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Why the Trend in Oil Is Up   (Josť de Freitas, July 30, 2008)


Although I'd be lying if I said I am certain of which direction the oil price is going, my gut feeling is telling me that it's going up as a general trend, despite brief respites. A few points have not been sufficiently made, and I think Rainer H.'s piece exhibits some of the problems those points would address.

1. Peak Oil is just a fairly specialized example of a much more general law: that of Diminishing Returns. Essentially, it simply says "that the easy to find oil was found first, and the easy to extract oil was extracted first, and as time goes one we're moving more and more towards the difficult to find and extract oil". It's as simple as that, and no amount of throwing money at the problem is going to change it. And the history of oil extraction (I dislike the word "production" it implies someone is actually hard at work somewhere making oil) seems to prove this point.

Some years ago, at the ASPO conference in Lisbon, I asked the director of Petrobras (Brazil's hugely successful oil company) if he was a proponent of Peak Oil. He said this: "I can't comment on that [remember, this was still 2005, and three years feel like a lifetime!] but I will make a simple common sense statement: if there were easier to find or extract oil, we certainly wouldn't be looking for it thousands of metres under the ocean and paying these incredible costs to bring it up!".

But see what Petrobras people are saying nowadays, and you get the drift: " July 25 (Bloomberg) -- Crude oil at $126 a barrel is ``not expensive,'' considering production costs and rising demand, said Jose Sergio Gabrielli, chief executive officer of Brazil's government-controlled oil company, Petroleo Brasileiro SA. ``Oil is an exhaustible resource,'' Gabrielli said in an interview today in Rio de Janeiro. ``In order to produce new oil to replace the barrel you just used, you have to find oil that's much more expensive than what you already produced.'' "

2. Rainer H. seems also to confuse extraction and reserves. Even if a field has billions of barrels worth of oil, there are serious and real geological constraints of how much you can extract at any one moment. The maximum flow of the field might be 1 million barrels, in which case, if demand is 2 million, we're shit out of luck and the price is going to go up (I'm making numbers up to illustrate the point, but these constraints exist).

Also, injecting steam (generally generated by using natural gas...) into an existing oild field is a last ditch resource and one that most companies try not to do, since this technique basically damages the field (geologically) and increases the amount of oil that is ultimately unrecoverable.

All fields have oil that will NEVER be recovered, from 5 to 10% of the total reserves. This is due to the fact that oil does not easily "rise" to the surface, so that lots of tricks are necessary to make it come up (the times when oil would explode out of a derrick are long gone, those were the days of "easy to extract oil", remember).

Also, fields are not smooth, nice, regular, round shaped caves, they are irregular, the walls of the deposits may be strong or brittle, etc... When you inject steam water into old, tired wells, it's not the production that "explodes", it's generally the well itself that goes down in a sort of cave-in (water is injected to fill the well, because oil floats on water and this causes it to rise).

3. As for the role of speculation on the price of oil, it's an interesting question, and rightly debated, but it's controversial, and I think it sort of misses the point. Speculators are going towards oil BECAUSE it is perceived as scarce, and becoming scarcer. Whether speculators account for 30$ or 50$ of the current price, I would add that even 75-80$, as Rainer H. seems to be predicting as a future price would be considered a shockingly high price just a few years ago (5? 6?).

And consider that a US Federal task force fundamentally disagrees with the idea that speculators are actually driving the price uo ( Speculators Aren't Driving Up Oil Prices, Report Says) using some sound analyses which refute some of the points he seems to be making in his text.

More important factors in driving the price of oil up are the US trade deficit and subsidies. The trade deficit has basically generated huge deposits of dollars in countries which are experiencing meteoric growth, just at the time that oil is becoming somewhat scarce (ie. as production seems to have hit a plateau).

Thus, the deficit is helping them to outbid other customers to get the oil. Since western economies are still reasonably resilient, they can buy the oil at that price, but someone is being pushed out of the market. These are essentially third world countries with weak economies, so you don't get to hear about their brown outs, oil rationing and so on. The other mechanism that the deficit is helping is that a lot of emerging economies simply subsidize gas at the pump. Oil costs a lot less in India or in China than in the US. This encourages increased demand in those countries as their economies grow. And the governments can only pay for it because they're sitting on all those dollars...

So, even though this is not really a scientific analysis, I feel that there are enough "holes" in his arguments for me to continue going with my gut feeling. Perhaps, as he says, oil prices will go to 75$ before they come anywhere close to 1000$.... But that's not saying much, is it? A few months reprieve in the price does not a trend make, and the price of oil will eventually climb again and fulfill his prophecy. Oil will go to 75$ and eventually will go to 1000$, whether it takes 20 years or 10 years from now, and it will be a trend, of course...


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