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Is Oil a Bubble? Part 3

by: Jordan Kahn June 08, 2008 | about stocks: IEO / IEZ / OIL / USO / XOP    
Jordan Kahn

Jordan Kahn

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In this last part of my series on the oil bubble, I am going to take a look at the supply side of the equation and touch upon why Congress might be as much to blame, or more so, than the oil companies at which they are currently pointing fingers. (In case you missed parts one and two, here are the links to them: Part 1  and Part 2.) For decades, the U.S. has had no real energy policy with which to hang your hat on. I remember in the early 1970s seeing funny commercials on television rallying people to get more active in conserving energy. However, conservation isn’t an active strategy for increasing supply.

Congress continues to search for scapegoats to blame for this mess, whether it is the big oil executives, financial speculators, or futures exchange regulators. However, they continue to show their failure to grasp the bigger picture, which is to increase domestic supply. Just over a week ago, the Senate refused to lift its ban on developing the oil shale in the Rockies, where estimates have put the amount of oil locked in this shale, stretching from the U.S. to Canada, at more than 1 trillion barrels. Can you imagine?

Congress has come up with a bevy of misguided “solutions,” including limits on CO2 output, restricting drilling on public land; windfall profits taxes on big oil, and trying to sue OPEC. None of these will help increase the supply that is needed to meet growing future demand. The primary solution should be tapping our own domestic supply sources, which remain out of reach.

The “windfall profit tax” is just another example of Congress’ inability to focus on supply and demand. Do you really think that the government would do something productive with those extra tax revenues if they got them? Moreover, why would you create a disincentive for the oil companies, when what we need is for them to invest more in exploration and drilling? A recent report from the International Energy Agency [IEA] warned of a potential global supply crunch, but said that it could result from the failure of governments – not private oil companies – to open up their lands for more exploration and development.

Reports out of countries like China and Brazil show they are getting the message. China reported 10 new oil discoveries last year, and Brazil has reported some huge finds this year, all of which bode well for those countries. Europe is also  increasing exploration in the North Sea, but our Congress is leaving billions of barrels untapped as it worries about the profits of the oil companies. According to Investors Business Daily, since 2002 the U.S. oil and gas industry has earned roughly $0.08 on each $1 of sales, which is about the same level as the U.S. manufacturing sector as a whole. It seems to me that the notion of windfall profits itself goes against the ideals of capitalism and free market economies.

I am not one to completely ignore the environment either. However, I have read that Louisiana, where many of our drilling and refineries are located, is one of the top areas for fisheries, and that the fish have thrived amid the drilling infrastructure. So let’s stop putting the environmental lobby’s campaigns ahead of the national interest of the rest of the U.S. consumers. If we had started drilling in the Arctic National Wildlife Refuge [ANWR] back in 1995, when President Clinton vetoed the proposal, we would be producing an extra million barrels of oil per day now.

The facts of the matter are that for the last 28 years, Congress has opposed our drilling in Alaska’s ANWR, which we know contains billions of barrels of oil. They have also prevented us from building any new oil refineries, prevented from drilling in the outer Continental shelf of the ocean, and halted the building of nuclear and clean coal power plants. Together, had these initiatives been promoted, they would have gone a long way toward alleviating the problems we are facing today.

The Institute for Energy Research estimated that the combined supply of oil contained in the sources mentioned above amount to as much as seven times the reserves of Saudi Arabia. This could be enough to meet current demand in the U.S. for hundreds of years. Moreover, The Heritage Foundation estimates that if full-scale production begins within five years, the U.S. could end its dependence on OPEC entirely by 2020. So Congress, what are you waiting for?

So ultimately, who is to blame for the oil bubble? To be fair, there are other factors that I have neglected to mention: China is likely hoarding resources, Iran is storing tons of oil in tankers, OPEC is running below peak production, and refineries are running below peak utilization rates as well. Remedying these situations would help, but their impact is less than the potential of the initiatives Congress has the power to green light. I can only hope that they somehow see the light and decide that it is more productive to start looking at solutions to the problem, rather than focusing on scapegoats.

As a last point, I probably could do a fourth part on the theory of “peak oil,” but I fear I am getting a bit verbose on the whole subject. Suffice it to say, I am not sure I believe in peak oil. Who is to say how much oil is still out there in previously hard to reach areas, or sources that were considered uneconomical to explore? However, these arguments lose sight of what really is important, and that is how long will oil supplies last? I think as alternative energy sources continue to become mainstream and as current transportation and industrial methods continue to use less energy for input sources, that we will deem the notion of running out of oil misplaced.

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This article has 51 comments:

  •  
    Jun 08 06:22 AM
    My friend,
    I thought your analysis was impressive but dare say you're missing the point. oil isn't about supply, demand or available reserves.. Oil is about P-A-N-I-C..
    Without Oil the Chinese and Indian economies (and many more for that matter) will simply come to a halt. China will pay any price to secure that black fluid that keeps factory machines working. You could find a huge Oil well in downtown NYC and the price will still remain the same. I guarantee Oil will reach $200 and beyond. The good news is that alternative energy is now fully funded and results will show soon, but the price of Oil will never drop.
    Cheers.
    Reply
  •  
    Jun 08 07:29 AM
    Kahn---Very good analysis. Almost the entire problem is caused by the democrats. If they continue to prevent drilling and the use of oil--millions will starve. The party is now entirely focused on man caused earth warming which is unproven. Neither sun power nor wind power is practical. The only power that can substitute for oil is nuclear which the democrats will not use.
    Reply
  •  
    Jun 08 09:01 AM
    Wrong. US can produce a little more but the market for oil overseas and the supply/demand balance overseas will still keep prices high for both local and foreign sources.
    Reply
  •  
    Jun 08 09:25 AM
    i see nothing in the above discussion about the vast amounts of syncrude available from liquefaction processing of illinois/west kentucky high volatile coal. we have lost 28 yrs of development of this resource due to the reagan cancellation of the demonstration plants program. colorado shale is good for jet fuel/diesel production except you need water for revegetation/reclamati... & there isn't any water.
    > jack
    Reply
  •  
    Jun 08 09:30 AM
    Here is what I see...billions and billions of dollars of infrastructure in the USA known as "streets, roads, and highways" built exclusively for motorized transportation. This motorized transportation is almost exclusively powered by oil, in one of its refined states. These roads are not going away, regardless of the success of alternative fuels such as solar, nuclear, etc. There will still be vehicles, predominantly powered by oil, traveling these surfaces for at least another century. Hydrogen power may someday be feasible. Electric cars may reach practicality. Heck, we might even put sails on the roofs and grab some wind power. But cars, trucks, and buses (not to mention fire engines and ambulances) are here for the long haul. And we are going to HAVE to have sufficient oil for these things. Alternate energy sources will best work for powering the electricity grid for powering factories and heating and cooling our homes. Nuclear will have to play a part here, regardless of what Congress thinks. Unless they want to hold their sessions in the dark.
    Reply
  •  
    Jun 08 09:37 AM
    I agree with a lot of what you are saying. Congress and Clinton could have provided the U.S. with independence from other countries. The need to drill oil on our own "turf" has gone ignored to the point of our own demise. Please do excuse the dramatization, however, I do not see people's wages increasing along with the surge of oil prices, along with the domino effect of rising prices everywhere. Congress can point the finger all they want, but if they do not allow the oil companies to drill on our land then how are we to become any closer to independence in the oil industry. However, the record high profits the oil companies are experiencing should go towards this goal and not out of the pockets of the American people, whatsoever.
    Reply
  •  
    Jun 08 10:44 AM
    Higher energy prices do not exclusively come out of the pockets of the American people; remember, energy is an earthly commodity.

    If only Congress would stop pretending to be Little Red Riding Hood while acting as the Big Bad Wolf, they might realize the opportunity for a two-fer: [1] vastly more energy production within U.S. confines, and [2] a rather large increase in high-paying jobs in the energy-producing areas.

    It'll be too late for places like Miami Beach when the cost of energy prevents tourism from arriving and staying in condos too expensive to cool.
    Reply
  •  
    Jun 08 11:16 AM
    What?
    Reply
  •  
    Jun 08 12:06 PM
    Regarding the comment by John S. above.
    You are absolutely correct John. Gasoline can be produced today for about 25 cents per gallon using coal as a feedstock. We are all being raped by big oil and nobody is doing anything except complaining. See the post at seekingalpha.com/artic... for the nitty-gritty on this.

    If anyone wants to contact me regarding building one of these carbon converters they can leave a message at the website contact.

    Reply
  •  
    Jun 08 12:12 PM
    The solutions offered in this article are what have gotten us into trouble in the first place. We need a marshall plan for a sustainable energy policy:

    1) Increase wind energy capacity in the US to at least 20% (currently 1%) over the next 20 years
    2) Invest heavily into new transmission lines that can unlock wind energy in North Dakota and West Texas and other high wind areas in the US and Canada
    3) Increase the amount of electrification in the economy (plug in hybrid vehicles, rail road electrification, increased public transit, geothermal heating and cooling, etc. etc. etc.
    4) Invest in energy efficiency in buildings and appliances, require Leed certification in new building construction and provide government rebates for extra cost
    5) Divert part of the defense budget to home grown energy rather than trying to defend middle eastern fossil fuel supplies that will never be stable and secure (just think what even 10% of the defense budget could do for home grown energy security)
    6) Implement a Carbon Cap and Trade program (remember climate change is not going away without being addressed), that will reward the right kind of consumer behaviour and punish energy waste

    These are just a few things that we can do NOW with existing technologies being produced right here at home and that will stimulate employment in the US and Canada and help us get out of the looming recession!
    6)
    Reply
  •  
    Jun 08 12:31 PM
    You are absolutely correct in your analysis- thank you! But I'll be disappointed if you don't keep posting to continue to remind us who the real culprits are. Obviously, we must not have gotten it yet.

    Indeed, it's time we ALL stood up and declared ourselves, as has Vaclav Klaus in his book, "Blue Planet in Green Shackles." He details how we have arrived at this entirely self-imposed energy crisis, which no American economist had the brains or guts to write.

    As for the Greens, they need to come out of hiding. Either they like the result of their gambit to boycott the use of U.S. energy reserves, which is now certain to result in $8 a gallon gasoline, millions of lost American jobs and the closure of entire industries, or they don't.

    But let's not let them be so disingenuous as to blame the markets, speculators, the dollar, oil companies, OPEC, George Bush, the weather (...now, really!), or some other straw man for this inevitability. They caused it, they know it, and they should be proud.

    So where are you, Greens? It's time to stand up and take a bow for turning the world's economy upside down. Don't be bashful now!
    Reply
  •  
    Jun 08 12:36 PM
    The oil price bubble is a problem of financial paper demand and supply, just look a the relative proportions of physical to financial/index trading.
    That said, don't ignore the greenhouse gas issue along the issue of increasing demand in Chindia. The first requires us (and anybody else) to wean of oil no matter how the bubble now turns out, the second will reignite long-term price increase and we have to become more effecient and think about where we actually really need petrochemicals. Arguably not in transportation (spare air travel), however in the petro-CHEMICAL industry. Arguably also not in fertilizer production. For those there are holistically better solutions. The benefit of the oil price bubble is that it drives energy effecient behavior, maybe for the wrong reason, but the outcome is positive overall. Just going ahead with oil exploration will increase CO2 output and that is the last we need.
    I would have hopped for some more careful data reporting and analysis here.

    Re: Cooling: Are you absolutely sure it is less effecient to cool houses in summer in the South vs. heat houses in the winter in the North? Do the math! Living in the North only works since mankind invented the fire and created greenhouse gases to go with it. Before, manking lived in the warmer regions. Somehow civilization started there and not at the poles.
    Reply
  •  
    Jun 08 12:41 PM
    That's right, let's put our Congress in control of $5 TRILLION new cap and trade dollars. They'd spend it on everything BUT increased energy supplies. The truth is, they don't need to spend one thin dime on increasing U.S. oil and gas production... just get out of the way! And thank God the Canadian government doesn't boycott it's own energy reserves like we do... us Americans would be walking already!
    Reply
  •  
    Jun 08 12:45 PM
    Some early civilizations were in warmer climes, others weren't. They must not have kknown about global warming.
    Reply
  •  
    Jun 08 12:50 PM
    But you're right. The war is over and the Greens have won... this round, anyway. Let's hope alternatives and renewables save the day. If not, our economy as we know it won't survive, which we lead to another kind of war one not too distant day.
    Reply
  •  
    Jun 08 01:24 PM
    OK, time for a bit of a rant:
    I'm paying nearly $6/gallon at the pumps.. so close that it might even be over $6 today 'cause, every day, it keeps going up. There is absolutely no reason for it other than everybody keeps plugging into big oil and nobody seems to want to make a serious move in any other direction.

    Look, it would be nice for everyone if we could turn to hydrogen powered vehicles.. but that isn't really necessary. We can continue to drive our existing vehicles, including those big gas-guzling SUV's and Winnebagos for about 50 cents per gallon at the pumps if we just give our heads a shake and unplug ourselves from dependancy on Big Oil!

    The reason we can do this if we want to is because we have the technology to do so.. if we have the will. The technology is sound and does not have to be expensive. Here's the solution:

    Back in WW2 Germany didn't have any fuel for it's war machine. What they did have was the most brilliant scientists in the world. So their scientists set out to create a method of turning carbon.. any form of carbon, into gasoline and diesel fuel through hydrogen bonding. They did exactly that. Germany fueled it's war machine by making gasoline and diesel from coal and wood.

    After WW2 America rounded up all the German scientists and set up test plants in the USA to master their technology. These plants ran for over 5 years. In 1949 the head of one of the US test plants announced that he could produce ALL THE UNLEADED 87-OCTANE GASOLINE AMERICA WANTED FOR 1.5 CENTS PER GALLON!

    Oil was cheap and plentiful then. It could be delivered to the process direct from the source by pipeline. The German technology developed into the modern-day cracking process where 4 barrels of gasoline plus many related products are produced from one barrel of oil. Actually you don't need oil. Any carbon compound will do. The (Bergius) process converts 99% of carbon into fuel.

    I know this process works. I had a forrest company and a mill in the '70's. I built a stage-1 Bergius wood waste converter and ran a stationary 4-cylinder Datsun gas engine directly from the output. This engine powered all the hydraulics at the mill. I made more than I could use so I also ran a free lottery for the mill workers on the surplus.

    Contact me if you want to build one of these carbon converting units. They will use any carbon/hydrogen compound: Coal, wood, used tires, plastic bags, household garbage, yard waste, corpses, etc..
    Reply
  •  
    Jun 08 01:49 PM
    Jordan,

    I really am alot more optimistic than I let on, actually. The Greens and their minions in the Congress have been pursuing their stealth domestic energy boycott program for years. The public has only caught on to this duplicity recently, however, as the result of the skyrocketing price of oil and gasoline.

    Longer term, both our oil and gas reserves and advanced energy technologies will combine to provide us more abundant and affordable energy supplies. The sad part is the millions of lost jobs and industries that are now certain to occur in the intervening years.

    The trick, of course, is getting from here to there. And it is the continued efforts of engineers, scientists, entrepreneurs and people like yourself reporting about it whose hard work on our behalf will eventually get us there. Not the "Know Nothing" Greens, and certainly not the mass media pandering to the politicians who are responsible for our present malaise.

    Reply
  •  
    Jun 08 02:46 PM
    Many of the comments here describe the issue in terms of win/loss. It isn't a sporting event.

    It isn't "Greens' versus "Hummer-driving, anorexic soccer mom's"

    The reason we have no reasonable energy policy is because no one is able to be reasonable.

    We need:

    - More drilling
    - More conservation
    - More nuclear
    - Higher CAFE standards
    - Tax structures that encourage investment and conservation.

    We don't need:
    - Whining conservatives bemoaning the environment for preventing them from driving their SUV's to Starbucks to get a latte.
    - Whining liberals complaining that Oil kills otters, Nuclear radiates all, coal dirties snow, wind kills birds, solar ruins their "view of the valley".

    Get over your pathetic selves, and sit down and negotiate!

    Mike
    Reply
  •  
    Jun 08 03:25 PM
    thank you bergius (have pott & broche been heard from recently?) for mentioning the 1947-1952 bureau of mines program @ louisiana MO, i knew some of the people who had worked @ that facility. the cost forecasts for synthetic gasoline from that facility were so low, the houston oil millionaires were scared to death that the market value of their reserves in the ground would fall to zero. when DDE came into office they went to the white house & demanded 2 things: (1) imported oil at 25c/bbl had to be kept out of the country so that they could keep pumping their 2.50/bbl material, and (2) the BOM program had to be terminated forthwith. as we all know they got their wish, and today we are living (?) with the consequences. using 2020 hindsight (the best kind) we should have kept our strategic reserve in the ground & pumped arabia dry. instead we pumped the usa dry & let foreign consumers have the benefit of cheap arab oil.
    > jack
    Reply
  •  
    Jun 08 03:28 PM
    This article misses the point entirely. A long term solution is not to increase production of a limited resource. We need to decrease demand and find alternatives.
    We have the technology today for plug in hybrids that get 100 mpg. We have vast resources of natural gas that can be used for vehicles. Wind, solar and nuclear must also be increased as part of any long term solution.
    Reply
  •  
    Jun 08 05:12 PM
    Jordan,

    The masses so deftly believe virtually anything; now the chant is environtmentalism uber allis. All the energy we need lies untapped so that we can give our grandchildren a pristine wilderness and an impossible debt. As my teeth lengthen, so too does my cynicism for all inforamtion "officially" distributed. If it weren't really happening, it would make a great sit-com in a more rational world. Thank you.
    Reply
  •  
    Jun 08 05:25 PM
    Although oil is not a "limited resource" (...any more than it is a "fossil" fuel), it will still be increasingly expensive to find, produce, refine and distribute in the future. Therefore, it makes inestimable sense to develop and produce alternate technologies to operate our nation's vehicle fleet.

    So if you think plug in electrics and hybrids, which must necessarily be supported by many more nuclear plants, new coal technologies, and replacing natural gas on the electric grid are good ideas, call your Senators. They're the only ones holding up the bandwagon on this parade.

    And "ditto" to the guy who's bothered by whining conservatives. Let's all whine to Washington for a change and get them off a dime. My own opinion is, however, they have NO intention of advancing any of the above alternatives to oil and gas. As we observed last week, their goal now is to adopt a government run, $5 TRILLION cap and trade charade.

    You guys better wake up before we're looking down the barrel at even more costly "Change we can believe in" next year.
    Reply
  •  
    Jun 08 05:29 PM
    USA is using 25 million barrels/day of oil, what if 30% of that energy didn't have to be from oil but from solar power instead? Well, Germany is almost there. They already attained their target of 20% and are not going for 30%. Oil is limited, solar is not... it's that simple. Uneven global heating creates wind patterns.... that's free if you'll just tap it. Cars could be made to run on electricity. Isreal is adopting an interesting approach where by you buy a car and rent the battery. You'll just swap out your low battery for a fully charged battery. A company, ALTI, makes fast charging batteries. There is huge geothermal resource sitting right under Yellowstone Park, that's essentially free heat --> steam --> electricity. Huge water flow & tidal forces are at play in places like the Hudson River and the like, not to mention the Golden Gate. In addition, skys-crappers could tap into strong wind for power. OCTL.OB has a nano solar product to coat windows so that they make solar energy. The technology is out there but what we lack is imagination and adequate leadership. Why didn't Bush want to sign that energy bill that would have required energy companies to produce just 20% of their energy from renewable sources by 2020? Because he is only pro-oil and has no vision for this country, instead now we're in a crisis state. Adding 1 million barrels/day from Alaska won't really solve our problems if we're using 25 per day, it will help only somewhat... Sugar cane is 10x more effective as corn in making ethanol, the Brazilians know that, why don't we? As for me, I'm using my bicycle 95% of the time and in my next long trip I'm taking a bus and train.
    Reply
  •  
    Jun 08 05:55 PM
    The old French saying: Each country has the best government its people deserve to have. No better and no worse.

    It is just stupid to blame the Congress for high gas prices and dependence on foreign and unfriendly energy suppliers.

    The US Congress just reflects the overall bankruptcy of the entire US way of life. Its moral, intellectual and economic values are in disarray and in crises. The degradation started at Lyndon Johnson "Great Society", and started to accelerate during both Clinton and G. W. Bush administrations.

    The American consumer-consumption driven economic model is nothing more or less as a parasitic way of life using somebody else money without any intention to pay it back.

    For the last 40+ years, America lived well above its means. It is a very long time; it could not last forever [similar to the Soviet Communist model], and eventually the time is up.

    Just to blame specific individuals in the Congress and in the Administration is stupid. These scoundrels were elected by American people.

    Now, America is about to start a transition to its new way of life. It will not be a painless transition. Just look at Russia. Ten years ago, Russia was in a terrible crisis. Now, it is one of the most dynamic and growing prosperity society.

    America will survive. It will take some time. America will be a very much different country.

    Reply
  •  
    Jun 08 06:33 PM
    Wow, you guys are even more down on our survival prospects than I am. Well, the future is daunting, and maybe you're right. Fortunately, I grew up in an era of cheap energy (... gas was 24.9 cents at the pump), so I'm okay. But that's not so for kids today.

    Indeed, it was a famous Frenchman, de Toqueville, who said when touring 19th century America, our democracy would do great until we realized we could vote ourselves the proceeds of the treasury. It's possible we already have. Good luck to each of you!
    Reply
  •  
    Jun 08 07:18 PM
    "3) Increase the amount of electrification in the economy ..."

    There may be problem with electrcity production TOO.

    www.prosefights.org/pn...

    Reply
  •  
    Jun 08 08:41 PM
    solar / wind --

    These are great ideas but the answer probably lies within automobiles since 90% of the gas we used is for transportation. Wind and solar won't put a big dent in prices.

    Push CNG cars, plug ins... and really good battery-powered cars and then gas prices will drop dramatically.

    Seeing as how the last time Bush had anything to say about automobiles he was AGAINST raising fuel standards... well, every time I see someone blaming Democrats for balking at drilling -- I just laugh. Look at the value of the dollar / value of oil during his reign.

    These will be called the Lost Years for America.

    I am optimistic change will come, hopefully before things really get ugly.
    Reply
  •  
    Jun 08 09:54 PM
    Man-made climate change is only "unproven" if you restrict your reading on the subject to propaganda funded by ExxonMobil and others. For a summary of the consensus amongst actual scientists see here:

    www.logicalscience.com...
    Reply
  •  
    Jun 08 10:25 PM
    You'r 90% figures is incorrect. We use 30% for transportation, 30% for food production and then 30% for plastics, chemicals, including fertalizers. We don't need to only use hydro-carbons to make electricity, the biggest nuclear reactor of all is above us giving it to us for free, just look up. Thermal energy can be accessed from below. The world supply is on the decline while demand is exploding. Oil is not in the future and the transition off of it will take place and it's going to be painful at first but Germany has set a good example; already past 20% renewable energy produced from the sun.... going for 30% now. That's the kind of leadership we need in the USA.
    Reply
  •  
    Jun 09 02:59 AM
    The problem is that we are socialist. Our government sucks and socialism sucks. I know first hand, I live in America.
    Reply
  •  
    Jun 09 07:01 AM
    Damn the greens they are just socialists. Damn the Democrats they are socialists and racists.
    Damn the Republicans they have no balls to stand up to greens or the Dems.

    Obama is like deer in the headlights. He will soon be run over and chased back to his racist chruch.

    Oh and damn Jesus too. He is a liberal hippy.
    Reply
  •  
    Jun 09 07:02 AM
    Oh and oil will be $200 by the end of the year,
    Reply
  •  
    Jun 09 07:36 AM
    Destroying the environment to produce more and more oil is like burning your house down to stay warm in the winter. It may feel good now, but the future consequences are not good. And if we produce more oil at lower prices, people will continue to buy Hummers and commute to work from distant suburbs driving alone in their Hummers. Higher gas prices are finally leading people to think about their driving habits and buy more fuel efficient vehicles. I think while high oil prices hurt in the short run, in the long run they will prove beneficial.
    Reply
  •  
    Jun 09 09:20 AM
    opec is a cartel. that means they have no competition. they set the price. supply and demand don't matter in the case of a monopoly, or a cartel
    Reply
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    Jun 09 09:22 AM
    "Destroying the environment to produce more and more oil is like burning your house down to stay warm in the winter. It may feel good now, but the future consequences are not good."

    Well said, Veeblefetzer! This article was incredibly short-sighted!
    Reply
  •  
    Jun 09 09:40 AM
    I agree with user206943. Any amount of domestic exploration and production will not end the speculation and high prices that the oil cartel enjoys. Letting these companies merge was a big mistake. Now they want to use the high prices to wreck our environment and you're shilling for those rascals.

    More solar and wind powered energy and a big tax on gasoline to help these industries (not owned) by big oil is the answer.
    Reply
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