$57 a barrel–Price spike or long-term hike?
The AP is quoting Venezuela’s oil minister as saying OPEC is approaching its oil production limit. OPEC production “limits” are often violated by OPEC members, but at this moment in time oil producers are pumping madly and the price continues to climb. While additional production capacity exists (500,000 barrels per day), as the AP story says, production is being stretched. Hence the current buzz word, “tight market.”
The AP’s lede:
The Organization of Petroleum Exporting Countries is running out of spare production capacity, Venezuelan Oil Minister Rafael Ramirez said Tuesday.
“OPEC’s production capacity is reaching its limit,” Ramirez told reporters, adding that it is too early for OPEC to decide on a possible half-million barrel per day production increase.Ramirez argued that geopolitical tension in the Middle East has contributed more to recent oil price rises than have any supply problems.
Oil prices opened at new record highs of above US$58 a barrel Monday, spurred by continuing worries about tight gasoline supplies in the United States.
Here’s a link to my thoughts a month ago on oil production– the post also discusses a price analysis I made last fall.
There’s a lot of interest in re-drilling or re-developing old oil fields in Texas and the rest of the continental US. Technology has improved immensely– both exploration and production technology. Continental US ol fields obviously avoid the Middle Eastern “geopolitical tension” the Venezuelan minister mentions. Oil field services (drilling and production support) are experiencing a renaissance in many West Texas and East Texas towns. A “mini-boom” is on, with Midland, Lufkin, et al benefiting. That being noted — this extended increase in oil prices, whether a spike or a long-term hike, is a warning. The US must move to develop alternative energy resources.
UPDATE: Interesting discussion in the comments– thanks. Actually, a number of old domestic oil fields have had second and third looks, and are being re-worked. Their actual production status? Don’t know. I hear about these projects anecdotally and read about them very occasionally in oil and gas reports in the Texas newspapers (though the Wall St Journal had a front-page article perhaps four months ago?).
The U. S. should adopt an oil import fee to assure a minimum price for imported petroleum that will increase every year at a constant rate above the actual rate of inflation. This would assure that we are not at a spike, but at the base of a gradual and constant ascent. After that, the market will take care of additional production and conservation. Otherwise, when all the production now being geared up comes on line and the Chinese have a recession, oil will crash in price and everyone will go back to their profligate ways.
Comment by Richard Heddleson — 4/5/2005 @ 1:43 pm
I can’t imagine a worse solution than implementing a guaranteed rising fee on imports (I’m guessing the only economist that would agree with you is Paul Krugman). It would most certainly not stop a spike from occuring either nor stop a crash later. All it would be is a tax that disproportionately impacts the poor. Part of the problem is there aren’t any new supplies being geared up, that’s part of why the price is so high. Government intervention always results in market dislocations, making any free market reaction worse than it need be.
Comment by Bunny Slippers — 4/5/2005 @ 4:23 pm
Thermal depolymerization could make a big dent in our oil needs and handle many waste disposal issues at the same time, and it’s easy to set up.
Comment by Yehudit — 4/5/2005 @ 4:24 pm
Yehudit–then go do it. If its a great idea, money will flow to it. In the mean time, those processes almost always use more energy than they produce (e.g.; ethanol which provides 80% of the energy it consumes and needs a $0.50/g tax to support it).
Comment by Bunny Slippers — 4/5/2005 @ 4:39 pm
Hmm, Thermal Depolymerization sites seem suspiciously quiet on the energy net gain/loss. On a side note, if it is as useful as it claims for industrial/sewage/agricultural cleanup it may be a net plus in some restricted cases even at a slight energy loss (although if at an energy loss it isn’t a solution to the oil/Nat gas shortage issues).
Comment by GekkoBear — 4/5/2005 @ 4:54 pm
Uh, Richard, that would just subsidize Chinese oil consumption.
Comment by AT — 4/5/2005 @ 4:56 pm
Import fees would not stop a spike, but they would stop crashes. It is easy to reduce the impact on the poor throug h EITC. New supplies do not get geared up because they are high cost. If potential producers were assurred there would be a minimum price floor, it would reduce the price volatility, increasing returns and stimulating investments and conservation. The only government intervention is to assure that the rise in price is less volatile, allowing both producers and consumers to use a longer time horizon in their energy decisions. This is the least intrusive, most market oriented government intervention possible. The alternative to government intervention is increased volatility as demand for oil from new consumers in China and India outstrips supply. Someone called Bunny Slippers is compaing people to Krugman? That’s rich.
Comment by Richard Heddleson — 4/5/2005 @ 4:58 pm
Thermal depolymerization supposedly has a yield of about 85% - 15% of the oil produced is consumed to fuel the process. The problems are that it costs a lot: $60 in the tiny pilot plant that produces 400 barrels a day, and the turkey waste they put in costs $20 a barrel. The production costs would presumably come down if full-scale facilities can be built. Note that this only increases carbon dioxide production, as do oil shale and oil sand extraction, since a significant fraction of the fuel produced must be burned to run the process.
Comment by AT — 4/5/2005 @ 5:03 pm
Bunny Slippers: A tax on imported oil or gas at the pump is quite reasonable and can be compensated for by tax cuts elsewhere. These could be directed towards the poor. One simple solution would be to make a per capita return of all additional fees. This would reqrd people who used less and allow others to pay more fully the costs of public transporation. Similarly ethanol has been producing more energy than it costs for a while, though the numbers are still far from delightful. It will be increasingly competitive if oil prices continue to spike. So you are twisting truth in all your comments. It puzzles me why alleged conservatives are unwilling to use market to limit demand. There is no doubt we have a problem, we use twice as much energy to produce a dollar of gnp as our competitors. If we regard our gnp as a product that means our energy margins rise twice as rapidly as theirs and with the dollar falling in relationship to their currencies the hit becomes heavier. This is simple algebra, you can’t escape with rhetoric. Add up other additional costs such as twice as big a percentage of gnp on health costs and we are facing burdens that must be met with old fashioned frugality. GM can’t continue to pay $1,500 per car in health costs and stay in business. Most conservatives ingnore this because they think any criticism is a plea for state medicine. It is becoming so because they propose no alternative. Similarly most conservatives oppose even the concept of conservation because it seems so Jimmy Carter and is associated with environmentalists. Still easily acted out choices could reduce demand (per unit of wealth) by at least 5% within a year with greater savings as fleets are replaced and other measures put in place. Incidently the talk about Texas wells and other domestic sources being reopened remains primarily talk. We have not seen the sort of booms that quickly followed previous ol price surges, nor do we see massive new exploration elsewhere, oil companies have so far tended to increase supply by acquisition. Now this could change, but don’t assume it will because your theory says it must. Look at the real world numbers, don’t live in an imaginery world.
Comment by geek — 4/5/2005 @ 5:13 pm
In the short term the only way out of the problem is drilling in areas currently off limits. In the medium turn the answer is nukes, lots of nuclear power plants that can supply the energy to make these other fuels without adding more pollution than we already have. At the current state of the art hydrogen power is a net loss. It takes a little more energy to make and transport hydrogen than is contained in the fuel itself. Only nukes can make this practical. Same with electric cars. We solved the problem of cities being full of disease because of the horsecrap filling the streets, we’ll solve this if the idiot environmentalist get out of the way, or are run over. The hard part will be solving the problem without massive economic dislocation.
Comment by Peter — 4/5/2005 @ 5:30 pm
What about thermal energy convection towers, developed by Technion in Israel, which uses the difference between air temperatures at different altitudes to drive turbines?
Comment by Josh — 4/5/2005 @ 5:36 pm
The Guardian (http://www.guardian.co.uk/life/science/story/0,12996,1451582,00.html) claims US is going after methane hydrate deposits. “The ship will hunt for methane hydrates, a weird combination of gas and water produced in the crushing pressures deep within the earth - literally, ice that burns. “The stakes could not be higher: scientists reckon there could be more valuable carbon fuel stored in the vast methane hydrate deposits scattered under the world’s seabed and Arctic permafrost than in all of the known reserves of coal, oil and gas put together.” Any idea what the cost of production would be? The Guuardian story is laced with global warming junk science warnings, but the potential looks intereresting. I am not familar with the substance and have know idea whether the concept is also junk science or science fiction.
Comment by Merv Benson — 4/5/2005 @ 6:01 pm
Apparently the DOE is pretty serious about methane hydrate research (http://www.netl.doe.gov/scngo/Natural%20Gas/hydrates/index.html). Looks pretty interesting.
Comment by Merv Benson — 4/5/2005 @ 6:07 pm
Geek - when conservation comes in an attractive enough package, higher energy prives will drive the demand for it. Then, conservatives will support conservation. Until then, while conservation measures require changes in lifestyle that Americans aren’t willing to make for a given price per gallon or kilowatt, conservation will remain the realm of liberals. I favor letting the markets sort these things out. It may be early to see much activity in Texas, but don’t you think that will come as it becomes obvious that expensive oil is here to stay?
Comment by Waffle King — 4/5/2005 @ 6:08 pm
TDP(thermal depolymerization) does NOT inccrease atmospheric carbon. The gas used to fire the feedstock comes directly from the feedstock.(in this case turkey guts) Yes, the carbon from the TDP process and it products will enter the atmoshere via combustion. However, that carbon would enter the atmospehere anyway. The carbon in the turkey offal would otherwise be respired into the atmosphere by micro-organisms through resperation. Tar sands and oil shales are fossil fuels - the carbon locked in these resources would not enter the atmosphere if they were not burned……the carbon in the turkey offal would enter the atmosphere normally through biological processes…TDP just harnesses about 85% of that energy for our use…the overall process is carbon nuetral. Unfortunately, the company behind this process is having trouble….its costing them $80/bbl to produce currently. for various reasons. Changing World Technologies is looking to open its next plants in Europe where there is a more favorable climate for their business. Back on topic, energy independence IS a national security issue. Check out some of the names behind this group….not exactly bleeding heart liberals. http://www.SetAmericaFree.org
Comment by Dazik — 4/5/2005 @ 6:47 pm
The point about alternative hydrocarbon technologies like TDp that noone has addressed is that the high cost of production is not the issue, it is whether we would pay $80/b for oil that is Mideast free, so to speak. There is no net change in carbon as the turkeys or landfills or whatever have already taken carbon out to be alive and would give it back as rotting flesh. The gain comes in reclaiming a material that would otherwise = 0, and the problem is that people are not willing to pay for it right now. Fact of government, you get less of anything you tax… If you tax labor, e.g. income tax, you drive people into investment, if you tax gas, people will use less… I am extremely conservative and a high gas tax could offset an income tax cut, generate the offset revenue, and hark, help the environment and geopolitical stability. Which if we remember, was the real stewardship of the Republican party. Smoking has trended down in direct proportion to taxes on cigarettes, and no single other variable has had any appreciable effect on smoking rates. (Time notwithstanding).
Comment by Anony — 4/5/2005 @ 7:13 pm
Dazik: Huh, yeah, I guess you’re right, except for some timing differences that are probably insignificant. I am starting to get nervous about atmospheric C02 levels. Not as nervous as variations in solar luminosity or being 65 million years into a 62 million year fossil diversity cycle, but still nervous.
Comment by AT — 4/5/2005 @ 9:08 pm
http://www.hubbertpeak.com
Comment by puredata — 4/5/2005 @ 10:12 pm
This issues has been examined for some time. http://www.hubbertpeak.com/hubbert/ I expect that the oil price rise will take the wind out of the Chinese economy.
Comment by puredata — 4/5/2005 @ 10:17 pm
I think something that can be done rather quickly and easily is requiring 100% of the oil pumped in the US to stay in the US. I’m not sure of the exact numbers, but even a 1 million extra barrels annually will help. This article says that alot more then that is sold overseas. I know this is an article from Reuters but it has to have some grain of truth in it….. http://channels.netscape.com/ns/news/story.jsp?id=2005040512350002903521&dt=20050405123500&w=RTR&coview= I’m all for opening ANWAR but not to then turn around and sell the oil to Japan or China. Which leads to another point, the lack of new refineries here in the US. Something needs to be done about that. I think the best solution for getting rid of dependence on oil is to actually consume it enough that at some point it runs out and the market is forced to change. My last point about oil is that, what would happen to nations in the Middle East if st some point the economies die because of lack of oil sales? I’m not suggesting that the governments of most of the Middle Eastern countries with oil are benelevont (something I think Iraq should do btw, cut checks for citizens as Alaska does). But if (hopefully) these countries become more democratic or even stay under the regimes like the ones currently, wrecking of their economies by lack of oil sales can only help the propaganda of the Nationalist/Whabbi types. No matter what, eventually that is going to happen, I guess that makes it even more imperative to get those governments in the ME working better for their people sooner, rather then later.
Comment by MKL — 4/5/2005 @ 11:40 pm
I have never seen a lot of merit in discussing pie in the sky future technologies that will never adequately supply our energy needs. What I view as most likely is a building boom in nuclear power plants to supply electricity. For vehicles, I do not see the demise of the internal combustion enginge for quite some time. Lets face it, people love their cars and that is not going to change. For new petroleum supplies, I think the Tar Sands in Alberta will continue to be developed to the point where they became our main source of supply. One of the tougher obstacles that oil companies have had to face in the development of Athabasca is the need for massive amounts of natural gas, which is consumed during the production process from oil sands to synthetic oil. This is where I think methane hydrates are going to come into play. Supposedly, there are more methane hydrocarbons locked into hydrate deposits than have been consumed in all of human history. Much of it is deposited in the artic tundra (where few people live). Would this not provide an abundant, compact, nearby fuel source in the production of pertroleum from oil sands? From what I have heard, there is more oil in Alberta than there ever was in Saudi Arabia. The only reason we have not exlpoited it so far is that extraction costs have always been so much lower in Saudi. That benefit does not exist in the current market.
Comment by Steven — 4/6/2005 @ 4:41 am
“It puzzles me why alleged conservatives are unwilling to use market to limit demand” Hmmmm. Import fees, higher taxes. That should be all the answer you need. Conservatives are all for using market mechanisms but not when the higher prices come about through government taxes and fees.
Comment by Johnny L — 4/6/2005 @ 7:20 am
Mr. Heddleson, obviously given that you use your name, you must be a serious, knowledgeable person. Why then did Alan Greenspan’s comments yesterday at the National Petrochemical and Refiners Conference in San Antonio directly contradict your thesis? Or is he not serious enough for you? Did you know he even spoke about oil and gas prices yesterday? The Natural Gas Policy Act of 1978 (which locked in very high natural gas prices) and windfall profits taxes on oil did more damage to this country’s energy balance than can be imagined and yet we have more economic Luddites now wishing for the same. The level of economic understanding in this country is so pitifully low that Johnny L doesn’t understand that a tax isn’t a market mechanism. Johnny, the tax doesn’t got to the market, it goes to government, so true pricing signals aren’t given. Capice? As for alternative energy supplies, its already been said so I won’t repeat that they can never meet our needs. However, I am always amazed at the noise surrounding them, but the lack of investment in them. For those of you promoting varied alternatives, great, but put your money where your mouth is, shut up, and go do it. P.S. I stand by my statement that ethanol is inefficient, a poor product compared to MTBE, and needs a huge subsidy to make it economic. What a joke!
Comment by Bunny Slippers — 4/6/2005 @ 12:34 pm
I don’t understand the focus on Thermal Polymerization turkey guts silliness. There’s are real technologies, already being implemented on a large scale, that promise much cheaper synthetic fuels. I’m speaking of Fischer-Tropsch synthesis, which has been done on an industrial scale since the 1940s, has a long track record in South Africa, and is currently being implemented on a massive scale in Qatar using that country’s vast fields of cheap natural gas as the feedstock (this facility is one of the largest investments Exxon-Mobil has ever made.) Fischer-Tropsch synthesis becomes economical when oil exceeds $25/barrel. It can produce a synthetic diesel fuel that is much less polluting (lower soot, hydrocarbon, NOx and CO, and much much lower SOx) than ordinary petroleum-derived diesel fuel. Fischer-Tropsch can be fed with natural gas, coal, biomass, or any organic waste that can be gasified into syngas. FT is one of the reasons why current oil prices are unsustainable. And I think OPEC must be worried that unless they can get prices down, so much experience will be gained with synfuels that petroleum will be permanently displaced.
Comment by Paul Dietz — 4/6/2005 @ 1:50 pm
Gas-to-liquids technology is now economic and will be used to produce ultra-low diesel as Europe and then the U.S. get the sulfur out. But it takes billions and billions of $$ of investment for GTL to even begin to matter in the overall scheme of things. Compare this to the trillions invested in oil production and refining. GTL is a small part of the answer, but not even close to being a threat to the existing heirarchy.
Comment by Bunny Slippers — 4/6/2005 @ 1:56 pm
OOps, meant to say ultra low sulfur diesel.
Comment by Bunny Slippers — 4/6/2005 @ 2:02 pm
TDP was brought up as an example of an alternative fuel. It is nowhere close to being ready for prime time a viable energy solution. The TDP can process about anything carbon based into oil, not just turkey guts. The reason you hear about turkey guts is the first TDP plant that opened last year utilizes turkey guts. Manuer, tires, ect. can be used as a feedstock if the plant is set up for it. The tech is still in its infancy however. The first(and so far only) TDP plant that opened last lear has had a lot of trouble. There was a bunch of shotty construction when the plant was built, so they had to go back and spend lots of money getting their facility up to spec. Also, the surrounding community in Carthage Missouri has been firing off complaint after complaint because, according to the residents, it stinks up the whole area to high heaven. If this weren’t bad enough, their feedstock is costing them a lot of money. CWT was counting on laws being passed forbidding the the practice of grinding up animal carcasses and incorperating them back into the feed after the mad cow scares. However, in the US, the only thing outlawed was the reprocessing of the effected cattle parts(brain/spinal cord) back into cattle feed. In Europe, the practice was banned outright. That is why Europe will probably see the next TDP plants built there. For now, TDP is not an energy solution. However, it does have a lot of potential as a way to get rid of waste currently being pumped into landfills and such. That is where the future of TDP lies. Nothing can replace oil right now, but that doesn’t mean we should just sit back resigned to the fact we have no alternative getting a good portion of our energy from that wretched sand pit. Conservation is a good start.
Comment by Dazik — 4/6/2005 @ 3:36 pm
#27. You haven’t the slightest idea of what you’re talking about, do you? Why bother to learn about the process in question when it obviously can’t work? You are such a paragon of inquiry.
Comment by Alan Kellogg — 4/6/2005 @ 4:48 pm
Alan (#31): I don’t see major energy players investing billions of dollars in thermal depolymerization. I *do* see them investing billions of dollars in Fischer-Tropsch. Now, do you think they are all idiots, or do you think that, just maybe, they know what they’re doing with their money? But, hey, there was an article in Discover magazine, so TDP must be a panacea, right?
Comment by Paul Dietz — 4/7/2005 @ 6:41 am
I agree with Paul Deitz on this. The history of engineering shows that it takes a long time, usually decades, to develop a technology to commercial and technical maturity. A key component of that maturity is an engineering infrastructure; a wide base of engineers experienced in designing and operating the technology. The FT process was invented in 1923 and has the huge advantages of both 80 years continuous R&D and large scale commercial operation over the thermal depolymerisation process. There is already a cumulative investment of many billions in FT plants. The Sasol 2 and 3 projects were worth about $4 billion in 1979 dollars. They would cost something like $12 billion to build today. And plants worth billions more being engineered for construction in Qatar during the next few years. TDP is an attractive technology that does appear to offer great potential. But so far that’s all it does. It still needs to prove itself technically and commercially. And it won’t get the billions until it does.
Comment by Michael Mac Guinness — 4/7/2005 @ 9:27 am
You’re *all* missing the boat. On the supply side Name an energy solution and I predict that it will be pressed into service. We’re going to be moving to a heterogeneous energy source situation because there isn’t enough out there in any single source to meet future demand (see below re India & the PRC). Conflicts between energy ideas presuppose that there will be one replacement of ME petroleum as petroleum was the one replacement for whale oil lamps. That is not a priori proven and few even realize that it is something that must be proven. What’s really needed is some sort of middleware that transports relatively easily, can be stored relatively easily, and just about any other energy source can be easily translated into it. That’s where hydrogen comes in. Just about anything can be translated into available hydrogen and you’re never going to actually run out of the stuff. On the demand side 2.3 billion people in the PRC and India are starting to seriously crank up their earnings and their thirst for energy in order to acquire the 1st world lifestyle they’re starting to afford. As far as I can tell the demand numbers are scary and will remain scary for decades as these two giants rise to 1st world status. Any analysis that this is just a spike has to provide an explanation why indians and chinese are unlike everybody else and won’t seriously put demand pressure on all energy sources including oil prices. The good news on the demand side is that hydrogen can be used in fuel cells instead of internal combustion engines (ICE). Fuel cells are not limited by the same physical laws that ICE is because they are not Carnot heat engines. At reasonable temperatures (what you find under the hood of your present vehicle) Carnot Heat engines *can’t* get above 30% efficiency while fuel cells can get up to 80% efficiency. In price, power density, cold weather startup, and other measures, the USG has set up some goals to achieve a fuel cell vehicle power system that would allow a practical power system at about the same price as current ICE engines without subsidy. Ballard Power Systems has, in the past month, produced a public commitment that it can meet those goals in the form of a technology road map.
Comment by TM Lutas — 4/7/2005 @ 4:12 pm
We could use nuclear power to generate electricity then gasify our coal reserves untill a reasonable alternative to the internal cumbustion engine is developed.
Comment by John R — 4/8/2005 @ 12:09 pm
There’s a fascinating article, ‘Is ‘Peak Oil’ A Scam? Oil Fields Are Re-Filling Naturally And Rapidly’, on the ‘Current News You Need To Know’ page at SurvivalistSkills.Com. Makes for interesting reading!
Comment by Jamie Buckingham — 5/6/2005 @ 3:17 pm
There’s a fascinating article, ‘Is ‘Peak Oil’ A Scam? Oil Fields Are Re-Filling Naturally And Rapidly’, on the ‘Current News You Need To Know’ page at SurvivalistSkills.Com. Makes for interesting reading!
Comment by Jamie Buckingham — 5/8/2005 @ 11:51 am