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Can Triumph Over Peak Oil Continue In A Post-Monetary Stimulus World?

It has become an increasingly universally accepted hypothesis, that given the increase in oil prices from the long-term historical norm of about $20 a barrel, to about $100 in the past few years, peak oil is no longer something we have to worry about. Even many of the people involved in trying to spread the knowledge about the subject, such as the popular website “The Oil Drum” recently announced their intention to stop publishing new material. The avalanche of claims of peak oil theory’s demise, backed by more and more proof that at $100 oil we can expect to have a large volume of unconventional resources come on the market, seem to have won the day.

I have to admit that I took for granted the long-term viability of $100 + a barrel oil myself, and even though I figured that it will take a 1% bite into long-term global economic growth potential, I also figured it will be a manageable decline from the growth trend we witnessed in the years prior to 2008. Given that average oil prices have been hovering in the $100 a barrel range for a few years now, and we seem to be able to handle the pain relatively well, I think almost everyone has taken the viability of this price range for granted. Therefore, the expectation that we have hundreds of billions or even trillions of barrels in new potential supplies has become the new accepted paradigm.

It seems, we have all forgotten the very important detail that has been part of the global economic reality since 2008, and that is that we have been on life-support ever since the financial meltdown. The US Federal Reserve purchasing as much as $85 billion a month in debt assets, cannot but have a huge distorting effect on all economic activities and prices. Now that we are starting to discuss a gradual removal of the life-support apparatus, the market is scrambling to re-price everything ranging from the value of money (interest charged for lending), to the value of commodities. This process will be completed once the monetary stimulus measures implemented since 2008 will be fully removed from the economy, and then we shall see the real level of oil’s long-term price viability.
It has become an increasingly universally accepted hypothesis, that given the increase in oil prices from the long-term historical norm of about $20 a barrel, to about $100 in the past few years, peak oil is no longer something we have to worry about. Even many of the people involved in trying to spread the knowledge about the subject, such as the popular website “The Oil Drum” recently announced their intention to stop publishing new material. The avalanche of claims of peak oil theory’s demise, backed by more and more proof that at $100 oil we can expect to have a large volume of unconventional resources come on the market, seem to have won the day.

I have to admit that I took for granted the long-term viability of $100 + a barrel oil myself, and even though I figured that it will take a 1% bite into long-term global economic growth potential, I also figured it will be a manageable decline from the growth trend we witnessed in the years prior to 2008. Given that average oil prices have been hovering in the $100 a barrel range for a few years now, and we seem to be able to handle the pain relatively well, I think almost everyone has taken the viability of this price range for granted. Therefore, the expectation that we have hundreds of billions or even trillions of barrels in new potential supplies has become the new accepted paradigm.

It seems, we have all forgotten the very important detail that has been part of the global economic reality since 2008, and that is that we have been on life-support ever since the financial meltdown. The US Federal Reserve purchasing as much as $85 billion a month in debt assets, cannot but have a huge distorting effect on all economic activities and prices. Now that we are starting to discuss a gradual removal of the life-support apparatus, the market is scrambling to re-price everything ranging from the value of money (interest charged for lending), to the value of commodities. This process will be completed once the monetary stimulus measures implemented since 2008 will be fully removed from the economy, and then we shall see the real level of oil’s long-term price viability.

Back to basic supply/demand issues.

We have no way of knowing what will be the new long-term acceptable price level for crude in the post-monetary stimulus future. I think however, it is worth taking a moment to go through an exercise of our imagination. We should think what the global oil industry would look like at $75 per barrel oil. Given the drastic changes we have seen in production patterns in the past decade, as well as the shape of the consumer sitting on the demand side of the equation, I believe the overall picture would end up looking more like the peak oil scenario envisioned by those who believe in it. At the same time, it would start moving away from the “we are forever saved thanks to technology accessing previously un-viable resources” crowd’s vision, which was argued for very successfully in the past few years.

On the supply side, we have millions of barrels in present and future additions to global production capacity, which stem from projects or fields which are viable at $100 a barrel, but not at $75. Just to name a few, the Eagle Ford shale oil and gas field, which given the information currently available in regards to reserves and investments, I made a crude estimation that we need to see oil in the $90 and gas in the $6 range in order for the collective firms operating in the field to break even. By 2015, collective investment into that field will be $150 billion dollars, with much more needed to be spent afterwards to continue to grow and keep production going. Oil reserves are estimated in the three billion barrel range. If oil prices were to settle at a new lower post-stimulus average of $75 dollars a barrel, the value of the current reserves at that price would be $225 billion. In this case, it does not take a well-by-well analysis and endless arguments over expected decline rates, in order for us to realize that many projects in this field would have to be shelved in the absence of the current price level supporting the development of the field. All we have to do is subtract $150 billion from $225 billion in order to realize that if prices were to drop significantly, companies that already invested all that money, will in fact lose billions of dollars on their investments.

Many other projects around the world, including most of the giant fields discovered in the past years in deepwater, off the coast of Brazil, Africa and North America also need the current price range, given the already known high cost of field development as well as the high level of uncertainty involved in deepwater oil exploitation (click for more info). These deepwater projects alone, if we were to lose them from the production schedule, would cut our potential expected level of production for the next few decades by a few million barrels per day.

Another major expected contributor to the expected global oil supply for the next few decades is enhanced recovery from aging conventional fields. Going after relatively small pools of oil bypassed by current conventional primary and secondary production methods, can often add significantly to the field’s ultimate rate of recovery from the total oil originally in place, but it is often expensive to do so. Recovery rates for conventional fields have gone from 15-20% many decades ago, to about 40% currently, by using secondary recovery methods such as water injection into the field, in order to help maintain the field’s pressure. Many experts in the field believe that ultimately, we will see 60% recovery rates, and I do believe it is technically possible to achieve it. I do question however, whether we can sustain the average price level needed to make it happen.

(click to enlarge)

EIA consumption data

Index mundi global oil price data

Note: As we can see in the graph, as the price of oil went above $110 a barrel, OECD consumption reacted negatively, which indicates our current level of tolerance for price increases, given that we are in a period of monetary stimulus.

We should also keep in mind that oil producers fund their projects in large part through accessing credit. With central banks around the world having to pull back on stimulative monetary policy, the price of money will increase, and so will the added cost to oil production, as companies will have to pay more interest on their debt. Therefore, as tightening monetary policy will push oil prices down, it will also push the cost to produce it up at the same time.

On the demand side of the equation, we have to remember that the current consumer is taking advantage of historically low interest rates, in order to be able to maintain the consuming patterns developed over many decades. Growth in real wages has been stagnant in the western world, as well as in many other places since 2000, yet consumption per capita has been increasing. With competition for investment being more and more fierce on a global scale, it is hard to see how we can ever hope to engineer a new era of real wage growth in the developed world. If anything, we can expect real wages to decline, given that growing youth unemployment worldwide is an increasingly widespread phenomenon.

If the monetary stimulus introduced by major central banks since 2008 will be removed from the system, we can expect new pressures to appear on the average household budget. A rise in interest rates will squeeze the ability of the consumer to afford other goods, and thus we will most likely see downward pressure on oil prices, even as the oil industry seems to rely on growing real prices (adjusted for inflation) to keep the peak oil monster away. It is therefore, I believe fair to conclude that peak oil is a myth, fiction, a scare tactic, and a host of other things that the other side labeled it, only and only if the monetary stimulus we see being injected in the global economy will continue to flow. If and when, for any reason, the monetary stimulus is removed, all bets are off.

Looking ahead, if I happen to be right and the current price range for crude oil will not be viable in a post-monetary stimulus world, it seems our choices are as follows: We can choose to continue with the current path of cheap and plentiful money supplies around the world, with consequences, which we cannot be entirely certain off, or we can face stagnating or even declining global oil supplies. It is hard to guess which path our elites would prefer, but my guess is that cheap money is here to stay, even if sometimes we will witness attempts to end it in the coming years and decades.

seeking alpha



21 Comments on "Can Triumph Over Peak Oil Continue In A Post-Monetary Stimulus World?"

  1. efsome on Mon, 29th Jul 2013 7:19 pm 

    “I believe fair to conclude that peak oil is a myth, fiction, a scare tactic, and a host of other things that the other side labeled it”

    conclude all you want, everytime i see this kind of wishfull thinking i remember pops’ post named “Just Wait! Who’s predicting now?”

    http://peakoil.com/forums/just-wait-who-s-predicting-now-t68250.html

  2. LT on Mon, 29th Jul 2013 8:39 pm 

    The more of these kinds of articles come out, the more it makes others (new ones) to believe in peak oil.

    One cannot see another mountain peak if one is already standing on the peak of mount Everette (because the rest would look like hills.)

  3. nemteck on Mon, 29th Jul 2013 8:45 pm 

    Someone said “predicting is always difficult, especially on the future”.
    Example:
    http://www.worldoil.com/August-2007-Systematic-bias-in-EIA-oil-price-forecasts-Concerns-and-consequences.html

    EIA Oil price projection in 2004:

    “..Crude oil prices are determined largely in an international marketplace by the balance between production in OPEC and non-OPEC nations and demand. In the reference case, the average lower 48 crude oil price is projected to be $23.61 per barrel in 2010 and $26.72 per barrel in 2025 (Figure 93). In the high world oil price case, the lower 48 crude oil price increases to $32.80 per barrel in 2010 and $34.90 per barrel in 2025. In the low world oil price case, the lower 48 price generally declines to $16.36 per barrel in 2010, then rises to $16.49 per barrel in 2025…”
    These fools predicted the oil price 21 years into the future to an accuracy of one Cent.

  4. Beery on Mon, 29th Jul 2013 9:50 pm 

    Another “The Oil Drum is Dead, therefore so is Peak Oil” article.

    If Peak Oil is a “myth”, then mathematics is a myth, geology is a myth, history is a myth. Should we just consign education to the scrap heap and go back to cavorting druids and reading the future by consulting entrails? I don’t fricken think so.

    It’s beginning to seem like any article that mentions the Oil Drum is worthless. I mean where do these idiots come from?

  5. GregT on Mon, 29th Jul 2013 10:57 pm 

    “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”
    Arthur Schopenhauer

    The Kübler-Ross model, from Wikipedia:

    “The Kübler-Ross model, commonly referred to as the “five stages of grief”, is a hypothesis introduced by Elisabeth Kübler-Ross and says that when a person is faced with the reality of impending death or other extreme, awful fate, he or she will experience a series of emotional stages: denial, anger, depression, bargaining and acceptance.”

    “according to her hypothesis, Kübler-Ross claimed these stages do not necessarily come in order, nor are all stages experienced by all patients. She stated, however, that a person will always experience at least two of the stages. Often, people will experience several stages in a “roller coaster” effect—switching between two or more stages, returning to one or more several times before working through it.”

    It would appear to me, that most of the people writing these articles are switching between Denial, and Bargaining. Either that, or they have not done their homework, and have no idea what they are talking about at all.

  6. Arthur on Mon, 29th Jul 2013 10:57 pm 

    “One cannot see another mountain peak if one is already standing on the peak of mount Everette (because the rest would look like hills.)”

    ‘Everette’ sounds like a hill 😉

    And Beery, nobody claims that Peak Oil is dead, merely that it is possibly not now.

  7. GregT on Tue, 30th Jul 2013 12:43 am 

    Peak conventional oil has already passed.

    Fraking, tar sands excavation, horizontal drilling, and fuel supplementation were all understood and expected to occur. The same oil prices that have caused the global economic crisis, are what has made non-conventional oil extraction viable.

    Even with cost averaging between conventional, and non-conventional oil, we have still seen a five fold increase in prices. As conventional oil supplies continue to decline, prices will continue to rise, exponentially.

    Peak oil is behind us, we are now on the undulating plateau, and will soon be plunging off of the cliff of the downward slope.

  8. BillT on Tue, 30th Jul 2013 1:22 am 

    Peak oil has passed. If not, why aren’t we enjoying a plentiful supply of $20 oil? After all, there is plenty of oil, just not where we need it.

    Well, as the author pointed out to those who read the whole article (some editing is needed) it is more a matter of cash flow than oil flowing.

    We are in the end days, people. No matter how you spin your view, the world is in a corner and there is no way out that will be pleasant or even allow most of us to survive.

    Few of those born today will ever live even close to today’s average life expectancy. Maybe none. I have 4 beautiful grand daughters and 2 handsome grandsons, all under age 12. They will live a life of hell, I’m afraid.

  9. GregT on Tue, 30th Jul 2013 1:56 am 

    BillT,

    We have an older daughter, who is now talking about having a family. She doesn’t get it, and we don’t have the heart to tell her. My wife and I have discussed it and have decided not to say anything. She would be devastated.

    Our son, is ten years younger, has 2 more courses left until university graduation, and he completely understands what is going on. We didn’t explain anything to him, he figured it all out on his own. It hasn’t stopped him from living his life to the fullest, and you will never meet a more happy, well adjusted young man.

    We figure that all we can do is support them, and if things get bad enough, soon enough, they can come and stay with us . Far away from largely populated areas.

  10. SilentRunning on Tue, 30th Jul 2013 4:13 am 

    The “Triumph” over peak oil can not continue even if the Quantitative Easing program continued forever. An infinite number of ones and zeroes in banking computers will do nothing to produce an infinite amount of hydrocarbons on a finite planet.

  11. Luke on Tue, 30th Jul 2013 8:41 am 

    Big Oil, Automotive, Stock Exchange, Casino Capitalism, Fetish Growth Thinking, Exhibitionistic Information Slavery, and so on, they all are in fact the so called modern Archetype Symbols of the Western Humanity as the famous psychologist Carl Jung happen to teach about a century ago. To keep up in this 24 h demanding system we also need to compensate: the opium called religion. Like mushrooms new religions pop up in our society. Those new financial institutes are being run by demagogical “inspirators” who will be the new Rich of tomorrow. They would massage our spoiled and sinful soul till we are fully addicted to them. And pay them with our remaining cash.
    People need Symbols to survive. As the aboriginals dance around a big hole with on its edge trees (symbol of fertility), people in the West dance around our own Gold Calf (Growth). Except our Symbol will drag us globally into our deathly deep hole called Hell. May dear Devil bless us in God’s own Country.

  12. Beery on Tue, 30th Jul 2013 10:18 am 

    Arthur wrote:
    “Beery, nobody claims that Peak Oil is dead, merely that it is possibly not now.”

    Really? Did you not read the article?

    From the article:
    “…peak oil is NO LONGER something we have to worry about.”

    “No longer” means it’s over, dead, gone, not coming back.

    From the article:
    “The avalanche of claims of peak oil theory’s DEMISE, backed by more and more proof that at $100 oil we can expect to have a large volume of unconventional resources come on the market, seem to have won the day.”

    “Demise” means death.

  13. Arthur on Tue, 30th Jul 2013 10:28 am 

    “We have an older daughter, who is now talking about having a family. She doesn’t get it, and we don’t have the heart to tell her. My wife and I have discussed it and have decided not to say anything. She would be devastated.”

    I’ll hope she will have two healthy children and will be not discouraged too much by parents who have been immersing themselves too much in doomer literature. There is absolutely nothing that will keep her from raising two children in Canada. Her children probably will not be driving a car, college could be problematic, but scratching a few potatoes out of the ground in a community of a few thousand should be the absolute minimum. The reality in all likelyhood will be much, much better. Canada (55 kwh per person per day, 60% from hydro) is THE place to survive.

  14. Arthur on Tue, 30th Jul 2013 10:39 am 

    ““No longer” means it’s over, dead, gone, not coming back… “Demise” means death.”

    Beery, that’s nitkicking. What he means to say is that peak oil is no longer acute. The new reality is that it seems possible that the world could be on a sustained path of 100$ oil, which is precisely what we need for a transition to work: not too high and not too low prices. The famous ASPO curve and icon of every peaker is dead:

    http://planetforlife.com/images/oilandgas.jpg

  15. BillT on Tue, 30th Jul 2013 12:16 pm 

    Arthur, you really do live in your own world, don’t you? Canada is no escape. They are suffering from all of the pollution and financial troubles that the rest of the West is. There will be no place on this planet that will not suffer when the SHTF.

    There IS a war coming and it WILL turn nuclear. When the power goes out to the pumps at the 400+ nuclear plants around the world, what do you think is going to happen? Solar panels? Wind mills? Why do you think they will still be operational?

    Yes, we can hope that there may be a few pockets that survive to plant potatoes, but they may wish they had been in the target zone.

  16. Laci on Tue, 30th Jul 2013 1:00 pm 

    Judging by the comments, it seems few people bothered to read the whole article carefully. Most people took a short quote and presented it as the view expressed in article.

  17. GregT on Tue, 30th Jul 2013 4:02 pm 

    Arthur,

    Scratching a few potatoes out the ground, in a community of a few thousand, is exactly what we are planning to do. You appear to have a vastly oversimplified idea as to exactly what that entails. If anyone survives the multitude of predicaments that mankind is currently facing, my son and daughter will. I will make sure of that.

    The end of the oil age is of humanities least concerns, the continuation of BAU is our greatest. The best thing that could happen for the human race, the planet Earth, and all life on it, is the complete collapse of modern industrial society. The sooner the better. Even if that did happen, the odds of human survival past the latter part of this century, are not looking very promising. There is a plethora of scientific evidence to support this view. You can bury your head in the sand, and refuse to read what you would consider to be ‘doomer literature’, but I will not. I prefer to understand what is occurring on the planet that I live on.

  18. Arthur on Tue, 30th Jul 2013 5:13 pm 

    “The best thing that could happen for the human race, the planet Earth, and all life on it, is the complete collapse of modern industrial society. The sooner the better”

    That’s like asking for Mad Max.

    I would prefer to try a more gentle, gradual transition path. 20% renewable energy as an EU target for 2020 for instance, is a good start. I was taught at university that western industrial civilization does not really lose it’s character if energy supply would be halved, if that is combined with a rigid program of energy saving measures. I can’t see why those 50% will not be achieved between 2030-2040.

  19. GregT on Tue, 30th Jul 2013 5:35 pm 

    A conservative view:
    http://www.epa.gov/climatechange/science/future.html

    A less conservative view:
    http://guymcpherson.com/2013/01/climate-change-summary-and-update/

  20. BillT on Wed, 31st Jul 2013 1:22 am 

    Arthur, you were brainwashed at university to tow the party line of economic and techno fixes. You cannot seem to see past the blinders they put on you then. Too bad. We do not have until 2030 or later. We probably do not have until 2020.

    If you haven’t noticed, the world is going crazy as the capitalist ‘for profit’ system breaks down and ‘survival of the fittest’ grows.

    Tech is a product of plentiful cheap energy. It is also dying along with the energy that feeds it. Most ‘improvements’ today are nothing new, just upgrades to sell products.

  21. Arthur on Wed, 31st Jul 2013 12:41 pm 

    “Arthur, you were brainwashed at university to tow the party line of economic and techno fixes. You cannot seem to see past the blinders they put on you then. Too bad. We do not have until 2030 or later. We probably do not have until 2020.”

    So what is your recommendation, other than “roll over and die, you techno sinner”?

    Btw, making progress with your internet connection via satellite lately? Solar panels?

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