Asymmetrical Information

Limited

I am riding on a limited express, one of the crack trains
of the nation.
Hurtling across the prairie into blue haze and dark air
go fifteen all-steel coaches holding a thousand people.
(All the coaches shall be scrap and rust and all the men
and women laughing in the diners and sleepers shall
pass to ashes.)
I ask a man in the smoker where he is going and he
answers: "Omaha."

Kindly visit the Economic Fractalist http://www.economicfractalist.com/

Jane:

Oil “Price Decks” are the product of economists but are heavily influenced by the bankers. Bankers prefer to heavily discount price decks to ensure that they only finance projects that can survive cheap oil, in the same way that they’ll often only loan you 80% of the acquisition price for property. Further, they recognize that the oil contracts traded on the NYMEX don’t have a lot of volume…if you tried to do a BIG trade to hedge a field, you’d quickly drop the NYMEX price. Finally, the oil price decks are for specific grades of crude that may trade at a discount (due to sulfur content or viscosity) to Brent, Dubai Light or WTI.

Another factor that is psychological but does fit with my experience in oil company forecasts is painful experience. The guys (and it is mostly guys) running these companies are all in their fifties and early sixties. They were in their early thirties, buying houses and raising kids when the price went to $10.00/bbl, and they remember seeing 65% of their peers lose jobs. I’m told it was possible to walk down the street in many of Houston’s suburbs and see half the houses abandoned, and it took 10 years for housing prices to recover. When I was a freshman engineering student at Texas A&M in 1989, the Petroleum Engineering professors were actually going so far as to bribe undergraduates with donuts to get them to listen to the Pet E sales pitch as if it were a timeshare presentation.

Three bits of anecdotal evidence lean towards a more bullish view on oil prices. First, the number of Volumetric Production Payments is starting to increase. In a VPP, a bank loans cash to a producer and is repaid in bbls of oil or MCF of gas. Second, Mezzanine financing, used to drill wells, is more available. Finally, when O&G properties are sold, the basis between Proved Developed Producing and Proved UnDeveloped reserves is shrinking; and people are starting to pay for Probables and Possibles, which (oversimplified) are reserves where seismic data look promising, but no oil has actually been produced yet. Used to be, people would pay for the option to drill but not for assumed reserves.

The foregoing is a GROSS oversimplification for several reasons, but no one really wants to read them.

Is oil a bubble? I don't know...I've been asking everyone I meet the way you'd talk about the weather. The most consistent answer I've heard is "Hoo boy, it'll be interesting, and to be a young guy like you....Hoo Boy..."

Holmes, as I say, I'm in no way predicting that oil won't be at $85 a barrel, or higher, in five years. I'm only saying I don't know where it will be, and there are too many possibilities for a glut--with China's banking system, a recession there in the next five years strikes me as more likely than not--to be willing to bet on higher prices, even if I believe that the overall price trend is up.

Operating costs in the Athabasca Oil Sands were in the $14 range in the early 1990s and heading south. Triple-digit prices are far more than is necessary to keep investment in this area moving.

ON another topic - "you won't catch me putting any $5,000 on the proposition that I have found a foolproof way to tell the future"

OK, but I'm not sure taking either side of this bet constitutes any such thing.

There's been some interesting press about bets on global temperatures recently. I believe two Russian scientists accepted a similar challenge re. global warming. Surowiecki-style, I'd love to see a mean temperature futures market like the voting market. We'd learn more about 'consensus'.

The global warming bet is on mean temperatures. This one, as I read it, is on the spot price in five years. I say that's crazy in a market as volatile as oil.

"Remembering a tip from Julian, I suggested that we use the average price for the whole year of 2010 instead of the price on any particular date - that way, neither of us would be vulnerable to a sudden short-term swing as the market reacted to some unexpected news. Mr. Simmons agreed, and we sealed the deal by e-mail."

Still too short term for me. If there's a recession in China, you lose the bet.

Homer Gwin's comments remind me of a factoid I recently saw -- the average age of a petroleum engineer is now 48.

Just think of all the advice they can give all
the unemployeed software engineers. Maybe they should have talked to all those people that got their degrees in aerospace engineering in the 1960s.

It is amazing how inefficient the markets are when it comes to human capital.

I hear a lot about the tar sands in Canada, but what about the prospect of turning coal into gasoline? They were talking about this during the gas shortages in Jimmy Carter's administration. Exxon supposedly had plans to build such a facility, but dropped them when the price of oil went down. The US is sitting on about half of the world's known coal reserves. If there was any truth to the notion that the oil reserves are being exhausted to the point that oil will become inherently expensive no matter how low the demand becomes, I'd think we would see such facilities popping up in the US like mushrooms after a heavy rain.

Does anyone have an opinion on what would happen to the price of oil if Pres. Bush announced, after the close of the market on Friday, that the U.S. would start releasing an unspecified amount of the Petroleum reserves in order to damp down speculation?

If oil is $85 in five years, Tierney wins. Remember that the bet is that oil will not be over $200/barrel (adjusted to 2005 dollars) in five years.

tcobb --

In fact, just this month a private firm has approached Montanna with a proposal to use a specific coal reserve as feedstock for Fischer-Tropsch conversion. You can get a lot of differing estimates on how high oil has to be for Fischer-Tropsch-made disel and gasoline to be profitable, but it's all well short of $200/bbl.

However, it is certainly not profitable at less than $30 a barrel. Which is why the financing isn't available for the plants right now, since everybody remembers $15/bbl oil and doesn't want to get stuck with a white elephant.

If you can get Tierney's side of the bet, even the "original" bet at $85, you should take it in a heartbeat. You can then just buy some futures or options contracts and hedge the risk away, for a guaranteed profit! And as a bonus, you can blog about it.

At what price would the US consider building more refineries?

IMHO I believe the oil companies are going to do a profit grab for the next few years. This is because they're going to need to start developing serious R&D funds to help usher in the new age of green power.

In five years a higher percentage of people will be driving green automobiles and using green power for their day to day use.

The problem with holding out tar sands as savior for oil supply (in an extremely short term manner) is the energy needed to process the sands into very ugly crude and thence to something usable. Using books that heavily discount the fact that natural gas supply is being eaten at an alarming rate that is increasing very rapidly, and factors of its supply (it doesn't taper off, it stops flowing abruptly), as well as the fact that the energy used is mostly held in house and is itself heavily subsidised (sp?)helps perpetuate the illusion of a viable alternative.

As for fields in existence and oil in the ground (proveable), reserve swing share has shifted to 20 or so muslim held lands - thus the pretext of terrorism.

Concerns for the industrialized west: rampant price increases destabilizing economies, global population demand outstripping resources, loss of control by government...answer in their eyes is abandonment of Republics and Parliamentary systems in favor of centralized authority.

In the past famine, war and financial disaster have reduced populations quite efficiently. The next will be a doozy.

If one wishes to take off the blinders, read salient facts on www.hubbertpeak.com and www.dieoff.org. There is no viable replacement for the massive energy supplied by oil, nor any will to curtail usage. Prices will rise as fast as the G8 can print money to paper over the tiger trap. And as we all know, paper can't support much weight.

I'd love to see a mean temperature futures market like the voting market. We'd learn more about 'consensus'.

Try getting a few quotes for long dated flood reinsurance if you want to find out about 'consensus'.

Mr. de Sieyes,
With all due respect, please do not make me laugh at you *too* hard. If it's not the oil sands it'll be something else. Back in the 70s good little Malthusians were hopping up and down on one leg in order to sing the same song that you are singing today. "The Big Dieoff will happen in the 1980s" When the 80s came and went without their cherished dieoff happening it became "The Big Dieoff will happen in the 1990s" among the optimistic Malthusians and "The Big Dieoff will happen by the year 2000" among the ones who were shamed by being so publicly wrong the first time. Do you really think there's anything in your links that hasn't been shrieked by the Club of Rome or Paul Erhlich before? I doubt it! I wonder if you've forgotten the outcome of the Simon/Erhlich bet? :P

http://www.wired.com/wired/archive/5.02/ffsimon_pr.html

With that in mind I'll encourage you to reserve your Snake Oil of Doom for the naive and the gold traders. I doubt anyone else will buy. ^-^

Merely anecdotal, but in this part of Colorado we sit on scattered coal veins interspersed by minor oil and gas deposits, and hence have many dozens of the low-production 'mulehead' style oil wells, typically installed 15-20 years ago (or more). These operated frequently in years past but most of them are now lucky if they autostart their respective disel engines once a month. Reworks of the well tap, as observed by me, were typically on the order of two or three annually. Now, in just the past six months, I have witnessed several of these reworks taking place.

Apparently, a sustained $40+ per barrel on the demand side does prod the supply side into action.

"To bet that oil will be above $85 a barrel in five years, you have to bet that... Americans won't change their driving/insulating habits"

Call me Simonesque, but I'm on the lower price side for this one. The above is an interesting illustration of Simon's whole point -- substitute goods come from areas we can't foresee, because they're part of human discovery.

You *do* see Americans changing their driving habits as a consequence of high oil prices (and other factors, mostly involving general traffic).

What do you think telecommuting is?

It's turning glass and silicon into a substitute good for oil. And do you think *that* is a trend that will pick up or slow down over the next five years?

Backing Tierney is not a bet--it's an arbitrage. As James Hamilton (www.econbrowser.com) points out, futures and options markets in oil exist out to year 2010. You could back Tierney, buy an out-of-the-money oil option for the year 2010, and lock in a sure profit.

Of course, you have to find someone as dumb as Simmins to take the other side.

I know of a couple of offshore oil field development projects that are on hold because of a lack of drilling rigs available.

Offshore petroleum engineers are in high demand right now. My company has at least 40 open slots. I get calls from recruiters looking for people on a weekly basis.

Business in the production/development side is picking up. The oil companies have been slow to respond to the high price of oil, but then they have to plan 3-5 years ahead for a development and aren't going to respond to short-term spikes.

The age issue is interesting. I'm one of the few young engineers in the industry right now. The 80's created a big gap in the petroleum industry. There are a number of engineers with 20+ years of experience and now a growing number with 5-10 years of experience. My company has a large number of "retired" engineers who have retired from one of several oil services or equipment companies and are now consultants. Many of them will be retiring for real in the next decade. It will be interesting to see how rapidly the 20+ year guys drop out as they retire.

Jane -
You've got a good point on China's banking industry. The trigger is likely to be a real estate crisis. People may be worried about a real estate bubble in parts of the US, but it's nothing compared to the Shanghai market, and their banks can't afford a massive increase in non-performing loans.

But even without a recession in China, the growth in demand should be tailing off soon. The first of many newer, more efficient power plants are coming on line soon. As you said, many people forecast by taking the recent past and projecting it off to infinity. The markets are probably expecting continued massive growth in Chinese oil demand, whereas demand will still be there (unless there's a recession) but won't increase at the same rate, as their efficient new base load power plants are connected to the grid and the horribly inefficient older plants are taken off.

Returning back to the source of Jane's post, perhaps Drum and Tierney (or whoever he finally finds to take the bet) can simply lay the respective $5k cashier checks on a table and ask a third party to flip Georgie's head for the consequent allocation. Similar odds, much more efficient, and possibly an inspiration for more prudent thought processes in the future?

I believe that the current oil price is more an artifact of trading market activity than underlying supply-demand relationships. Any market that soars to record heights attracts momentum players from other fields who make it go up more. I would be really surpised if the price does not break sharply at some point, which it will if -- as I surmise -- we're looking at a trading bubble. If I could predict that point, of course, well, y'know.

Longer term, there will defintely be supply issues from conventional oil drilling, but higher prices that prove sustainable do bring new production. Someone asked about making gasoline or diesel from coal. Yes, it can be done, and is done. The South African company SASOIL does it to produce something like 22% of South Africa's petroleum needs. It's a modified Fischer-Tropf (sp?) process, I understand. They are also in the business of creating diesel fuel from natural gas, and have a big project in the Middle East to do that with partner Chevron.

Cheap coal is essential -- you need a lot of process heat in addition to the coal feedstock and the heat normally comes from burning the same kind of coal you're converting. US Western coal might be economic enough (Eastern coal is defintiely too expensive), but there would be major environmental regulation challenges to face if the program were started on a large scale.

My understanding is that the economics are pretty marginal at $30 bbl, but $50 bbl is a very different story. Still, it takes donkey's years to set up a large plant (figure four-five years after you've made the investment decision and selected a site), so I wouldn't expect any coal-to-gas or coal-to-diesel on any appreciable scale in this country before 2015.

Still,I think the technology is promising enough, and our coal reserves are abundant enough, to seriously explore making a serious national commitment along this line. I emphasize "explore."

Meanwhile the traders will play their trader games while the commentators oooh and ahaaa about fundamental supply and demand factors that have little real bearing on the near-term price.

Natural gas is not required to convert tar-sand bitumen to product.  The gas is steam-reformed to hydrogen, which is then used to crack high-carbon molecules to light hydrocarbons; it is just as feasible (albeit more expensive) to gasify some of the bitumen to provide the syngas for hydrogen production.  I found a news item recently where one of the tar-sands outfits was looking to do exactly that.

Coal-to-liquids is also a possibility, but it may not be the least-cost path.  We're much better at converting coal to electricity, and it may be both cheaper and more efficient to go coal -> electricity -> battery -> wheels than to go coal -> syngas -> liquids -> engine -> wheels.  Oxygen-blown IGCC can convert coal to electricity at 40% efficiency and nearly eliminate sulfur and particulate emissions, while you're always going to have some amount of tailpipe nastiness from an internal-combustion car; if the CTL process stacks 50% losses ahead of the car's average 17% efficiency, it really looks sensible to go electric even if you're burning coal to make it go.

The USA burns about as much gasoline as Saudi Arabia pumps in crude.  If we started going electric in a big way, and also started making menacing moves toward the oil routes of nations (like China) which are acting belligerent, we could push the world to follow us.  The ensuing drop in demand would make the oil peak.

(Is there any chance of getting the content censor to quit blocking my real e-mail address?  I mean, really.)

Dear Small Rodent:

Small rodents produce smaller thought. I thank you for the ad hominem and hope you enjoy such in return.

As for the followers of malthus and hegel - let them eat cake, time is their ally. They still discounted Hubbert along with the rest. Had they heeded his (now validated) prognostications, they would have been far closer to the mark. The mark, by the way, is in the area of 2040. This is when energy supply (oil) turns to energy sink at current world consumption. Until that time, they'll all fight for whats left...malthusian or not. You will no doubt enjoy watching CNN as the zero sum game is played out.

Your ire should be reserved for those who claimed leadership but failed to plan for the eventuality, other than to strip you of your liberty and wealth, and perhaps life as well.

Enjoy your mouse trap :~)

'They have begun killing the messengers. What I feel for myself is lost in what I feel for my country. It seems I am too much an American."

Quote from another who acknowledged reality and spoke it plainly.

Engineer Poet -

Interesting read.

[quote] Natural gas is not required to convert tar-sand bitumen to product.[/quote]

No, but it is the energy of choice at the moment and so was used to highlight the fact that we have not found a way around the laws of thermodynamics.

[quote]it is just as feasible (albeit more expensive) to gasify some of the bitumen to provide the syngas for hydrogen production.[/quote]

Outstanding. What is the source of energy for gasification and is it a more efficient energy carrier than oil or natural gas?

[quote]Coal-to-liquids is also a possibility, but it may not be the least-cost path.[/quote]

Ersatz fuels all share the same problem...more energy in than out. Energy sink is the issue for long term viability...not cost.

[quote]We're much better at converting coal to electricity[/quote]

Much of our coal goes overseas (China), and it is being heavily relied on now in the States. How long these reserves last is also in question, especially when the world shifts more and more back to coal fired plants for energy and manufacturing.

There is currently no replacement for oil and its cousin natural gas. All replacement technologies would be lucky to make up 1...lets be generous... 5% of what oil supplies. Those are the hard cold facts we are going to have to come to grips with in VERY short order.

As for the rest, we are already seeing the outcome of US attempting to be the sole arbiter of the worlds remaining oil supplies. That kind of hubris got a little corporal (and millions of upon millions of others) a shallow grave some years back and all he asked for was 'lebensraum' (do not construe as support for the mad); we should heed the warning.

Between current coal and breeder fission technologies, we have enough energy at a continuous rate of current annual increase in consumption to get past the middle of the 22nd Century, including enough energy to make synthetic petroleum at $100/barrel for applications where we need it instead of electricity.

Oil just isn't that important. It's convenient, yes, but that doesn't make it vital.

What is the source of energy for gasification and is it a more efficient energy carrier than oil or natural gas?

There is currently no replacement for oil and its cousin natural gas.

If oil companies are enjoying the largest profits in recorded history, and receiving billions in tax cuts from Bush's energy plan, what exactly is the motivation to change strategies?

>>>"Just look at the financial statements issued at the end of July. Exxon Mobil Corp.’s second-quarter earnings climbed 35 percent from the second quarter of 2004 (after excluding special items) to $7.64 billion. BP PLC, the world’s second-largest publicly traded oil company, said its net income increased 29 percent, to $5.59billion. At Royal Dutch Shell PLC, second-quarter profits rose 34 percent to $5.24 billion. ConocoPhillips, the third-largest U.S. oil company, reported an eye-popping 51 percent jump in earnings, to $3.14 billion.

What’s behind those numbers? When oil prices rise, petroleum companies that have long-term contracts or own oil reserves get a huge windfall. After all, they may have invested and developed those oil fields when prices were $10 to $25 a barrel. Suddenly prices spurt upward and the companies are awash in profits."

http://www.fortwayne.com/mld/journalgazette/news/editorial/12358264.htm

What are some of these companies, like Exxon, doing with all these profits?

>>>"Exxon Mobil upped its capital and exploration budget last quarter, but it spent nearly as much buying back its own shares, bolstering its stock price. This quarter, the company said, it will spend even more – $5 billion – repurchasing shares."

http://www.fortwayne.com/mld/journalgazette/news/editorial/12358264.htm

Corporate profit outweighs the public interests almost every time.

--Cobra

John Galt de Sieyes:

Energy sink is the issue for long term viability

I assume you are a proponent of nuclear energy, then?

Warmongering...

http://www.dieoff.org/page175.htm

On the energetic limits to growth and the paucity of a viable replacement. Breeder reactors are a no go as well.

Eric -

No. I am a proponent of individuals becoming net producers of energy, not net consumers of it. I am a proponent of teaching individuals how not to confuse money with physics/energy. In short, I am a proponent of freedom...in its many varied iterations.

It makes little sense for individuals to become their own producers of e.g. wind power; individual powerplants are in the range of 0.5-10 kW, while the most economical size appears to be well above the current maximum of 5 MW.

Solar PV appears well-suited for co-location at consumer sites.  Concentrating solar thermal might or might not, and cogeneration requires location at the customer site.

I suspect that fusion research would make some major breakthroughs given a real need for the technology. Right now, fusion researchers are fooling around, spending grant money, and doing a lot of science and elaborate experiments designed to generate a lot of data and pave the way for eventually building power generation plants.

If we really started running out of other sources of energy and the focus on fusion was to produce a viable generator NOW, I suspect it would happen quickly.

Even if somone came up with a way to build a fusion power plant that generated significant net power, power companies would probably be hesitant to try to build one. The fear of RADIOACTIVE DEATH RAYS by the population would sabotage efforts to build fusion plants just as it has done with fission plants.

For that matter, I suspect people would embrace fission a lot more readily if the alternative was giving up air conditioning, electric lights, etc...

Earnest

Cobra - "Corporate profit outweighs the public interests almost every time."

If Exxon giving money back to its rightful owners is a scandal, then you must be really outraged that I just spent some of my own money to buy my children school supplies and clothing, rather than giving my last penny to the government to pay down the debt.

E-P:

Why did I guess I was reading one of your posts before I got to your name?

Anyone wanting to get up to speed on what is out there in the alternative energy world, what has been tried and found wanting, what technologies are nothing more than subsidies for favored groups, and what might actually work would do well to browse through the archives of E-Ps site.

I have learned more there on these topics than anyplace else (though StevenDenBeste, and Peak Oil Optimist both are good, and led me to discover EPs site after noting his frequent comments)

If oil companies are enjoying the largest profits in recorded history, and receiving billions in tax cuts from Bush's energy plan, what exactly is the motivation to change strategies?

Their motivation is simple -- underselling their rivals in order to make even *more* egregiously large profits.

You're also forgetting that anyone who wants to can start their own company. So even if existing oil companies were all engaged in a conspiracy to keep prices high, that wouldn't change the fact that *new* companies would have every reason in the world to undercut those artificially high prices.

If my comments are so obviously from none other than me, I am obviously in a rut. ;-)

Dan, that was hilarious. There is no underselling of their rivals in the oil business. In fact they have quietly worked towards the same goal of maximizing their profits in ways such as shutting down refineries that could accidentally do something like produce enough gasoline so prices wouldn't be where they are now. If you can find it check out an article that appeared in a Kansas City Star article about a month ago on how they did it. Also, if you don't understand that the capital requirements for that kind of business are such that it would be nothing short of a miracle for anyone to raise the funds to start a company to compete with the existing players.

There are plenty of smaller (and larger foreign) oil companies out there that would be able to step in and undersell any of the majors who tried to foist off inflated prices. Just because you've only heard of Chevron Texaco, Exxon Mobil, BP, etc... doesn't mean these other companies aren't out there.

As far as refineries go, the current regulatory environment is driving them all out of business. Current refineries have old and outdated equipment and have safety and environmental problems. They generally avoid fixing any of these problems because the federal government has mandated that any significant upgrade or renovation requires that the entire unit be brought up to the current level of environmental and safety requirements. Often this is prohibitively expensive to do all at once and companies are not allowed to make incremental improvements.

The Bush administration eased this a bit by rolling back some of the environmental requirements from absurdly overprotective to more realistic but still very, very expensive.

If the refineries can make obscene profits for a while, maybe they could afford to upgrade some of their equipment...

Earnest

In a tearing hurry so I hope I'm not repeating a comment up the thread, but -

Diff. betw. reserves and resources: Reserves (proven or un-) mean a higher level of confidence about how much is there - including whether it's there. Resources are much more speculative. It requires a certain degree of actual exploration in order to determine the presence and volume of a reserve. It's not cost-effective, in general, for an oil company to explore more than 20 years out (speaking in wild generalizations); my husband tells me company reserves of about 15 years are considered "being in great health" in natural gas, at any rate, 8 years are more average, and 4-5 is in the range of "I'm a startup trying to buy other people's excess reserves." More than 20 years of reserves, he tells me, and the excess generally gets sold off to a company that really wants to bump up its reserves.

So of course current reserves get used up; they're supposed to. And of course we have about 20 years "on hand" at any time, and of course which reserves become economical at what price point switches around depending on technology, world price, etc. But these things don't make a crisis. (The hubby and I were just having this discussion last night; he thinks he talked a Seattle liberal around from "crisis" to "normal operation," which is some doin'.) I have no idea what the concomitant resources number is. Anyone?

Which wouldn't account for:

1. The rate of discoveries being well below the rate of production since what, 1985?
2. The small size of current discoveries compared to the fields previously found.

Earnest Iconoclast says something about obscene profits.  The oil producers are certainly getting theirs, but consider what you could do with a GO-HEV:  you could buy your "motor fuel" from the electric utility or even make your own with a solar panel.  Once the price comes down (and it will come down, it needs maybe another factor of two) the oil producers will face stiff competition from other supplies.

At the same time, the energy requirements for the production of oil (pumping it up, separating it from water) will keep rising.  The cost of crude will go up while demand shrinks due to substitution.  At some point falling production will outrun rising prices, incomes stagnate and fall and the economies of the OPEC nations will collapse.

An ideal Fibonacci ratio length third fractal growth sequence was completed on Friday 26 August 2005. A high probability primary decay fractal pattern is evident.

The fractal evolution since October 2002 strongly suggests that there are very real and very simple quantum number fractal laws that underlie the macroeconomy. This discovery will be little consolation to the turmoil that is about to unfold over the next decade.

August 24 (Wednesday's) and August 25 (Thursday's) trading days once again demonstrated on a 5 minute unit fractal level, the recurrent precise fractal theme of x/2.5x/2x-2.5x - that pervades the economic universe.

For the Wilshire 5000 the base was about 17 five minute units. The three sequential growth fractals were 17/42/34 of 34 before the fall on Friday morning. The lateral 'skeletonized' evolution of this fractal sequence suggests the final lower (very lower) high is close at hand. Friday August 26 is the Fibonacci 85th day of a 52/130/85 daily sequence dating since August 2004.

1.62 times 52 equals 84.24 days.... If growth sequences follow idealized Fibonacci related fractals, Monday 29 August 2005 will see a nonlinear lower break in the equities.

For oil next week, week 52 will complete its third growth fractal and its ideal maximal growth fractal sequence: 21/52/52 of 42-52. This maximal growth fractal will be coincidentally timed with Katrina's hurricane winds slamming into US gulf oil rigs. Timed with the Katrina, the second most powerful hurricaine to hit the US, is the US's greatest evolving economic deluge. Gary Lammert http://www.economicfractalist.com/ "

Letters We Love

That'll teach me to hurry... I don't mean to imply that oil "can't" run out, just that it isn't imminently running out. Wish I could remember where I just saw someone observe that we're more likely at or near the peak of cheap oil than the peak of oil. Good news for alternative transportable/storable energy sources (and hence for energy independence), since expensive oil makes them more competitive.

As for the size of new fields' being smaller than the size of old fields, I think you can chalk that up to "low-hanging fruit," oil not being a renewable resource. Though it could be argued that Canada's tar sands are right up there, and even that the prospects for central Asia are largely unknown but suspected by some to be pretty important. I don't know nearly enough about them.

Oil is eventually going to run out because it is a limited resource, but that isn't the real issue, at least not at the current time. The real issue is, if you look at the total amount of oil sold annually, which roughly translates to the demand for oil, you can see that the demand is increasing. There is also a supply of oil. The supply of oil is limited not just by how much oil is in the ground, but by how fast we can get it out of the ground. That is why a previous poster was talking about "peak production".

In order for the price of oil to stay constant, the rate of increase in oil production per year has to match the demand for oil. Unfortunately, even if there was an unlimited amount of oil in the ground, you can just product more by sticking more pumps in the same place, because of the physics of oil pumping (which I am not knowledgable about to explain coherently, but the dummies version is that every hole in the ground reduces the pressure of the oil and makes it harder to pump). You basically have to find new places where oil is not currently being pumped.

Yes, people are finding new sources of oil, such as the sands in B.C. but they are also gradually using up old sources. I read a 4-part online article (sorry, I can't remember the source) that claimed that many experts believe that oil production will reach its peak in the next couple of years, if it isn't there already.

The next issue is the demand side. Even if the U.S. stopped increasing its use of oil, there is still China and India,as well as other developing countries, which are gradually increasing their demand for oil as they become wealthier.

So that is the basic argument for why the price of oil will continue to rise... an increase in demand which cannot be met by an increase in supply. But it doesn't say how fast they will rise.

On the other hand, as prices get higher, people will gradually shift their consumption use. For example, they will start getting jobs closer to home, or move closer to where they work, or start moving back to denser population areas with mass transit. I don't think the price of gasoline is high enough yet to cause this type of pain for most people, but there is a price for everything. I am sure $10 a gallon would be enough to start shifting consumption patterns.

oops, that should have been, "You CANNOT just produce more oil by more pumping"..

Everybody understand why we have to move away from the fossil fuel dependency. The politics of it, the damage to the environment, and the inevitable exhaustion of oil. We are all fascinated with combustion automobiles and have little motivation as consumers to demand alternative technologies at $1 gallon. At $3 we are seeing what's known as an extinction burst, behavior gets worse once a relied upon and known stimulus no longer elicits the same response or any response at all. What if oil dried up all at once today. Would the world stop? All of the sudden we'd be producing cheap synthetic oil until we came up with an alternative to fossil fuels. Clearly, there are forces beyond supply and demand driving up the cost of crude oil. We're now paying for future advances, that's somewhat ok with me, I believe that data is being monitored to make sure high oil prices doesn't cause any substantial damage to the economy or strategic alliances.

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