Posts Tagged ‘Peak Oil’

Is the world really running out of oil?

Sunday, November 15th, 2009

Many of us would have heard of the threat of Peak Oil to our way of life. To put it very simply, according to the Wikipedia, Peak Oil is the

Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline.

Unfortunately, there is a lot of misunderstanding as to what Peak Oil is. For example, in our quote of the news article in our previous post, it reported that

The world is much closer to running out of oil than official estimates admit, says a whistleblower at the International Energy Agency…

This is an example of how the mainstream news media can oversimplify things and subtract knowledge from their readers’ minds. Please note that we are not saying that the news media is useless, but it pays to be careful with what you read, especially with so much vested interests wanting to control public opinion through control of the media.

To add to the confusion, the debate on Peak Oil is as polarising as the inflation/deflation debate with both sides having different motives and vested interests. There are some experts who do not believe in Peak Oil (we are not geologists here, so we shall not get involved in this debate). For example, one of our readers forwarded us this news article by an expert (Leonardo Maugeri, the senior executive vice president of the Italian oil company Eni, and a visiting scholar at the MIT), who believes that there will still be plenty of oil in the 21st century and we need not fear losing our way of life as we know it.

First, let us understand what Peak Oil is not. It does not mean that the world is running out of oil. There are still plenty of oil on this earth. The last drop of oil will not be used up any time soon. But there is a problem. The cheap and “easy to get” oil is getting harder and harder to find and extract.

The best way to understand this problem is to use an analogy. Imagine we have a fruit tree that has plenty of fruits. We have been consuming the low hanging ones for quite a while and are realising that our daily supply of fruits are in decline. No doubt, there are plenty of fruits on the tree. But the problem is, the low hanging ones are getting fewer and fewer and the ones left are hanging higher and higher. That means, we have to expend more work (e.g. using a ladder) to get those higher hanging fruits if we want to maintain or increase (with China & India coming) our daily supply of fruits.

The point of contention is what is means by “low hanging” fruits. Critics of Peak Oil believe that new technologies will help us to extract the higher hanging fruits more easily than before. They believe that mankind will find new ways to extend the lifespan of existing oil fields, extract non-conventional oil (e.g. get the oil from the tar sands), find new oil fields in previously infeasible locations (due to technical and economic reasons) and so on.

As usual, we have to cast a skeptical eye on whatever we read. For example, the news article by Leonardo Maugeri is full of optimism with regards to mankind’s ability to pluck the higher hanging fruits. Perhaps he is a little too optimistic? As we read his article, we can’t help but notice that he is using some kind of turkey thinking- mankind’s ability to innovate in the past with regards to oil-related technologies will see that further innovations is the default result for the future (see Failure to understand Black Swan leads to fallacious thinking). For example, he wrote,

But when new exploration technologies do take root, the results are remarkable.

Fifteen years ago, all this was simply unthinkable.

Of course, being an oil industry executive, he has to walk the talk and be optimistic. We are not saying that he is lying or wrong. We are just exercising our skepticism. We certainly hope he is right. If not, this is a BIG problem for mankind.

Oil prices?the big picture

Tuesday, February 20th, 2007

In November last year, we wrote Is oil going to be more expensive?. A few months had since gone by and oil prices are still going nowhere. Last month, it even went under US$50. We guess by now, short-term traders are no longer enthusiastic on oil anymore.

As long-term investors, we must always keep our focus on the big picture. There is a growing consensus that sources from conventional oil fields are declining and that more unconventional sources of oil will have to be found and developed. This article, Future oil much harder to extract, from the mainstream newspaper, echo that view. Though the theory of Peak Oil is not mentioned in that article, it is clear that this theory forms the underlying assumption. However, not everyone believes in Peak Oil. Also, there are optimists who believe that technology will one day come to the rescue by making the extraction of oil from unconventional sources (i.e. oil sands) commercially viable. We believe that such optimism is currently premature?serious constraints still exists (see Curing oil sands fever). Then there is this idea of ?exploration paradox? where exploration is declining despite high oil prices (see Oil takeover time). Finally, there is always this wild card?Middle-East conflict.

If you are a pessimist who believes in (1) theory of Peak Oil, (2) ?exploration paradox,? (3) impracticality of oil extraction from oil sands, (4) inevitable Middle-East conflict, (5) continuous monetary inflation and (6) forthcoming ferocious oil appetite of China and India, then you will have to be bullish in the long-run price of oil and bearish on future human civilisation.

As for us, our advice is always the same: be prepared.

Additional Notes on “Is oil going to be more expensive?”

Sunday, November 12th, 2006

In our previous article, we mentioned about the theory of Peak Oil. For the sake of objectivity, we have to alert our readers that there exist arguments against and for the theory of Peak Oil. Some people regard Peak Oil as a myth while others believe we are now entering the stage of Peak Oil production. Yet some others believe that development of new oil extraction technologies or rise of alternative energies will render Peak Oil irrelevant. Regardless of whether Peak Oil is true or not, our basic belief is that ceteris paribus (everything else being equal), the trend points to a growing gap between demand and supply of oil.

Is oil going to be more expensive?

Friday, November 10th, 2006

For the past couple of months, oil price had fallen from a high of US$78 to a low of US$57. Many reasons were given, ranging from rising US oil inventory to quieter than usual hurricane season in the Caribbean. Consequently, that gave the Dow Jones an excuse to rise on the back of an ?improved? consumer sentiment.

But what are our convictions for oil prices? We have no confidence in predicting the price of oil in the immediate short term. But we have an opinion on where oil prices are heading in the long term?we believe the direction is up. What is the basis of our conviction?

Firstly, we look at the fundamentals?the dynamics of supply and demand.

On the demand side, the rises of China and India in the 21st century, with their massive populations, will have an immense impact on the world?s total demand for oil. As the East (China and India) get wealthier by the day (see our article, Transference of wealth from West to East), you can expect the rise (in numbers and prosperity) of their middle-class to increase the strain on the earth?s resources. Today, the US, with a population of only a fraction of China and India, consumes far more than its proportionate share of the earth?s resources. Imagine how much China and India will consume as they attain towards the current living standards of the US! Next, we have to ask ourselves another question: will the increase in usage of alternate and renewable energies eventually supplant the usage of oil? While we do not know how the usage of such energies will turn out in the future, we can be sure that it will take quite a long time for the world economy to retool and wean itself from oil. This is because the world economy is running on the basis of cheap and abundant energy.

Now, let?s look at the supply side. According to a growing consensus in the scientific community, the world is approaching the stage of Peak Oil. Put it simply, the Peak Oil theory states that the world?s oil production has reached the peak and is entering the stage of terminal decline. One common misunderstanding of Peak Oil is that the world is running out of oil. No, the world is not running out of oil?the world is running out of easily accessible oil. This factor, along with the inadequacy of the world?s oil infrastructure led to dwindling of the global spare oil capacity to a 20-year low. With razor thin spare capacity, all the world needs is an unexpected supply disruption to cause oil prices to shoot up as it had happened recently. Thus, as the article in the Sydney Morning Herald said, there is an urgent need to increase global oil production capacity:

THE world’s top finance ministers and central bankers will meet in Melbourne next week to discuss attracting $US8 trillion ($10.4 trillion) in energy investments to avoid production shortfalls.

The startling forecast of the 30-year investment funding needed to bolster inadequate oil and gas capacity – which implies that the oil price could soar far above yesterday’s $US59 a barrel – is in an International Energy Agency report commissioned by the G20, which is to meet on November 18 and 19.

A third factor may lead to increase in oil prices?monetary inflation. Since oil is priced in US dollars, any deterioration in the quality of the US dollar will have an upward effect in the nominal price of commodities, oil included. We will discuss this issue in more detail in the future.