The Peak-Oil Trail...

[npg]

I'm starting a new thread so that it is easier to track our thoughts about peak-oil, it's impact and likelihood.

Let's recap the facts:

• Oil is the lifeblood of the economy
• Economy is linked in lockstep with our ability to explore and refine oil
• Demand for Oil is rising as Asia 'awakens' and aims for a lifestyle similar to ours
• Nuclear power is definitely an alternative in the future. But until we get the infrastructural capability up and running, we're more reliant on oil than ever!
• easy and cheap ways of extracting it from the ground are running out.
• according to the International Energy Agency we suck down about 82 million barrels and we produce 84 million barrels. That's 2 million barrels surplus tucked away as strategic reserves.
• car sales in China are breaking records year on year and it just can’t satisfy its thirst for oil as it tries to keep up with its industrial boom.
• china accounted for 40% of the growth in oil demand over the last four years, says the US Energy Information Administration (EIA). Its demand for oil is expected to double in 20 years.
• Demand in other countries (developed or not) is also rising.

Now here comes the value bit

• OPEC had to limit how much oil each member could sell, because prices were too low. The quotas were based on each member's oil reserves.
• In the 1980s, OPEC's claim of total reserves magically leaped from 353 to 643 billion barrels without a single major discovery. Industry experts call it the ‘quota war’.
• The Saudis alone jacked up their estimate by about 100 billion. Kuwait added 50 percent to its reserves in one year, 1985. Venezuela doubled its reserves in 1987. Iraq and Iran doubled their estimates, too.
• OPEC members did like the Saudis and kept their reserve estimates the same year after year, as if no oil was being pumped out and sold.
• The IEA could find no sign the Saudis were selling more oil.
• As far as the IEA can tell, they only pump around five million barrels a day and that's all they've pumped for years.

Thus, there is a likelihood that global demand will outstrip supply. If oil reserves have effectively been overstated in the 80's and never adjusted downwards towards more honest levels, then a nice squeeze could occur if production cannot satisfy demands. There appears no evidence that production in any of the existing oil fields is increasing. In the contrary, a lot of the major fields are reporting declines (except the Saudis who refuse to have their output independently assessed. hmmm, I wonder why). Also, for any alternative solutions to come on-line it takes anything between 5 - 10 years. Nuclear power stations aren't build within a year.

So a likely scenario is:

Rise in demand + increased shortage of supplies + overstated reserves

That has the potential of sparking wars, civil unrest and god knows what else. It will certainly drive prices through the roof. Inflation will balloon to incredible levels and the credit bubble goes pop once interest rates are in double digit territory. This however, is the full on scenario.

I give this event a high probability. However, I am not sure whether we will meet the full on scenario or something much softer. It's a painful thought but it has to be contemplated.

[Rooster]

This website is a great read on the subject: Peak Oil: Life After the Oil Crash

[kubla000]

There is a great blog called The Oil Drum which discusses these topics in great length and it's populated by industry insiders and brilliant people who work within the geological/science community, all chatting away... it's also a touch alarmist, and they regularly discuss signs of potential peak oil/ $100-barrel oil as well as future gasoline prices.

To get a great feel for just how intelligent and detailed the discussion gets, start with this recent post regarding future potential production of the Ghawar Oil Field in Saudi Arabia.

[spectragroup]

npg

when we discussed UNT I got the impression that their was a great possibility that oil prices could fall based on the weakness of the dollar. You obviously understand this much more than i do, but here it sounds like oil could likely go up. Everything that I've read seems to point to oil prices rising dramatically over the next 5 years? If this is the case could these energy companies like UNT be a good investment?

[npg]

Originally Posted by spectragroup

npg

when we discussed UNT I got the impression that their was a great possibility that oil prices could fall based on the weakness of the dollar. You obviously understand this much more than i do, but here it sounds like oil could likely go up. Everything that I've read seems to point to oil prices rising dramatically over the next 5 years? If this is the case could these energy companies like UNT be a good investment?

I guess what you are seeing is _volatility_. This can lead to the false impression of one believing they will head either way. Like in Schroedingers cat example, it depends on the instance of time you look which determines whay you see.

I made the case for the oil crash scenario. It's not my own work. This scenario is available to anyone after a bit of searching on that subject. It's nothing original.

What I need to do now is to figure out to which extends that is probable and how bit my bet (if I want to make one) should be.

I am a bit stuck for arguments not playing out like that and am interested in any contrarian take to that scenario, knowing that it will greatly improving my chances in making an intelligent prediction.

So far it looks like oil is a must to have. Berkshire Hathaway has a substantial stake in COP (a lot of gurus have) as well as PTR for eg.

How well UNT will perform I cannot tell you. It's too early to make a call. I need to ponder this stuff for longer before jumping on board.

[kubla000]

npg, are you a Prophet?

Take a look at this!
A world without oil

Scientists have criticised a major review of the world's remaining oil reserves, warning that the end of oil is coming sooner than governments and oil companies are prepared to admit.
BP's Statistical Review of World Energy, published yesterday, appears to show that the world still has enough "proven" reserves to provide 40 years of consumption at current rates. The assessment, based on officially reported figures, has once again pushed back the estimate of when the world will run dry.
However, scientists led by the London-based Oil Depletion Analysis Centre, say that global production of oil is set to peak in the next four years before entering a steepening decline which will have massive consequences for the world economy and the way that we live our lives.
According to "peak oil" theory our consumption of oil will catch, then outstrip our discovery of new reserves and we will begin to deplete known reserves.
Colin Campbell, the head of the depletion centre, said: "It's quite a simple theory and one that any beer drinker understands. The glass starts full and ends empty and the faster you drink it the quicker it's gone."
Dr Campbell, is a former chief geologist and vice-president at a string of oil majors including BP, Shell, Fina, Exxon and ChevronTexaco. He explains that the peak of regular oil - the cheap and easy to extract stuff - has already come and gone in 2005. Even when you factor in the more difficult to extract heavy oil, deep sea reserves, polar regions and liquid taken from gas, the peak will come as soon as 2011, he says.

[npg]

Originally Posted by kubla000

npg, are you a Prophet?

Take a look at this!

I heard about the quota war quite a while ago... it's pretty much public information (which is also vehemently denied in public). If you keep looking into peak-oil you will inevitably stumble upon that info.

PS: That link doesn't work. Care to re-post it?

[joshuat]

While I've enjoyed reading npg's posts on oil, I currently have a different take on it. So I'll expose it to the light of day, and see where the flaws are. I'll start with simple declarative sentences just to lay out my thinking.

Peak oil. Are we there yet? I don't know, but I do know that there are very smart people studying it, and betting on it in the market, who know more about it than me. If I try to make a play based on my 'knowledge' of peak oil, I'm the sucker. So I'll not do that.

What I do know is that oil is sold in a capitalistic market. What that means, is absent any govermental regulation, such as gas taxes, prices will respond to demand. Companies will respond to prices, and innovate as necessary. We still have a lot of energy underground, it just isn't cost effective to extract at current prices.

China is sitting on many decades of coal energy. They _must_ be banking on that for their future energy needs, not oil. It's the only way they can sustain their growth, and in a capitalistic society (which they are not, yet), businesses will go whichever way is required to maintain that growth rate.

Studies of oil prices vs. market prices (is the S&P up or down) shows absolutely no correlation.

Adjusted for inflation, we've had higher oil prices in the past.

The big guys (Buffett, Pabrai, Peak, etc) are shifting attention to alternative sources or industries that will profit from a shift from oil.

Higher oil prices don't equal higher oil stock prices. It all comes down to ROI. As we hit peak oil, exploration and extraction costs will increase, G&A could increase, so revenues might increase but profit margin will not unless some company has a huge moat allowing them to maintain that higher margin.

The US government has the ability to drastically reduce our energy footprint, but aren't. How? Nuclear. Our President can't even pronounce the word; meanwhile France has drastically reduced their oil dependence by shifting to it.

The US government is trying to change our energy footprint by politically expedient means. They push ethanol, which is great for the Iowa caucuses, but terrible for energy, since it takes more energy to make the ethanol than it releases. However, there is a play here, if you research and see what energy they use to make ethanol.

All in all, I don't think it is a slam dunk to just buy an oil stock (which npg never said). And, so long as the markets remain capitalistic, I don't think it will be a catastrophe. Prices will go up, we will adjust by extracting new sources and changing away from oil.

In all of that, what do I know that everybody else doesn't? What is Mr. Market ignoring? I have a very definite answer to that, but there is no point in sharing it because what I know is different from what you know, so you can't take advantage of it anyway. If what you know is commonly known, it is already priced into the stock, and there is no play there. Anything you see typed into a post on an internet board is already priced into the stock.

Anyway, those are my thoughts. Look at the energy sector, recognize it will react and adapt to changing conditions as it always has, and try to find something in there that you know that Mr. Market doesn't. If you can't find it, don't invest - you are betting against Buffett, Peak, et. al., and they can see your cards but you can't see theirs.

npg, thoughts? Disagreements?

[npg]

Great take!

A cheery consensus can be quite expensive. It is not such a good thing when everybody looks through the same glasses.

Indeed, you are right. Oil stocks are not a slam dunk. Maybe I made it sound too much like they were but that was not my intention.

Because of certain intellectual prejudice I wanted to make it clear that oil or energy related stocks can be a great investment as well. I would not discount important sectors from my investment just because an estate-agent says they should not be part of a portfolio. That's nuts.

My only criticism is that nuclear energy alone won't be sufficient to solve our needs. It takes ages for new reactors to come on-line. Some countries already experience periodic black-outs.

Coal seems the best alternative so far. It will move more and more into the limelight. That was my explanation for Buffett buying into BNI at what was generally percieved as a FULL VALUE purchase (duh, they ignore Munger, again, *sigh*). He even admits that he 'came late'. His friend Bill Gates was on that band wagon much earlier FYI.

Whoever is best positioned to process coal (the US has sufficient coal for 150 years --that will do me fine) efficiently without the environmental impact will be the one to profit most from this 'crisis'.

In the meantime, railways get a new revival. Hell, there might even be a rejuvenation of Yorkshire or Wales in the UK, who has been hit hard by the demise of coal.

I would not bank on alternative energies yet. It's too unknown and hard to figure out. Making solar panels requires a lot of energy as well FYI.

What I would argue however, is that a position in the oil or energy sector may be wise. The fundamentals need to be right though, the price needs to be sensible. At current valuations, there are a lot of attractive companies out there.

Industries profiting from the increased shortage in oil is an ideal hedge against the peak-oil scenario not playing out as every one anticipates. Usually, it never does. This is definitively one to try and figure out! At the least, its a model to keep in your head when dealing with peak-oil.

Great to hear different opinions. It makes the picture clearer, bit by bit...

[GRock]

Great thread NPG,
I have only skimmed the posts but my initial reaction is all this was said before in the 70s. Once the scientist figured out it wasn't rotting dinosaurs and vegetation that created oil there is more underground than we realize. Nobody has been looking that hard till recently since the oil was cheap and many oil companies were losing money. We have alot in this country but the greenys won't let us drill it. The Greenys won't let us build refineries. The laws of supply and demand always work when allowed. That is what happened from the 70s. Supply met demand and then bubbled over and the oils lost money. Supply and demand works better when the governments stay out of it (including OPEC). It will work again. Plenty of oil for the rest of this century. Alternative fuels should come along as supply and demand dictates only. Look at what is happening to corn and ethanol. Government promoted ethanol and has screwed up the supply and demand of corn and we will have Mexico declaring war on the US corn conglomerates over corn prices, Geez! We will have an army instead of illegals coming over the boarder. Technology best develops in a real sense as the supply and demand dictates not by governmental dictates. The capitalist system is the best monetary system ever invented and allows for unprecedented innovation. Supply always will reaches an appropriate level, as well as price. Governments can never do it better. It always screws it up when it tries to control and or manipulate it to our detriment.