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Latest Comments16 Comments
Investing in Wind Energy: When Will Growth Peak?
Manufacturing of equipment, availability of capital, capacity of local and long distance power infrastructure, NIMBY problems that require months and years of public hearings, environmental hurdles such as Environmental Impact Statements (often requiring a year or more of preparation), leasing of land from landowners, building of roads, species impacts such as those on bats and birds (not to mention endangered species like Kangaroo Rats and Mojave Ground Squirrels), Federal leasing requirements, local and state government regulations and permits, time required for actual site research into wind patterns to justify economics of projects, time limitations on field and construction access caused by wildlife breeding periods (required by Federal regulations), lack of trained installation personnel who are willing to work 200 ft in the air, insurance and liability issues, transportation limits that restrict the size of equipment that can be moved in many areas, bad weather and myriad other problems are quite likely to limit the growth rate to a much smaller number and will eventually impose a maximum growth rate, probably long before 2016. As the overall annual growth increases, it is likely to be a smaller and smaller percentage of the year before leaving the total installed capacity to grow in a pattern resembling a natural log, rather than being exponential as you suggest. Dream on.
Fossil Fuels vs. Green Energy: What's a Better Investment?
The other comment I have is that while demand destruction was a significant factor early in the decline of energy prices, it is no longer an important factor. The new problem, and what will drive prices upward as the economy inches upward, will be supply destruction in oil and gas. The current low prices will destroy much of the planned supply additions (exploration projects) that were being put together over the past two years of rising prices. The next cycle in oil and gas is likely to be much more extreme, while it may be a recession away.
The plans of Obama to tax "windfall" profits of oil and gas producers in the US may be dashed, suggesting his proposed economic support for the alternative energy sector may also never come to pass. I don't expect profits of the oil and gas sector to remain high after the forward selling of oil and gas that many producers have utilized run out. By 1st Quarter '09 this profit will be gone. Natural gas producers in the US are going to be particularly hard hit, especially in the marginal resource plays, as production this year is up almost 10%, and if demand does not go up, they will be forced to either cut production or produce at lower margins. Not even T. Boone Pickens will be able to change this market, as his ideas, while excellent, depend on building infrastructure that will take years.
Was 'Peak Oil' a Multi-Billion Dollar Hoax?
The real question is how realistic 100 years really is, and at what price level we can expect. At $200 a barrel, it is very much more likely we have 100 years supply, as this will allow many now marginal operations to be profitable. The current price decline will definitely affect oil company future planning for the next few years, likely producing yet another traumatic upward cycle in prices as demand destruction abates and drilling activity slows to match current price levels.
I've attended a number of presentations like this from the Saudis for several years. This is not news. They have contended they can keep growing production slightly for several more decades. Yet only recently it looked as is they too had reached a current maximum capacity. They too rely on higher prices to be able to apply cutting edge technology and saying that they can keep producing 10 or more million bbls a day doesn't mean they will if oil hits $50. That also does not mean they can keep up with world demand when it grows faster than they can drill.
There are two things that are certain here. Oil is finite. Prices will change. Meanwhile, hang on because we are on a roller coaster ride that likely will see faster cycles than it has in the past. Oil prices have not decoupled from the world's economic growth rate (consumption patterns still match GDP), but still merely reflect it. That may be the nuance that those who came late to the "peak oil" picture did not understand. When demand outstrips production, and it will happen again, we can expect to see new record levels of high prices for oil, followed by increased production from new sources and demand destruction. Rinse and repeat. It isn't going to be a smooth curve.
Need Gold? Check Your Fed Holdings
From the website:
www.spdrgoldshares.com.../
SPDR® Gold Shares
Objective Designed to track the price of gold (net of Trust expenses)
Structure Continuously offered investment trust
Symbol GLD
Exchange New York Stock Exchange Arca
Initial Pricing Based on the price of 1/10th of an ounce of gold
Minimum order 1 share
Short Sale Eligible Yes
Margin Eligible Yes
Estimated Expenses 0.40%*
Obviously, there is no guarantee that each share matches 1/10 ounce of gold. I have already noticed that it does not exactly match that based on spot. It seems to vary by a significant amount from gold spot at times during the day. This is a problem I have noticed with other ETF's based on various commodities (like oil for example).
Why "Drill, Baby, Drill!" Does Not Translate Into Effective National Energy Policy
Likewise, I can shift my investment portfolio from US oil producers to foreign producers that will benefit from having a larger market share in the US. As US production goes into even higher declines, oil will no doubt go higher and I will continue to benefit in my portfolio. I can even start collecting my paycheck in Euros or Swiss francs!
Also inherent in your position is the shift away from environmentally responsible oil and gas production within a strongly regulated framework, to production in areas where there is no environmental regulation. Russia still considers plowing on-shore oil spills under with a tractor to be "spill remediation." Other countries I have worked in tolerate lakes covered with 12 inches of oil as the cost of doing business. Your attitude only supports this lack of responsibility and will hasten the decline of the worldwide environment.
Meanwhile, you seem to suggest the US stop using oil, or alternatively import more oil, as for some reason drilling seems to upset you. You would prefer to take the point of view that since we can't produce all of what we need, we should not even try.
I can easily change the way I live. It will not be beneficial to you however, but will be very beneficial to me. Can you change the way you live? Call me an idiot, but at least I have a positive suggestion on how to make the transition to renewable energy and alternative raw materials that will be needed to replace oil and gas. As is often repeated quietly in the oil industry "you can all go freeze in the dark" if you don't want my help. I'm not the cause of your digestive problems.
Why "Drill, Baby, Drill!" Does Not Translate Into Effective National Energy Policy
EOG Resources, the principal operator of Parshall field, reported production of 854,119 bbls of oil from 53 wells in July. NONE of these wells existed two years ago.
Large percentages of these new record production levels in North Dakota are being produced from Federal leases. This is something you would have us stop leasing, since apparently 5 million barrels a month isn't enough to matter to you. At only $100 per barrel, that translates into $500 million dollars of revenue that went into the US economy; new wealth created by US oil companies, and money that was NOT part of the US trade deficit. That $500 million of revenue also may have provided as much as 12 1/2 percent of the gross revenue (the Federal royalty payment) to Federal tax coffers, effectively reducing the need to tax US taxpayers by millions of dollars (which would have been needed if we had bought imported oil instead.)
You really need to rethink your numbers.
Why "Drill, Baby, Drill!" Does Not Translate Into Effective National Energy Policy
I think your premise is radically WRONG. It seems to me the facts are already there to support more drilling as both a way to increase domestic production, drive down prices for hydrocarbons (already happening for natural gas), and reduce the trade deficit. Increases in production this year certainly support that. You don't seem to understand that the period you are using to prove your data includes significant periods of oil prices near $12 a barrel and longer periods below $25. Next you are going to tell me that having sex does not lead to more babies.
I think you've done a good job of choosing your data in such a way that it matches your hypothesis. As an exploration geologist, I disagree with most of your "facts."
Will Drilling Offshore Affect World Oil Prices?
1) these estimates of the "undiscovered reserves" are nebulous at best. As a geologist involved in these sorts of studies I can assure you the results could be dramatically different, either with much higher or much lower amounts, and the error bars in those sorts of studies would allow for about an order of magnitude of error in the figures. The amount of data that these sorts of studies are based on would be laughable to most other fields of study. We probably have more data for Mars than we do on some of these areas.
2) that the long period of time it takes to lease and then drill is partially filled with government delays- so the five or ten years it takes to drill- is actually more the result of government than industry. The time delays in drilling leases are often self-fulfilling prophecy by the politicians who are promoting the regulatory morass that exists rather than solving it.
Finally, while I too will be happy to see alternative energy supply a larger share of our energy needs, the biggest lie out there is that any of those alternatives can be developed faster than drilling for oil. If you think oil prices are high now, wait and see how high it is in ten years with continued restrictions on drilling in the US.
It is very conceivable that a large discovery in the offshore area could actually affect the market in advance of production. As it does begin to produce, only a few hundred thousand barrels a day can have a significant impact on market prices (as the frequent small supply interruptions do now), and it is wrong to say that small increments of supply do not affect prices, and do not have significant supply implications over many years. Keep in mind, about 15% of US production today comes from wells that produce less than 10 barrels a day from each well. We actually depend on these small increments for stability in the market.
Your mention of Iraq is something I consider ludicrous. It will very likely still be a decade before anyone is willing to situate a nicely lighted 175 ft tall oil rig motionless in one place for a month at a time like a giant target for attacks in the Iraqi desert. Infrastructure (pipelines, compressor stations, separators, water disposal, etc.) has to be built, since it either does not presently exist or is in disrepair, and that will take years while providing more targets for hostility. Iraq is not going to be any immediate solution (nor is it likely to be cheaper than offshore), and the Iraqis are barely able to supply themselves at present, while still importing large amounts of oil products.
How Elastic Is the World's Oil Supply?
"Based on these inventory figures, current prices, although high, are not prompting the
inventory accumulation that would be associated with artificially high prices."
I think the problem they are alluding to is that while market demand has dropped, it appears that market supply has fallen as well. In this business, falling supply is not necessarily related to market forces. There are lots of areas the world-around that are in declining production mode and even more that are politically-impeded. There are very few that are actually increasing their production, and this is not due to the market, it is mostly due to geology and engineering.
It takes time find new oil reservoirs and to drill new wells and add production using the newly justified economics of higher prices. Most oil companies (wisely) refuse to have faith in current market prices to predict economics of drilling new prospects, and whatever benchmark price they use (often only 50% of current prices) can determine whether or not a well gets drilled.
There are very few producers that have the ability to turn on the taps and produce oil at a higher rate just because prices are rising. The market impetus is there, but geology and engineering limitations do not always respond to market forces. Often, increasing production rates can damage a field and reduce long-term production. One of the few short-term responses in the market supply is often the oil moving in tankers, which can be diverted to different ports depending on prices while still in transit.
The problem is not the speculators, it is declining production and the failure of many producers to replace reserves- pointing to long-term problems and thus changing the market character from backwardation to contango. The speculators have merely reacted to the inability of the supply side to respond to the demand side in a timely manner.
For everyone who thinks the oil market is somehow a perfect market (and that speculators are the control), I like to use the analogy of the corn market. If you can predict the weather a year ahead, you can master the corn market. Oil is no different- except there are probably just about as many factors as those that affect the weather, and they are just as complex.
As for the previous comment on how prices of gasoline are not falling as fast as the price of oil -be very very glad. Gasoline prices never got up to an equivalent price of oil and were lagging behind strongly. Oil was selling for $3.45 a gallon at $145 per barrel, and a barrel of oil does not make 42 gallons of gasoline- it only makes about 25 gallons, meaning wholesale gasoline could have reached well above US$4.00 per gallon (that would have put retail above US$5/gallon)!!!
The Oil Bubble Will Meet the Same Fate as Tech, Housing
Does Big Oil's Apathy Justify Proposals to Tax Windfall Profits?
On top of all of this the industry has gone through extraordinary hard times only a decade ago when prices went to $13 and layoffs were huge. Exxon bought Mobil to survive. BP bought Amoco, Arco, and Pennzoil. Today they can't hire enough people and only recently have new college recruits showed signs of being willing to work for a "dead" industry- never mind that it pays incredibly well and we use technology that would make NASA envious. At times the value of the computing power under my desk has exceeded $500,000 if you count the software on my computer. Yet the damage from years of periodic layoffs has left a serious mark on the industry and chased away much of the talent that is needed to find new oil. Never mind that in an experience based business, the next generation will have to learn from increasingly scarce workers who remain. Of course, it doesn't help the majors that some of their best talent gets hired away by the likes of National Oil Companies.
The point you don't seem to get, is that big oil has been failing to find enough new reserves to replace its own production for quite a few years. The Gulf of Mexico is in decline. Alaska has been in decline since 1987. Mexico has been in decline for decades. The North Sea has long been in decline making the Brent marker crude almost an obsolete pricing tool because the trading is too thin.
The future of US oil and gas production is not with the majors. They have the unenviable position of trying to find resources that have "material" value. Too small, and they walk away; they never even drill. Only a few years ago I was told that if my play concept couldn't reach a scope of 3 Trillion cubic feet of gas, it wouldn't get tested. Those elephants are mostly gone. Small independents who are purely producers are the wave of the future. Small independents are happy to drill a $5 M well and find less than 1 million bbls. Some have figured out how to drill a $50K well that may only produce 10K bbls. Majors can't do that. They would never be able to grow the balance sheet, much less keep up. The problem is that $5 M well will probably only produce a 100 barrels a day. We need 180,000 of those. Currently there are 1,921 rigs working in the US. Most of those average one well per month. If half of those wells fail to find commercially viable oil, they might be able to add a little over $1.2 million bbls/day in production to the US. Of course, that is $580 Billion a year at current prices that would not be part of the trade deficit. What would that do for the dollar? As much as $90 billion of that might go straight into state, local, and federal tax coffers. The US oil industry currently is the 2nd largest source of income to the Federal government, with revenues from leasing, royalties, bonus payments, and other taxes. All of that is BEFORE income taxes- it is at the wellhead. In reality, the idea of adding windfall profits tax to the US oil industry is most likely to be revenue neutral because as the production falls, the existing royalties will fall also.
But you would like to tax us. The result: less money for the high risk exploration budget. Job cuts. Lower production in the long run. Fewer new hires. Fewer small independents that are willing or able to raise the millions in capital it takes to drill just one well. And I will just go work for Saudi Aramco or some other foreign company, where even my personal tax burden will be lower. I don't see grocery stores risking $15 million dollars trying to find enough canned beans to stock the shelves next month.
If you want to see what the result of your tax proposal will be, you don't have to look far. The Canadian province of Alberta raised taxes on oil companies last year. Layoffs were almost immediate. Stock prices fell dramatically. Large companies left the province like mice from a sinking ship. Drilling rigs moved south to the US, which was fortunate for the US operators. Production is down already.
I will also take issue with your belief that oil companies are not investing in alternative energy. Shell did key research in developing thin film solar and is part of a joint venture to create the next wave of solar energy. BP is one of the world's largest solar power manufacturers. Shell is one of, if not the largest generator of wind power in the US. I believe they have about 500Kw of wind generation. Chevron is the world's largest geothermal power company. Shell has major investments in cellulosic ethanol and is the world’s largest refiner of biodiesel. None of these enterprises is large enough to attract the attention of stock investors, but none of the alternative energy supplies come close to displacing oil (some like corn ethanol don't even have the capacity to replace oil), so being a big fish in the smallest pond is not very impressive to investors like you. Nevertheless, the oil industry has my bet to dominate the "alternative"... energy industry as soon as the economics begin to work.
The oil business is NOTHING like grocery stores. If your suggestions are implemented, I'll be moving out of the US to find a job, unless of course I want to stock shelves.
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