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Tuesday, March 16, 2010

Is $80 A Barrel the New Floor For Oil?

Anybody who is still in denial regarding the reality of Peak Oil need only consider the type of drilling being done now. Never has so much money been committed to such high-risk drills in places so difficult to access and requiring so much new and expensive technology, for such relatively trifling yields, as with the deepwater drills being done by Chevron and Petrobas.

Newsweek writer Matthew Philips, in his article last week, Journey to the Center of the Earth, called this deepwater field, which could contain enough oil to supply the U.S. for ten years, "perhaps our best shot at energy independence." If so, we are destined for considerable economic hardship and material deprivation going forward, because the cost per barrel of drilling alone is nearly 50% more than the current price of oil, about $80 a barrel.

Chevron's offshore drilling platform, the Tahiti, is located about 190 miles from the shore in the deep waters of the Gulf of Mexico, where the drill must plunge through 7,000 ft of water, then through a thick layer of much and a salt bed beneath it that is over a mile deep, and then through several miles of crust to reach a paybed estimated to contain 85 billion barrels of sweet crude. That's a real giant, a stunning find relative to the relatively piddling yields projected for other deep sea drills, which are expected to yield 15 billion barrels at best, or the Bakken formation, which is considered to be good for 3.5 billion barrels at the most.

But it will not be cheap oil, and we can put to rest any dreams we may have of seeing $30 a barrel oil ever again.The project is expected to cost about $100 Million, which means that if it yields the 85 billion barrels thought to reside there, the cost per barrel will be $117.64. And that assumes that all 85 billion can be recovered, and that nothing major goes wrong with the project to cause massive cost overruns, which are pretty optimistic assumptions.

Why would Chevron do a drill that costs at least $117 a barrel when oil is currently trading around $80? Now we know why oil companies have been a little recalcitrant about obeying the command to "Drill, baby, drill!" and you have to figure that there must be a very powerful incentive to induce the people who front the money and risk to do the drilling to embark on such a massively risky project. Chevron is, after all, a business, and we can safely assume that it isn't doing this to take a $37 a barrel loss. The oil producers can only be extending themselves to this extent in the belief that near-future oil prices will support these projects and give them a decent return on this massive investment, and they must have a reasonable basis for believing that the supply/demand balance will work in their favor.

There is less dispute everyday over whether Peak Oil is a reality, and the major argument now is not if but when, and the estimated years of arrival are closer together. Kenneth Deffeyes believes that 2005 was the year that global production peaked, and points out that production has never exceeded that year's level. Other analysts say 2008, and most ominously of all, Sadad as Husseini of Saudi Aramco predicts that its Gwaihir field, the largest in the world, will reach peak production in 2015.

Just as the early Peak Oil prognosticators warned, demand is increasing while each new discovery is smaller and harder to exploit, and we're now arriving at the interstice between increasing demand and declining supplies, and arguments about exactly what year the peak will occur or has occurred are really beside the point. We will be paying more for less, not only oil, but everything that is somehow dependent upon it. And that means just about everything.

Looks like we are in for a long economic convalescence.

4 comments:

consultant said...

Isn't it interesting how what matters gets little notice.

$80, $100, $117 or more. Whatever it is, from here on out it becomes a wild, painful ride.

Here's my formula:

holding on to the unsustainable + Peak Oil=increased chaos and dissolution of social institutions

Nudge said...

Consultant, there chaos is manageable if at least some of us take steps to mitigate the damage. It would of course help if the central government were to align its priorities that way, instead of its business-as-usual wars in the Middle East, no-billionaire-left-behind Wall Street bailouts, socialized support for Big Insurance, Big Agribusiness, Big Auto Manufacturing, Big Pharma, Big Military Industrial Complex, Big Real Estate, and so on.

I for one am hoping that conservation, in one form or another, will help mitigate the speed at which the necessary energy-downshifting trends will propagate. If the changes come on so quickly that there’s no time to cobble together ad-hoc schemes for shipping produce to the supermarkets, or keeping the primary & secondary goods markets moving, or keeping the electrical grid running, then things’ll be very ugly, and the ensuing population crash will mean the end of our country until the survivors regroup.

This is that unknown unknown again .. we just don’t know what the powers-that-be discuss behind closed doors. I think there is quite a lot they could do, even if all they did was repeat the same wage/price controls and rationing schemes used during WW2, encourage people to grow those Victory gardens everywhere (and support them with seeds and how-to books), and put some of the out-of-work folks to work building stuff we’ll need. Electrified passenger rail, anyone? Replacement of all that aging infrastructure out there – dams, bridges, roads, embankments, earthworks? For all I can tell, the PTB are already discussing this in detail and trying to figure out how bad they have to let things get before people demand that kind of strong government response.

Although it may be pure fantasy on my part, I would like very much to believe that among the PTB there are some who would rather do things like the above, and see our nation safely into the future, than let it burn like Rome just so they can extract their bonuses while the going is still good.

consultant said...

"If the changes come on so quickly that there’s no time to cobble together ad-hoc schemes.."

That's the key, I think. But to expand on this point, I think the crises are coming on faster, right now. They're just harder to see because:

A)we are in a culture of denial

B)we have a lot of "stuff" in our culture, both physical and psychological that is absorbing some of these seismic changes.

Despite the ads on tv, the morning television shows with all the grinning fools, the infomercials on the weekends and March Madness, it really isn't back to business as usual. These artifacts of our previous culture send the message that everything is normal, but they don't reflect the underlying reality.

Most people are a paycheck away from poverty. Most of the people who run our financial institutions, now criminal, aren't going back to nice, safe, legal and morally defensible loans. That's not how criminal behavior works. Trust, once destroyed, is hard to regain.

Modern America, approaching 320 million disparate souls, is a frothing bromide that could fall under the hand of tyranny as quickly as it could break apart.

I desperately want us to stay together. To find good leadership. To restore balance to our economic, political, civic and spiritual life. But our culture has been twisted and reduced to the elements that have always existed in regional, scattered and isolated fragments of our culture. Today, these same elements are the working framework for the leaders of our society. Chief among these elements are narcissism and unbridled greed. Obama, for example, is a good man. But he has little to work with. Our political life roughly reflects the values of this country. That's why Bush, an incompetent speaker, was able to sell so completely to our leadership the falsehoods that led us into Iraq.

I've always thought of our country as an experiment. A work in progress. Sometimes, as in periods in the past, the experiment goes wrong.

Things to ponder:

-this is the first time in our history (or any nation's history), where a country has lost it's way but also has the capacity (currently) to destroy the world
-the high interconnectedness of our society and the tremendous loss of social capital among our current population does not bode well for those who think the ride down will be manageable or relatively painless for some areas/people
-will we have the time to recover? To regain our balance. I don't know. This is where "events on the horizon" come into play. Events too far off or too uncomfortable for our current culture to contemplate.

The health care vote is today. And while I'm not satisfied with what's in the bill. I'm for it and the next 50 steps to make it better.

Nudge said...

Consultant, sorry, I forgot to clarify something upthread. You quoted: “If the changes come on so quickly that there’s no time to cobble together ad-hoc schemes..”

Consider, if you will, the possibility that the same people who, in the future, will be cobbling together schemes and trying to find ways to save as much as possible, will not be the same ones as those presently trying to run our country (aka the United Parking Lot of America, aka UPL) into the ground.

I, for one, cannot imagine the current crop of politicians (at any level above grassroots local) suddenly or even slowly doing an abrupt 180-degree turn, and announcing to all & sundry: “Shit, we've been completely dead-wrong about everything we've done in terms of running the country. Instead of supporting the biggest businesses, and allowing them through lobbying to drive the country to hell in a handbasket, we should work to preserve the assets of the nation and to see our culture safely into the future.” Something like that is just so not going to happen.

What I'm saying is that the people in charge (probably all of them and on many levels) will have to be replaced before you'll see anything good happen. Whether it's by ballot or bullet, or by punditry vs pitchforks, remains to be seen. One can only hope that people avail themselves of the workings of the system to clean house in a big way and replace the current crop of pols with one that hasn't got its collective head stuck up the collective ass.

Suppose some new congressperson/senator/whoever runs under the premise that absolutely no lobbying will happen on his watch .. and s/he takes out an insurance policy of sorts, which is to have a video crew handy to catch all the many bribery attempts that lobbyists will make. Catch it on film, show it on television and on the net, and publish the info on said lobbyist(s). Nonrepresentative special interests have got to have their paws forcibly removed from the wallets of those whose hands are on the levers of power, if our country is to ever regain democracy.

The same people who are denying the crises just now will not be the same ones working to save things later. The ones in power at the present time will be replaced. Responsibility means being able to respond, and the present crew of jack-holes can't do that to save their lives. They're all busy running the congressional favors pork-o-rama.

Oust them all .. at the voting booth! ;)