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Re: [Pen-l] Re: Peak oil

> Has investment in unconventional oil sources - oilsands and shale oil - increased over this period?

Julio Huato:
"I don't know those details, but I cannot help but think that
capitalists do respond to the profit incentive."

I think that's a given.  But how will they respond?  Their response will be far more complex than simply increasing productive capacity.  If they are increasing productive capacity at a faster rate with the increase in prices then perhaps it indicates that they feel the global production peak in conventional oil is nigh.  If their response is other than that - lobbying to prevent increased royalties, marketing overdrive to slow down growing consumer resentment, etc. - then they may recognize the price increase as a bubble that should be milked while it lasts.  If a bubble encourages excessively quick investment in production of unconventional sources then they'll undermine future profits when the bubble bursts.

Julio Huato <juliohuato@xxxxxxxxx> wrote:
troy cochrane wrote:

> Has investment in unconventional oil sources - oilsands and shale oil - increased over this period?

I don't know those details, but I cannot help but think that
capitalists do respond to the profit incentive.


When a journalist writes that...

> Higher prices have done little to suppress global demand or attract new production, and the
> resulting mismatch has sent oil prices ever higher."

... my intuition tells me that, perhaps, that's a bit too careless.
Even NYT journalists can write stupid things (often). It goes against
what seems kind of obvious to me.

First off, investment is the most volatile component in the net output
of an industry. So, to see where an industry or market is going, you
need to look at investment over longer periods of time or capacity
levels (stocks rather than annual flows). I also understand that
although in the long run (if we're not all dead) supply and demand in
virtually any market will be elastic, in the short run both global
energy supply and demand may be highly inelastic. That makes sense to
me. Much in the production and consumption of energy is dependent on
specific technologies, i.e. there are huge sunk costs that cheapen the
production/consumption status quo compared to the alternative. Fair
enough.

Leave aside for the moment the huge superstructure of derivatives
built upon oil. All those financial assets are, well, financial
assets. They behave as such. But leave them aside for now. Think of
the underlying alone (oil). Crude oil is a commodity that markets
treat (trade) as an asset -- i.e. as a store of value. Oil storage
costs are not negligible, but largely you may store it by simply not
extracting it. Oil is not perishable. That means that the primary
owner can just sit and wait if the price is expected to go up and pump
it out as quickly as possible if otherwise. That's aside from
oligopoly quotas, etc. Just plain trying to take advantage of
momentum. Because asset prices are understandably volatile and are
time-serially correlated. Everything that affects the discount rates
(change in base interest rates, changes in liquidity preference,
change in perceived risk, inflation shifts, currency depreciation, you
name it) will buffet those prices. Now add the derivative markets.
Futures prices are an element in the present value of oil. Even if
you don't believe that futures prices are unbiased estimators of the
future (note the singular here) prices of oil, that doesn't mean that
people will ignore them. That's true under certain conditions, but
those conditions are not very realistic. Anyway, conclusion: Oil
bubbles are to be expected. As are panics and long periods of
"irrationally" depressed prices.

That's just logic. Now, these are not things to just speculate about.
One needs to measure them. Measuring them though is tricky. It
requires expertise that I lack. So I defer to the experts. For what
I know, the DOE publishes short-term outlooks of the energy markets
that tend to be in the ballpark. The people that put together those
reports are perhaps among the most knowledgeable in the field and they
tend to be rather careful. Their diagnosis of the current state of
oil markets (latest report released on 4/8/2008) doesn't suggest to me
anything like peak oil:

> The global oil market remains fundamentally
> tight entering the second quarter, despite
> a slowdown in U.S. oil consumption and growing
> risks to global economic growth. *The
> combination of rising world oil consumption
> and low surplus production capacity is putting
> upward pressure on oil prices.* *The flow of
> investment money into commodities has
> contributed to crude oil price volatility.*
> Inventories are improving in the Organization
> for Economic Cooperation and Development (OECD)
> countries, but given the lack of surplus
> capacity and geopolitical concerns in Nigeria,
> Venezuela, and Iraq, a higher level of
> commercial inventories is desirable. The
> magnitude, breadth, and duration of any global
> economic slowdown will certainly influence
> market conditions over the near term. The
> increase in non-Organization of the Petroleum
> Exporting Countries (OPEC) production in the
> second half of the year, however, is expected
> to contribute to increases in OPEC surplus
> crude oil production capacity and ease upward
> price pressures toward the end of the year

Now, let's lay out some basic facts to get a sense of where things may
go. Currently, the U.S. produces 10% of the world oil output.
(Canada a bit less than 4%, Mexico a bit more than 4%.) According to
the DOE, the U.S. is expected to increase its output by 3.3% in the
coming year and much more in 2010. (Canada will expand output faster
and Mexico, well, is expected to have a lower output because the gov't
has run down reserves and capacity to starve the beast and justify the
privatization of PEMEX. That's the main political fight right now in
Mexico.)

Due to the geopolitical situation in the Gulf region and Latin America
(e.g. Iraq mess, quotas, etc.), OPEC -- which produces 42% of global
oil output -- is expected to keep its levels about flat. The countries
formerly known as the Soviet Union that produce already 15%+ of global
oil output will expand much faster. So will China's output, which
already is more than Mexico's. Aside from Mexico, of the relatively
big producers, the North Sea countries (mainly Norway and the UK),
which altogether produce over 5% of global output, are the only ones
with an expected decline in absolute output in the near future.

In consumption, the U.S. takes almost 1/4, Europe 18%, and Asia almost
20% (China 9% of that). In the U.S., consumption is expected to
decline or be flat in the next 2 years. Canada flat. Europe flat.
Only China and other relatively decoupled economies rich in natural
resources will keep pulling demand up. For how long? The prices of
oil and other commodities will be a key factor, as will the global
macroeconomy.

Finally, anecdotal evidence suggests to me that there's been a recent
wave of massive investment in oil prospecting and extraction.
Refining has lagged, perhaps. For example, rather recently Brazil
found large reserves of oil in the deep waters of its continental
platform. How did they find that oil without investment? Another
example: Venezuela, which is as disciplined an OPEC quota hawk as
there is, has been trying to have its dense Orinoco oil reserves duly
recognized and it's also been inviting foreign investment to extract
and process it. I imagine there's some investment going on there.
Finally, check the existing figures on FDI into the U.S. oil industry.
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