Last year I published a report with the (justifiably) bombastic title, “$500 per barrel: could oil price rise tenfold?” One of my central claims was that producing oil requires investment of real capital including materials, equipment and highly skilled labor, and that, “as more and more resources are required to generate the same amount of liquid fuels, energy production is becoming ever more expensive to society in real terms.” Thus, as it becomes more expensive in real terms (as the deteriorating EROEI figures indicate), the fact that energy has recently become cheaper in nominal (dollar) terms can only be a temporary abberation. EROEI stands for energy return on energy invested; in the early 1900s, we obtained 100 barrels euqivalent of oil per barrel invested (EROEI of 100 to 1); today we are at about 15 to 1 globally and at 11 to 1 in the USA. Continue reading
Tag Archives: Peak oil hypothesis
5/5: $500 oil and how to manage the looming uncertainty and risk
Let us recap what we covered in parts 1, 2, 3 and 4 of this report. In spite of the low price of oil (just below $50 at the time of this writing) and predominantly bearish market sentiment, the “big picture” suggests that we are facing a grave energy predicament. Petroleum producing countries, especially members of OPEC, have been vastly overstating their oil reserves. Production of oil from conventional sources is in an irreversible decline. Over the next 15 years, the EIA projected that production will fall over 40% short of demand. New drilling technologies, and this includes fracking, are unlikely to impact this shortfall in a meaningful way. These conditions have led the UK’s Ministry of Defence to predict in 2012 that oil price could rise to as high as $500 per barrel over the next three decades, causing crises of unforeseeable proportions. For the oil market participants, the trillion dollar question is how to cope with the looming uncertainty and risks. Continue reading
4/5: Sources and quality of oil market information
This posting is part 4 in the 5-part series on the future energy crisis we are likely facing. Here are parts one, two, and three. My research to try and establish facts about oil supply and demand led to many dead-ends where you must take the information at face value and hope that it is true. For example, we’ve all heard (again) about tanker-fulls of unsold crude oil floating around the world, but ultimately, this information was based on hearsay. For example, Bloomberg reported how oil companies are seeking supertankers to store 20 million barrels of crude oil [i] (that sounds like a lot, but it represents only a few hours’ worth of global demand). Continue reading
3/5: Revisiting the peak oil hypothesis
As we discussed in part 1 and part 2 of this series, the world is facing a dire energy predicament; world oil reserves are fast dwindling and new extraction technologies won’t be able to reverse global production declines. By all accounts, it appears that we are past the point of peak oil and today we take another look at the peak oil hypothesis. One of the key thoughts in this report is that, as oil production becomes more expensive in real terms, it must also become more expensive in nominal, or dollar terms. That it has recently become cheaper in dollar terms can only be a temporary aberration. Continue reading
1/5: Making sense of Saudi Arabia’s oil reserves and production capacity
UPDATE: This article is part of a 5-part series posted in 2016. Latest oil market related article is here: “The coming oil price shock”
So, the question is, why did oil prices suddenly collapse in 2014 and continued slumping into 2016? Neither U.S. fracking boom nor the slow demand growth can explain the event’s timing. We’ve known about fracking since at least 2009 and the “boom” part became quite apparent by 2011. The weakness in global demand wasn’t news either, so what did happen in June 2014 when oil prices collapsed? Supposedly, this had something to do with Saudi Arabia’s refusal to curb excess production for whatever reason – there has been no shortage of explanations. Saudi Arabia is the world’s biggest oil producing powerhouse endowed with virtually inexhaustible reserves of the black gold and the capability to switch the taps on or off and move global oil supply and prices at will. That, at any rate is what the mainstream media narrative would have us believe. However, if we scratch the gloss off that narrative, the situation appears starkly different: Continue reading
$500 per barrel: could oil price rise tenfold?
In 2012 a report produced by the UK Ministry of Defence predicted that oil prices would rise significantly out to 2040, and by “significantly,” they meant to $500 per barrel. Today, after nearly two years of low oil prices and much talk about an oil glut this may seem farfetched. But we shouldn’t dismiss UKMOD’s warning. This could turn out to be the most important development facing humanity for decades to come. Continue reading
Market facts vs. market narratives
So the economy is in the doldrums globally and demand for oil languishes. At the same time, oil producing countries are pumping the stuff out as hard as they can with no let-up in sight. So how does it make sense that oil price surged nearly 60% from its January lows? Today’s news and rumors may explain today’s advance, but what about previous three months’ rally? The answer is that over time, it is the price that leads the narrative, not the other way around. I’ll try to elaborate.
The Naked Hedgie 