Ready for $262/barrel oil?

yahoo ^ | 1-27-06

[LouAvul]

DAVOS, Switzerland (FORTUNE) - Be afraid. Be very afraid.

That's the message from two of the world's most successful investors on the topic of high oil prices. One of them, Hermitage Capital's Bill Browder, has outlined six scenarios that could take oil up to a downright terrifying $262 a barrel.

The other, billionaire investor George Soros, wouldn't make any specific predictions about prices. But as a legendary commodities player, it's worth paying heed to the words of the man who once took on the Bank of England -- and won. "I'm very worried about the supply-demand balance, which is very tight," Soros says.

"U.S. power and influence has declined precipitously because of Iraq and the war on terror and that creates an incentive for anyone who wants to make trouble to go ahead and make it." As an example, Soros pointed to the regime in Iran, which is heading towards a confrontation with the West over its nuclear power program and doesn't show any signs of compromising. "Iran is on a collision course and I have a difficulty seeing how such a collision can be avoided," he says.

Another emboldened troublemaker is Russian president Vladimir Putin, Soros said, citing Putin's recent decision to briefly shut the supply of natural gas to Ukraine. The only bit of optimism Soros could offer was that the next 12 months would be most dangerous in terms of any price shocks, because beginning in 2007 he predicts new oil supplies will come online.

[RightWhale]

That's what I do, and the wood stove when it gets significantly cold. But, that will work until the municipal power utility has to raise prices, which could happen.

[WoofDog123]

yeah there are a few posters who either are from panama or live there (or both) on the forum and all of them say pretty much the same thing about the panama canal/china thing.

I think the PRC's main interest in china was/is as a people-smiuggling destination, since apparently that is a fairly high-value export. THere is now a huge chinese community in panama, many of whom speak little spanish yet, complete with their own mafia.

[ichabod_65]

It is always encouraging to know that the Chinese are smuggling people into Central America. All this time I just thought that they made really good food.

But seriously, I did some work for some Chinese people (millionaires) here and when it came time to pay me they wanted to start the ole "you did inferior work" meme. After much trepidation trying to translate (they aren't fluent in English either) that my cell phone dialed 911 they got the idea.

[Sunnyflorida]

"And I think that was a mistake"

It may have been a mistake but it was Constitutional.

[fallujah-nuker]

If this is a war, why is there no draft, no civilian defense organizations? In fact, since we are fighting in the middle of all those oil producing countries, it is the utmost insanity not to have started gas rationing and other emergency energy conservation measures.

When I think of what the home front did in WW2 and compare it now it is pathetic. They planted victory gardens, bought war bonds and practiced "make do or do without." Today it goes about as far as slapping "Support our Troops" magnet on the car.

The WW2 generation had national will, the boomer generation (I'm one too) does not. The pathetic thing is how little the sacrifice need be to get results. A forty hour work week could be done in four tens rather than five eights, that would cut commuting mileage by 20% and actually give folks an extra day off. If we cut oil consumption by 2.5M bpd we've equaled Iran's oil exports.

[Sunnyflorida]

You are defacto privatizing the energy industry. You know that, of course. You are taxing the consumers of oil and building a synthetic oil industry with the proceeds. Make no mistake when you tax, you tax the consumer no matter where you attempt to apply it.

I forgot, are you taxing all imports or just ME imports. Look I live in Florida and the thought of sticking it to canadians is very appealing, but is that what you intend.

[fallujah-nuker]

Taxing all oil imports, we get a fraction of our imports from the Mideast but were the Persian Gulf shutdown a lot of oil flowing from to the US from other sources will be diverted elsewhere. At one time I would have been content with reliance upon the western hemisphere but Hugo Chavez changed my mind about that. My taxes are already going to support the Islamofascist oil industry, I'd rather they support domestic sources (Alberta tar sands are OK).

At some point when we have enough domestic supply on line we can start selling off the SPR, its only needed in the event of supply disruption from overseas. Another advantage is that the industry can be more dispersed so the next Katrina would not have such an effect.

Once it became obvious to the rest of the world that the US was going to lose interest in the Mideast in the third decade of this century other nations will probably plan accordingly. If the EU wants to takeover thats fine but I really doubt that they'd want to.

Once the Mideast oil is no longer required you can let a lot of cool things happen like a Sunni/Shi'ite version of the Thirty Years War.

[WOSG]

I'm not trying to be flippant about Kuwait's write-down of reserves, but changing numbers are unimportant if it has minor or no impact on actual production between now and 2040. Kuwait produces 2.5 million barrels a day or 912 million barrels a year. So an announcement of cutting a number from 100 to 50 billion barrels has accounting importance wrt to when Kuwait might 'run out' but doesnt change production projections for the next few decades, since their reserves/production ratios are so high to begin with.

In any case, Kuwait officials are denying the story entirely:

http://www.gulf-daily-news.com/Story.asp?Article=133228&Sn=BUSI&IssueID=28308


By way of analogy:

Iraq also has 100 years of proven reserves. For all we know the years of neglect may also leave them damaged... but the important thing for Iraq is not whether they have the 100 billion barrels of oil in reserves, but whether they will be pumping at 2 mbd or 4 mpbd in the coming decades.
At current production rates of 1.5 mpd, Iraqis have 300 years of reserves!!

Even if Iraq also cut their reserve numbers in half, at 4 mpd they wouldnt go through those reserves for 40 years.
The key question for Iraq, near to mid-term, therefore is what level of production can we expect.

[WOSG]

"For the record we should:

(i) drill ANWR offshore California, Florida Atlantic Coast other prospective domestic locations; (ii) build nukes; (iii) hold our noses and promote coal and where appropriate shale oil production; and (iv) finally and perhaps most importantly stop taking the word of bureaucrats [especially Arab bureaucrats] about oil supplies at face value."

I agree with all points.

I would just point out that there are many independent oil analysts who have issues with Simmons and peak oil, while also *not* taking OPEC etc. statements at face value.

Since this debate is devolving into assertions of authority, it is becoming pointless. All I can say is that energy and oil pessimists have been wrong every single time in the past, and their views have often been popular - yet wrong. Doom-n-gloom and predictions of the end of the world or end of history are popular in our culture: "We are in the Endtimes". Until the sun rises the next day. We really do have 3 trillion barrels left to drill out there, and I suspect the peak oilers wont be convinced until it is actually drilled and used.

[WOSG]

"If the US taxed oil prices would go up."

Price at pump goes up, BUT world price of oil goes DOWN, due to lower marginal demand.

" OPEC just does a cut off and world price goes up."

They can do that NOW ... in fact they DID that 2 years back and sparked the current ramp up in crude oil prices.

" The only way to stick it to the mulahs is to produce the marginal domestic barrel that breaks the back of the market."

Yes, and the way to do *that* is to have an oil import fee that discourages imports and supports domestic supply.

If this happens via say a $15/barrel oil import fee, it is quit possible that the impact would
a) lower US oil demand by about 5% or 1 mbd
b) incentivize about 500,000 in new US production (10% increase),
leading to ...
c) 1.5 mpd lower US demand on international oil markets,
leading to ...
d) loss of OPEC pricing power and collapse in global price of oil.

Tell us again why this oil import fee would be a bad thing, if it led to that result?

[WOSG]

" The break-even point for getting oil from tar sand is estimated around $30/bbl, oil shale is $40/bbl. Coal can be converted to gasoline as well. Why don't we see it happening more? Because for all of these, the big cost is up-front capital cost, and investors are not going to put up the money unless they are sure that oil prices will stay stably above $40/bbl. And we know that OPEC will crash the price of oil (bankrupting the operations) as soon as it sees investment occuring heavily.

So a variable tariff that sets a floor of $40/bbl would allow investors to predict a demand for oil substitutes at a price point that makes investment worthwhile"

Yes, that is my thinking as well. The floor makes sure the investment works.

This is classic protectionism, something I normally oppose, but I will make an exception when the foreign producers are oil dictatorships growing fat on our oil dependency.

[SauronOfMordor]

That's what I do, and the wood stove when it gets significantly cold. But, that will work until the municipal power utility has to raise prices, which could happen.

Here in PA, most power is nuke or coal, which isn't affected by higher oil prices. And the capacity is there -- we don't use as much power in the winter as we do in the summer air-conditioning season

[SunkenCiv]

"OPEC gets stronger if we raise prices of oil. the easiest way to do that is through taxes."

Wrong. It raises the price domestically, leading to a higher but stable price, and builds in a margin to make domestic production profitable. Increases in supply (and/or conservation technology, non-liquid sources of petroleum, and in some cases alt fuels) follow, leading to a downward spiral in prices.

Of course, the Chinese increase in demand will grow, and that will mitigate that.

It should be noted that the Chinese increase in demand will happen regardless of whether the US drives toward energy independence and energy surplus. Selling energy to Europe and China could happen, but if in the form of petroleum, it will be taxed on the way out the door. That is as it should be -- since we're a net consumer of petroleum, we have no business exporting it (apart from foreign policy, support for democracy).

[fallujah-nuker]

This is classic protectionism, something I normally oppose, but I will make an exception when the foreign producers are oil dictatorships growing fat on our oil dependency.

And besides OPEC is as much free market like Helen Thomas is a Hooters waitress.

[RightWhale]

I am just glad I don't live 50 miles from work. I know some who do, and they are getting kind of tense about pumping so much gasoline through their vehicles.

[R W Reactionairy]

"'m not trying to be flippant about Kuwait's write-down of reserves, but changing numbers are unimportant if it has minor or no impact on actual production between now and 2040."

To quote Simmons, "we will never run out of oil." Barring a comet impact [or some other doomsday event]; a miracle source of energy [cold fusion or may just plain old fusion] we will peak ... and we will peak with a peak in demand.

With all due respect, the absolute quantity of Kuwaiti reserves has an direct impact on the point in time when the decline [post peak] era begins. Until technology fully overcomes geology, this is an axiom of reservoir mechanics. When it stops being easy, it starts to become difficult.

For example, it is already "difficult" in the lower 48 onshore as well as a number of other places. This may represent the "undulating plateau" referred to by the optimists. I hope so. because the lower 48, through the application of the efforts of a bunch of diligent oilmen has more or less continuously declined but has not fallen through the floor. Would a bunch of Saudi "princes" and their bureaucrats do as well? For that matter, would XON really be interested in wells that when initially completed make thirty barrels a day?

The model for peak oil is that at some point production peaks and goes into irreversible decline. That peak corresponds with some percentage of the original recoverable oil in place [somewhere from a few percent for super heavy small reservoirs to 60 plus for highly productive light reservoirs with a natural water drive.]

This peak happens before the production winds up. If the Kuwaitis oil reserves are less than previously thought, the peak is sooner [or maybe now]. When you make assessments of when the peak is going to hit, dividing reserves by current production doesn't cut it. Demand will probably increase, and depletion curves come into play from the time a well is first completed.

Demand is growing. We do not need an absolute peak to have a problem. If demand grows faster than growth, at a minimum prices go up. Given relative inelasticity, prices go up a lot.

From what I have read in regard to Iraq, I am somewhat of optimist on that country's oil production. I think that given an environment of stability, because Iraq is both relatively under explored and has considerable reserves already identified, there is some room for production increases. Probably in the South and [central / western areas] less so in the North as that area is quite old as oil provinces go.

As to Kuwait denying the Petroleum Intelligence report: Did you expect otherwise [not surprisingly I didn't]?

Someone once told me that in the oil business you only really know what you have is when it is in the tank. They were right.

[R W Reactionairy]

"Since this debate is devolving into assertions of authority, it is becoming pointless. All I can say is that energy and oil pessimists have been wrong every single time in the past, and their views have often been popular - yet wrong. ... We really do have 3 trillion barrels left to drill out there, and I suspect the peak oilers wont be convinced until it is actually drilled and used."

And all I can say is that at some point the optimists have been wrong on each successive country / oil province. Witness the U.S. in the early seventies. If you had told most oilmen in 1970 that oil would reach $40 by the end of the decade and that production in the lower 48 would decline, they would have laughed.

Since this discussion has devolved into disputes over whose experts are right, I wish you would address the question I have repeatedly asked: Where is [or where do you believe] the extra two trillion barrels of undiscovered oil is lurking. Give me something to work with in terms of unexplored basins / structures or whatever [when you provide your answer remember that the IEA has already plugged in numbers for Arctic / Ultra Deep / Ultra Deep Water etc.]

[R W Reactionairy]

I wrote: "And all I can say is that at some point the optimists have been wrong on each successive country / oil province. Witness the U.S. in the early seventies."

To which I should have added the North Sea in the here and now, most modern technology period.

[Light Speed]

Badami [article excerpt from the net PDF]

Recent production success at Alpine, to the west of Prudhoe Bay, is balanced by a notable failure to the east, toward the Arctic Refuge. In June 2003, BP announced the shutdown of its Badami field, an outpost 25 miles east of the Prudhoe Bay complex and 30 miles west of the western edge of the Arctic Refuge.
When Badami entered production in 1998, it was expected to produce approximately 120 million barrels of oil at a peak rate of35,000 barrels per day. But by early 2003, Badami had produced a total of four million barrels and was pumping at a rate of 1,350 bpd when BP threw in the towel and shut Badami down.
BP said one of the problems was that the field was more highly compartmentalized than had been anticipated.
The Badami reservoir is located in a rock structure known to geologists as the Brookian Unstructured Eastern Turbidite Play.
This structure extends eastward, where it underlies an estimated 430,000 acres and accounts for approximately one-sixth of the technically recoverable oil that the U.S. Geological Survey (USGS) believes may lie beneath the Arctic Refuge Coastal Plain.
***********************************************

I worked on the front end of Badami for several years.
Infact...several Fabrication shops in Calgary went full tilt on Badami.
My Firm was NATCO group [Houston]

Aside from running the CNC Plasma underwater cut Gantry,...handled Metallurgy matrix specs allong with inspection.
Badami had rigorous demands which saw Consortium hover over details daily.
Paper trail that Lawyers would envy.

So ya...My Managers would wander out on the shop floor and throw cig butts down murmoring that Badami was FUBAR from start up.
when pressed for details...answers such as,
"Engineers and Geologists got it wrong
Flows not there....pipes could freeze
pumps are all wrong for whats occuring......they may walk away from it"

Badami was dead on arrival.

Having fabbed the front end for 2 decades plus on world oil/gas,.....you hear about the success's and the failures.
Watch consortiums ride the wave....and fall out with each other.
U.S. Federal legislation is also in the picture too.
Projects in planning for say Venezuela....go up in smoke after confrence call from U.S.

BP has several other nightmarish realities which make Badami seem as nothing.
The Russians jacked them big time.

From Tanker Insurance going from $125,000 to $400,000 a ship in Persian Gulf waters after the the French Tanker got blitzed in Yemeni waters to,
Massive amounts of money paid into foreign nations to work fields which are on line in 5 years on paper.....but are more likely a decade away.

All this makes for cooked books and investor non confidence.

There's plenty oil....but how much is low suphur and low contaminate is anyones guess.
To play with whats available...nations will need to break with protocals on refining.

Or stick with EPA and low suphur,.....and pay high at the pump.
Gov gets their cut anyway in taxes......strategic reserve first...then the populace.

This all gets muddled if a major war occurs in the mid east,....or Iran succeeds in arranging a trade cartel of world clients with those favored.....and those not so.
Some South American countres are leaning this direction.
China in the curtain folds smiling.

Its all a learning curve for Simmons.
Ground reality for upsetting the Saudi's.
Simmons missed his cues to leave the dance floor when Texas two step was playing.

The Saudi water injection process is phenominal in scope.
Should they ever lose their pumping capacity via say....terror/sabotage....or war.
The fields may be in jeopardy.
Like the Movie Dune.... Life is water.

The Saudi's may pull it off.....but if they don't...we knew ahead of time were the vulnerabilty's lay : )

[WoofDog123]

i read the PLA/PRC?whoever got 15k$ a head for getting a chinese to peru, so i assume that is similar to panama price. The primary function of their mafia there is collections for families who got more family brought over and are paying on time. Chinese must own (or at least run)90% of teh mini-supermarkets, laundries, low-end electronics and auto parts stores in the capital now.