OT - Drilling for Oil

[flere-imsaho]

T. Boone Pickens, the guy who underwrote the SwiftBoat Vets and can't keep a promise, wants Obama or McCain to underwrite his latest energy venture and so far they aren't exactly warming to the idea? I wonder why....

[jonesz]

So thinking about it, maybe I was defining "supply & demand" wrong. I was thinking of it as the amount of barrels being produced as supply and the amount of barrels being consumed as demand. Thinking about it, what it really is the number of oil contracts available as supply and the number of people interested in purchasing those oil contracts as demand.

While correlated it is important to note that it is not the same. So, if you look at it this way, supply and demand is driving the price up. But, to me, isn't this also speculation as I wonder how many of those contracts are actually executed and how many are re-traded. How else can you explain the $10 drop in oil prices over the last 2 days?

[jonesz]

Originally Posted by flere-imsaho

T. Boone Pickens, the guy who underwrote the SwiftBoat Vets and can't keep a promise, wants Obama or McCain to underwrite his latest energy venture and so far they aren't exactly warming to the idea? I wonder why....

But according to him he his the foremost expert in energy in teh US and is trying to save the country. If you believe that, he's also got a windmill he'd like to sell you

[Daimyo]

Originally Posted by Mizzou B-ball fan

1. This isn't a new situation that suddenly occurred in the past year or two. The supply of oil has been a concern for some time. Also, the drastic increase in price doesn't match up when demand is factored into the equation. There's simply not a level of demand increase that should create this sort of price increase.

China has grown from having almost zero to nearly 50 million privately owned automobiles in only a few years. Ownership is growing by something like 30% each year now with no end in site. Maybe 1 in 10 adults own a car there compared to maybe 8 in 10 in the US and they have four times our population so there is still huge room in that one area alone for sustainable, increased demand. I assume India and the rest of the developing world have a similar profile.

$200/barrel in the very short team is probably unlikely (it will be interesting to see what happens in China when the government stops subsidizing petrol), but demand is increasing faster than supply at this point and that doesn't appear to be changing anytime soon.

[SteveMax58]

Originally Posted by jonesz

While correlated it is important to note that it is not the same. So, if you look at it this way, supply and demand is driving the price up. But, to me, isn't this also speculation as I wonder how many of those contracts are actually executed and how many are re-traded. How else can you explain the $10 drop in oil prices over the last 2 days?

I may be oversimplifying the speculator situation a bit...but if you force anybody purchasing an oil contract to accept 50% shipment (i.e. cannot resell >50% of their contract)...would this not eliminate most (if any) artificial inflation due to speculation?

Not that $150/barrel is completely from speculators.

[molson]

Originally Posted by jonesz

While correlated it is important to note that it is not the same. So, if you look at it this way, supply and demand is driving the price up. But, to me, isn't this also speculation as I wonder how many of those contracts are actually executed and how many are re-traded. How else can you explain the $10 drop in oil prices over the last 2 days?

The prices ARE driven by speculation, but that speculation is motivated, in part, by the fact that this is a finite resource, whose production has probably peaked, and whose value is "always" going to go up. That can spiral out of control very quickly. That all definitely leads to a correction at some point, but with a resource running out, that correction will just be viewed as a buying opportunity.

[jonesz]

Originally Posted by molson

The prices ARE driven by speculation, but that speculation is motivated, in part, by the fact that this is a finite resource, whose production has probably peaked, and whose value is "always" going to go up. That can spiral out of control very quickly. That all definitely leads to a correction at some point, but with a resource running out, that correction will just be viewed as a buying opportunity.

Current production may have peaked..but as the price of oil goes up, newer technologies become more economical (e.g. Canadian Oilsands, Bakken Oil Shale), thus production will not remain "peaked". It is a finite resource but we are many, many, many years from draining ole Mother Earth of all her oil.

The issue is that, since prices have been so cheap for so many years, there has been next to no infrastructure development over the last 30 or so years. Infrastructure is very expensive and the return/barriers to entry where too high for the anticipated return. There are many oil wells in Texas right now that aren't tapped out, but where shut down because it was ineconomical to run them when oil was $20/barrell. Now that greater profit can be had, as with any industry, others/competition will look to enter in greater numbers. It may take some time, but IMO, they will enter, and prices will come down again.

[JW]

Nobody has the answer. Instead of arguing about doing this or doing that and how much oil is left or not left, we should drill now. Drill offshore. Drill ANWR. Recover oil where we can. Now. Our own oil instead of transferring our wealth overseas to folks who generally don't like us. Start now, and if serious we can bring that oil online quicker than most people say. We need to use our coal resources. We need to use our natural gas resources. (T. Boone Pickens, like him or not, and others say we could run US transportation on natural gas.) We need to build nuclear plants. Lots of them. At the same time we need a national program to develop other alternative energy like wind and solar and hydrogen and others. But someone opposes EVERY one of these options. Every one of them. We should not be afraid to drill. We should not be afraid to dig. We should not be afraid of nuclear power. We should not be afraid of alternatives. We should tell the naysayers in each case to go fuck themselves. And if the price of gas keeps going up -- which it will -- that is exactly what the American people are going to do.

[NoMyths]

Originally Posted by jonesz

Current production may have peaked..but as the price of oil goes up, newer technologies become more economical (e.g. Canadian Oilsands, Bakken Oil Shale), thus production will not remain "peaked". It is a finite resource but we are many, many, many years from draining ole Mother Earth of all her oil.

The issue is that, since prices have been so cheap for so many years, there has been next to no infrastructure development over the last 30 or so years. Infrastructure is very expensive and the return/barriers to entry where too high for the anticipated return. There are many oil wells in Texas right now that aren't tapped out, but where shut down because it was ineconomical to run them when oil was $20/barrell. Now that greater profit can be had, as with any industry, others/competition will look to enter in greater numbers. It may take some time, but IMO, they will enter, and prices will come down again.

The problem with this position is that whether or not new technologies become "economical", both will be significantly more expensive than the current economy can support. You're talking about a significant revision to the American lifestyle as if it won't be a big deal, or more erroneously, as if the cheap energy days will return.

[BishopMVP]

Originally Posted by NoMyths

BishopMVP, jonez, and Mizzou:
I'll take the high road and point out that the same was said about $144/barrel oil -- which is a figure Osama bin Laden was targeting as a way to destabilize the Western economy. I might further point out that oil prices have risen 265% in the last four years from $40/barrel to $146/barrel, and that the president of OPEC has predicted that prices could rise to $170 this summer.

This chart should worry you more than it appears to.

You'll notice something else if you look closely, since 2000 other than last year the end-year price is lower than the summer average. It hits a high around August/September and falls afterward. Not surprisingly, with most population and industry centered in the Northern Hemisphere, demand peaks in the summer months up here.

Originally Posted by NoMyths

jonez, you've asked how this run-up could make sense. There are a number of factors cited as probable reasons ranging from tensions in the Middle East to speculators to Katrina's aftermath. The primary reason is that we are running out of oil.

No, that is not the primary reason. Setting aside the argument that we're finding more reserves than we currently use (there's more oil in the Oil Sands of Alberta or the Oil Shale of Colorado or under the Siberian Tundra than all of Saudi Arabia, possibly the Middle East ever had) the long-term increase in demand doesn't explain the sharp increase and fluctuations over the past couple years. A few factors off the top of my head.

- Weak US $ leads to money being invested in commodities. This has affected all other commodities, like food too, but no one seems to be noticing that (the Quiksand hypothesis that it's because they don't advertise the price of bread or milk on billboards every block seems to fit.)
- We're reaching the edge of our refining capacity worldwide, and there is no new amount coming online soon. While people are saying light crude is tight in supply and thus expensive, heavy crude is being stored up by producing countries because it's not expensive enough to be worth selling (Iran for example has over a dozen supertankers filled with heavy crude idling by Natanz in the Straits of Hormuz.) The refining capacity to turn the heavy crude into legal uses isn't there.
- Fears of instability, from Nigeria (with the Delta Gangs) to Iran (that we/Israel will attack) to Iraq (these should be subsiding, but I doubt they are) to Venezuela (fears the US will put an embargo on Venezuela) to Canada (that environmental groups will shut down some of the oil sands)
- All 3 combine to lead non-experts to overreact. Like Mizzourah(? maybe) said, it's a bubble that will pop at some point in the next few months, with a lot of people losing a ton of money. If you want to make money, don't get involved in that market, invest in the companies that make drilling equipment. They will keep going up even when oil is unstable.

Originally Posted by JPhillips

Total oil supply is not as important as pumping capacity. Our problem is that there is perilously little spare pumping capacity globally and current wells diminish over time. We need to tap a lot of our known supply just to keep up with current daily pumping. I haven't seen much of any evidence that pumping capacity can be increased much over the next 20-50 years.

Pumping capacity could easily be increased by turning over all the poorly-run, deteriorating state-run companies in Mexico, Venezuela and most of the Middle East to experts and investing money in infrastructure. It won't happen though.

Originally Posted by jonesz

What we really need is a president to challenge the country to become Middle East oil independent in 10 years, much like Kennedy did with the moon. Unfortunately I really don't see that in either of our prespective candidates. Neither really seems to "get it".

That makes no sense. It's a global market - US stops buying from the Middle East, then Europe/Asia will just switch where they buy from. It'll just be an unnecessary swapping of who buys from whom with no effect on price.

Originally Posted by molson

The prices ARE driven by speculation, but that speculation is motivated, in part, by the fact that this is a finite resource, whose production has probably peaked, and whose value is "always" going to go up. That can spiral out of control very quickly. That all definitely leads to a correction at some point, but with a resource running out, that correction will just be viewed as a buying opportunity.

It's not based on the fact it's a finite resource because these aren't indefinite contracts. They have due dates, such as "BishopMVP will sell molson a barrel of oil for $150 on August 1, 2008". Because I don't have storage space, on August 1, I have to go buy a barrel of oil. If the current price is below $150, I make out. If it's above $150, I lose money and you make out. I don't know how far in advance most oil contracts are, but I very, very much doubt there are many longer than 1 year at most.

Sorry for the short reply, I'll try going more in-depth later.

[jonesz]

Originally Posted by NoMyths

The problem with this position is that whether or not new technologies become "economical", both will be significantly more expensive than the current economy can support. You're talking about a significant revision to the American lifestyle as if it won't be a big deal, or more erroneously, as if the cheap energy days will return.

Agreed we've seen the last of the $40 barrels of oil, but Canadian Oilsands for one are economical at around $80 a barrel. Some adjustment to the American lifestyle is going to and is happening. No doubt.

On one hand I kind of hope oil prices continue to escalate, because as JW says we need to do something in this country to get off of the oil crack pipe. On the other hand, I, fortunately or unfortunately don't see this happening mid/long term. It has just become increasingly annoying to me that more and more "analysts/experts", who never saw this price runnup occuring in the first place suddenly are spouting off about $200/barrel prices.

[jonesz]

Originally Posted by BishopMVP

We're reaching the edge of our refining capacity worldwide, and there is no new amount coming online soon. While people are saying light crude is tight in supply and thus expensive, heavy crude is being stored up by producing countries because it's not expensive enough to be worth selling (Iran for example has over a dozen supertankers filled with heavy crude idling by Natanz in the Straits of Hormuz.) The refining capacity to turn the heavy crude into legal uses isn't there.

Bingo. There's the bottleneck. Very good point. It costs between $2 BILLION and $4 BILLION to build a refinery. Talk about high barriers to entry. As of the beginning of this century no new refineries had been built in the US in 25 years. Why, because oil was $40/barrel. At $100/barrel it suddenly becomes a lot more attractive.

Originally Posted by BishopMVP

- Fears of instability, from Nigeria (with the Delta Gangs) to Iran (that we/Israel will attack) to Iraq (these should be subsiding, but I doubt they are) to Venezuela (fears the US will put an embargo on Venezuela) to Canada (that environmental groups will shut down some of the oil sands)

Add the risk of hurricanes into that mix...

Originally Posted by BishopMVP

- All 3 combine to lead non-experts to overreact. Like Mizzourah(? maybe) said, it's a bubble that will pop at some point in the next few months, with a lot of people losing a ton of money.)

I would argue that it also leads the so called "experts" to overreact.

Originally Posted by BishopMVP

That makes no sense. It's a global market - US stops buying from the Middle East, then Europe/Asia will just switch where they buy from. It'll just be an unnecessary swapping of who buys from whom with no effect on price..)

Point taken. I should have removed Middle East from the statement. I firmly believe that it is in this country's best interest to work towards becoming less oil dependent.

[gstelmack]

Originally Posted by jonesz

Bingo. There's the bottleneck. Very good point. It costs between $2 BILLION and $4 BILLION to build a refinery. Talk about high barriers to entry. As of the beginning of this century no new refineries had been built in the US in 25 years. Why, because oil was $40/barrel. At $100/barrel it suddenly becomes a lot more attractive.

Wrong. Environmental regulations have prevented and blocked attempts to build new refineries in the US.

[jonesz]

Originally Posted by gstelmack

Wrong. Environmental regulations have prevented and blocked attempts to build new refineries in the US.

Environmental regulations haven't prevented and blocked attempts in most cases. They've just added substantially to the cost of construction. Whether these regulations are needed or not is a whole nother question/debate.

[Glengoyne]

I heard an interesting piece on oil prices this morning on NPR. Essentially the guy said that "no one knows what is driving the price up" Sure speculation, supply demand, China and India increased utiliziation are all factors, but no one thing is driving this.

He essentially said that the more certain an individual is in declaring something as THE factor, the more certain that you can be that they don't really know what they are talking about...or that they might be trying to sell a product or Ideology.

[NoMyths]

Link: OPEC warns against military conflict with Iran

From the article:

The head of the Organization of Petroleum Exporting Countries warned Thursday that oil prices would see an "unlimited" increase in the case of a military conflict involving Iran, because the group's members would be unable to make up the lost production.

"We really cannot replace Iran's production - it's not feasible to replace it," Abdalla Salem El-Badri, the OPEC secretary general, said during an interview.

Iran, the second-largest producing country in OPEC, after Saudi Arabia, produces about 4 million barrels of oil a day out of the daily worldwide production of close to 87 million barrels. The country has been locked in a lengthy dispute with Western countries over its nuclear ambitions.

In recent weeks, the price of oil has risen higher on speculation that Israel could be preparing to attack Iranian nuclear facilities. The saber-rattling intensified this week with missile tests by Iran. That has further shaken oil markets because of concerns that any conflict with Iran could disrupt oil shipments from the Gulf region.

There are also other factors to consider when calculating the end of oil.

[molson]

Originally Posted by NoMyths

There are also other factors to consider when calculating the end of oil.

And its also a good illustration of why even if the middle east had an unlimited amount of oil, it really, really sucks for us to be absolutely dependent on it.

[Tekneek]

Originally Posted by molson

And its also a good illustration of why even if the middle east had an unlimited amount of oil, it really, really sucks for us to be absolutely dependent on it.

More than anything, I wish the government would stop getting into pissing matches and get serious about the future of this nation. They will not be able to continue going around manipulating other nations for access to resources, nor should they want to. A nation as large as the United States should not be beholden to any other nation/region for critical resources. With the current attitude about alternative energy solutions, we will be forced to buy those from other nations when that time comes as well.

The UAE, which pumps millions of barrels of oil every day, wants to become an alternative energy hub. It has made an initial investment of $15 billion for its Masdar Initiative, which it hopes will establish it as a leader in the field of green energy.

"We have a long history of being suppliers of sources of energy," said Masdar CEO Dr. Sultan Al Jaber. "We want to maintain that and always be enablers and a catalyst for providing the world with clean solutions of power."

We might end up buying it from some of the same people we're buying oil from today. Won't that be a real kick in the pants...

[NoMyths]

Link: Iran discovers billion-barrel oil field

Full Text:

Iran discovers billion-barrel oil fieldFrom correspondents in Tehran

Iran says it has discovered a new oil field containing more than one billion barrels of crude.

Oil Minister Gholam Hossein Nozari said the oil field held 1.1 billion barrels of sweet crude oil, of which 233 million coudl be recovered, the Shana news agency reported.

The field was in the area of Andimeshk town in Khuzestan province of southwest Iran that borders Iraq, Mr Nozari said.

Iran is the No.2 producer in OPEC and No.4 worldwide, although its ability to reach oil production targets has been hampered by a lack of international investment.

Production started in February from Iran's biggest onshore oil field, Azadegan, which is estimated to have 42 billion barrels of crude oil.

Sounds like a lot, no? Sadly, the math points out that 233 million recoverable barrels would represent a little over eleven days worth of oil in the U.S. at current rates (21 million barrels a day).

[Tekneek]

Iran would like to sell their oil in Euros, at a price starting around 11 Euros a barrel, from what I read earlier this year. I'm sure the US government would not let any of that oil come our way, assuming it ever actually happened.

[BishopMVP]

Originally Posted by http://biz.yahoo.com/ap/080719/oil_prices.html

Oil prices tumble in biggest weekly drop ever
Saturday July 19, 4:16 am ET
By Adam Schreck, AP Business Writer As the price of oil drops dramatically, some analysts wonder if the bubble is bursting

NEW YORK (AP) -- The price of oil recorded its biggest weekly drop ever, and a gallon of gas finally pulled back from its record high. So is it time to declare the energy bubble popped?
Experts won't go that far just yet.

"It's too early to say we've seen the worst of it," said Tom Kloza, publisher and chief oil analyst of the Oil Price Information Service in Wall, N.J. "We would be Pollyannish if we believe one week represents a trend."
Still, with oil recording yet another drop on Friday, some industry experts who just days ago thought there was more juice left in oil's meteoric run are reconsidering. "If this is not the bubble's implosion, than it's a reasonable facsimile," analyst and trader Stephen Schork said in his daily market commentary. "Time will tell. Nevertheless, for the time being we no longer care to hold a bullish view."

.

[flere-imsaho]

A little more info on oil speculation from last night's All Things Considered:

Congressional Democrats who want to lower gas prices by curbing speculation in oil futures saw their legislation survive a key vote in the Senate Tuesday.

Many Republicans question how much impact speculation has really had on prices, but they voted unanimously to let the bill move forward anyway.

GOP lawmakers are seeking a vote on lifting a longstanding moratorium on oil and gas exploration in the U.S. outer-continental shelf.

Speculation in the oil futures markets has exploded over the past few years, ever since a Republican-led Congress changed the rules so anyone could buy oil futures — not just those who actually intended to use that oil. As a result, the number of futures contracts has increased nearly 12-fold since 2001.

On Tuesday, Sen. Byron Dorgan, a Democrat from North Dakota, called that "excessive, relentless speculation."

In 2000, 37 percent of the people in the oil futures market were speculators, Dorgan said. Now, speculators make up 71 percent of the market.

"They've broken the market," Dorgan said.

Democrats cite estimates that speculation is responsible for between 20 and 50 percent of the recent spike in oil prices.

Sen. Mitch McConnell of Kentucky, the Senate's Republican leader, said he was skeptical.

"Nobody can say with a straight face that simply addressing speculation — a very narrow part of the problem — is a serious approach," he said.

McConnell said he and his fellow Republicans want an extensive debate on energy, what he called the nation's No. 1 issue. But Sen. Harry Reid of Nevada, the Senate's majority leader, rejected the changes Republicans proposed adding to the anti-speculation bill.

"They want 28 amendments," Reid said. "They're not serious about this."

Reid accused Republicans of simply trying to undermine the anti-speculation measure.

"Forty-seven different Republican senators have spoken at one time or another on the need to do something about speculation," Reid said. "That was before they heard from the oil companies, and I guess some people on Wall Street.

"Now, suddenly, they don't think speculation's a big deal."

Yes, speculation is a big deal, said Sen. John Ensign, a Republican from Nevada, but he warned that curbing speculation in the United States could mean that foreign markets will take over.

"We've been willing to do something on the speculation front as long as you're not destroying our futures markets in the United States and just sending those markets overseas," Ensign said.

At the White House, spokeswoman Dana Perino played down the significance of speculation.

"We believe that speculation does cause some volatility in the day-to-day market fluctuations of oil prices, but we believe that the root causes of high energy prices is supply and demand," Perino said.

The Commodity Futures Trading Commission issued a report Tuesday cobbled together by various Bush administration agencies. The report concluded that supply and demand is indeed the problem — not speculation.

Another Senate panel heard Tuesday from Texas oilman T. Boone Pickens. He warned lawmakers that the smart response to the oil price shock is not to drill more, but to expand solar and wind power.

"We have walked into a trap and ... we've got to get out of it," Pickens said. "We are the ones that put ourselves there, nobody else."

It's not clear whether the anti-speculation bill will keep moving forward — Republicans are balking at being limited to only two amendments. Democrats say one of those amendments can be on expanding oil drilling, because they don't expect it to pass.

Two points:

1. If the GOP really wanted to open up more areas for oil leases, why didn't they do it in the first half of this decade, when they controlled Congress? I think the obvious answer is that this is a land grab by oil companies before Bush leaves office. After all, oil companies haven't drilled on over 7000 of the leases they hold already, so who's to say they'll do so with new leases?

2. I love the GOP flip-flop on oil speculation. Clearly speculation is just one of the many influences causing high oil prices, but every serious economist has also said that supply and demand alone can't be responsible for the pace of the run-up in oil prices over the past few years.


Let's be clear: The GOP changed the oil speculation rules, allowing people to buy future who would never use them, specifically to cater to the desires of Wall Street. They clearly never thought of the consequences, and this is one of the consequences. We've already elsewhere established that today's GOP doesn't understand fiscal responsibility, but it's now also clear that they don't understand economic systems in general.

Luckily, however, Bush has an explanation:

President George W. Bush has an explanation for the housing-market meltdown that has thrown the global economy into turmoil: Wall Street got drunk.

"There's no question about it. Wall Street got drunk," Bush said at a private event in Houston on Friday. "It got drunk and now it's got a hangover. The question is, how long will it sober up and not try to do all these fancy financial instruments?"

Bush's comments were recorded on a cellular telephone camera and posted to the YouTube Internet site on Tuesday.

He was in Houston to raise money for Republican congressional candidate Pete Olson, who is challenging incumbent Democrat Nick Lampson.

The video shows Bush joking with a friendly crowd and musing about his life when he leaves the White House in January. "We've got a housing issue," Bush said. "Not in Houston, evidently not in Dallas, because Laura's over there trying to buy a house today."

Bush explained that his wife no longer wished to live in rural Crawford, Texas.

"I like Crawford, unfortunately after eight years of asking her to sacrifice, I am no longer the decision maker," he said. "I did tell her, 'Honey, we've been on government pay now for 14 years, go slow."'

Bush, 62, was arrested for drunken driving when he was 30 and gave up alcohol when he turned 40.