Both the production increase and the capacity decrease vary depending on your point of measurement and definition of production. Average OPEC surplus in 2003 was 2.8 mb/d, now it's 1.7. Total 'supply' (IEA) in 2003 was 79.7, second quarter 2005 was 84.5. So, 'net' is about 3.1 (bearing in mind second quarter is typically a seasonal low).

So, even with the production declines you cite, we've increased 3.1 mb/d in capacity. I don't think that's indicative of a peak.
Mike Lynch

CERA is the leading energy consulting firm (and competitors of mine). I haven't seen details of the work, but Bob Esser was a co-author and his track record is very good.
Mike Lynch

Mike,
If you post your Simmons article on the web, can you post the URL in this thread? Also, I was curious about your answer to nero's question at the bottom of P. 18 (you seem to have overlooked it).
Thanks,
JD

been lurking JD?

there seems to be some circle to square here

that must have a geometric style component?

if so cost must go up unless drilling cost can be reduced for economic or technical reasons? you need production well cost by unit to fall in line with increased well head count?

would that indicate a resource under stress?

also does repairing katrina storm damage count as increased production costs? or is that a special case if so why?

drilling in areas of higher risk is a cost issue and a indicator that lower cost reserves have been stressed... is that incorrect or overly argumentative in a semantic way? if my production comes from the GOM am i producing more costly oil?

what physical issues count for raising costs so as to indicate resource stress?

Boris
london

Causality in futures and inventories is difficult to determine. Contango leads to inventory builds, but occurs when inventories rise. And since there is no measure for 'desired' inventories, you can't say how it changes according to perceived threat (unfortunately).
But, that said, even if people want higher inventories due to a perceived higher threat to supplies, they have been achieving them. And rising inventories is a sign that supply exceeds demand.
Mike Lynch

The lower oil production in the Gulf will reduce the inventory build expected over the next few months, by maybe 30 million barrels or so. That's serious, but not catastrophic.
On the other hand, expect much lower demand at least in the short term, which should offset partly. If a recession occurs, prices will drop sharply
It's too early to say now what the 6 month impact will be, but I expect overall prices will be lower next year.
Mike Lynch

You might check my article “Forecasting Oil Supply: Theory and Practice,” Quarterly Review of Economics and Finance, July 2002 for a discussion of data problems in measuring costs.

Transient events like Katrina are not indicative of long-term resource cost trends. Nor are market cycles; many thought the drilling boom in the 1970s was indicative rising resource costs, but it represented a tightness in the E&P market.

Higher risk is suggestive of higher costs to the companies, but not resource stress. If you had 8 Saudi Arabias in African countries in civil war, the high risks/costs wouldn't tell you about resource stress.

Adelman and Shahi (1989) did a nice piece comparing the change in physical effort to retrieve oil around the world, and showed it was dropping. (rig years per productive capacity)
Mike Lynch

Mike,

I'm interested in your thoughts on this thread, given our common distrust of OPEC & Saudi reserve claims.



SA

thanks for source... if Adelman and Shahi are correct is it possible we woudn't detect stress as readily? the ability to detect stress over time would surely inly hold true with metrics that are stable in regards to recovery rates etc? or is my kindergarden logic deeply flawed?

I would think the GOM risks are boarder line transitory?

when we look at risks the notion it is not indicative of resource stress at first hand seems reasonable ..however the fact your are forced into higher risk areas even for primary non geological reasons is possibly an indication you are under stress as if geography(location) determines risk rather than stress you need to accept that the volumes under these locations is a limitation on geology...

this may seem a fatuous argument at first glance but movement of production into these areas of political and geographical difficulty is perhaps an indication of depletion.. in-fact it must be as it is a function of the physical reality of 3 dimensional space..

on a aside for the mo

would it be fair to summarize your position as one where depletion and peak will occur but the evidence it is near or remotely an issue at present false?

ie: we grossly underestimate the oil in place combined with ever increasing recovery rates?

also how exactly do you define stress?

thank you for your attention

Boris
London

the thing i wonder, spike, is why economists are even bothering to argue that the peak won't happen until 2030. I thought economists believed that the invisible hand of the market will bring about a smooth transition to a better fuel than oil when the time comes and oil gets too expensive.

So what is the problem? Why are economists vehemently denying that Peak Oil is likely in the very near term? Why are they concerned? Won't the market simply find a better alternative with no effort needed by anyone? Its worked so far, so why not this time? Is the concern and denial over peak oil a tacit admission that there is no better fuel than oil and that 'this is it'?

IMO, economists don’t give a rat’s ass when the peak happens – they believe the market will provide a solution. Ok, let’s assume they are right. What are the necessary conditions for the market to provide the solution?
1) There has to be a solution.
2) There has to be enough time to implement the solution, especially in the case of oil.

Assume 1 is true. Point 2 then is key – due to society’s utter reliance on oil, shifting away will take a long time to happen – the Hirsch report says 20 years.

Therefore, in order for economics to be of any real use, the market MUST not be looking at just current supply/demand, but it must be looking far enough into the future so as to even allow for the “solution” to be provided. The simple fact that we don’t have contango in the oil futures market indicates that the market feels we aren’t near peak. (I know some have said we have contango, other’s have said we don’t.) If we do have contango, it’s another flag that peak may be upon us. If we don’t have contango, then either the market isn’t looking far enough into the future (so it’s useless), or the market doesn’t have enough data to look that far (making it useless, this is why Simmon’s is yelling for more data.) or the market feels there is plenty of oil (peak is 2030+)

So, only if peak is 2030+ are we still ok.

If we take CERA’s numbers (which admittedly many here don’t like), CERA claims no peak before 2020. Let’s assume CERA is right, and the peak is some point after that. Let’s also assume the Hirsch report is right. If that’s the case, we’re halfway through our “grace period”. The market should be signalling right now that the transition is necessary. Wait, is the market doing that now? Maybe it is!. But Mike feels the current price is speculation based. If the current price is purely speculation based, then using CERA and Hirsch as our guides, the market is never going to “solve” the problem for us. If the current price isn’t speculation based, then for all intents and purposes, peak oil is basically upon us.

So, we’re back to peak oil in 2030+ being a must - CERA is being pessimistic Mike has said he believes the peak is “well beyond 2025”. In order for the peak to be 2030+, URR has to be at least 3TB+. In order for URR to be that high, discoveries would have to be keeping pace, and this is the one thing we know isn’t happening. The only thing that Mike can point to is that production is currently increasing but that could just as easily be “sucking out what remains faster”. The production is increasing argument is like driving down a mountain road in the middle of the night without lights and saying “hey, we haven’t run off the cliff yet, so we’re ok”.

- The market doesn’t have the ability to accurately see far enough in advance… it’s shortsighted and unless this is fixed, we’re screwed regardless of when the peak is. (again, Simmons #1 beef)
- To believe the 2030+ dates, there really needs to be discoveries to back it up, not just “production is expanding.” Show me the beef. The statistics and hypotheticals used by USGS (who claim 3TB) means there is 1TB just sitting out there waiting- so why isn't it being found and booked?

Well there is a pretty obvious profit motive for inventory build when you can make easy money out of the futures market. I don't see how the causality can be in question.



As you rightly point there is no metric for 'desired' inventory thererfore there is no way to know whether or not it has been achieved.



Rising inventory by definition means supply exceeds demand. I take it what you mean is that rising inventory is a signal that the price is too high and should be expected to drop?

Not necessarily, that was my point. Demand for inventory can change. There are seasonal changes in inventory. Do you call these rises in inventory a "sign that supply exceeds demand"? Similarly if the market perceived that there was going to be a shortage some time in the future (for whatever reason) it would induce people who had the capacilty to build inventory. That too would not be a " sign that supply exceeds demand" (whatever that means).

Question for Mr. Lynch:

Do you have any idea on the impacts of oil shale for oil production? Rough estimates on how much and when (technically and economically possible?)

Interesting. Who says Saudi Arabia has been explored several times over? The data suggest otherwise. (And responding to this thread has delayed my Saudi article, that's my story and I'm sticking to it.)

The Saudis rely heavily on the biggest oil field they have, which means they are in the early phase of resource exploitation. Reserves are clearly very large, and undiscovered oil as well.
Mike Lynch