Wednesday, June 25, 2008
Peak Oil Truths and Consequences
Below is an excerpt from Weiss Research,Inc.'s Money and Markets http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=1908
I hear that along with Peak Oil, the world is now hitting Peak Fertilizer. Well, there's enough BS being spread about the oil crisis that it could solve our fertilizer problem in a jiffy.
Much of it is — no surprise — coming from Washington. Another load of bull is coming from our so-called "friends" in the Middle East. Even corporate America, where you might expect common sense to hold some sway, is busy shoveling misinformation. As a result, many investors are left neck-deep, choking, and grasping for a lifeline.
The good news is that I do have solutions for you. More on that in a little bit.
First, I want to start with some Peak Oil truths, half-truths, outright lies, and the dire consequences that are coming due if we don't get on the stick soon.
Truth: America consumes 25% of the
world's oil (20.5 million barrels per day),
but has 3% of the world's oil resources.
Right now, we pump 7% of the world's production (in other words, we are depleting our resources faster than other parts of the world). But we don't have enough oil to meet our own needs — we cannot drill our way out of this.
But here's some good news: Although the U.S. is the biggest consumer of oil, the U.S. represents only 4.8% of the world's population. That means we have plenty of room to save oil by pushing conservation.
Truth: The Saudis aren't our friends.
Despite their recent assurance to raise oil production to record levels within weeks, Saudi Arabia has effectively used propaganda methods for decades to convince governments, corporations and individuals to believe their statements.
The market is grateful because the Saudis are talking about boosting production by 200,000 barrels per day on top of a 300,000 barrel per day hike in May. But this is just bringing Saudi production back to the level it was at in 2006. Why did the Saudis cut production in the first place? Because they want higher oil prices!
OPEC production cuts, rebel attacks in Nigeria, mismanagement in Venezuela and the crashing of production in Mexico have all removed about a million barrels a day from the global market. The Saudi hike barely makes up for half that. With friends like that, who needs enemies?
And while the Saudis say they are raising production ...
Truth: OPEC exports will probably FALL in July.
According to Britain-based tanker tracker Oil Movements, OPEC crude oil shipments are projected to fall by 230,000 barrels a day to a total 24.59 million barrels a day in the four-week period to July 5.
The biggest drop is in the Middle East. Shipments from key Middle Eastern OPEC producers are projected to decrease by 350,000 barrels a day to 17.63 million barrels a day.
Oil Movements forecasts OPEC exports based on spot and term chartering of crude oil from OPEC member countries.
So how does this jibe with Saudi Arabia's promise of more production? Answer: It doesn't! But then, a promise made isn't always a promise kept.
Truth: America isn't in the driver's seat
when it comes to global oil prices.
Global energy consumption increased by 2.4% in 2007 on top of a 2.7% increase in 2006. U.S. energy consumption was flat, while Chinese consumption rose by 7.7%. This year, emerging markets combined (China, India, Russia and their other "life in the fast lane" buddies) will pass the U.S. in oil use. Going forward, global oil consumption is expected to keep climbing even as U.S. consumption eases. After all ...
Americans each use 25 barrels of oil per year.
The Chinese each use 2 barrels of oil per year.
And the folks in India each use just 1 barrel of oil per year.
Where do you think the growth is going to come from? The rest of the world wants to live and drive like Americans!
So with China in the driver's seat and India close behind, the U.S. can't do much to influence prices unless it cuts consumption sharply.
Truth: Refineries are the biggest bottleneck.
The kind of oil U.S. refineries like to turn into gasoline is called light, sweet crude. Light sweet crude is in short supply, especially with the Nigerian oil fields under siege by rebels. But Saudi Arabia and other Middle East countries actually have excess "heavy, sour" crude that is not easily turned into gasoline by most refineries. Iran's state-owned National Iranian Oil Co has been unable to sell about 25 million barrels of crude stored in 14 oil tankers anchored in the Arabian Gulf, even though the price on that heavy oil is discounted by up to $13 a barrel!
Refineries in the U.S. are running at less than 90% of capacity. The culprits: Poor maintenance, reduced productivity of workers, no new technology, and more. And oil companies aren't exactly eager to spend $7 billion to $10 billion and 5 years building new refineries that could handle heavy, sour crude if we're on a collision course with peak oil.
Truth: There aren't enough drilling
rigs or ships to exploit the deep-water
fields in the Gulf of Mexico.
The world's existing drill-ships are booked solid for the next five years.
And that shortage should continue. Transocean, the world's largest drilling company, is building nine new deepwater rigs, and eight of them are already under contracts that run from four to seven years — even before they leave the shipyards!
Those drill ships are designed to plumb the depths of deepwater oil fields, those below more than 1,000 feet of water that represent one of the final frontiers of oil prospecting. In fact, some of the best prospects are in so-called ultra-deepwater fields beyond 5,000-foot depths. Thanks to the shortage, drilling costs for some of the newest deepwater rigs in the Gulf of Mexico have hit $600,000 a day, compared with $150,000 a day in 2002. So while we might eventually find more oil there, it won't be cheap oil.
Half-truth: Billions of barrels of oil are
locked away, out of reach, on federal lands.
Well, sort of. There may be up to 75 billion barrels of oil on land that is currently off limits. But there's probably a lot more than that on 68 million acres of land that oil companies can currently drill, but aren't.
According to the Mineral Management Service two-thirds of the 36 billion barrels of oil believed to lie on federal land, mainly in the Rocky Mountain West and Alaska, are accessible to drilling. Another 89 billion barrels of recoverable oil is believed to lie offshore, and fourth-fifths of that is open to industry. And it's not just oil — in the Gulf of Mexico, four times more natural gas is probably contained in the areas already open to drilling than in those protected by the ban.
In the last four years, 10,000 more permits have been issued to oil and gas drillers than have been used. That means the companies are actually stockpiling extra permits.
As for the offshore areas in the Gulf of Mexico, there are 7,740 active leases and only 1,655 in production. Only 10.5 million of the 44 million offshore leased acres are currently producing oil or gas.
So why do oil companies want to open up new lands for drilling? Maybe it's that if they lease that new land — and stockpile more permits — they can add to their "potential" oil reserves without putting one drill in the ground, and potentially boost their share prices in the short term.
Lie: Drill here, drill now, and pay less.
The talking point in some parts of Washington is that if only we would open up the Alaska National Wildlife Reserve (ANWR) and restricted parts of the Gulf of Mexico to drilling, gasoline prices would fall pretty quickly.
Nothing could be further from the truth. Now let me be clear — I believe we SHOULD open up ANWR and the offshore Florida coast to drilling — eventually we'll want all the oil we can get from those spots, so we might as well start the process now. But it won't affect prices at the pump for years to come. Even if we dropped the ban right now, production probably wouldn't start before 2017.
A 2004 study by the government's Energy Information Administration (EIA) found that drilling in ANWR would trim the price of gas by 3.5 cents a gallon by 2027. If oil prices continue to soar, the savings would be more, but not much. Opening up areas off the Florida Coast may also cut gasoline by a few pennies a gallon when that oil eventually comes to market.
Reason: While offshore territories and public lands like ANWR may contain up to 75 billion barrels of oil, and that may sound like a lot, it won't make a significant difference in a world that uses about 86 million barrels of oil a day and will use even more by the time those fields start pumping.
However, that said, the Democrats are on the wrong side of this issue. Sure it will take years to find new fields and get them producing. But we'll still need oil in 2017, 2027 and beyond, and it will be more valuable — and more useful — than it is now.
So while I'm in favor of drilling off the coast of Florida, people should be aware that it won't lower gas prices anytime soon ... and they should want to do it for the right reasons, AFTER we already have a massive conservation program underway.
The bottom line is that the best thing we can do to lower the price of oil very quickly is to conserve. After all, the cheapest oil is oil you DON'T use.
Lie: Opening up Florida's coast to offshore
drilling will be an environmental disaster.
Actually, drilling industry technology and safety standards in North America are getting better. Drillers have a very good track record in recent years. And remember how Hurricanes Katrina and Rita ripped up rigs all through "Energy Alley"? That didn't cause massive spills.
There IS a "dead zone" the size of New Jersey in the Gulf of Mexico, but it's caused by fertilizer and chemical run-off from Midwestern farms that flush out through the Mississippi. The recent floods in the Midwest and the resulting washout of chemicals into the Gulf are probably causing more of an ecological disaster than new drilling ever could.
Lie: The oil market needs more regulation.
The topic of energy speculation is taking center stage on Capitol Hill this week, where nine bills attempt to limit the role of traders. A House panel examination is set for Thursday.
Oh, please! A U.S. Commodities Futures Trading Commission (CFTC) investigation showed NO evidence of price fixing in the commodities markets. Global investors (perhaps including a fund that's in your 401k) are hedging their bets in the stock market by betting on rising commodity prices. Oil is a commodity that looks like an especially good bet. Therefore, there's speculation in oil futures.
This isn't a plot by the Forces of Evil. It's the way free markets work. And while big funds may buy oil futures contracts, they don't take delivery — in other words, they aren't adding to global demand.
As for regulating the oil companies themselves — while I don't think they need tax breaks, I don't think they need Big Brother riding them either. If they want to drill, let's cut the red tape and get out of their way.
Lie: The government is working to solve the crisis.
This is the most depressing lie of all. I already told you about the Democrats being on the wrong side of offshore drilling. And just last week, GOP members of the Senate put the kibosh on a bill that would have extended tax credits for wind power, solar, and renewable energy sources like biomass, geothermal, landfill gas and trash combustion. There is no good excuse for the GOP action — none — except that it makes their contributors at the oil companies happy (less alternative energy means more demand for oil). And leadership from the White House on this issue has been laughable.
The flood of lies and the inability to see the truth has consequences ...
If America Doesn't Get Its Act Together,
The Consequences Will Be Dire
Here are just three things that could go wrong ...
1) We could lose the natural resource wars. Countries like China and India have a plan. What resources they don't have enough of, including oil, they go out and get by making deals. The U.S., on the other hand, makes enemies.
The U.S. plan was (apparently) to seize the oil from Iraq. That didn't work out so well, though Iraqi oil production is finally climbing. Now, the same people in Washington who wanted to invade Iraq are pushing for war with Iran. If it comes to that ... if the Iranian oil fields go up in flames and they start lobbing missiles around the Middle East ... forget $200 per barrel oil. Heck, oil prices will probably go to $300 or even $400 per barrel.
Apocalyptic literature sales are booming in America as oil prices explode. Author John Walvoord's deep and probing book entitled Armageddon Oil and the Middle East Crisis: What the Bible Says About the Future of the Middle East and the End of Western Civilization has sold over 1 million copies.
2) We could slide into a steep recession. High energy prices are already killing the airlines and hammering American companies both big and small. In contrast, the World Bank just raised China's economic growth forecast to 9.8% from 9.4%.
An expanding Chinese economy is very bullish for oil/diesel/gasoline prices, even though China is cutting fuel subsidies for its citizens. Last week, China announced it was raising the cost of diesel and gasoline by about 42 cents a gallon. But folks in Beijing still get fuel at a discount, and they'll probably have more of it BECAUSE prices went up — before the price hike, fuel stations across China sometimes ran out of gasoline because Chinese companies don't like to sell at a loss.
China's biggest area of growth is internal demand. If it keeps growing while the U.S. economy falters, that could spark more trouble ...
3) The U.S. dollar could tumble even lower. The U.S. dollar is 86% negatively correlated to the price of oil. That means when one goes up, the other usually goes down.
This makes our Arab oil "friends" grind their teeth, because they're selling oil in dollars. If rising oil prices weaken the U.S. economy, pushing the U.S. dollar lower, that's one more reason for OPEC to move to pricing oil in a basket of currencies.
The U.S. dollar is propped up by its role as the world's reserve currency for oil transactions. If that is undermined, that could send the greenback crashing on its next big leg down.
See more of this article at http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=1908