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May

2012

Skepticblog » News from the oil patch

oil is never going to be as cheap or easy to obtain again, and the global price of oil will get higher and higher as it becomes more and more scarce, especially with the huge increase in demand from developing countries like China and India. I heard this message over and over again, from the gossip on the exhibit hall floor with friends, to the plenary addresses by the top people in the oil business. Coincidentally, it was the cover story of the April 9. 2012, issue of Timemagazine as well. This fact has been known for some time, and was first predicted by the pioneering oil geologist M. King Hubbert in 1953. Using his knowledge of the history of non-renewable resources (which show a “bell curve” history of production, from their initial log growth phase to an equally rapid decline as the easily obtained resources vanish), plus his deep understanding of the amount and nature of oil reserves. he predicted that U.S. oil production would reach a peak in the early 1970s—and his prediction came true in 1971. Since then, U.S. oil production has steadily declined as fewer and fewer large fields were found, and older fields have been used up.

www.skepticblog.org/...news-from-the-oil-patch

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Oil Academia Corporation Capitalism Price Fuel Fuel Price

The most obvious difference is MONEY: the exhibit area for AAPG is HUGE, and filled with gigantic expensive booths from many of the major companies like Schlumberger and Halliburton. These booths have mini-lecture theaters with multiple big-screen displays where they give free seminars on their methods, thick plush carpets, potted plants, free food and drink, and fancy furniture—all for less than 3 days that the exhibits are open! Professional registration for this meeting is expensive (since most oil geologists make MUCH more than academic geologists, and the oil companies pay their employees to attend), and the dress code is also suits and ties for men (it’s much more casual at academic conferences).
The second difference is the emphasis of the meeting. At GSA, nearly 6000 attendees give more than 4000 talks or posters, 20 talks every 15 minutes for four straight days plus hundreds of posters. By contrast, for the same attendance there were only 5-6 20-minute talks at any given time at AAPG in less than 3 days, and the majority of the attendees didn’t present anything. Their job is to do whatever their company pays them to do, not churn out new research results to present at a meeting every year, like academic geologists must. Most AAPG talks tend to be very narrow and describe details of one particular oil field, not independent research into general principles of geology that academics are trying to decipher.
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- Finally, the demographic differences are striking. Academic geologists are nearly 50% women now, and they are distributed across all age classes. Oil geologists, by contrast, are nearly all old white guys in their 60s or older, with a lot of young men (and a few women) just recently hired in the business. The entire generation that would now be in their 40s and 50s is missing because of the attrition during the oil busts of the late 80s-90s.
- The U.S. oil companies have indeed been drilling as fast as they could everywhere in the U.S., and as the figure shows, getting very little no matter where they look. As the Time magazine article pointed out, now they’re spending most of their time and money on increasingly risky and expensive operations like fracking, pumping water in old fields to push out the last drops of oil, or mining oil sands with all their environmental costs. The biggest push is in offshore oil platforms—and the 2010 Gulf oil disaster (along with previous oil disasters on platforms around the world) shows just how risky it is to drill so far offshore.
- World discovery rate peaked in 1965, and has been steeply declining ever since, even though more and more exploration is conducted in the farthest reaches of the globe in the past 47 years. The “peak oil” effect has probably already occurred, and we are likely on the slow downward decline in discoveries of cheap, easy-to-pump oil.
- This was the number that Hubbert himself used when trying to determine the amount of oil left and when the peak would occur (he estimated a window between 1995-2000). Depending upon how the model is run, most scientists predicted that the peak of world oil production would occur around 2005-2010, with most estimates around 2006 to 2007. Although it’s still to early too tell if the peak has fully passed until we view it from a further distance, so far that prediction has proven accurate. According to the International Energy Agency (IEA), the peak of global oil production was in 2006, and declined by 6.7% in 2007. As this figure shows, the peak may have occurred between 2006 and 2009, and production has hit a plateau, despite increased pumping while the oil price climbs.
- Meanwhile, demand continues to climb, driving up prices. The booming economies of China and India, along with some other developing nations, are greatly exceeding any increased production due to new discoveries. The numbers are truly staggering. From only 50,000 barrels/day in 1980, world consumption is now almost 100,000 barrels/day.
- To summarize: the era of cheap, easily obtained, abundant oil is over, and oil will soon become scarce despite more and more costly efforts to squeeze out every last drop from more and more “unconventional” sources. The fact that Hubbert’s model exactly predicted the U.S. oil peak, and seems to be predicting the global peak, should be strong enough evidence in and of itself. There is also the fact that the peak of discovery of major oil fields occurred 47 years ago, and there have been no giant oil fields found in a long time, and most of the world’s older oil fields are nearing their ends. There are no polls that show just how many qualified experts (geologists and geological engineers within and close to the oil industry) accept the concept of peak oil and the end of cheap abundant oil, but a lot of oil experts are on the record as supporting it, including a number of oil geologists and executives. My many friends in the oil business almost all tell me that “peak oil” is widely accepted among their colleagues, and they have long been forced to work with extraordinarily difficult exploration problems because there are no easy oil fields any more.
- If cheap oil ends, we will just go to alternatives”. They say “We’re finding lots of natural gas,” which is true—so far as it goes. This sounds fine in theory, but when you look hard at the evidence, it doesn’t hold water (or oil). First of all, even if we stopped using oil for our cars tomorrow, there would still be huge demands in other areas. Most of our nation’s power plants are oil or gas burning, and they account for a huge percentage of our consumption. Natural gas is indeed more abundant, but it only solves part of the problem—it takes much more of it to get the same amount of energy, and it still produces greenhouse gases—nor is it practical for transportation fuel yet. If we got rid of oil- and gas-powered electricity, we’d have to go to nuclear power (which is still controversial here thanks to the Three Mile Island disaster, or the recent disaster in Japan), or coal.
- coal is one of the dirtiest and nastiest of energy alternatives. Most coal must be extracted either by dangerous shaft mining (which is expensive and produces relatively low quantities of coal) or by strip mining, which literally rips a landscape apart. In addition, most coal is high in sulfur, so it has long been the major source of acid rain. Finally, coal produces far more greenhouse gases than does oil or natural gas, so coal does not solve our carbon footprint problems. And no one is even thinking of using coal to run cars any more (let alone going back to the coal-fired steam locomotives of the past).
- People also forget (or do not realize) that we use oil in many other ways besides energy. Nearly every synthetic substance you use, from the huge array of plastics in every product we own, to all the fabrics (nylon, rayon, Dacron, polyester, and many others) are produced from cheap oil. Just look around you and you will probably see dozens of plastics and synthetic fabrics in your clothes, and nearly every object in a typical room has plastic in it. When oil becomes too expensive for these things, what will we do? We will no longer be able to import thousands of cheap plastic toys for our kids’ Happy Meals, or wear synthetic fabrics (even when we need our polyester or spandex), or use products made largely of plastic (like the computer parts I’m using right now), or throw away plastic water bottles by the millions. When cheap oil becomes expensive, plastics will have to be recycled and rationed, and become much too precious for most ways we use and waste it today. And you can’t make plastics cheaply from anything but oil—not coal or anything else.

Jan

2012

McKinsey spots grim resources trend

www.lowyinterpreter.org/...pots-grim-resources-trend.aspx

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Commodity Price

that after a long period of falling prices appearing to signal easing resource constraints, recent trends look quite different:

Nov

2011

Gabe Newell: Piracy is a “Non-issue” to Valve; Providing better Services Will Result in More Sales - GamingBolt.com: Video Game News, Reviews, Previews and Blog

there is a general misconception about piracy, and it’s not really the high cost that forces people to pirate. It’s about the delivery service and how convenient it is to people with purchasing power.

gamingbolt.com/ices-will-result-in-more-sales

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Piracy Cost Price Convenience Technology

Newell explained a lot more as to how they were providing better services and creating a sense of brand loyalty. He mentioned that piracy is basically a “Non-issue” for Valve.

“Our goal is to create greater service value than pirates, and this has been successful enough for us that piracy is basically a non-issue for our company.”

He also gave a nifty example as to why this is the case.

“Prior to entering the Russian market, we were told that Russia was a waste of time because everyone would pirate our products. Russia is now about to become our largest market in Europe,” he revealed.

Oct

2011

Roger Pielke Jr.'s Blog: Cornucopians vs. Malthusians

Where are commodity prices headed? Will Simon's optimism continue to win out and demand create new supply, again pushing prices down, as they did through the last century? Or will Ehrlich's pessimism finally have its day, and are we entering an new era of scarcity?

rogerpielkejr.blogspot.com/...rnucopians-vs-malthusians.html

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Scarcity Economics Price Malthusian Cornucopian

But recent goings on with commodity prices have some people asking whether Simon's timing was just lucky and perhaps Ehrlich views will ultimately triumph. In August, The Economist reported that had the famous bet extended to 2011, Ehrich would have won, as shown in the graph below.

In its survey of the global economy from a few weeks ago The Economist presented its entire time series for global commodity prices. On that graph I have superimposed a red line showing the dates of the Ehrlich-Simon bet.

Note that the original bet covered five commodities, and the graph from 1845 covers a much larger set. Of course, the original bet was meant to be representative of such broader trends.
The price spikes over the past century were linked to interruptions in supply, notably during the first world war. But recent price rises have been too broad-based and long-lasting to be adequately explained by frost or bad harvests. Nor is it obvious that producers are hoarding supplies. . .

The demand side has been boosted by industrial development unprecedented in its size, speed and breadth, led by China but not confined to it. Growth in emerging markets is both rapid and resource-intensive. The IMF estimates that in a middle-income country a 1% rise in GDP increases demand for energy by the same percentage. Rich economies are far less energy-hungry: the oil intensity of OECD countries has steadily fallen in recent years.

China’s appetite for raw materials is particularly voracious because of the country’s size and its high investment rate. Though it accounts for only about one-eighth of global output, China uses up between a third and half of the world’s annual production of iron ore, aluminium, lead and other non-precious metals (see chart 5). Most of the energy for Chinese industry comes from coal—a dirty fuel that contributes to China’s poor air quality. Its consumption of oil roughly tallies with the economy’s size but is likely to grow faster than GDP as China gets richer and buys more cars.
2 more annotation(s)...
- received by email from Tim:
  
  "I think using $US as a reference point is deceptive because it does not take into account the depreciation of the $US.
  
  If you measured that chart in JPY or Chinese Yuan the results would be quantatively different."
- Both the Ehrlich-Simon bet and the Economist index are based on a fixed basket of products, i.e. keeping quantities fixed over time and just letting prices vary. This ignores not only the relative importance of the various products at the base year, but specially the change in their relative importance over time. This may cause (as usual in this sort of index) a "substitution bias", usually tending to overstate rises and understate falls in the index. In the case of price indexes such as the CPI this tends to overstate inflation (slightly per year, but accumulating more bias over time).

Jul

2011

China's Manufacturing Jobs Moved Overseas - TIME

In what is supposed to be a land of unlimited cheap labor — a nation of 1.3 billion people, whose extraordinary 20-year economic rise has been built first and foremost on the backs of low-priced workers — the game has changed. In the past decade, according to Helen Qiao, chief economist for Goldman Sachs in Hong Kong, real wages for manufacturing workers in China have grown nearly 12% per year. That's the result of an economy that's been growing by double digits annually for two decades, fueled domestically by a frenzied infrastructure and housing build-out — one that, for now anyway, continues apace — combined with what was for a time an almost unquenchable thirst for Chinese exports in the developed world. Add to that the fact that in the five largest manufacturing provinces, the Chinese government — worried about an ever widening gap between rich and poor — has raised the minimum wage 14% to 21% in the past year. To Harley Seyedin, president of the American Chamber of Commerce in South China, the conclusion is inescapable: "The era of cheap labor in China is over."

www.time.com/...0,9171,2078121,00.html

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Labour Cost Price Minimum Wage China

that doesn't mean that labor costs in China, even in the most expensive parts of the country like Guangdong province, are higher than in most other places, particularly in the developed world. They aren't. The average manufacturing wage in China is still only about $3.10 an hour, (compared with $22.30 in the U.S.), though in the eastern part of the country, it's up to 50% more than that. The hourly cost advantage, while still significant, is shrinking rapidly. For the vast majority of companies, whether small, medium-size or huge multinationals, the decision about where to produce a product is always driven by multiple factors, of which the cost of labor is but one. "For lots of companies over the past two decades, the disparity was such that labor costs often drove the decision," says economist Daniel Rosen, the China director and principal of the Rhodium Group, a a New York City–based consulting firm. "Now, increasingly, that's no longer the case."