[Tyler_JC]

Has anyone seen a supply curve except for Lonesnark and me?

Just because Saudi Arabia can produce oil at $2 a barrel doesn't mean the market price of Saudi Oil is $2.

We have to look at the marginal producer.

At $40-$50 a barrel (depending on who you talk to), the Canadian tar sands are the marginal producer. They will not produce anything at less than that price but they will produce if oil breaches that point level.

At $90 a barrel, oil shale could be the marginal producer.

[FreddyH]

At $40-$50 a barrel (depending on who you talk to), the Canadian tar sands are the marginal producer. They will not produce anything at less than that price but they will produce if oil breaches that point level.

At $90 a barrel, oil shale could be the marginal producer.

Your logic is correct but the numbers are wrong. Saudi's lift costs are presently $5. The weighted global avg is $19. And large scale kerogen production is $15% less than the tar sands, so about $38 (but has a range from $25 to $70 dependent on the yeild). American producers chose to ignore kerogen due to sounder alternatives to the available capital. A kerogen-friendly federal gov't has paved the way for a concerted American effort on this front. Many of the technologies with sands are interchangeable.

One must remember that tar sands development was already huge when oil was $29 exactly five years ago. The CapX numbers were staggering and the nervous fled due to the weak margin.

With a new President giving the SOTUA in less than 365 days & a ton of new capacity to hit the market in 2008/2009, we will see most of the $37/barrel fear premium in oil prices evaporate. January's Contract Oil price of $88/barrel will want to drop two bucks/month thru 2008 & a buck/month thru 2009.

But it may be thwarted by a series of small OPEC production quota reductions during that period. OPEC likes high prices, but they don't want to bring on a global Recession. They will find a balance that affords a 3% Real GDP growth.

OPEC has become a partner in Global Monetary Policy. Regional economies can be manipulated by energy costs as easily as by conventional interest rate intervention.

[Tyler_JC]

At $40-$50 a barrel (depending on who you talk to), the Canadian tar sands are the marginal producer. They will not produce anything at less than that price but they will produce if oil breaches that point level.

At $90 a barrel, oil shale could be the marginal producer.

Your logic is correct but the numbers are wrong. Saudi's lift costs are presently $5. The weighted global avg is $19. And large scale kerogen production is $15% less than the tar sands, so about $38 (but has a range from $25 to $70 dependent on the yeild). American producers chose to ignore kerogen due to sounder alternatives to the available capital. A kerogen-friendly federal gov't has paved the way for a concerted American effort on this front. Many of the technologies with sands are interchangeable.

One must remember that tar sands development was already huge when oil was $29 exactly five years ago. The CapX numbers were staggering and the nervous fled due to the weak margin.

With a new President giving the SOTUA in less than 365 days & a ton of new capacity to hit the market in 2008/2009, we will see most of the $37/barrel fear premium in oil prices evaporate. January's Contract Oil price of $88/barrel will want to drop two bucks/month thru 2008 & a buck/month thru 2009.

But it may be thwarted by a series of small OPEC production quota reductions during that period. OPEC likes high prices, but they don't want to bring on a global Recession. They will find a balance that affords a 3% Real GDP growth.

OPEC has become a partner in Global Monetary Policy. Regional economies can be manipulated by energy costs as easily as by conventional interest rate intervention.

Thanks!

The actual numbers aren't as important as the idea of marginal producer.

What people also must remember is the opportunity cost of investment in oil shale.

If it costs $100 million to make $5 million a year in oil shale profits, no one is going to bother because the return on capital is too low.

On the other hand, if it costs $200 million to make $20 million a year in oil shale profits, it could be an entirely different ballgame.

Energy is not the only expenditure so an increase in the value of energy (400% in this case) does not lead to a 400% increase in the amount of investment necessary to make oil shale profitable.

It is this same logic that allows everybody else in the world to compete with Saudi Arabia when prices are high.

[TonyPrep]

Just because Saudi Arabia can produce oil at $2 a barrel doesn't mean the market price of Saudi Oil is $2.

I didn't say it was. I was pointing out that your argument was based purely on market prices and that can change. The analysis I'd be most interest in is EROEI, although some here seem to think such considerations are of no use.

[FreddyH]

FreddyH, you must not have heard of the 'Law of Receding Horizons.' The more expensive petroleum becomes the more expensive petroleum becomes. Tar sands, shale, etc. (in fact gunk of any sort) will always be indexed to the price of crude because the tools of extraction, maintenance, and infrastructure are all built and maintained themselves with petroleum. There is no magical $ level when this stuff suddenly becomes profitable.

But there is always the illusion that profitability is about to happen because for brief moments these tools are available in the open market at last period's manufacturing cost---just before petroleum inflation sends their cost up in delayed lockstep.

It is a ultimately a hopeless race to run because you always loose.

Sorry, but i cannot engage further in your nonsensical argument. Tar sands were profitable five years ago. Shale is even more profitable. And in so much as the combined sands/kerogen production is under 3% of total global production; and the economics of the non light crude that form the world's surplus capacity (an equivalent volume) are superior to sands/kerogen, your hypothesis plainly has no merit as this category clearly does not affect the global price.

[Tyler_JC]

Pstarr, I don't see it in the data. Do you?

And just so you know, natural gas is far more important for industrial applications than crude oil.

And yet the "lockstep" comparison between natural gas prices and equipment prices simply isn't there.

[Oil-Finder]

As for shale? Give me a break. ... . We know it has the energy content of a baked potato.

Peakers keep repeating that, but after searching the internet I have yet to find the original source for that claim. The only thing I can find is that Randy Udall keeps repeating it and seems to be the originator of the claim (maybe), but after some more searching I can't even find where he ever has provided proof of the claim. If someone has a link to some sort of calculation, it would be nice. But I can't help but wonder if this is one of those things people keep repeating because it makes a nice sound bite, but they don't even know the source of the claim, or whether it's even true, or whether it's even meaningful.

[yesplease]

just hasn't caught up yet is all.

When will it catch up?

[FreddyH]

I'm beginning to see that most people are incapable, not interested, or most likely scared to learn about energy-return analysis.

Simple. They are incapable, uninterested & unscared 'cuz it doesn't hurt yet. Energy costs are still a 3% component of the avg joe's CPI. Until that changes, status quo...

[yesplease]

just hasn't caught up yet is all.

When will it catch up?

I don't know but maybe when we are on the downslope of the peak. Then it will probably go way past..

How will it go way past?

[yesplease]

just hasn't caught up yet is all.

When will it catch up?

I don't know but maybe when we are on the downslope of the peak. Then it will probably go way past..

How will it go way past?

Well, cost in an energy-increasing regime reflects current and expected supply/demand balance. In an energy-decreasing regime it will always be assumed that there is less product (less supply) in the future which will generate unimaginable real-good monetary inflation now. Does that sound correct?

It doesn't sound correct or incorrect since you haven't specified how the cost of equipment compared to the cost of other commodities, specifically oil, will go way past on the downslope. Feel free to make reasonable assumptions about other commodity prices if you like.