Sunday, February 22, 2015

What is Saudi Arabia not telling us about its oil future?

It is popular these days to speculate about why Saudi Arabia cajoled its OPEC allies into maintaining oil production in the face of flagging world demand. As the price the world pays for oil and oil products has plummeted, the price OPEC members are paying in terms of lower revenues is high, even unbearable for those who didn't save up for just such a rainy day.

Was the real reason for the decision to maintain production the desire to undermine rising U.S. tight oil production--which has now proven embarrassingly vulnerable to low prices after years of triumphalist talk from the industry about America's "energy renaissance"? Were the Saudis also thinking of crippling Canada's high-cost tar sands production? Was it Sunni Saudi Arabia's wish to undermine its chief adversary in the region, Shiite Iran? Was the Saudi kingdom doing Washington's bidding by weakening Russia, a country that relies so heavily on its oil export revenue?

The Saudis say explicitly that they believe non-OPEC producers must now balance world oil supply by cutting back production rather than relying on OPEC--meaning mostly Saudi Arabia--to do so. And, those cutbacks in the form of drastically reduced investment are already taking place in the United States, Canada and around the world as low prices are forcing drillers to scale back their drilling plans dramatically. It is not well understood, however, that almost all of the growth in world oil production since 2005 has come from high-cost deposits in the United States and Canada which has made the two countries easy and tempting targets for the Saudis' low-price strategy.

Recently, investment manager Jeremy Grantham opined in Barron's that Saudi Arabia has probably made the wrong decision. He explains as follows:

[T]he Saudis could probably have absorbed all U.S. fracking increases in output (from today’s four million barrels a day to seven or eight) and never have been worse off than producing half of their current production for twice the current price … not a bad deal. Only if U.S. fracking reserves are cheaper to produce and much larger than generally thought would the Saudis be right. It is a possibility, but I believe it is not probable.

First of all, he vastly overestimates the ability of the United States to increase its RATE of production, though he correctly assesses the production cost and longevity (or lack thereof) of U.S. tight oil reserves. Even the ever-optimistic U.S. Energy Information Administration believes that U.S. oil production will plateau in 2019 (not far above where it is now) and start to decline after 2020.

But, my concern is with Grantham's assertion that the Saudis could have let U.S. drillers simply drill away while OPEC countries--meaning again, mostly Saudi Arabia--reduce their production without being worse off financially than they are now. U.S. tight oil production would presumably play itself out by 2020 or so and then start to decline allowing OPEC to recapture market share and raise prices again.

But there is one possibility which Grantham is blind to, one mentioned to me by a friend. It's a big what-if. But then pretty much everything is a what-if when it comes to the secretive Saudis.

What if the Saudis are acting now to undermine U.S. and Canadian oil production because they realize that Saudi production will soon reach a peak, level out for several years and then start to decline in no more than, say, a decade? What if the Saudis fear that energy efficiency, fuel substitution (say, toward natural gas), and mandated greenhouse gas emission reductions will inevitably diminish their oil revenues beyond the next decade? What if this coming decade will therefore be the best time to maximize Saudi revenues per barrel? It would then make sense for the Saudis to cripple North American production now with, say, a year of low prices which should be enough to make investors skittish for many years thereafter. Then, the Saudis can capitalize on higher prices during the next nine years as the kingdom experiences its peak flows and before energy use reduction strategies threaten oil revenues.

(This assumes that they are right about the reluctance of investors to return to the tight oil fields and tar sands after having been walloped by the current low prices, something that would slow or prevent further growth in U.S. and Canadian oil production. If investment returns readily with any price increase, it is possible we could see wildly fluctuating prices due to short boom/bust cycles in the U.S. and Canadian oil industry, something I regard as possible but unlikely. This is because I expect many if not most of the current tight oil leases to pass into the hands of the major international oil companies as a result of bankruptcies of and distressed sales by the independent tight oil players in the coming year to 18 months. Those majors will take a more measured and patient approach to the development of those leases.)

Now, of course, no one knows what the Saudis know about their own oil reserves or anticipated flow rates. Saudi Aramco, the Saudi national oil company which controls all oil development and production in the country, is 100 percent owned by the government and therefore is not obliged to release information to the public nor submit to an outside independent audit. But the Saudis have already publicly stated that the world cannot count on them for more than 12.5 million barrels per day (mbpd). The country currently pumps about 9.7 mbpd of which it exports about 6.9 mbpd.

If the Saudis are acting now to cripple U.S. and Canadian production for the reasons my friend suggests, it means world oil supplies are going to be much more problematic after 2020 than many people suppose. It implies that at some point in the next 10 years OPEC will cease to be able (rather than cease to be willing) to balance world oil supplies. And, it suggests that no one else will be ready to act in that role when the time comes.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, February 15, 2015

William Catton's warning

William Catton Jr., author of the seminal volume about our human destiny, Overshoot: The Ecological Basis of Revolutionary Change, died last month at age 88.

Catton believed that industrial civilization has sown the seeds of its own demise and that humanity's seeming dominance of the biosphere is only a prelude to decline. His work foreshadowed later works such as Joseph Tainter's The Collapse of Complex Societies, Richard Heinberg's The Party's Over: Oil, War and the Fate of Industrial Societies, and Jared Diamond's Collapse: How Societies Choose to Fail or Survive.

In Overshoot Catton wrote: "We must learn to relate personally to what may be called 'the ecological facts of life.' We must see that those facts are affecting our lives far more importantly and permanently than the events that make the headlines."

He published those words in 1980, and now, it seems, at least some of those facts have made their way into the headlines in the form of climate change, soil erosion, fisheries collapse, species extinction, constrained supplies of energy and other critical resources, and myriad other problems that are now all too obvious.

But, even today, few people see the world as Catton did. Few realize how serious these problems are and how their consequences are unfolding right before us. Few understand what he called "the tragic story of human success," tragic because that success as it is currently defined cannot be maintained and must necessarily unwind into decline owing to the laws of physics and the realities of biology. We can adjust to these realities or they will adjust us to them.

Perhaps the single keenest insight Catton had is that humans have become detritovores, organisms that live off the dead remains of other organisms. By this he meant the human dependence on fossil fuels which are the ancient dead remains of organisms transformed into oil, natural gas and coal.

It is the fate of detritovore populations to expand and contract with their supply of detritus. He likened modern humans to algae feeding on the rich surplus of nutrients from dead organic matter swept into a pond by spring rains and often multiplying so as to cover the entire pond with a green carpet. By summer, with the rush of spring nutrients depleted--nutrients which are like the one-time infusion of fossil fuels into human society--the algae population crashes, leaving mostly open water and sometimes just an uneven ribbon along the edge of the pond. It is a boom-bust population cycle well-known to biologists.

In 1980 it seemed as if this cycle might be mitigated by wise policy and serious, but achievable adjustments in the human way of life. By 2009 when Catton published his other book, Bottleneck: Humanity's Impending Impasse, he felt that the time for major mitigation of the inevitable bust portion of the population cycle had passed.

So, why even write another book? Catton explained in the last paragraph of Bottleneck:

I hope by the time [my great-grandsons] become great-grandfathers themselves, their generation will be so conspicuously more enlightened than mine was and our forebears were that the world population of bottleneck survivors will have evolved social systems better able to be circumspect in the use of their planet and its vulnerable biosphere. If readers of this book come to share similar hopes, and contribute to instilling them in their descendants, my reasons for writing will have been justified.

This is a humble ambition compared to the cautious hope that flowed from Overshoot in 1980. And, it is important to note Catton's emphasis on social systems for he was trained as a sociologist. He believed that despite our considerable technical prowess, our social system simply cannot contemplate making the drastic changes necessary to mitigate the downslope.

Perhaps the most important thing to note about Catton is that he did not blame anyone for the human predicament. To him that predicament is the natural outcome of evolutionary processes and the powers given to humans through those processes. That predicament is no more a product of conscious thought and intention than is the beating of our own hearts.

When I met and chatted with him for the one and only time in 2006, he was mildly jocular in the same way that his writing is, and he was upbeat in his attitude toward daily life, however disturbing the future may seem.

That was probably the product of a life spent in deep and patient study of the world around him, a world that yielded some of its most hidden and important secrets to him. And, he had the satisfaction of having published those secrets so that they would not be secrets any more.

Overshoot may stand as the central text of the 20th century about the ecological fate of humankind. The book represents a missed opportunity in that so few people were able to hear what Catton had to say in 1980, and so few want to hear it now--even as the headlines are filled with the very precursors of the bottleneck he laments in his last major piece of writing.

(To see my review of Bottleneck, click here.)

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, February 08, 2015

Alternate opinions: The world's energy information duopoly comes to an end

Recent developments are beginning to undermine the supremacy of the world's long-running energy information duopoly and its perennially optimistic narrative. Policymakers, investors and the public should take heed.

Until now most energy price and supply forecasts and analyses were based predominately on information from the globe's two leading energy information agencies: the U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy, and the International Energy Agency (IEA), a consortium of 29 countries originally formed in response to the 1973-74 Arab oil embargo to provide better information on world energy supplies to its members.

Both agencies provide forecasts that are publicly available and widely covered in the media. What's not apparent is how dependent private forecasts issued by the energy industry and financial firms are on the work done by these agencies.

These agencies are able to bring to bear substantial financial resources and large dedicated staffs of statisticians, economists and other specialists focused solely on gathering and analyzing energy data across the world. Few organizations--except perhaps the major international oil companies--are able to muster such resources to monitor world energy. And, the major international oil companies make little of their analysis public. For policymakers and the public, the EIA and IEA have been the go-to sources for presumed-to-be objective energy information.

What's changed is the willingness of private donors to fund independent energy supply research on a scale not previously undertaken outside of government and industry control. The implication is that the world needs more diversity than the two current institutional opinions and the cryptic, self-serving pronouncements of the industry.

Two recent studies illustrate the point. And, they're not good news for the oil and gas industry. First, there is the study by the Bureau of Economic Geology (BEG) at the University of Texas at Austin. On the surface the bureau may seem too embedded in the heart of oil country. But, the money for its recent study on the future of U.S. shale natural gas came from the Alfred P. Sloan Foundation and NOT from the industry. The whole purpose has been to provide an independent, unbiased assessment of the future of shale natural gas in the United States.

The conclusions of that research--which I mentioned in a previous piece--are far more pessimistic about the future of U.S. shale gas than either the EIA or the industry. Those conclusions became an embarrassment for the EIA when the difference came to light in a recent article in the science journal Nature.

The second example is a study entitled "Drilling Deeper: A Reality Check on U.S. Government Forecasts for a Lasting Tight Oil & Shale Gas Boom" published by the Post Carbon Institute. (Full disclosure: I worked as a paid consultant to publicize this report. But, the fact that the funders provided money specifically for this purpose means they are serious not only about the research, but also about getting this alternative view out to the public and policymakers.)

"Drilling Deeper" aligns quite well with the findings of the BEG on U.S. shale natural gas. But, it goes beyond gas to analyze the future of U.S. tight oil derived from deep shale deposits. In doing so "Drilling Deeper" not only utilizes EIA data, but also data from one of the leading data providers to the oil and gas industry, Drillinginfo. That information costs money, and funders are now willing to provide that money.

All of this has put the EIA on the defensive. The Paris-based IEA, however, has not been directly challenged yet since the two studies mentioned above focus on U.S. oil and natural gas. Still, the growth in worldwide oil production since 2005 has been due almost completely to rising production in two countries: the United States and Canada--and that has huge implications for any forecast done by either agency, especially if the assumptions about future oil and gas production growth in those countries are overblown.

Both the EIA and the IEA have generally released similar worldwide forecasts for energy in the past. The IEA has in recent years, however, taken a more activist tack since its charter allows it to talk about climate change as a danger. And, the agency has warned about the lack of investment in energy of all kinds because of the recent drop in oil prices.

The IEA was the first to declare that conventional oil--that is, easy-to-get, low-sulfur, liquid crude--peaked in 2006. The world is now increasingly living on expensive, hard-to-get unconventional oil under deep ocean waters, in the Arctic and from deposits that aren't even liquid such as the Canadian tar sands. The IEA still claims, however, that given the proper investment, these unconventional sources can meet rising oil demand for at least another two decades.

The ever so slowly growing divergence between the EIA and IEA and the advent of well-funded independent original research suggest that the day of looking solely to the two governmental energy entities for energy information are over. Both failed to predict constraints on oil production in the last decade and a half, and both now continue--despite their seeming differences--to assume a business-as-usual future when it comes to energy, if not climate change. This is despite the growing evidence and chorus of experts calling such complacency into question.

Now, those experts are beginning to garner enough financial resources to create in-depth independent, data-driven analyses and disseminate them to a broad audience--one that no longer has to take either the EIA or the IEA at its word.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, February 01, 2015

Commodities crash: Bad news for the world economy, but is anyone listening?

Reading the general run of financial headlines might lead one to believe that price declines in those commodities which are highly sensitive to economic conditions such as iron ore, copper, oil, natural gas, coal, and lumber are good on their face.

Obviously, the declines aren't good for those who sell these commodities. But, those of us who buy these commodities in the form of cars, houses, utility bills and other products and services ought to be helping the world economy as we buy more stuff with the freed up income.

As true as that may be, these commodity price declines also signal something else: exceptional weakness in the world economy. It is no secret that economic growth in Europe has been stalled for some time and is now receding. The European Union's confrontation with Russia over the Ukraine conflict and the resulting tit-for-tat economic sanctions levied by both sides are only worsening the economic climate.

Russia has been hit by the double whammy of oil price declines and sanctions which are probably sending the country into recession. And, now the new anti-austerity government in Greece seems to be pushing Europe headlong into another Euro crisis as worries about Greek debt default spread.

Chinese economic growth appears to be faltering. And, that seems to be one of the direct causes of the broad-based commodities price decline. A fast growing China has previously created enormous demand for basic commodities needed to build out its infrastructure--commodities such as copper, iron ore and the petroleum products needed to run all the vehicles and machines essential to that build-out. Chinese demand for basic commodities has also increased as China's expanding wealth has allowed many more people there to own private automobiles and to enjoy other fruits of a spreading consumer society.

Economic distress for China seems to come when its hypercaffeinated annual growth rate falls below 7 percent where it seems to be heading now. Official Chinese statistics have long been suspect, so growth may already be below 7 percent. Lower growth makes it difficult for the country to provide work for all those who are leaving the countryside and streaming into the cities as China industrializes.

Commodity-exporting nations such as Canada, Brazil and Australia have taken a big hit on declining Chinese and world demand. But, their bourses seem surprisingly buoyant given the extent of the damage.

The commodity price declines aren't just confined to the industrial and energy commodities mentioned above. Food commodities have been swooning as well recently. Of course, food prices swing based on farm yields which have no necessary relation to the economy at a particular time. What is especially telling about the decline in the prices of foodstuffs is how broad-based it is.

Price declines affected wheat, corn, soybeans, and oats in part due to record harvests. Prices for cocoa declined due to rising harvests and falling demand. But, not every food commodity is experiencing increased harvests. Sugar production has actually declined in the last growing cycle. Yet, sugar prices fell. At the margin, it seems, people are buying less of what are essentially discretionary food commodities such as cocoa and sugar. Does that seem right if consumer buying power is being buoyed by cheaper industrial and energy commodities?

Stock and bond markets across the world are being levitated by central banks which have telegraphed to investors that the banks will react to practically any weakness in stocks or bonds. Of course, central banks don't much concern themselves with the prices of commodities because they cannot control them directly in the way they manipulate money and credit. That's why commodity prices right now are a much better barometer of the global economy than the world's stock markets.

One could say that the stock markets of the world disagree with the global commodity markets about the direction of the world economy. One could also say that the world's bond markets agree with the commodity markets. Low bond yields typically mean that investors expect inflation and economic growth to be low or even negative. High inflation and/or economic growth tend to cause investors to demand higher yields as credit availability tightens and as concern about inflation eroding bond returns rises.

It is especially telling that in the United States, where the U.S. Federal Reserve Bank ceased its government bond buying program last year (known as quantitative easing), that long-term government bonds returned almost 39 percent, much better than the U.S. stock market which registered a 12 percent gain in the S&P 500 index. With waning support from the U.S. central bank, government bonds were supposed to decline (and yields go up). Just the opposite happened--big time!

And as 2015 began, the consensus was that U.S. (and Canadian) interest rates would rise and thus bond prices would decline. Instead, long-dated U.S. governments--which are very sensitive to interest rate changes--spurted upward another 12 percent in January alone as yields plunged to record lows. This was in perfect concert with the continuing commodity rout suggesting that investors in these markets expect low or no economic growth in the year ahead.

Practically the entire investor class across the world believes that central banks now guarantee stock prices, and that the stock market therefore is a sure thing. Commodities and bonds, however, are telling a contrarian story. The obvious questions are: If central banks are omnipotent, then why didn't they prevent stock market crashes in 2001 and 2008? If it's different this time, what exactly will central banks do to prevent another crash? Can they really effectively lower interest rates which are already at zero in much of the world (and below zero in a few instances)? If central bank policy is so powerful, why haven't six years of the lowest interest rates in memory--and in the case of Great Britain since the beginning of central banking there in 1694--resulted in booming growth across the world?

Last week analyst Doug Noland of Credit Bubble Bulletin fame, summarized the situation this way:

To this point, mounting risks – financial, economic, geopolitical and the like – have been viewed as guaranteeing only greater injections of central bank liquidity.

The assumption has been that if markets falter, central bank liquidity can and will always hurl them higher than before. It seems there is no crisis too big that ever greater liquidity injections cannot solve it. That assumption is already being tested this year, and there are likely to be many more tests coming.

The rather precipitous, alarming and lockstep trends in bond yields and commodity prices in the last year suggest that we are likely to get some clarifying answers in 2015 to the questions listed above.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.