Oil Crisis: Your Primer on the Great "Peak Oil" v "Speculators" Debate

Oil prices soared to new highs ($138, up $11) as brokerage firm Morgan Stanley predicted that oil will hit $150 a barrel by July 4th and Israel suggested it might attack Iran. Needless to say, stocks got clobbered (with the exception of ExxonMobil).

In case you haven't been watching CNBC lately, there's a Great Oil Debate going on. On one side is the "Peak Oil" crowd, who believe that the world has now reached its maximum daily oil output and that increasing demand--which is already outpacing supply--will now drive oil prices into the stratosphere.

On the other side are those who blame the problem on "Evil Speculators", and argue that big energy traders are "gaming" the energy markets and adding at least a $30-$40 speculation premium to each barrel (Michigan Rep. Bart Stupak is in this camp).

Who's right? No one knows for certain (and anyone who says they do is fooling themselves). Part of the problem is that no one knows exactly how much oil the world is producing, or what the world's actual daily consumption is. What's more, no one knows what the "intrinsic" value is of a barrel of oil (other than what someone will pay for it--which brings you back to the beginning of the argument again).

But still, it's a fascinating debate, with smart folks (and morons) on both sides. Below are some short articles that lay out the "peak oil" and "speculation" cases. For what it's worth, my answer is that the current crisis is a combination of both influences: a short-term spike driven by sentiment, money flows into commodity funds, and supply/demand concerns...riding on top of a long-term upward trend.

THE LATEST:

Goldman's Oil Bull Speaks: The Man Who Predicted The Super-Spike Says Again Oil Going to $150-$200, Gas to $4-$6

PEAK OIL:

Goldman Sach Oil Bull: I'm Not A Crackpot

Boone Pickens: Why Oil's Going Straight to $150

JUST A SPECULATIVE BUBBLE:

Goldman Sach Oil Bull a Nutcase: Crash Coming Soon

Oil a Classic Bubble, Detached From Reality, Like Houses, Dotcoms, and Tulip Bulbs

ARMCHAIR QUARTERBACK:

The Donald Speaks: President Trump Would Tell OPEC Who's Boss, US Screwed at $125 Oil

Follow Henry Blodget on Twitter: www.twitter.com/hblodget

Comments

[lancesjogren]

I've been skeptical of the "speculator" theory, but today's jump in the oil price would be hard to interpret any other way.

I don't think the two theories are mutually exclusive. Peak oil is pacing the long-term trend of oil prices upward, speculation may be adding some additional shorter term spike.

As to Mr. Unbias, sure they are finding a little more oil here and there in places like Brazil but peak oil is here.

As to "we have plenty". If we drilled in all the promising US sites we might be able to come up with 30-50 billion barrels. That's 1-2 years of global production. Sure it would help a lot in buying us some time during the couple of decades or so it is going to take to develop an energy economy that is not primarily based on fossil fuels.

Both extremes are wrong about US oil sources. Conservatives are wrong that it provides a long term solution to our energy shortage. Liberals are wrong in saying just use renewables. Because large-scale development of renewables is going to take decades. The question is, what do we do in the meantime, put ourselves all in cryogenic chambers?

[KillTheMessenger]

"Because large-scale development of renewables is going to take decades. The question is, what do we do in the meantime, put ourselves all in cryogenic chambers?"

The conclusion is wrong because the premise is wrong. Large scale development of renewables does not take decades. You can buy solar cells today that can, in terms of cost per Joule, compete with oil in form of gasoline. What we are missing is an electric commuter car that does not cost $120,000. The latter can be made available in less than a decade.

Moreover, you fail to mention conservation in your argument. 60+% of US gasoline consumption are waste because we failed to tax gasoline and impose higher mileage standards. Similar things can be said about heating and electricity. If you look at the worst case Peak oil projections, that oil supply will decrease by 4% per year after 2012, we have a decade to exploit the most straight forward conservation measures. After that we can go electric on the commuter traffic side, if necessary.

I am already looking forward to President Obama's speech where he will talk the American people into higher gasoline taxes. It's a bitter spoon of medicine but we will have to take it, eventually.

[apduncan1]

What happens when you have a commodity, say West Texas Intermediate Oil (WTI), quoted at, say, US$100.00, and that becomes the yardstick.

Now, say that the oil producers quote their oil using the WTI yardstick but ask for payment in Euros.

What happens to the USDollar vis-avis the Euro and how does the affect the future price of oil?

Any takers?

[knosiswar]

There should be no peak oil debate if you guys would report to the people the Brazalian's great achievement in recovering oil from the 'pre-salt deep reserves'. They original discovery was 8bln barrels and the estimate of their second discovery was 33bln barrels, but it seems the media has squashed this story.


"Brazil's state-run oil firm Petroleo Brasileiro SA (PBR), or Petrobras, last October had said that production tests showed the existence of a "significant volume" of 30 degrees API crude in an exploration well in the BM-S-11 exploration block.

The find is considered a new frontier. It lies below a water depth of 2,140 meters, then a 2,000-meter-thick salt layer that itself is under 3,000 to 4,000 meters of sand and rocks. That means the oil find is at a distance of more than 7,000 meters from the Ocean's surface. "

http://www.rigzone.com/news/article.asp?a_id=44086

[KillTheMessenger]

33 billion barrels? Too bad that the world uses roughly 31 billion barrels a year. So that "great discovery" amounts to, at most, one year's worth of oil. Since it will take 20+ years to exploit, it's not more than 5% of supply. And no serious oil expert I have heard from would hope for even close to that much.

NEXT!

[Peps]

As KTM said, 1 years supply stretched over 20+ years of extraction­...we're saved!

Next you're gonna start touting the Bakken formation as our saviour...­.

[john456]

This is why they are pushing oil higher and storing it everywhere possible. We need adults running the government and leaders willing to tell AIPAC that they can support Israel but not insanity.

"If Iran continues its nuclear weapons programme, we will attack it," said Shaul Mofaz, who is also transportation minister.

"Other options are disappearing. The sanctions are not effective. There will be no alternative but to attack Iran in order to stop the Iranian nuclear programme," Mofaz told the Yediot Aharonot daily.

He stressed such an operation could only be conducted with US support.

A former defence minister and armed forces chief of staff, Mofaz hopes to replace embattled Ehud Olmert as prime minister and at the helm of the Kadima party.

It looks like there will be an attack, at least the markets are hedging that there will be. It might be a way to split the "pro-Israel" crowd from the Democrats since Obama would have to make a choice about where he stands.

[apduncan1]

The question we should be asking is: How many atomic bombs does Israel have?

[KillTheMessenger]

Enough to make give the world a bad day. It does not matter. Nobody is planning to use them.

[Henry]

If you were to assume the American life style for some 6 billion people on this planet and do the arithmetic it would become apparent that there is not enough oil. The global world is heading into a world with all sorts of problems. I mean, what will the Amazon Rainforest look like as bald?
Who has an ability to consider the consequence of the headlong plunge into stupidity? Condi Chevron Rice, George (call me a Hunt Brutha) Bush, Dick Haliburton Cheney, Rummi tamiflu Rumsfeld? I believe all these people have all taken the "cash" and run. Their individual or collective concern for mankind is close to zero. This kind of ugly republicanism needs to stop.
The prices for oil went up today spurred by the Iranian strike statements of Israel. Now... is that speculation? Or is that manipulation? (I'm pretty certain there are some devious bastards chuckling at the lot of us right now, eh?)

[KillTheMessenger]

Nobody assumes the American Wastestyle for 6 billion people. The world can do better. That Americans can't is, well, not the world's problem.

[Mencial]

Both can be right. Oil at $80 is perfectly compatible with peak oil.

¿The "intrinsic" value of a barrel of oil? ¿What is that supposed to mean? It is worth whatever you can get someone to pay for it.

The sad part is, oil is such a wonderful stuff, it is just incredibly versatile, it is needed for plastics and medicines and many many other things. But we just burn it. It is like burning food. Damn, we do that too.

One morsel of brain food for those that think that "there cannot be an oil shortage because it is against economics": Texas and a few other places used to produce all the oil needed in the USA, cheap and plentiful, there was even some kind of Texas OPEC in the form of railroad associations to keep the prices from dropping too much. Then one day the oil flow stopped growing. Everyone acted surprised, limits were raised and dropped, price shot up, but the flow started going down. And has gone down since then, even though price is up by orders of magnitude.

Do not tell me that "we just cannot drill freely". For the purpose of this thought experiment, think that forbidden places are just other countries.

¿¡¿What happens when we have all drunk our milkshakes?!?

[KillTheMessenger]

What is the intrinsic value of oil? That's easy. One barrel of oil has an energy content of 6.1GJ. That's about 1700kWh. If burned in the most modern power plant, approx. 1000kWh can be extracted (at 60% thermodynamic efficiency).

At the industrial price of electricity (8 cents) this amounts to $80 worth of energy. $120, if you assume residential pricing.

If you burn the same oil in form of gas in your car, you get 130MJ/gallon. That's 36kWh. The thermodynamic efficiency of a good car is on the order of 15-20%. So at best, you get maybe 7kWh of useful energy out of a gallon of gas. That is worth 84 cents at residential prices. Of course, an electric car would not be 100% efficient, either. Let's assume a conservative 60% efficiency, then the same energy we get out of 1 gallon of gas can be had electrically for $0.84/0.6=­$1.40.

Obviously, if you are paying $4/gallon, you are over-paying by a factor of over 2.8.

In other words: gasoline is close to three times as expensive right now than any other form of energy. It's actually more a factor of five if you look at true cost, not retail prices.

[seawolf77]

President Trump. What a joke. Writing a book on how to get rich when he was born that way. Kinda like Jesus writing a book about how to get holy. Please stop seriously quoting that man. Peak oil is now in the history books and I have read quite a few people say it's coming out party was Memorial Day.

[UnbiasView]

We have pleanty of oil in the US and off of our coasts, we just need to be allowed to go get it. Brazil just found 2 massive reserves, one of them being the 3rd largest ever and guess what they are going to do . . . drill.

[seawolf77]

That is of yet unconfirmed but we'll see. This notion that we have plenty of oil is proof positive what a magnificent job of propaganda has been worked on the American people. It's like global warming or climate change. People's beliefs resist change, but more importantly their beliefs demand expression. To the guy who believes the Saudi's are sitting a on big creamy nougat of oil, he's going to go out and buy a big one ton F-350 to show that he is right. How's that working for you now big guy? I have always maintained that even when Florida is underwater, the Republicans will be screaming from their rowboats "It's a natural cycle...it wasn't us." Splish splash. Who cares?

[Ratbert]

I would have loved to have gone through life with the unbacked optimism that so many people (mostly men) have about oil supplies. Without any background in geology, without having done any propsecting for oil, without reading any of the published reports on oil production and oil reserves, they can somehow declare that there is "plenty" of oil.

The world uses around 86 million barrels ever single day and the US uses at least 20 million of that. And the US is intent on increasing both figures as quickly as possible - exporting jobs to China and India as fast as possible and increasing immgration to record levels. The situation is dire.

Oil discoveries peaked in the 1960s and have declined every decade since. Demand is increasing, discoveries decreasing, production plateauing, and yet we have plenty?

[HeevenSteven]

Anybody interested in this subject needs to read Vaclav Smil; look him up. In his book "Energy at the Crossroads", read the chaper titled "Against Forecasting". Also in his book "Oil: A Beginers Guide", read the last chapter titled, "How long will Oil Last".

[DrDreg]

The recent spike in oil prices is, in essence, a supply/demand mismatch. Supply has been hampered by disruptions in the Middle East, but, more so, it would seem demand has simply grown too fast, fueled by growth in both east and west. Supply is not infinite, but certainly less oil is being pumped than what can be pumped. Profiteering on the supply side is another factor in the price rise. The end of oil has been a topic since almost the first wells were drilled in the 19th century. Practically speaking we usually have only 25-50 years of proven reserves because it is not economical to search for reserves past this time frame. Huge areas of Central Asia, eastern Russia, and western China have yet to be explored by those skilled at finding oil. Huge reserves remain in oil considered "marginally recoverable" when oil was $20/barrel, but worthwhile when it is $100/barrel. Markets are only semi-rational, and price swings are not uncommon. Within 10 years, the demand issues will have been addressed and will probably overshoot demand, leading to another price trough. In the meantime, we can hope alternative sources, especially solar, become increasingly efficient and cost-effective.

www.drdreg.com

[Robert59]

You're overlooking the obvious. All the new exploration will do is replace current production. And as the world gets more affluent the demand for oil will skyrocket. Go to EIA's website and you'll see we have 30 years of oil left in this country and 50 years of natural gas (based on current consumption of 20 million barrels per day).

We are way behind in transforming from an oil based transportation industry to electrical.
Solar thermal and wind power can more than meet our needs. We should have taken that tax rebate and spent it on the construction of solar thermal plants, wind farms, and retooling America's auto plants to produce electric cars.

We continue to piss away opportunities.

[DrDreg]

I remember this EXACT same discussion from the 70's after the October War and the Oil Embargo. The world is running out of oil!! Only 25 years left!!. What followed was the largest expansion of oil capacity in the history of the world. Twenty years later, this led to a supply overshoot and the 90's oil price nadir. In response, OPEC production was scaled back, and now, with the explosion of the 3rd world economies, supply has once again outstripped demand. The best predictor of the future is the past. Look for another expansion of capacity and another glut in 10-20 years, especially as this time around alternative sources are significantly more mature. There money to be made and the market will respond. See:

http://www.drdreg.com/Notes_from_the_Morgue/Notes_From_the_Morgue/Entries/2007/1/30_The_End_of_Oil.html

[bendzela]

What's interesting about this debate is that the more accurate the peak oil predictions turn out to be, the less they are believed.

I was warned this would happen, back in 1981. It helps to know a little geology.