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Hamilton The Changing Face of World Oil Markets

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Hamilton The Changing Face of World Oil Markets

Unread postby Pops » Mon 28 Jul 2014, 13:20:38

The Changing Face of World Oil Markets
Link to PDF

Intro Post from econobrowser:

Here’s the introduction to a new paper I just finished:

This year the oil industry celebrated its 155th birthday, continuing a rich history of booms, busts and dramatic technological changes. Many old hands in the oil patch may view recent developments as a continuation of the same old story, wondering if the high prices of the last decade will prove to be another transient cycle with which technological advances will again eventually catch up. But there have been some dramatic changes over the last decade that could mark a major turning point in the history of the world’s use of this key energy source. In this article I review five of the ways in which the world of energy may have changed forever.
Below I provide a summary of the paper’s five main conclusions along with a few of the figures from the paper.

[see the link for the charts]

1. World oil demand is now driven by the emerging economies.

2. Growth in production since 2005 has come from lower-quality hydrocarbons.

3. Stagnating world production of crude oil meant significantly higher prices.

4. Geopolitical disturbances held back growth in oil production.

5. Geological limitations are another reason that world oil production stagnated.


And here is the paper’s conclusion:

Although the oil industry has a long history of temporary booms followed by busts, I do not expect the current episode to end as one more chapter in that familiar story. The run-up of oil prices over the last decade resulted from strong growth of demand from emerging economies confronting limited physical potential to increase production from conventional sources. Certainly a change in those fundamentals could shift the equation dramatically. If China were to face a financial crisis, or if peace and stability were suddenly to break out in the Middle East and North Africa, a sharp drop in oil prices would be expected. But even if such events were to occur, the emerging economies would surely subsequently resume their growth, in which case any gains in production from Libya or Iraq would only buy a few more years. If the oil industry does experience another price cycle arising from such developments, any collapse in oil prices would be short-lived.

My conclusion is that hundred-dollar oil is here to stay.
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby Plantagenet » Mon 28 Jul 2014, 14:37:03

Prof. Hamilton does an excellent job in his paper on the world oil markets. However, he is an academic economist and doesn't quite understand the geologic and scientific aspects of Peak Oil. For instance, one of his main conclusions is:

wrote:2. Growth in production since 2005 has come from lower-quality hydrocarbons....


Actually, the hydrocarbons produced by fracking tight oil shales are of excellent quality. Here is a technical assay of Bakken crude, for example: Bakken crude oil gravity ranges from 36 to 44 degrees API. The quality of this oil is excellent, almost identical to WTI. The benchmark crude oil is West Texas Intermediate, which is 40 degrees API sweet crude. It is the benchmark because it requires the least amount of processing in a modern refinery to make the most valuable products, unleaded gasoline and diesel fuel.

But overall, I'd give Prof. Hamilton an "A" on this paper. He does understand that geologic realities play a big role in limiting the available oil supply (which is more than many economists are able to grasp). He concludes by predicting that hundred-dollar oil is here to stay. I'd say $100/bbl oil is the floor for future oil prices. I still think we will see it creep inexorably higher to $110, $120, $130 and higher in coming years. As demand continues to rise and supply continues to tighten, the law of supply and demand predicts higher prices.
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby Pops » Mon 28 Jul 2014, 14:57:44

Page 4-6 of the PDF.
The legitimate object of government, is to do for a community of people, whatever they need to have done, but can not do, at all, or can not, so well do, for themselves -- in their separate, and individual capacities.
-- Abraham Lincoln, Fragment on Government (July 1, 1854)
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby Plantagenet » Mon 28 Jul 2014, 18:58:43

Peter---Actually, I read Prof. Hamilton's paper a couple of weeks ago. I made my comment above in order to forestall people who aren't familiar with the global oil production data being mislead by Prof. Hamilton's inaccurate statement quoted by Pops, i.e. that global production gains are due to "low quality hydrocarbons." AND your post nicely illustrates just how folks can be misled---thanks!

The data is pretty clear---global oil production gains are mainly due to the increasing contributions from the US, which in turn are largely from the fracking of shales in the Bakken and Texas Eagle Ford formations. These are not "low quality hydrocarbons". Current oil global production gains from these sources are of excellent quality oil---see the technical assay info in my post above

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hydrocarbons from the Bakken and the Eagle Ford are of excellent quality. 8)
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby Plantagenet » Mon 28 Jul 2014, 20:55:56

pstarr wrote:The above chart refers to a single momentary USA spike, that has yet to offset global oil declines.


Peter ---- what are you talking about? There are no "global oil declines."

The rate of growth in global oil production has dramatically slowed, but it is still slowly going up mainly because of the increases in US oil production. This is all well documented in EIA and IEA data and is covered in Prof. Hamilton's paper --- perhaps you should read it again? :roll:
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby Plantagenet » Mon 28 Jul 2014, 22:35:53

pstarr wrote:.. bakken....


You really should read the Hamilton paper that you claimed you read. You'll learn that the Bakken is not the only tight oil being produced in the US. There are several others. Taken together, US tight oil production is the reason US oil production has gone up by over 3 million bbls/day, and this in turn contributes to the continued slow growth of global oil production.

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Get it now?
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby Plantagenet » Tue 29 Jul 2014, 01:08:40

Peter---you just don't know what you are talking about. This is your fourth totally wrong post in row---if this keeps up I'm going to have to start charging you for all this tutoring you're getting :)

Now, please pay attention. Lets check out a typical 2014 news article on the Permian Basin---this one in the "New Mexico Watchdog":


we can expect to see three to three-and-a-half million (barrels a day from the Permian Basin),” Hallam told New Mexico Watchdog in a telephone interview. “We could see even more than that.”

The reason?

Horizontal drilling, using hydraulic fracturing — “fracking.”

In the past, drillers in the Permian Basin relied on drilling vertically — straight down to get to the crude oil. Horizontal drilling was used more widely in places such as the Bakken and Eagle Ford but now, the Permian is getting into the game.

In addition, the geology of the Permian Basin makes it a prime source for oil extraction.

Zones in the Permian Basin such as the Wolfcamp, Strawn, Fusselman, Cline, Mississippian and Atoka possess multiple layers of rock that are sometimes stacked on top of each other, making the area ideal for drilling.


Ok, Peter. Now keep paying attention. The "zones" in the Permian basin refer to various rocks and formations. The main one is the Wolfcamp SHALE. Another important target is the Cline SHALE The other zones of interest include limestones and other clay-rich carbonates, but here is the part that may be hard for you to understand. Limestones and clay-rich carbonates are also TIGHT. They contain oil, but they have limited permeability prior to fracking. They also can be fracked and oil can be produced from horizontal wells from limestones just as it is from shales. This is nothing new---In fact, there are even carbonates interbedded in the Bakken Shales and they also produce oil.

So you see---your silly claim is wrong---the dramatic jump in oil production from the Permian basin is indeed due to fracking. AND its been so successful that production there is up to 1.5 million bbls/day and still increasing, with some seeing it peaking at ca. 3.5 million bbl/day.

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The Permian basin---another US fracking boom.
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby westexas » Tue 29 Jul 2014, 07:28:57

As previously noted, it seems likely that actual global crude oil production (45 and lower API gravity crude) has not shown a material increase since 2005, while global natural gas production and associated liquids, condensates and NGL's, have so far continued to increase.

The EIA shows that global dry gas production increased at 2.8%/year from 2005 to 2012, a 22% increase in seven years. If the increase in global condensate production only matched the increase in global gas production, global condensate production would be up by 22% in seven years. If global condensate production matched the 2005 to 2012 Texas rates of change (relative to the global increase in gas production), global condensate production would be up by about 67% in seven years.

In any case, we don’t know by what percentage that global condensate production increased from 2005 to 2012. What we do know is that global C+C production increased at only 0.4%/year from 2005 to 2012. In my opinion, the only reasonable conclusion is that rising condensate production accounted for virtually all of the increase in global C+C production from 2005 to 2012, which implies that actual global crude oil production was flat to down from 2005 to 2012, as annual Brent crude oil prices doubled from $55 in 2005 to $112 in 2012.

The following chart shows normalized global gas, NGL and C+C production from 2002 to 2012 (2005 values = 100%).

Image

The following chart shows estimated normalized global condensate and crude oil production from 2002 to 2012 (2005 values = 100%). I’m assuming that the global Condensate/(C+C) Ratio was about 10% for 2002 to 2005 (versus 11% for Texas in 2005), and then I (conservatively) assume that condensate increased at the same rate as global gas production from 2005 to 2012, which is a much lower rate of increase in condensate (relative to the increase in gas production) than what we saw in Texas from 2005 to 2012.

Image

Based on foregoing assumptions, I estimate that actual annual global crude oil production (45 or lower API gravity crude oil) increased from about 60 mbpd (million barrels per day) in 2002 to about 67 mbpd in 2005, as annual Brent crude oil prices doubled from $25 in 2002 to $55 in 2005. 


At the (estimated) 2002 to 2005 rate of increase in global crude oil production, global crude oil production would have been up to about 90 mbpd in 2013. 


As annual Brent crude oil prices doubled again, from $55 in 2005 to an average of about $110 for 2011 to 2013 inclusive, I estimate that annual global crude oil production did not materially exceed about 67 mbpd, and probably averaged about 66 mbpd for 2006 to 2013 inclusive.
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby Pops » Tue 29 Jul 2014, 08:46:26

Thanks wt

I'll take the other tact and say if price is an indicator of the supply of energy and the effect of horizontal drilling and fracturing shale, this chart from Hamilton's paper comparing products by energy content ($/BTU) is revealing. Oil price per BTU has steadily increased for a dozen years (excluding the little hiccough around '08) and while other product prices tracked oil closely prior to 2005, their price has since decoupled from oil. In fact those non-oil prices have fallen, which indicates an increasing the supply of not-oil but not of oil.

Image

When the N gas price fell due to oversupply, drillers switched to wet gas, which then produced an excess of liquids such as ethane and propane. Ethane is a feedstock (plastics) and is easily transportable and exportable but is not in short supply globally. Most importantly, it doesn't replace crude oil, so the price is down around it's pre-2002 level.

Propane is another not-crude, but it can replace crude in some applications, it is fairly easily compressed and exportable but still, it isn't crude. It contains only 3.8 million BTUs vs crude's 5.8 million. Even though it is an energy source (as opposed to ethane), it is of a lower quality energy wise and so priced lower. However it is still about 3 times it's pre-2002 price indicating the actual problem which is a shortage of BTUs.

Which of course brings us to actual oil. Notice there has been no reduction in the price of oil per BTU. Asserting all LTO increases from h. drill'g & frac'g are the same as WTI when the price of landlocked WTI has steadily increased over the period of the fracing rush is misinformed at the least.


I think the upshot is that fracking is great for some things, obviously one carbon methane is easy to coax out of that certain flavor of tight shale that prevented it from migrating naturally. It is a great resource to keep the lights on. 2 & 3 carbon ethane and propane are good for what they're good for, as are butanes and pentanes and they come out easily too it seems. But it also appears obvious to me that the more Cs you string together the harder they are to squeeze out of tight rocks and the 6-10 C molecules are the ones we really want and the ones we aren't getting.

Obviously they all contain energy and we'll burn them all in the end but I think it is disingenuous to pretend we aren't starting to burn the furniture.
The legitimate object of government, is to do for a community of people, whatever they need to have done, but can not do, at all, or can not, so well do, for themselves -- in their separate, and individual capacities.
-- Abraham Lincoln, Fragment on Government (July 1, 1854)
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby JV153 » Tue 29 Jul 2014, 13:52:41

pstarr wrote:Pops, apparently Plant did not read page 4-6 of the PDF. I am shocked!


You shouldn't be surprised that people don't read everything about even one specific topic.

But rehash yet another paper ?

I mean, even the fact that a pumpjack has to be put on a oil well at all means the natural pressure is too low for it to flow up, so that it has to be sucked up. That means EROEI has been worsening for a heck of a long time, offset by drilling even more wells which uses even more energy. The earliest wells gushered as the wellhead was much simpler than they are today, without a blowout preventer. .

https://www.google.ca/search?tbm=isch&i ... %20history

http://www.sjvgeology.org/history/gushers_world.html
Last edited by JV153 on Tue 29 Jul 2014, 13:58:09, edited 1 time in total.
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby radon1 » Tue 29 Jul 2014, 13:57:33

Looks like this thread is yet another confirmation of the soundness of rockman's Peak Oil Dynamic concept.
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby vtsnowedin » Tue 29 Jul 2014, 14:16:55

Would not the lower- quality hydrocarbons he is talking about be the Canadian tar sands crude, the Venezuelan very heavy "oil" and the Saudi heavy sour along with the lightest condensate from fracking?
There isn't enough high grade tight oil from the Bakken to create an increase in world production by itself.
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby Pops » Tue 29 Jul 2014, 16:34:48

A good observation VT but I think the perception is generally similar to Plant's (by those that pay enough attention to perceive anything about it) that the US LTO boom is going to change everything - or rather prevent everything from changing and even postpone the expansion of the strip mining for x-heavy oilish stuff. And it is going to do it because it is just like old fashioned drilling, only with cool high tech stuff and none of the messy strip mining, definitely none of the troublesome importing.

But even including x-heavy, etc, which is counted under "field production" by the EIA, Hamilton's point is that a greater percentage of "liquids" are being produced which are less energetic than "oil." IOW, he is staying away from the whole net energy, EROEI bit and all the inherent pitfalls with that: what to count, what not to, blah and just sticking with simple BTUs - propane contains less energy than "oil"

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The legitimate object of government, is to do for a community of people, whatever they need to have done, but can not do, at all, or can not, so well do, for themselves -- in their separate, and individual capacities.
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Re: Hamilton The Changing Face of World Oil Markets

Unread postby Plantagenet » Tue 29 Jul 2014, 16:52:08

JV153 wrote:You shouldn't be surprised that people don't read everything


I don't mind that people don't read everything, but it is disappointing when people read things but don't comprehend what they just read.
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