've dried out. Looks better on Google Earth if you've got it installed.
Yes that second one is great on GooggleEarth. It's the black contrasted with the blue that got my attention. Would they pour the combined liquids out into settling ponds and then skim off the oil?
BTW great insight to the oil field management, thanks.
Skimming the oil off is certainly one way to clean up produced water - nice and easy to build if you've got the space available. But if the intention is to evaporate the water, you want to get it as oil-free as possible before it sees the air as an oil monolayer will inhibit evaporation. I suppose you could do it in steps - fill the pond, let it settle (maybe add some chemicals to help things along), skim the oil (or pump the water into another pond), let the water evaporate.
I was idly wondering if they built that first cluster of ponds next to the flare (flame visible as yellowish blob to immediate North) so the radiant heat would help things along a bit... just guessing
Fascinating. Thanks for the tour and the insight. Heading out.
And while on the subject of water cut, someone here said that Texas (in some parts) has 99% water cut.  Is that true?

If so, why would the Saudis possibly damage their fields when cutting in the mid 30s?  (again, going from memory so maybe this argument is moot)


Water cut is not the problem it has to do with pump rates.
My basic understanding is that if you over pressurise the reservoir with water it damages the structure basically these reservoirs are spongy limestone or sandstone that can crack.
The water also tends to follow natural fractures.

Your right its not simple but there is a direct correlation between the rate that water is pumped into the reservoir and damage. I think when people speak of damaging the resivors by over pumping most of the damage is actually caused by injecting to much water to over pressurise the resivor so you can pump more.

Surprisingly google does not return a good link on the subject I think it would be a excellent topic for the oil drum.

Close, but no cigar on the formation damage. When a water drive reservoir is produced too fast it draws water in the well displacing the oil or gas. And once water flows through a reservoir rock oil will not flow through the rock around the perforations in the well's casing. This is called coning.

   Lots of early fields were ruined in the US by these practices. That's why oil wells are choked {produced through a small orifice) and the Railroad Commission sets an allowable at the maximum effective rate, or MER.

  What really matters in an oil well is not the percentage of oil but how much fluid an operator can produce and separate and dispose of responsibly. And this is on a well by well basis. I know a couple of operators who make money with a 3% oil cut. Although I don't know of any 1% cut wells making money, I would not be surprised to hear of some, particularily if they just dump the formation water in a creek or the ocean. That's not allowed in the US, but who knows whats being done in the jungles of the Amazon or the Nigerian Delta. And in Saudi the water is used in pressure maintainence.

  Reentering old wells that were abandoned when they were making oil or gas but not in commercial quantities is big busness here in the US, and lots of production was abandoned early because of water disposal costs.

Bob, it is possible to make money with a 1 percent oil cut. Whether these wells are energy positive is however an open question. To a large extent, the most marginal wells are trading electricity for oil. Assume that a 250 HP REDA is going to cost maybe $10,000 in electricity per month to operate. Do the math. Even with that big a nut to make it doesn't require that many barrels per month to go cash flow positive.

The water in these operations is sent back down on a gravity feed arrangement to another zone for disposal after the oil and water is separated by skimming the oil off the top in a separator. Electricity is expensive, the disposal well --- [in particular the special tubing in the disposal well] -- is expensive, casing and tubing sizes in the production well are typically large to allow for a larger diameter and thereby cheaper pump, and the REDA [Russian Electric Downhole Actuation] submersible pump itself is also fairly pricey.

Strangely enough, these "brine stained with oil" wells produce with a much higher cut when they are pumped down to a level just above the producing zone. Reducing hydrostatic pressure is much more important than any ill effects from the coning that undoubtedly occurs. A massive water drive and good permiability and porosity are required, and a number of large diameter cased holes make for a good prospect.

There is also a different category of well that operates a little like I suppose the coal bed methane wells, where the object is to physically "dewater" the formation which mobilizes the oil. Good prospect in these cases are typically fairly tight carbonate reservoirs with gas solution drive. The Carney area of OK has produced a lot of very profitable Hunton Lime wells applying dewatering techniques. Unfortunately I don't own any part of any of them.

REDA = Russian Electrodynamic Apparatus or its equivalent in Russki - those fiendish commies came up with a way of building a halfway decent electric motor that would fit inside casing (long and skinny is not what you really want in most forms of rotating machinery).
Thanks. Makes sense ... I'll blame it on the guy [petroleum engineer] who defined "REDA" for me many years ago ... and stick to "REDA". They are an interesting and effective bit of technology and amazingly durable considering the small diameters and hostile environments in which these devices operate.
memmel -

My layman's understand of the matter goes something like this:

When water injection is used to maintain the pressure of an oil field (which naturally drops as a greater and greater volume of oil is extracted from the formation's pore space), the water injection wells are typically placed toward the outer edges of the field, so as to  produce a pressure gradient that will help 'sweep' the oil toward the production wells.

This technique will work just fine if the formation is of uniform porosity and uniform permeability. However, in reality many formations exhibit quite variable porosity and permeability, as well as outright fractures. Under such conditions, if the water is injected at too high a rate, instead of uniformly sweeping the oil toward the production wells, some of the water can move preferentially along pathways of high porosity and high permeability and completely bypass the oil. The higher the pressure on the injection wells and the higher the reate of water injection,  the greater the risk of this occurring.

 Excessive water injection not only increases the water cut of the oil coming out of the wells but also leaves a certain amount of oil stranded, sometimes irreversibly (or only reversible at very high cost).  

So, it's not just the inconvenience and expense of having to deal with all that oily water, it's that a high water cut is a symptom that all is not going well down below and that a lot of oil is being left behind, possibly permanently.

I hope I got this at least close to being right. If not, any of you real oil people out there, please jump in.

As Oilmanbob stated, the real risk at Ghawar is "coning."  In virtually all reservoirs, the permeabilty relative to water is higher than the permeabilty relative to oil; therefore, it is very easy for water to bypass the oil, leaving zones of unrecoverable oil behind.  This situation is exacerbated in formations with non-uniform permeability, which is to say, virtually all reservoirs.  

Ghawar has made about 60 Gb.  If it matches the world record recovery factor of about 45%, Ghawar will make about another 17 Gb (souce:  Simmons).  

The problem is that with a rapdily thinning oil column, a high production rate is the enemy of high remaining recoveries.   The Saudis may be telling the truth that their cutback was voluntary, but as I said before it may be voluntary in the sense that you have the choice of whether or not to hand your wallet over to a robber holding a gun on you.

The 45 mile long East Texas Field, the largest oil field in the Lower 48 (about 5.5 Gb), is now producing 1.2 mbpd of water, with a 1% oil cut.

Ghawar and Saudi Arabia are now at about the same point--based on the HL method--at which the East Texas Field and Texas started a terminal decline in production.

Note that in regard to the recovery factor, Simmons was talking about carbonate reservoirs like Ghawar.

BTW, in regard to Norway, following is a link to my HL plot of the total North Sea (crude + condensate) production, through 2004:


In regard to my Export Land model, note that the UK has already slipped from exporter to importer.  Norway will be a net exporter for quite a while longer, but if you look at the net oil exports from the North Sea as a whole, the UK will be sucking hard on the Norway's declining net exports.  Note that Norway is the third largest net oil exporter in the world, and at this point in time--based on EIA data to date--the top three net oil exporters in the world are reporting declining oil production.

  That's true about fields with no natural water drive (solution gas drive). These are the least efficient conventional well oil fields.
  In water drive fields the water expands as the pressure is released by production and is already present.The best fields in Texas are water drive-East Texas, Webster,Seminole and thousands more.
  But natural pressure can cause over-production too. The iconic Gushers often caused formation damage. The Spindletop field  caprock is the first major example of that kind of field. The American Association of Petroleum Geologists published a paper 60 or 70 years ago that identified that problem. The original field is only about 200 acres, but produced about 60 million barrels and then crapped out from overproduction. There were over a 100 gushers and they were allowed to run wild as a money raising tool. Blow-outs are the modern gusher and are rightly reguarded as a disaster because they often ruin oil fields. A good example is the Refugio field that had a well burn for a year and ruined the pressure. This kind of uncontrolled depletion might be a large part of the problem with the Kuwait production.
  The breakthrough can also happen with CO2 production too. I've heard as a rumour that the CO2 is breaking through at Seminole, and its from a creditable source.
  I'm a landman, not an engineer. A good petroleum engineer could answer in a whole lot more detail.I'm interested because I think a lot of the old fields could have their ultimate production raised by a factor of 10%-20% by being redrilled and water cycling operations set up. And now everyone knows my strategy for getting rich.

''...This kind of uncontrolled depletion might be a large part of the problem with the Kuwait production...''

Perhaps Kuwait's current problems then have a lot to do with the intentional blow outs created by the retreating Iraqi land forces in the First Gulf War. This may not be the sum total of Kuwait's current problem, but may well have made a bad situation worse. Bearing in mind that an isolated blow out is problematic within a field, how much more problematic is a score or more of blown out wells on a field for a long period of time?

As for water cutting, I have been led to understand that Ghawar is now 40% cut in parts of the Arab -D. Also, there are distinct zones of high permeability bounded by low permeability strata above and below and that these strata are the effective conduits for oil and are therefore also an even more effective conduit for pressured water. The need for complex drilling practices now indicates that the strata is less of a simple layer cake with a high, uniform yield and a much more complex carbonate system. This complex carbonate system was obscured by the ease of which oil could be tapped but it is now becoming increasingly problematic.

Whichever way you shake a stick at it, if ultimately you have to pump 9.5mB of water per day to get 9.5mB oil (which , on aggregate is what they are saying they need to do)then surely you are at peak!

All in all, and after reading Simmon's latest offering, (Opus Apocalyptica?)then 2006 is as good as it will be for Homo Sapiens Hydrocarbonensis.

I think I need to go and find my blue blanket.

  The intentional blow-outs during the first Iraq war were exactly the blow-outs I was trying to describe that may be behind their current production problems. Sorry I wasn't more specific. Its just my hunch that this is the root problem, nothing I've read or heard. And thanks for the specific formation info on the Saudi production. I'm sure I'm talking through my hat compared to professionals who have been there and have a lot better technical education than I have acquired. I was just trying to help the laymen understand a few of the basics about production engineering and will certainly concede to anyone who knows better.
  I feel that its important for people in the business to try to explain some of this stuff clearly. Its a total lack of understanding that makes people advocate silly "solutions" like ethanol and oil shale, as well as punitive, self-defeating stuff like the windfall profits tax. I know in my heart that West Texas is right-conservation will help a whole lot more than any other one thing. And support your neighbors, buy local products. It saves fuel, is healthier, tastes better and probably improves your sex life ( well, ell it to anyone you really need to convince!). And,if it really comes to a crash a bicycle repairman is a lot more likely to have a job than a fast food manager.
Energy literacy - what you don't know can hurt you.

The sad truth is that Americans know much less about energy than we think, according to a study released last September by the National Environmental Education and Training Foundation in Washington, D.C:

  • Just 12 percent of Americans can pass a basic quiz on awareness of energy topics.

  • 130 million Americans believe that hydropower is America's top energy source, though it accounts for just 10 percent of the total.

Hydro accounts for 7% of electricity generation. How this translates to 10% of the total, I have no idea. Glad this guy did his homework before telling us we don't know anything.

Somebody administered a quiz to 130 million Americans. I must have been out of the country that day. Yeah, right.

Somebody administered a quiz to 130 million Americans. I must have been out of the country that day

You missed the quiz?   Here ya go.

Oh come on.  I think that this article (printer-friendly version here )  is excellent, and  the technical mistakes are rather minor relative to typical journalism.  Great experts are quoted (David Pimental, Charlie Hall, Cutler Cleveland, etc), peak oil and climate change are mentioned, personal conservation is emphasized.  We need a lot more articles like this.  As for the 130 million, that's an extrapolation from the survey sample to the whole population, which is what surveys are all about.
Oh come on? Come on. He clearly stated 130 million Americans believed... Yeah, I know what he meant. I know how surveys are conducted, too. That's part of the problem.

You don't find the "technical mistake" that he led off with rather ironic given what the article is about? I just found it slightly amusing, that's all.

On a side note, most Americans can't locate New York on a map or tell you who the Vice-President is even though 50 million of them voted for him, I would hardly expect them to even know what hydropower is. I took the quiz that Eric Blair posted. It didn't have a question on hydropower, maybe it was a slightly different version. I got one wrong. The quiz wasn't easy. We can all laugh, but the readers here are a little above average in their knowledge of these topics.

It wasn't an energy quiz. It was a quiz about environmental issues.
In a bureaucratic decision that I object to, pumped storage losses (more energy to pump up than you get comming down) are subtracted from hydroelectric generation.

I think the losses should be subtracted from nuke (and some coal) because that is the fuel used to pump the water up.

Legislation has been proposed to make the ethanol subsidy, set to expire at the end of next year, permanent. I presumed they were going to let the subsidy expire, since ethanol is now mandated. Why mandate it AND subsidize it? I was looking forward to people finally paying market price.

The legislation is discussed at Green Car Congress:



Those representatives know that corn ethanol is bogus. If it was real they wouldn't need to "stabilize" the market.

I live in the mid-west and it is not possible to discuss corn rationally with anyone: not the media, not the University crowd. You may laugh, but I think the Maya had it right.

The Corn God requires human sacrifice.  

Gotta love Mike Luckovich....

About Global Warming, Steve Forbes said on CNBC this morning that Global Warming was no problem and that volcanic activity has far more impact on the climat that human activity!
Unfortunately the ice cores have a different opinion than Forbes ;) Though I guess he can still claim the caps are melting because of volcanic activity, but I'm sure once he examines the data he will gladly change his mind, haha.


Steve Forbes prays to the "Invisible Hand".  I think endless growth economics can truly function as a religion complete with unshakable faith in the face of evidence to the contrary.

Unfortunately, too many a scholar pray to the Absent Appendage (Invisible Hand) and to the Priesthood of Perpetual "Progress" without daring to ever question their religion or whether its machinations have benevolent "intelligence" or direction.

Just this morning, I saw some R-type Senator on C-SPAN yapping about how American GDP is rising and how that proves that the Lord Leader (GWB, aka the tipping shrub) did the good thing for the USA by cutting taxes for the upper class. Did this guy ever stop to think that maybe, just maybe, US population is heading for the 300 Million mark and that is why GDP is rising? The "numbers" seem to be the end all of all rational thought.

Capitalism and Adam Smithism are not the same thing BTW. Smithism is the religious part.

Capitalism merely means that capital (means of production) is privately owned and owners can do as they please.

Smithism, on the other hand, assumes that the selfish acts of individuals will automatically lead to benefit for the collective. Sometimes this is true, but not always.

It's the "not always" part that bothers me.
(Tragedy for the Commoners, tisk, tisk --they're doing as best as they can for themselves)

If that guy had to pay a thousand bucks for every stupid thing he said in public, he'd be digging in dustbins for a living.
Actually its flatulence from cows and vegetarians raising the methane level and causing global warming. If we could attach a heat pump and a windmill to Steve Forbes' mouth we would have a erpetually renewable resource!
So where did he buy his PhD in Paleoclimatology and Atmospheric Physics?
  Don't know about Forbes, but my PHD in BS is from the Liberty University of Pat Robertson,thank you Jesus.
Katrina's impact felt far from destruction zone

East Coast homeowners lose coverage as insurance companies retreat

...Those in the industry stress that a single massive event like Katrina can wipe out years of savings, putting an entire company with policyholders all over the nation at risk.

Edward B. Rust Jr., chairman and CEO of State Farm Insurance Co., the nation's largest personal property and casualty insurer, used Andrew as an example. In 1992, a subsidiary of the Bloomington, Ill.-based company, State Farm Fire & Casualty, was the top insurer of homes in the country. Claims from Andrew consumed the accumulated profit since its founding in 1935.

"That's what these low frequency but high severity events can do. They eat up not just profit, but all the accumulated capital," Rust said. "And I'm not talking about just policies in Florida -- but in Seattle, in North Dakota, in Maine, in New York."

thats to be expected.
insurance company's follow the money and they see that insuring coastal homes now as a money loosening venture.
Maybe we shouldn't be building homes on beaches anyway, unless we're talking about the Pacific, where hurricanes are less prone at least.
of course we shouldn't but that won't stop them anyway.
  Poor insurance companies, they talk this trash and noone believes them except the Republocrats and Demicans that get their campaign donations.
Insurance companies may be the first ones to get big business to take global warming seriously.  "The Winds of Change" mentions that Swiss Re and Munich Re, two of the world's largest re-insurance companies, are considering excluding coverage for climate related damage in their D&O policies for execs of companies that claim global warming isn't important or connected to human behavior. If anything is going to make these companies stop lying about this, personal liability on the part of the corporate execs might be it.
Insurance companies may be the first ones to get big business to take global warming seriously.  "The Winds of Change" mentions that Swiss Re and Munich Re, two of the world's largest re-insurance companies, are considering excluding coverage for climate related damage in their D&O policies for execs of companies that claim global warming isn't important or connected to human behavior. If anything is going to make these companies stop lying about this, personal liability on the part of the corporate execs might be it.

The cost to build a waste treatment plant at the highly contaminated Hanford Nuclear Reservation in south-central Washington has risen to $11.55 billion, according to a new cost estimate released Wednesday by the Energy Department.

The Energy Department hired contractor Bechtel National in 2000. At that time, the cost of the project was estimated at $4.3 billion.

If it's Bechtel and Sam Bodman it's all funny munny.
my only big surprise is that they didn't get Haliburton to give a competing bid so that Bechtel's looks good.
Two Pools of Reserves

Let us start with a few undisputable facts:

Fact #1: Most countries in the World, especially modern developed countries are "short oil"; they do not produce enough oil domestically to meet their needs.

Fact #2: Oil is priced in US$. In fact, since the end of WWII, the US$ has been by and large the recognized currency of international trade. When France buys oil from Algeria, the barrels are quoted in US$. When China buys tin from Malaysia, US$ are exchanged. If Nokia buys chips in Taiwan, the chips are priced in US$...

Fact #3: Given that the world needs US$ to trade, the US is sort of forced to run a current account deficit and export US$ (otherwise, how would Nokia get the US$ to fund its purchases in Taiwan?). This explains why improvements in the US current account deficit usually lead to global economic meltdowns somewhere in the world - all of a sudden, there are not enough US$ to go around (see What Investors Should Know About the US Current Account Deficit) and entire countries can be found "short US$".

Putting the above three facts together, it makes sense that countries whose daily activities cause them to be "short oil" and "short the US$" will want to store either one, or both, to prevent any financial accident from happening. Consequently, we can say that we have two large pool of US$ liquidity in the world at any one time: a pool of oil reserves, and a pool of US$ reserves

These two pools of reserves are of course interconnected and the best way to envision is to imagine a scale on which you place two reservoirs. One reservoir is full of money, and the other reservoir is full oil. Now if the "oil reservoir" starts to cost more (i.e.: move up on the scale) then all else being equal the "money reservoir" should go down. Of course, all else is not equal. If nothing else, the "money reservoir" is fed at all times by the US current account deficit. And this is where it gets interesting.

4- Oil & the US$

As things stand, the World consumes around 85 millions barrels of oil per day. And as we all know (but unfortunately, as we did not foresee), the price of oil has jumped by US$25/bl over the past 12 months. So, if nothing else, the "dollar working capital needs" of the world must have increased by approximately US$775bn (85m barrels of oil * 365days *25 US$). So point #1: given the increase in oil prices, the world needs an extra US$775bn (and note that we do not even go into the need for extra US$ because of higher metal prices, higher soft commodity prices, rapidly growing global trade etc...).

Now let us assume that the world's oil inventories (whether on ships, in refineries, in the SPR...) have stayed more or less flat at around 100 days of consumption. Then the financing of this excess inventory alone costs the world US$212bn (100 days*US$25*85m barrels). So simply between the rise in oil prices, and the rise in the costs of keeping oil inventories, the demand for US$ will have increased by around US$1,000 billion. And with this rising demand, one might have expected (we did!) a rising price for the US$. One might also have expected (we also did!) that the need for US$ will have lead to a reduction in central bank reserves. Indeed, as illustrated in the diagram above, higher oil prices typically lead to weaker central bank reserves. But as we know, central bank reserves did not shrink in late 2005 and early 2006 (against our expectations). Far from it: they continued growing by over 12% per annum or US$ 220bn in the past year.

Putting it together, this means that:

A) Demand for US$ resulting from oil has increased by US$1000bn in the past twelve months.

B) Reserves have grown by US$

So in other words, in the past twelve months, the World has spent more dollars, and saved more dollars than ever before. How is this possible?

Did the US central bank dump US$ into the system? Not really.

5- Oil & US$ Borrowing in the Late 1970s

In 1979, we experience the Second Oil Shock. At the same time, the general perception in the market was that the United States could not be trusted to keep the US$ as a store of value. Inflation ran rampant and "cash was trash".

With the second oil shock, large amounts of petrodollars fell unto a number of countries and financial participants (Saudi Arabia, Nigeria, Venezuela...) who had neither the skills nor the infrastructure to deal with such amounts. Consequently, large amounts were deposited into OECD bank accounts (Citigroup, JP Morgan, BNP...). These banks immediately turned around and lent the money to countries which had been put in difficulty by the rise in oil prices, and thus had current account deficits (Brazil, Mexico...). It was called recycling the petrodollars.

To justify these policies, the chairman of Citibank (Walter Wriston) reassuringly told investors that countries do not go bankrupt. And sure enough, the trade worked for quite a while: the US$ declined steadily (partly because the dollar recipients were constantly "diversifying" outside of the greenback) and commodities kept rising.

However, one day Mr. Volcker came in and put US short rates at 20%. And, of course, the US current account deficit swung into surplus as US consumers tightened their belt. As this happened, we found that the World not only had an inherent short position on oil; it also had a short position on the US$.

And sure enough, the countries who had borrowed the US$ could not afford the new rates anymore than they could afford the oil prices. They went bankrupt (Mexico first, the rest of Latin America afterwards), and Western commercial banks found themselves on the hook. The commercial banks "rescheduled the loans" which allowed them not to go bankrupt, officially. But, on a cash flow basis, the OECD commercial banks were in fact short the dollar by an amount equivalent to the defaults. They had to purchase the dollar back, regardless of its price and the dollar exchange rate happily doubled from `81 to '84 on the simple necessity to cover a short position which had been established inadvertently.

Incidentally, this is why markets can be violently irrational, and for a long time, simply as an echo of a phenomenon which took place quite a while before and that everybody has forgotten. Markets have memories, and these memories are the positions that have been established in a different period and cannot be disclosed for fear of a run on the institutions which have these wrong positions. But these positions must be liquidated and adjusted nevertheless, and it takes a long, long time...

We had an echo of this very same phenomenon in Asia in the period 1995 to 2000. In 1995, everyone was convinced that the THB, MYR, KRW were massively undervalued and due a large revaluation. Everyone borrowed US$ (since rates were cheaper than local rates) to finance local projects (usually real estate). As money continued to plow in, returns on capital weakened. Soon the returns on capital moved below its cost and Asian currencies were forced to devalue. Asian banks, and the OECD banks that had lent to them, found themselves de facto "short the US$". As Asia repaid its US$ borrowing in the period 1997-2000, the US$ rose higher than anyone expected (including ourselves) and central bank reserves barely grew (despite large current account deficits).

6- Today's Short US$ Position
As our reader will not fail to notice, something a bit odd started to happen in 2001: China started saving substantially more money than it was earning. An odd fact from which we could only draw the following conclusions:

A) Large amounts of capital found its way to China through unofficial channels (although Macao's growth would have led us to the opposite conclusion!).

B) Chinese and foreigners were betting on a revaluation of the RMB by borrowing US$ and buying RMB assets (real estate, factories...).

Having ourselves participated in such trades (i.e.: buying Beijing apartments with 80% variable rate mortgages in US$), our natural inclination was to think that the explanation might lay there. And in recent weeks, our theory that China has been building up short term US$ borrowing was confirmed by the government who declared: "China's short-term foreign debt far exceeds the level deemed safe by international standards, raising the risk of insolvency for some companies... At the end of 2005, China's outstanding foreign debt totaled $281.05 billion, a 13.6% increase from the year earlier (or an amount equivalent to 32.8% of China's total reserves)...". So according to the government, nearly a third of China's reserves can be accounted for by short term US$ debt. And we would venture to say that the Chinese have not been the only ones to borrow US$ to play the "inevitable decline" of the US$ (remember that in 1980, this was also the perception).

In recent years, we have seen large amounts of US$ borrowing taking place outside of the US. This means that an improvement in the US current account deficit could trigger a massive economic crisis; all the guys who are short would find themselves unable to earn the US$ to service their debt. So policy makers should be careful what they wish for... for if they get it, they won't like it!

Still, we hear our clients say, this is all well and good... but it does not help explain the recent meteoric rise in the Euro! But hopefully, this might.

7- The Impact on the Euro

As we have highlighted above, higher oil prices make for a much higher demand for US$. But of course the US$ also end up in someone's pocket.

Destination #1: Rational and professional investors. When the second oil shock hit the World, most oil producers were not organized to adequately absorb the wall of money that fell onto their (still small) economies. This time around, however, a number of countries have improved their financial infrastructure substantially (growth of ADIA, SAMA, KIF etc...). These professional investors will know that cash in US$ is their source of fund (since it comes from oil). So it makes perfect sense for them to try and diversify away from the US$ (since that is what they earn and will continue earning). So for the cash that befalls them, they can find the following use: a) other currencies (the US$ thus falls). b) global bonds (so the negative correlation between oil and bonds breaks down), c) global equities (so stocks do well, especially the more illiquid ones who benefit disproportionately from liquidity flows), d) other commodities and gold.

Destination #2: Russian oligarchs. The destination of choice for the money here is either their local market (Russian equities and bonds power ahead), Swiss banks (and the CHF/Euro rise), or the UK (the GBP and London property prices go through the roof). Little of that money makes its way back into the United States partly because of distance (the US is much further than Europe) and partly because the US is too often a hassle for private investors to deploy money in (forms to fill in, capital gains taxes, dividend income taxes etc...).

Destination #3: Shady Characters. Unfortunately, we live in a world in which rising oil prices mean higher revenues for shady characters. And we do not mean Louis' in-laws in Oklahoma but places like Venezuela, Iran... These countries, as soon as they receive their US$, will feel a strong urge to sell them and buy Euros, Gold, Sterling or anything else which does not have a picture of George Washington attached to it. Most probably, these monies will stay in bank accounts (Iran), or be invested in silly projects (Venezuela). In any event, the returns on invested capital of that money will likely be low...

So putting it all together, we currently have a nice merry-go round in the financial markets whereas:

  1. Oil prices increase, leading to

  2. Large US$ borrowing from oil importers to pay for the rise in oil, so

  3. Large amounts of "borrowed US$" are received by oil producers who

  4. Sell the US$ either for rational diversification or irrational policy, leading to

  5. A growing perception that the US$ can only fall, which, in turn re-enforces the willingness to borrow US$ (Point #2)... and off we go around the merry-go round again.

8- How Do We Stop the Merry-Go Round?

The first option is of course that the oil price starts to decline, hereby a) making it less necessary for non-oil countries to borrow US$ and b) pushing less money into the pockets described above.

The second option is that the cost of capital in the US continues to rise to the point where servicing US$ debt starts to become ever more costly. On this point we would note that, if one is a Chinese producer and one feels that the RMB will rise by 5% a year for a long while, then the cost of capital in the US is nowhere near a level which would discourage US$ borrowing. However, after the past week, can a Turkish producer say the same thing? Or an Indonesian producer? Or a South African producer? All these guys might not be as convinced as they were a few weeks ago that the US$ can only go down (for them, lately, it hasn't!).

The bottom line is that oil consumers around the World have decided to postpone as much as they could the moment of reckoning which the increase in oil prices should have triggered. They have decided to borrow dollars (or yens?) to buy oil. As a result, a number of countries are now not only short oil, but are increasingly short the dollar. This means that, slowly but surely, we are building a corner on the US dollar similar to the one we built in the period from 1978 to 1980, or from 1995-97...

To discover the guilty parties, simply look at the last two pages of The Economist, and check which oil importing countries run large current account deficits (Turkey, Poland, Hungary, Slovakia...). As a rule, also avoid the countries with an overvalued exchange rate according to purchasing parity, and/or fixed exchange rates (Euroland, UK, Australia, New Zealand...). Maintaining an overvalued exchange rate by borrowing abroad is a time honored tradition for incompetent governments. It always ends in tears (Argentina, Korea, Mr. Major in the UK...).

As far as the oil producers are concerned, they are getting far more dollars than they expected. So they diversify these excess dollars either irrationally, or rationally. But they do not realize that a lot of the dollars that they are getting are not "earned" dollars, but "borrowed" dollars (see the increased indebtedness of Chinese companies, or individuals in US dollars as an example). As a result, US assets have underperformed the rest of the world assets for no valid reason at all. As soon as the flow of money to these countries will dry, the US assets will go up versus the other assets. This is a very good opportunity to start accumulating assets with positive cash flows in US dollars.

I don't mean to hog the resources of TOD, but I think this article I got from John Mauldin is a great insight into the money behind the oil and the macro international picture.  I took out all the graphs, but the graphs make it easy to see some things John talks about. John doesn't understand peak oil (yes I have written to him), but he does address the economic impact of higher oil prices.  He tries to provide a scenario for price collapse, but I really do not see that happening at all.  

For those who want the entire article (yes it's longer), check out this link.

This piece is a bit naive. If a European buys  oil  Euros are exchanged. Although the oil price might be qoted in US Dollars,  at closing it is converted to euros, and the deal is settled in euros. No need for US Dollars, and no this deal doesn´t finance the US deficit !!!
Yes it does finance it.  Producers are paid in dollars which need to be converted to Euro's.  You still need a central bank to do this and thus the demand on the dollar is there.  Petrodollars are real and the middle east recylces them back into T Bills which DOES finance our debt.
It is simple: A price that is quoted in US Dollars can be settled in whatever your trading partner accepts, there are even barter trades. And believe me, most of the world accepts euros, especially that part of the world that imports other merchandise from Europe. You can  have accounts denominated in US dollars and other accounts demoninated in Euros at the same bank. All you have to do, is  to agree with your trading partner on the terms of settlement.  Oil exporters don´t accumulate dollars, they accumulate foreign currency.  
If I go to the Austrian mint and buy a one ounce Philharmoniker gold coin I pay euros, I don´t have to exchange  my euros for US dollars, just because the price of gold is fixed in US dollars.
I read the book Petrodollar warfare some time back and the whole premise of the book was based on Tate 423's view of this situation.  I got really interested in this topic when I heard about Iran's proposed oil bourse and the effect it might have on the US economy.  I kept digging and found a number of contrary opinions as expressed by obdacher.  Then I just got confused.

What is the truth in this matter?  I think if Tate 423 is correct then Iran and now Russia's move to get away from the dollar in oil pricing/sales could spell disaster for the economy.  If obdacher is correct then there is a lot of fear mongering going on.  Are there any experts in this topic on TOD who wish to help clarify the issue?  I suppose the truth lies somewhere in the middle but I can't even figure that out.

  I'm jest a poor ol' country boy, and I'm probably gonna P.O, everbody, but you need to take any economic pronostiication with a grain of salt and maybe a whole handful. I believe the most dangerous person in the world is a 26 year old with a computer and a MBA and just enough statistics to plot a straight line. Mauldin makes a couple of really interesting observations. Since foreign banks make loans in petrodollars to companies outside the US then our currency is out of the control of the Federal Reserve, and the Bank of Japan has been fueling the current boom with the free loans that let bankers go buy bonds and keep all the interest with this borrowed money. These may be correct observations. It explains how the US can continue to fund the disastrous deficit. It explains why interest hikes don't seem to be slowing the base rate of inflation. It might even be true. But what are you going to do now? Its still going to affect the relative value of everything. My best guess as to a real plan of action is for me to invest in oil exploration and personal energy efficency, pay my bills and try to be a decent human being. Its for sure I won't live another 40 years (I'm 54 and diabetic) and things are changing so fast in this world and with so much complexity that I can't predict the future. And neither can anyone else.
P.S. When somebody tells you he's jest an ol' country boy or how conservative he is or how much he loves Jesus, watch your wallet.This is a solid tip from the oil patch.    
OK, but your gold coin analogy is not really that useful because the Austrian Mint is not the primary producer of the gold.  How is the primary producer paid for the gold that went into your coin?

Same with oil, you pay euros for the petrol at the petrol station, but the petrol station is not the primary producer of the oil that was used to make the end-products that you buy.

I think the biggest question is: Are real dollars currently exchanged for the majority of oil products that are sold by these primary producers who want to trade in Euros.  If they are currently not selling their oil for real dollars, then the switch will make no difference.

I just wish someone here could answer that question definitively.  

How do we currently pay for Russian and Iranian oil?

Obdarcher is correct. It matters not one whit what oil is priced in, it can be invoiced in any domination agreeable to both parties. Oil is quite often traded in euros or yen.

At any rate, it takes a fraction of a second to convert any currency to any other currency on the FOREX. And it cost about three basis points, that's three cents per hundred dollars.

The very best summery of the role the euro plays in oil trading can be found here:
Go to "Box 3, on page 24 of this file. It is actually page 25 if you use the PDF file numbers at the bottom of the page. At any rate the box is only about a page and a half long so you should be able to cover it in a couple of minutes.

At any rate, it takes a fraction of a second to convert any currency to any other currency on the FOREX. And it cost about three basis points, that's three cents per hundred dollars.

But doesn't this effect the price of both currencies?  If I trade $100, it makes no difference, but if I trade $100 million, that will change the exchange rate.  When you make the exchange, the money doesn't come from thin air, someone is doing the opposite exchange.  If fewer people want US$ then the US$ drops in value until more people want it at the better exchange rate.

Also, as I understand it, all oil exporting countries choose to use US$ for all purchases of oil, and there is a lot of political pressure to keep it that way.  Iraq start requesting that they get paid in Euros.  Then the US invaded Iraq, and Iraq suddenly started accepting only US$ again.

To add to this and clarify what I think may be the middle ground.  The prices START in US dollars no matter what.  You can pay Euro's for this oil, but the exchange rates determine how much Euro's you pay, thus the underlying petrodollar is still true.  This in effect causes international banks around the world to hold US dollars in reserve to perform the FOREX operations.  I know the Middle East loves European banks to park some US cash.  Damn look at Saddam hording 1B in US notes, HARD CASH!
So the Arabs loan us the money to buy their oil meaning that we are also paying interest on top of the price of oil. At these levels of debt it is more their problem than ours'.
You are very right. Almost everyone is lending money to the americans. With the borrowed money the americans buy all the stuff they like to consume. But when the americans no longer pay back their lones, it is not they who will be in trouble, it is the rest of the world.

I really don't understand why the rest of the world keeps lending money to america, why don't they buy something usefull for themselfs with it?

Much of the countries that lend money to the US have an interest in US spending: eg. China to sell widgets, Saudi-Arabia to sell oil.

When the world stops lending it's unlikely that their former loans will be repaid, but they aren't throwing good money after bad anymore. The US, on the other hand, will need to find other sources of funding (difficult, with a service economy), or cut back spending (infectuous, with a service economy).

To keep the merry-go-round going.  Don't you want to be comfortable (prior to downturn) for as long as possible?  I'm not adding to my personal debt except for college which sadly I can do little, but I'm in my last year.

Wow a small spill thats barely in the news and we have to
open the strategic reserves.


I thought this was interesting.

Egyptian officials said their government asked Hamas to release the soldier and deployed 2,500 extra soldiers along the border with Gaza to prevent an influx of Palestinians if Israel invaded. Egypt also imposed a nighttime curfew on residents along the border.
yea but it's been tit for tat there between the two.
Which two?

And I think it was Carlin who said "If it's tit for tat, where can I get some tat?"