21.9.05

What do Hurricanes, free markets, and refining capacity have in common?

Answer: Peak Oil

 

Energy consultancy PFC Energy said in a note that the OPEC offer of spare production capacity is a "de facto suspension of quotas," and would send a stronger political message than raising output quotas by 500,000 b/d.

www.rigzone.com

 

“The Organization of Petroleum Exporting Countries will supply all the oil it can, effectively suspending its quota system for the first time since the 1990 Gulf War after prices surged because of damage from Hurricane Katrina.

OPEC estimates its members can pump another 2 million barrels a day, enough to supply the U.K. , Europe 's second-largest economy. The offer of additional barrels starts Oct. 1 and lasts three months, OPEC President Sheikh Ahmad Fahd al-Sabah said in Vienna .”

http://tinyurl.com/ap7vd

 

In a study released today, Jeff Rubin, Chief Economist and Chief Strategist at CIBC World Markets, said we are likely to see US$100 per barrel oil sooner than later. The CIBC World Markets study predicts that oil prices will average US$93 per barrel in 2007 with prices expected to reach or exceed US$100 per barrel by the fourth quarter of that year. The September Monthly Indicators report notes that both supply and demand factors are pushing oil prices higher. The devastation to both oilfields and oil industry infrastructure from Hurricane Katrina will not only impact current oil production but future production as well. The study expects that planned expansion of production in the Gulf of Mexico over the next two years is likely to be halved; cutting off nearly 300,000 barrels per day of potential future supply. The setbacks to planned expansion of Gulf of Mexico capacity comes on the heels of stagnant production in Russia and tapped out capacity in OPEC.

http://tinyurl.com/bbcrp

 

When a cartel loses its ability to increase or decrease supply is ceases to be a cartel. It no longer has control over supply and hence prices. That has now happened at least for the next 3 months. From now there is no one in control of the most important commodity we have, and no one really knows where this leaves us. It appears that we are in for a period of price and supply instability, with possible swings, upwards and downwards, all of which make for a very uncertain future for oil producers and for us consumers. For without price stability, oil producers including OPEC, will be wary of investing in future production.

 

This wariness seems to have already restricted refining capacity, as no one seems to want to build new refineries, which have a payback period of 20-25 years. If a refinery you build now were to be idle in 5-10 years time because there wasn't the oil to supply you wouldn't get the return on capital employed to build the plant. There would be no point in building it. The refining capacity we have is also set up to process the wrong sort of crude, light, sweet, and not the heavier crude oil that Saudi Arabia apparently has spare capacity in. There has even been calls by several governments to build refineries, apparently because the excessively profitable oil companies seem unwilling to do so. Even Richard Branson has flown a proposal to build a refinery to supply his beleaguered Virgin airline's fuel.

 

It is also clear from the above report from CIBC World Markets that oil producers are having second thoughts about the Gulf of Mexico, the only region in the USA that has seen significant growth in oil and natural gas production. The results of hurricane Katrina, and previously Ivan last year, and now possibly Rita, is either you build oil platforms and infrastructure to withstand more violent storms, or you abandon oil production in this region, or you stagger along and accept that from time to time various parts of the region will be off line, and or damaged beyond repair. Any way you look at it some part of future potential production will have to be forgone because of higher costs, which at some point will outweigh the benefits of that portion of production.

 

It is interesting to note that this cost, more severe weather due to climate change, is most likely the direct result of burning fossil fuels creating elevated CO2 levels in the atmosphere. This is an unforeseen twist to the peak oil story, direct negative feedback due to climate change, making oil production too expensive and pushing the EROEI (Energy Returned on Energy Invested) envelope from positive to negative.

 

This comes on top of the apparent peak in light sweet crude oil production, as reported by OPEC http://tinyurl.com/7wvtj . As light sweet crude is the most sought after crude oil, requiring the least refining, and producing more of the most profitable products like petrol (gas), it would make sense that it would be the first product to peak, obviously oil companies search for and produce the most profitable oil first, and save the less desirable product for later. This is another indicator signal of an immanent peak in world oil production.

 

Today's developments add several other layers of complexity to the problem we are facing, namely energy security, and with it the future of our industrial civilisation. The so called Hubbert's peak in world oil production has always been seen as a geological constraint. In theory it is but in practice it appears as the peak of world oil production nears, several other factors, economic, political, and the negative climate changing effects of burning fossil fuels will conspire to create effective peak production sometime prior to the physical Hubbert's peak. What this all means is that previous estimates of Hubbert's peak will have been optimistic, as they are based more less solely on geology, while it has become apparent in a complex and chaotic world that there are other factors that have become just as important.

 

Without a safe secure energy supply industrial civilisation cannot function. What with having armies in Iraq to guard the supply of oil to the USA , and storms in the Gulf of Mexico , and lack of refining capacity, and now effectively no OPEC we are in uncharted and complex territory. Increasingly oil is proving to be a loadstone to the global economy, a position it always had but because of plentiful supply the importance it held was masked. As we reach the first and perhaps the most important of earth's limits my only prayer is that we see the folly of the road we are now travelling and move at all possible speed towards the only safe and secure energy policy. It is one that has renewable energy and conservation at its centre and fossil fuels, at most, at the periphery.