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Mar 1, 2012

Waiting for Oil

Fred:  I wish we had half as much oil as Saudi Arabia.
Mike:  Shhh. We do, but it's illegal.
Fred:  I suppose what we don't know won't hurt our politicians.

Proven Oil Reserves

Worldwide "proven oil reserves" is a very restricted definition. Even those reserves have been expanding as technology has improved and as the oil price has stayed high. There is no "peak oil" on the horizon.

Saudi Aramco is the world's largest oil company. Radford by Bill KovarikIts CEO said in 2006:

[edited]  There are more than 4.5 trillion barrels of potentially recoverable oil, 140 years at our current rate of consumption. The world has consumed about 18% of conventional oil potential. That fact alone should discredit the argument that peak oil is imminent, and put our minds at ease concerning future petrol supplies.

US proven oil reserves are defined by US law as oil in the ground which can be recovered under current  prohibitions and regulations. For example, Alaskan ANWR oil is not included, as its development is not allowed.

US Energy Information Administration

EIA defines proved reserves as those volumes of oil and natural gas that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.

North America Radfordhas 400 billion barrels of recoverable oil with current technology. That is one-half of the 800 billion barrels in Saudi Arabia, if there were more reasonable regulation.

The US consumes 21 million barrels/day.  400 billion barrels at that rate would last 52 years. That is plenty of time to develop new technologies without turning our lives over to government energy controls.

Time to Market

The time needed to develop new US oil is commonly reported as 10 years. Yes, under those same regulations.

Less than ten years to develop offshore oil if regulations were modified
July 2008  -  Next Big Future

[edited]  Monica Showalter at Investors Daily proposes that California's 10 billion barrels in offshore oil could be brought to market in as little as a year if the moratorium were lifted. The oil is under shallow water and drilling platforms already exist.

The time offered to develop oil resources includes regulatory delays. It is not an engineering limit of technology. The Gulf of Mexico offers an example. There is a dramatic slowdown in approvals in an area which has had oil development for 50 years. This followed a large accidental spill which was remediated by the BP oil company. The extreme slowdown is not required as a technical response to prevent future spills.

Regulations Delay Revenue, Jobs, and Oil Supplies
07/22/11 - Rigzone

[edited]  The permit moratorium in the gulf of Mexico ended October, 2010. The federal approval process has not returned to previous levels in the following six months.
  • 86% fewer approvals/month for plans.
  • 38% more time needed to approve plans.
  • 2.5 times greater backlog of deepwater plans pending approval. It was 18 per year, and now is 67 per year.
  • 60% fewer drill permits (combined shallow water and deepwater).

When you want to fool the peasants public about possibilities in life, write a regulation and only report what is possible under that regulation, no discussion needed.

Oil Supply and Speculation

Is Obama Responsible for High Gas Prices?
03/10/12 - EconLog by David Henderson

[edited]  The primary reason for the increased price of gasoline is the price of oil in the world market.

People are nervous about war with Iran, which would likely cut Iran's production. The world uses 90 MBD (million barrels per day) and prices are inelastic. Cutting supply by just 1 MBD (1.1%) would raise the market price by about 10%. Speculators anticipate this, bid up the future price, and the current price follows upward.

A price is "inelastic" when small changes in supply produce large changes in price. The world already conserves oil by applying it almost entirely to productive uses. Living patterns are established, and people must get to work, manufacture products, and have heat and hot water. It takes a large change in price to cause people to use less oil.

Higher US oil production would shift oil costs lower. Obama talks about US oil production as being an insignificant fraction of world production. He is correct that oil prices are determined mostly by world production, and incorrect that our production doesn't matter.

The US could easily produce 1% to 2% more of world production, which would lower prices by 10% to 20%. This competition at the current price would remove pricing power from big producers such as Saudi Arabia, Russia, and Iran. They would lower their expectations, set lower long term prices, and increase planned production.

Is 1% insignificant? Consider that 1% for a full-time worker is 2.5 days of additional paid vacation.

Oil Prices
04/07/08 - Economist Robert P. Murphy

[edited]  The demand for oil is unpredictable. This partially explains record-high oil prices.

The major oil companies in the 1980's and 90's underestimated the economic growth 25 years later in countries such as China and India. The necessary infrastructure was not in place to comfortably meet the increase in oil consumption. So, spare capacity margins have become extremely narrow, leading to price spikes.

The major oil companies are all owned by foreign governments. Exxon is a bit player in that world. Does it reassure you that our government has hindered US oil development for those 25 years? High oil and gasoline prices are a predictable result of government refusal to allow expanded US oil production.

Are Oil Speculators Bad or Good?
08/04/08 - Economist Robert P. Murphy

Many companies want to arrange for the delivery of oil to them in the future. This is agreeable to oil producers who want to "lock in" a sale today, to cover their expenses producing that oil for future delivery. The collection of these contracts is the Oil Futures Market. The public prices of these contracts allow anyone to estimate or guarantee what their oil will cost for some time into the future.

Every contract specifies actual delivery of the oil. "Speculators" are companies or people who buy or sell such contracts without having any means for either producing or receiving that oil. They expect to hold these contracts and sell them back into the market for a higher price at some time before they would have to take actual delivery (or produce the oil). If they are wrong, they must "unwind" their position at a loss.

[edited]  Have speculators "artificially" driven futures prices far above the level justified by fundamentals? We don't see indicators of this, neither higher futures prices nor large increases in stored oil inventories. Oil prices have been lower in the futures market for much of the run-up in prices, and commercial oil inventories in the United States have hovered in a stable range for a decade.   (Talk like a traderWhen the future price of oil is higher than the current "spot" price, the market is "in contango". When the future price is lower, the market is "in backwardation".).

Say that we knew that speculators were responsible for a huge increase in oil prices to $140 per barrel. Ironically, there would be a good case for saluting their behavior!

For example, people fear that Israel may bomb Iran, and Iran will cut off exports and mine the Strait of Hormuz to block tanker traffic. Spot oil prices (outside already arranged contracts) might then exceed $400 per barrel. People would then be grateful for large inventories that had accumulated because of the speculative increases in prices, and grateful for the conservation that $140 oil had enforced in the months before the war.

Free-market economists understand the beneficial role that prices play in smoothing out production and consumption. This role holds true for futures prices and the allocation of resources between present and future uses. True speculators ensure that futures prices are as accurate as possible, so futures prices coordinate production and use as effectively as possible.

People risking their own money have the highest incentive to apply their knowledge correctly. If you do not have knowledge about oil production, delivery, and demand, then you had better not buy or sell those contracts. If you do have fundamental knowledge, that market is the best mechanism for collecting your knowledge and paying you for sharing it, to all of our benefit.

The futures market of participants and speculators collects the best information about how to balance current and future supply, demand, risk, and reward.

1 comment :

StephUF said...

This blog is wonderful! Good stuff and so much fun!

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