It is geology not economics was (RE: Greenspan says no oil problems)

>-----Original Message-----
>From: asa-owner@lists.calvin.edu [mailto:asa-owner@lists.calvin.edu]On
>Behalf Of Al Koop
>Sent: Saturday, October 16, 2004 4:33 PM

>In a speech yesterday Alan Greenspan said that oil supplies will keep up
>with demand. Market forces will assure that we always have the desired
>amount of oil. Even though we have discovered few new fields, our
>reserves have increased 100 billion barrels over what we extracted. I
>suggest this is the result of creative accounting practices. Quite a
>different view than Glenn presents from the Society of Exploration
>Geophysicists.

I stand my ground. The entire oil industry is a buzz about Hubbert's peak
being very near. There have been sessions devoted to the topic at the
Offshore Technology Conference in May, at the Soc. of Petroleum Engineers
meeting in Sept. and the Soc. Exploration Geophysicists conference this
month. All sessions were packed to the gills. I didn't see Greenspan at
any of those conferences. so I will address this to Mr. Green span.

Mr. Greenspan,

I don't think you know what you are talking about when it comes to oil.

***** You can plant more corn; you can't plant more oil. ******

The economists, which is what you are, Mr. Greenspan, have tried to claim
over and over that the price is going up because of 'terrorist' fears,
Nigerian strikes, Venezuelan problems, turmoil in Iraq and every other
excuse. If this were true for the oil markets, then it would mean people
buying and stockpiling oil. It would mean that oil stocks would be climbing
around the world. That isn't happening. The Now, things are precariously
balanced right now. Should a recession drop demand, the price will fall
sharply. There are indications in China that their economy is slowing.
However, if you look at the oil futures market, the near month contract is
going for $54 and some change. April 2005 contracts are above $51. Since
the idea is that one wants to buy low and sell high, the traders are betting
that in 6 months, the price of oil will be above $51. That is not a bet one
makes easily, especially at the amounts of money those guys throw around.

Secondly, if oil price will magically bring forth more oil, why did it not
magically bring forth more oil in the US lower 48 when in the early 80s, oil
sold for an inflation adjusted $80/barrel in today's money? The US lower 48
production continued to fall in spite of us having 4,500 drill rigs working
at that time!

Mr. Greenspan, you are reported to have said:

>Alan Greenspan, the chairman of the Federal Reserve, said Friday that
>the long-term outlook for global oil supplies is reassuring even though
>anxiety about dwindling reserves has helped push spot prices to nearly
>$55 a barrel.
>
>More disturbing than the run-up in spot prices, Mr. Greenspan said, has
>been the sharp rise in the price of long-term futures contracts for oil
>that would be delivered as late as 2010. Long-term futures prices
>remained steady at about $20 a barrel from 1990 to 2000, even though
>spot-market prices fluctuated from $11 to $40 during that period. This
>time around, long-term prices have climbed to about $35.

As I said above, these guys are betting that the bottom floor price of oil
in 2010 will be higher than $35.

Mr. Greenspan, you are reported to have said:
>
>"Unlike past concerns, the current situation reflects an increasing fear
>that existing reserves and productive capacity have become subject to
>potential geopolitical adversity," Mr. Greenspan said in a speech here
>to the National Italian American Foundation, according to a text of his
>remarks.

This is what comes out of the south end of a northbound bull. The fear is
NOT geopolitical adversity (although that plays a role). The fear, the big
fear, is that the Saudi's have no more spare capacity . The fear springs
from reports this week like what Mexico is saying. They are saying that 2/3
of their production will begin experiencing a 14% decline in just 2 years.
The UK is now a net importer for this summer. Thus, the UK continental
shelf is no longer part of the solution for the world's energy. The UK has
become an energy sink. Norwegian production has dropped 5% in the past 2
years. This is the fear, Mr. Greenspan.

Consider this:

" "It's a tale that Statoil's explorers enjoy retelling. In 1992, the
company decided to give up on an offshore tract after two exploratory wells
came up dry. Management was getting nervous about the cost--$15 a well--and
was ready to cut its losses.
        "The explorers still had hopes though, and managed to get permission
for one last try. The third well struck oil, opening a new field with about
550 million barrels of oil, enough to satisfy all of Britain's consumption
for a year..
        "But Statoil's find, the Norne field, was the last significant crude
oil discovery in Norway. In more than 11 years of hunting since then, quite
a bit of natural gas has been found, but hardly any more oil.
        "The same is true across much of the developed world. Western oil
companies are running out of likely places to look, and significant finds
are growing rarer." Jad Monawad, "New Oil Proves Elusive, and Alarm Bells
Ring, International Herald Tribune," Sept. 7, 2004, p. 1

Where, Mr. Greenspan, do you think the Norwegians are to find their new oil
supplies, at the grocery store? It is geology, not economics. Its the laws
of fluid flow, not economics.

 "These anxieties patently are not frivolous, given the stark
>realities evident in many areas of the world."
>
>But he went on to argue that higher oil prices would eventually lead to
>the discovery of new reserves, greater investment in new production and
>alternative energy sources that would allow supplies to keep up with
>demand over the long term.

All I can do is quote:

"Even Greenland and the mountains of Tibet have been looked at for E&P
purposes." Ivan Sandrea, "Deepwater Oil Discovery Rate may have Peaked;
Production peak may follow in 10 years," Oil and Gas Journal, July 26, 2004
p.22

The same author concludes:
"Global exploration potential looks now more limited than ever." Ivan
Sandrea, "Deepwater Oil Discovery Rate may have Peaked; Production peak may
follow in 10 years," Oil and Gas Journal, July 26, 2004 p.22

And they didn't find much oil in those places. Exactly where do you think
we haven't explored for oil, Mr. Greenspan? The only place I know of is
offshore Antarctica, which is prohibited by international law.

>
>Though Mr. Greenspan conceded that there have been relatively few new
>oil fields discovered in recent years, he said the world's net proven
>reserves have risen by 100 billion barrels over the last decade even
>though more than 250 billion barrels have been extracted.

Big friggin deal. Mr. Greenspan you don't understand what is important and
what isn't. Production rate is what is important, not reserves. All oils are
not equal. What has been added to the reserves is highly viscous, heavy
crudes which have the consistency of molasses (or worse) and thus can't be
produced very rapidly. Remember my banking analogy. If I put a billion
dollars in your bank account but tell you you can only extract it at the
rate of $10 per day, you are not rich, I would submit.

>
>Noting that the Energy Department predicted in the 1970's that oil
>prices would reach the equivalent of $120 a barrel, Mr. Greenspan said
>market forces would lead to both increased oil production, greater
>energy efficiency and faster development of alternative sources of
>power.

Mr. Greenspan, you are right that we will have greater energy efficiency,
but with Hubbert's peak, the problem is that if you save 1 billion barrels
of consumption, you do no more than move the peak in world oil production
back by 1 week. This is what Colin Campbell told the British Parliament:

"Facts not scenarios. If by some miracle we could add 500 Gb of reserves –
more than half as much as produced so far – it would delay peak by only ten
years. One indisputable fact stands out. Discovery peaked 30 years ago. It
takes no feat of intellect to conclude that we now face the corresponding
peak of production."

Presentation to a House of Commons All-Party Committee
on July 7th 1999 THE IMMINENT PEAK OF WORLD OIL PRODUCTION
by C.J. Campbell

>
>"If history is any guide, oil will eventually be overtaken by
>less-costly alternatives well before conventional oil reserves run out,"
>he said.

Never in human history have we faced a time in which we had less energy
tomorrow than we had today. History will be no guide for this.

>
>Despite that generally sunny prognosis, which is consistent with Mr.
>Greenspan's deeply held belief that market forces will eventually solve
>almost any kind of shortage, the Fed chairman suggested that the
>short-term outlook might well be bumpy.

Not only the short term, but the mid-term and long term. As I have mentioned
to the ASA, today's fields produce 80+ million barrels per day. In 2020,
those very fields will be producing about 40 million. If demand projections
are accurate, meaning 120 million bbl/d required in 2020, then we must put
on production the same amount of oil that we now have on production. And we
must do this in the next 16 years. I know no one in the oil industry who
believes this is possible. What do you know that we don't, Mr. Greenspan?

Australia is a good example which illustrates the coming problem. In 2001,
The European Assoc. of Geoscientists and Engineers publication, First
Breaks, predicted,

“Current reserves, however, are insufficient to sustain present levels of
production in the medium term. Estimates of future production of oil and
condensate suggest that at the mean expectation, production rates will drop
by around 33% by 2005 and 50% by 2010, largely as a result of a decline in
oil production. This forecast includes production from fields that have not
yet been discovered. Condensate production will continue to grow, but rate
of growth is constrained by gas production rates and overall by the
development timetable for the major gas fields.”
        “The rate of discovery of new oil fields is insufficient to replace the
reserves that are being produced. If Australia is to maximize the
opportunity to maintain production at similar levels to the recent past, it
is probable that exploration effort will have to diversify to the frontier
basins to locate a new oil province whilst continuing to explore the full
potential of the known hydrocarbon-bearing basins. Australia still has a
remarkable number of basins that have received little or no exploration.” T.
G. Powell, “Understanding Australia’s Petroleum Resources, Future Production
Trends and The role of the Frontiers,” First Break, 19(2001):7;397-409, p.
397

What has been the history since that piece was written in late 2000 being
published in mid 2001? In thousand barrels per day, here are the numbers
from the BP Statistical Review.

   2000 2001 2002 2003
    809 733 731 624

Australia is down 23% from 2000. And a Melbourne news source says:

"The latest global oil production data from the Energy Information Agency
(USEIA 2004) includes a significant revision for Australian production. The
EIA now estimates that in 2003 Australian oil production fell by 18%, and
that in the first four months of this year it is down by 15% in comparison
to the same period last year. "
http://www.melbourne.indymedia.org/news/2004/07/73418.php

If the 15% decline carries throughout the year, then Australia's production
will have matched the prediction by being down betwwen 28% and 35% from
2001 and 2000 respectively. A 15% drop this year will mean Australia will
only produce 530 thousand barrels per day.

I point this out just to show that such predictions as made about Australia
are reliable. Just wait til Mexican production begins its decline. Luis
Ramirez Corzo, Director-general of exploration and produciton for Petroleros
Mexiconos (Pemex) was quoted saying:

     “Production from Cantarell will begin to decline in 2006, and the
drop-off will be brutal—14 percent a year, according to Ramirez.” David
Brown, “Politics Cloud Mexico’s Promises,” AAPG Explorer, Oct. 2004, p. 16

Mexico has an abysmal record of managing their oil production.

        “At the end of 2003, Pemex reported proven reserves of 18.9 billion barrels
of crude oil equivalent and total reserves—proven, probable and possible—of
48 billion barrels. Energy Minister Fernando Elizondo, in a recent
presentation to the European Chambers of Commerce, said that Mexico’s
replacement of reserves averaged 35% between 2003 and the present, and that
it was aiming for 100% by 2010. But he said reserves have continued to
decline despite record investment, and he estimated that exploration and
production investment requirements through 2012 would be $117 billion.
        “Pemex is currently producing 3.4 million b/d of oil, of which 2.2 million
b/d comes from Cantarell, the world’s sixth largest oil field which lies in
shallow waters in the southern Gulf of Mexico. Cantarell is expected to
begin a sharp decline in 2006 at a rate of 14% a year.” anonymous, “Mix
Message over Mexican Major Deep Water Hydrocarbon Treasures,” First Breaks,,
22(2004):10: 31

The same article mentions that they think (probably correctly) that there
are huge fields in the deep water in their part of the Gulf, but it also
notes that the Mexicans lack the technology to extract them.

And don't forget what I have been told by reservoir engineers about Ghawar,
the world's largest oil field. Engineers who have personally worked Ghawar
tell me that their reservoir models show a catastrophic decline in
production by 2008-2009. What do you think will happen to the price of oil
when 6% of the world's oil is removed from the market in this one single
event? I have just placed the picture of the Uthmaniyah part of Ghawar on
my web site: http://home.entouch.net/dmd/ghawarResMod.jpg

The full paper is at http://home.entouch.net/dmd/ghawar.htm

Happy driving, Mr. Greenspan. I would suggest selling the Hummer and
retiring to a warmer climate, like Florida where you can read up on what
makes the oil industry tick.
Received on Sat Oct 16 15:51:52 2004