Tech Talk - A Gentle Cough!

When I last wrote about the global supply of oil, it was back in October, as the fall in oil prices was developing. Since then the price has continued to fall, with prices now below $60 a barrel. I was doubtful back then that the price would fall as far as it has, and remain cynical that it will remain down for very long. Since this seems to go against much current wisdom, let me explain why I remain pessimistic that the boost to the global economy from access to cheaper fuel will continue for any great length of time.

It depends on whose data you believe credible as to how much more oil is available than that currently in demand. When looking at the numbers in the past I used a number of roughly 1 mbd, but this is hard to realistically quantify. Why – well the problem comes with the regions of the Middle East and North Africa (MENA) where there are current conflicts. The ones of particular concern are Libya and Iraq, although the fluctuating state of exports from Iran cannot be neglected. When the Libyan conflict first impacted the export of oil from that country Saudi Arabia began increasing its production to offset the loss in Libyan exports.

There came a time in September when Libyan exports, which had fallen to around 300 kbd from a high of over 1.6 mbd, shot back up to around 900 kbd. The EIA has recently shown an inverse correlation between Libyan production and oil price:

Figure 1. Brent Oil Price and Libyan oil production (EIA )

Thus, when an additional 600 kbd suddenly appeared back in the marketplace, it is not surprising that it had an impact on prices. However while there was already some surplus in the market (from increased production in the US etc, as I will comment on below) the volume of the addition had a more significant impact on prices, and when KSA decided not to reduce production this led the market to assume that we had returned to plentiful sufficiency, and prices have continued to fall since.

However, this perception is already unraveling. Libyan conflict has continued to embroil their oil fields. The Sharara field, which produces 300 kbd closed in November as conflict overwhelmed it. At the moment two of the oil export terminals are threatened, and with them another 300 kbd of oil. But it is not possible, at this point, to predict what is going to happen in either location. There is little sign that the conflict is any closer to resolution, meaning the production will continue to be threatened into the foreseeable future. Sadly it it more likely that this will have negative impact on oil production, so that it might be wiser to assume lower rather than higher volumes coming from the country.

The situation is a little clearer and more optimistic in Iraq, where the pipeline through Kurdish territory has lessened the impact of the Islamic State take-over of a large swath of the country. The recent agreement between the Iraqi Federal Government (IFG) and the Kurdistan Regional Government (KRG) approved early this month is already raising questions over the volumes that the KRG will put onto the market. The agreement calls for sales of around 550 kbd, but there is an additional 100 kbd that is available, the status of which is unclear. The country is exporting, overall, around 2.51 mbd and the pipeline to Turkey is currently carrying 280 kbd, but is being boosted to carry 400 kbd, with an ultimate throughput of 700 kbd. Part of the problem in assessing the market for this, however, in the short term is that the Iraqi crude is often heavier and of relatively lower quality than the market average. This is currently causing some marketing problems, leading the IFG to lower prices in order to find a market. In neither case, however, is the current conflict likely to impact the production for export, and while it is difficult to anticipate much production above 3.5 mbd. (The December OPEC MOMR suggests that they are producing 3.36 mbd at the moment) we are unlikely to se any significant reduction in production going forward. The significant growth in global production to meet a still predicted rise in demand next year (albeit down slightly from previous estimates) will, therefore, not come from OPEC, who still anticipate that they will produce, on average 400 kbd less than they have this year. It is still expected that American production will continue to rise to meet expectations of increased global demand.

The problem, unfortunately, with that view, is that increases in US production are tied to output from fracked horizontal wells that are expensive to drill, and have a relatively short production life, with the majority of production coming in the first year of operation. Thus, in order to sustain production, more wells must be drilled each month to cover the loss in production from existing operations. The North Dakota Department of Mineral Resources projects that 225 or more drilling rigs are needed to sustain the growth of production from the state over the next three years (at which time it will plateau at around 1.5 mbd). Presently there are roughly 180 rigs operating, with the count falling by the week, as the rewards, at present, do not match the cost. The agency anticipates that the number will fall by an additional 40-50 rigs by the middle of next year. Well completions are also falling by the month, as the industry likely plans to wait out the current hiatus in prices. The impact of this on even short term production should not be discounted. There has already been a slight fall in production, rather than a gain, in October, and that will likely accelerate.

Without any gain in production, and in fact seeing the potential for a drop in US production over the next year, then the anticipated surplus between oil supply and demand will likely disappear. Remember that the MENA nations are seeing a growth in their internal demand for oil (in the KSA this has already passed 3 mbd) so that if they had no impetus to reduce production and exports in the face of falling prices, so they are unlikely to increase production when prices pick up. (They haven’t before).

When will this all happen? Well I got the size of the price fall wrong, so don’t hold me to the exact timing, but I would anticipate that when we see the start of the driving season next year, the oil market will tighten rather quickly. Following that (given the inertia in getting production back in the US) we will (as I have been expecting for a couple of years) see the global concern over supply start to be a significant factor in 2016.

Have a Happy Holiday!

Tech Talk - and things continue to get worse

It is difficult to see any positive interpretation of the changes and conflicts that are increasingly filling the headlines of the press. Fluctuating optimism over the return to credible export production from Libya, to take but one example, is no sooner reported when the news comes of increased fighting in Tripoli, including the international airport. At the same time violence is spreading towards Egypt. Without a strong central government it is likely that the conflicts in that country will continue into the foreseeable future, with continued negative impacts on the export of oil from the country.

Transient attempts to maintain a cease-fire and stabilize South Sudan have apparently failed again. The fighting has shut down local oil production, while overall production from South Sudan has been cut to 165 kbd.

Capital continues to leave Russia (h/t Nick) and that flight is only likely to accelerate as the tensions over the shooting down of the Malaysia Airlines plane continue to grow. Given that investment continues to be required to sustain Russian oil production against the current transition into decline, and that such cash is not being spent only magnifies the concern that Russian export decline will be faster and sooner than the world anticipates. (And given the critical value of Russian oil and gas exports to their economy – it provides about half the budget revenue - President Putin desperately needs a scapegoat to blame as the economic gains of the past, and future growth targets of over 5% become unrealistic dreams for that future).

With the emphasis on the daily events in all these countries (not forgetting Iraq) it is more difficult to discern the overall medium term impact that this is likely to have on oil availability, and consequently on oil and gas prices. Europe cannot function at current economic levels without the 30% of its energy that it gets from Russian natural gas, which has to be a big consideration as they discuss whether to impose more sanctions on Russia. While a recent Total study shows that, with Gazprom co-operation, Europe could cope if flows through Ukraine were stopped, without that co-operation the EU would not be able to adequately replace the lost fuel. And the conflict in Ukraine is unlikely to be resolved fairly soon, so the degree of co-operation that Western Europe can expect from Gazprom next winter is likely to lead to some fairly tense negotiations over the next few months.

One of the frustrations with watching TV pundits muse on this is that there seems to be an assumption that wells, pipelines and other necessary infrastructure will magically appear to provide immediate solutions should things start to get worse. One such today commented that President Putin is now in total control, since should the west decide not to take all of the Russian oil and natural gas that they currently consume, that he could immediately increase sales to China to replace the lost income.

That neglects the time that it is going to take to get the wells drilled in Siberia, the pipeline connections made and the receiving network in place to meet the current amount that has been sold. Even with the current agreement to increase Russian exports to China it is going to take some four years for the new gas to flow, and it took years for this agreement to be signed.

By the same token Europe can’t turn around and expect the US to be able to replace any significant amount of Russian natural gas for about a similar period of time. Facilities cannot be created overnight, and permitting and construction take finite amounts of time.

I would expect that, if anything, the price that is charged for Russian oil and gas is going to go up for the Europeans, even as the oil supply starts to decline. As Euan Mearns has noted all the significant producers of natural gas in Western Europe are seeing declines in production and while the fall last year was not that significant, overall the continued cumulative decline will make the need for Russian gas that more critical, given that the pipelines are in place to deliver it.

Unfortunately as oil and natural gas supplies continue to tighten, the natural consequence is going to be an increase in price. And this will, in turn, affect the economic growth of the different countries around the world. The current price has slowed economic growth, but as it continues to ratchet up then the impact on global growth will become rapidly obvious, although differentiated by country depending on how dependent they are on fuel imports.

Complacency within the United States, given the assumptions of indigenous supply availabilities, is likely to be shaken as internal oil supplies stop there unsustainable growth rates, while the current low prices for natural gas will disappear as the available funds for future wells reduce on the increasing evidence that most of these wells are unprofitable at current gas prices.

It is difficult – well, to be honest, impossible - for most of us to be able to see how almost any of the growing conflicts around the world can be resolved in any short-term period. The consequent impact on oil production in the countries of the Middle East and North Africa (MENA) is going to lead to a tightening of the surplus between available supply and demand, particularly at current levels. And, unfortunately, when economic circumstances grow colder political rhetoric gets hotter, and there is less chance for negotiation and diplomacy to resolve the situation.

The main surprise, at the moment, is how rapidly the situation is deteriorating in so many of the countries that supply oil and gas to the world. Sadly the headlines will only cover one or two of these at a time. As a result the overall trends are missed as headlines instead focus on the very small changes driven more by sentiment and political perspective than by the realities of the medium, and even short-term oil and gas supply situation.

Tech Talk - Oil Supply, Oil Prices and the Kingdom of Saudi Arabia

From the time that The Oil Drum first began, and through the years up to the Recession of 2008-9 there was an increase in the price of oil, and that resumed following the initial period of that recession, and, in contrast to the price of natural gas, oil has recovered a lot of the price that it lost.

Figure 1. Comparable price of oil from 1946 (Inflation data)

And if one were to draw a straight line on that graph from the low point in 1999 though now there hasn’t been a huge variation away from the slope of that line for long. That, of course, does not stop folk from pointing to the very short, roughly flat, bit at the end and saying that oil prices are going to remain at that level, or are even about to decline.

To address that final point first, I would suggest that those making such a foolish prediction should go away and read the OPEC Monthly Oil Market Reports. Remember that, for just a little while longer, oil is a fungible product. OPEC make no secret of the fact that they continuously examine the global economy and make estimates on how it is going to behave. This month they note that the economies aren’t doing quite as well as expected, and have revised down global growth to 2.9%, though they expect next year to be better, and hold to their estimate of a 3.5% growth rate.

But OPEC go beyond just making that prediction, they use it, and data that they have on consumption and oil supplies around the world, to estimate how much OPEC should produce each month to balance supply against demand, so that the price will remain at a comfortable level for the OPEC economies. And based on those numbers they tailor production.

This month, for example, they note that global oil demand is anticipated to grow by 0.8 mbd this year (and by 1.04 mbd in 2014). They anticipate growth in production of around 1.0 mbd from the non-OPEC nations, with projected increases from Canada, the United States, Brazil, the Sudans and Kazakhstan contributing to an additional 1.1 mbd next year. From these numbers they can project that demand for OPEC oil will be slightly down this year, at 29.9 mbd down 0.4 mbd on last year, with next year seeing an additional fall of 0.3 mbd on average.

Figure 2. Projected oil demand for 2013 (OPEC MOMR )

Thus slight reductions in production from OPEC, and particularly the Kingdom of Saudi Arabia, (KSA) can keep the world supply in balance with demand and more critically for them keep the price up at a level that they are comfortable with. Note that in relation to the overall volumes of oil being traded they are not talking much adjustment in their overall volume (around 1% of the total 30 mbd) in order to sustain prices. The USA produces more, OPEC produces less – not much less because global demand is growing – and the price is sustained.

This has virtually nothing to do with the speculators on Wall Street and the corrections they might impose, this is all about supplying a needed volume to meet a demand and controlling that supply to ensure that the price is sustained.

There are a number of caveats to this simplified explanation, one being the short-term willingness and ability of some producers to keep to their targets. One of the imponderables is the production from Iraq. Although Iraq has been given a waiver through 2014 on the need to limit their production, the increasing violence has led to a drop in production, back below 3 mbd.

Figure 3. OPEC production based on data from secondary sources (OPEC MOMR)

As I have noted in the past, OPEC is sufficiently suspicious of the reported numbers from the countries themselves that they check from secondary sources, and provide both sets of numbers.

Figure 4. OPEC production numbers from the originating countries. (OPEC MOMR August 2013)

Note, for example, that Iran says that it is producing over 1 mbd more than other sources report, and Venezuela is around 400 kbd light. The balancing act is largely the charge of KSA, since it produces the largest amount and can adjust more readily to balance the need.

One of the other caveats is that the internal demand in these countries is rising, and that lowers the amount that can be exported. This will in time require that OPEC produce more, just to sustain the amounts that they export. And the problem here is the biggest caveat of all. Because KSA cannot continue to produce ever increasing amounts of oil.

Just exactly how much the country can produce is the subject of much debate, and has been at The Oil Drum since its inception. But if I can now gently admonish those who think it can keep increasing forever, and that it has vast reserves that can flood the market at need. This fails to recognize that the major fields on which the country has relied are no longer capable of their historic production levels, and that, over the time that TOD has been in existence, production has switched to the new fields that KSA had promised it would, back in time.

But these new fields, including Manifa and Safaniya produce a heavier crude that, for years, KSA struggled, usually in vain, to find a market for internationally. It is only now that it is building its own refineries to process the oil that it can find a global market for the product. Yet those refineries have only a limited capacity. If you can’t ship, refine and market your product in the form that the customer needs, it can’t be sold, regardless of how much, instantaneously, you can pump out of the ground. And so KSA is starting to look harder for other fields. They have increased the number of rigs employed to 170 by the end of the year (in 2005 they had about 20 oil and 10 gas rigs operating), going beyond the 160 estimated earlier, seeking both to raise production from existing fields, but also to find new ones. This is almost double the number that Euan reported at the end of last year. That this is being expedited is not good news! Because new fields will very likely be smaller, and more rapidly exhausted, and may not have the quality of the oil produced from Ghawar and the other old faithfuls.

Realistically, over a couple of years, I would suspect that the oil price line, that I mentioned was rising at the beginning of the piece will continue to rise and we are just going to have to accommodate to it.

OGPSS - Current oil production and the future of Ghawar

(Updated intro)There is a growing impression being given in the discussion of oil and natural gas supplies, that the world is moving into a period where there will soon be such a plentiful sufficiency of crude that the US may consider exporting some of its production. (h/t Leanan). But if one looks behind the headlines, and particularly at the current status of the largest oilfield contributing toward this rosy picture, the Ghawar field in Saudi Arabia, that optimism becomes more evidently built on a very transient set of data that, as this series of posts seeks to show, will not be sustainable for any significant period into the future.

 The three major oil producers (i.e. those producing more than 5 mbd each) are currently seeing surges in production as the world moves to an overall production of 90 mbd. The OPEC June Monthly Oil Market Report (MOMR) notes that this has brought Russia to 10.33 mbd in May, some 100 kbd over the same period in 2011; and Saudi Arabia is reported to have averaged 9.917 mbd in May, up 40 kbd over April. The United States is running at 6.236 Mbd of crude (from the EIA TWIP), while importing 9.117 mbd. The MOMR reports US oil supply at 9.66 mbd on average, but counts more than just crude in this value. The gain over the past year is around 600 kbd. It is interesting to note, in regard to OPEC production the continued difference between the volumes that OPEC reports from direct contact with the suppliers, and that when the numbers are obtained from “secondary sources.”
Figure 1. OPEC production from its members, with values provided by them (OPEC June MOMR)

 
Figure 2. OPEC production from information provided by secondary sources (OPEC June MOMR).

 This surge from the majors has, in part, led the EIA to project that oil prices will, for the remainder of the year, remain relatively stable.
 
Figure 3. EIA estimate of crude oil prices going forward over the next eighteen months (EIA TWIP)

 In the short term, and leading into a national election, there is no significant event (short of a hurricane or two) that obviously threatens this projection – though the Iranian situation and the questionable stability of nations in the Middle East and North Africa (MENA) has to remain a concern. But sadly the continued ill health of the global economy, with no evident savior or realistic plan for growth now visible, means that demand – which OPEC projects will still grow 1.17 mbd y-o-y on average this year, may continue to be met.

I have, however, in previous posts, given my reasons for anticipating that the surge in both Russian production and that in the United States are at near peak, and will soon decline. Saudi Arabia’s fall will be less dramatic and a little later, but the combination does not bode well for the international supply in the next presidential term. The big question with Saudi Arabian production has been, to date, more focused on the production from Ghawar, which at 5 mbd has been the rock on which the overall production builds. But that rock is continuously eroding under the long production periods that its different regions have seen. The final major new effort to bring new production on line in the overall field was the effort at Haradh, down in the South tip of the field.

 JoulesBurn has written comprehensively on this region, beginning with the first well that came into production. In 1979, as the late Matt Simmons pointed out in “Twilight in the Desert”, the three northern segments of Ghawar, Ain Dar, Shedgum and North Uthmaniyah were producing 4.2 mbd of the 5.3 mbd total Ghawar output, with South Uthmaniyah producing another 400 kbd. By 2006 North Uthmaniyah was running at a 46% water cut. Joules has taken the historic record for that region of the field and made a short movie presentation included in a post that shows how Uthmaniyah was developed over the years.
 
Figure 4. Single frame from the movie on drill site development in Uthmaniyah, over time (JoulesBurn)

 The sequence of wells, moving inexorably to the crest of the field, shows how the wells had to move as the underlying reservoir became more depleted in oil. Uthmaniyah is the region where the test program to inject carbon dioxide to enhance EOR is under construction, as mentioned earlier, and scheduled for completion in the fourth quarter of 2013. It is worth noting that Aramco are also planning on using more steam injection for enhanced oil recovery (EOR) and that plans have just been signed to increase steam production at the Ju’aymah, Shedgum and Uthmaniyah plants, with completion dates in 2014 and 2015.

Figure 5. Sectors of Ghawar with the date of discovery (Afifi )
As one moves south the quality of the reservoir changes, and becomes more difficult to produce. However as Greg Croft has noted the two lower segments of the field Hawiyah and Haradh were developed with horizontal wells, rather than the vertical wells further north in Ghawar. This has overcome some of the geological constraints and the fact that the productivity index drops from around 140 barrels of oil per day/psi to 45 BOPD/psi at Hawiyah, and 31 at Haradh. In 2008 the Hawiyah NGL recovery plant was commissioned, to yield 310 kbd of ethane and NGL. 

 The further development of the lowest segment of Ghawar, down at Haradh, was one of the major projects that Aramco listed as contributing to their ability to produce up to 12.5 mbd. The latest development built on earlier development and because the use of horizontal wells had transitioned into maximum reservoir contact (MRC) designs by the time of Haradh III reduced the anticipated number of wells from 280 verticals to 32 MRC wells.

  

Figure 6. Planned well layout in Haradh III (from Aramco via JoulesBurn) 

 In his initial review of how that developed JoulesBurn showed how the wells were developed and laid out and explained how he was able to use satellite images to determine the different components of the production equipment. It is relevant to note that Joules updated his view of the region in 2010 when he noted that, after looking at the satellite images of the region, he was able to show that instead of the production coming from the original 32 wells, there were actually some 52 production wells connected up, which – as he noted – raise a few questions as to the actual performance of the wells over the original projections. 

 Aramco have reported, however (pdf) using Real-Time Reserve Management, that it had by the summer of 2009, been more successful than anticipated. Some of the additional wells drilled were to allow cross-hole tomography (pdf) to monitor the location of the oil:water front which, as production evolved, did not follow the anticipated path. This was particularly important to establish given the 1 km spacing between wells and the more complex geology relative to that further north in Ghawar. 

 

Figure 7. Schematic showing how cross-hole tomography is carried out (Stephen Prenskey ) 

 

Figure 8. Image from Crosshole tomography at Haradh (out (Stephen Prenskey) 

 What is, however, also clear from looking at the different regions of Ghawar is that there are no places left for new programs to restore production as wells become exhausted. If KSA is to sustain its production it must look beyond the King of Oil Fields, who now lies stricken in years.

Putting on blinders - the EIA Budget cuts

Pit pony wearing blinders to limit what it can see, and so make it easier to control. Horse and Man)

If you read many of the pieces that I write here you will soon notice that I am convinced that this country, and most of the civilized world, has a problem with future oil supply. That problem is getting worse rather rapidly, and this is causing the price increases that you have noticed every time you visit a gas station. It is popular, and easy, to blame the current increases on either speculators or the “evil” oil companies. While both may play a role on the edges of what is going on, the harsh reality is that prices now are largely controlled by those nations who form the OPEC partnership. Saudi Arabia, who supplies the largest portion of OPEC oil, has said that it is uncomfortable with current oil prices, since they are getting high enough that they could cause another recession. However that did not stop them from raising their prices in April and they now need the high prices to help pay to keep Saudi Arabia from seeing any of the riots that are happening to other countries. One has to know how to separate the popular myths from the actual reality.

And if legislatures at both state and national level are to make the right choices about what to do as oil prices keep going up (bearing in mind that it was a cause of the major recession in 2008) they too need to know what is really going on. There are alternate strategies for changing domestic production and alternate fuels (such as the growing supply of natural gas) that could be a significant help in the near future. Some of those that seemed to be promising, don’t always work as fast as promised, as we found out with cellulosic ethanol. They (and the rest of us who try and explain what’s happening) need to know not only what is going on, but as things change, what the effects of new rules events (such as banning drilling for a while in the Gulf of Mexico) are having on current and future supplies. It is only in this way the rational and useful steps to help get America, and the rest of the world, off this addiction to OPEC oil can be picked out, and put into place.

Because of the need to trim the Federal Budget, different Federal agencies are cutting back on the services that they provide to the public. One of the most recent has been the Energy Information Agency who have just explained in a press release, the cuts they are making. Bear in mind that this is the agency that is supposed to provide the information that I have just said that we have to have. With a tip to Gregor, the cuts that are occurring are given below, together with a comment.

Oil and Natural Gas Information
• Do not prepare or publish 2011 edition of the annual data release on U.S. proved oil and natural gas reserves.
• Curtail efforts to understand linkages between physical energy markets and financial trading.
• Suspend analysis and reporting on the market impacts of planned refinery outages.
• Curtail collection and dissemination of monthly state-level data on wholesale petroleum product prices, including gasoline, diesel, heating oil, propane, residual fuel oil, and kerosene. Also, terminate the preparation and publication of the annual petroleum marketing data report and the fuel oil and kerosene sales report.
• Suspend auditing of data submitted by major oil and natural gas companies and reporting on their 2010 financial performance through EIA's Financial Reporting System.
• Reduce collection of data from natural gas marketing companies.
• Cancel the planned increase in resources to be applied to petroleum data quality issues.
• Reduce data collection from smaller entities across a range of EIA oil and natural gas surveys.

Electricity, Renewables, and Coal Information
• Reduce data on electricity exports and imports.
• Terminate annual data collection and report on geothermal space heating (heat pump) systems.
• Terminate annual data collection and report on solar thermal systems.
• Reduce data collection from smaller entities across a range of EIA electricity and coal surveys.

Consumption, Efficiency, and International Energy Information
• Suspend work on EIA's 2011 Commercial Buildings Energy Consumption Survey (CBECS), the Nation's only source of statistical data for energy consumption and related characteristics of commercial buildings.
• Terminate updates to EIA's International Energy Statistics.

Energy Analysis Capacity
• Halt preparation of the 2012 edition of EIA's International Energy Outlook.
• Suspend further upgrades to the National Energy Modeling System (NEMS). NEMS is the country's preeminent tool for developing projections of U.S. energy production, consumption, prices, and technologies and its results are widely used by policymakers, industry, and others in making energy-related decisions. A multiyear project to replace aging NEMS components will be halted.
• Eliminate annual published inventory of Emissions of Greenhouse Gases in the United States.
• Limit responses to requests from policymakers for special analyses.

In addition to these program changes, EIA will cut live telephone support at its Customer Contact Center.

So here we are in a mess. Generally when you’re in a mess it is a good idea to understand what the mess looks like, so that you can work out how to get out of it. But now that information is not going to be locally available. Yes there will still be the information from the IEA, though it is not really comparable, and OPEC itself provides Monthly Oil Market Reports, but that is a little less independent than most, and does not cover the internal production within this country that is a valuable tool to indicate how fast we are approaching the next crisis. (And the indications are that it may well hit right around the next election). And ignoring the information (or deliberately choosing not to collect it), is not going to affect the situation from developing, only perhaps possibly it might slow our noticing, but since we go to gas stations very regularly I think that is a bit doubtful.

At some point in the future, perhaps even that soon, politicians and Administrators are going to complain “but nobody told us!!” and rush to blame the industry yet again. But the truth is that there was a group that was keeping the records, and who could tell those with the responsibility to fix it that there was a problem. And the Administration just closed it down. We will regret that lack of information and the warning messages that it would have brought.

The Mayor and the Monthly OPEC Oil Report

A couple of days ago Boris Johnson, the Mayor of London, had a column in the Biritish Telegraph about his shock at having to pay just over 80 English Pounds (EP) ($126), to fill up his Toyota Previa (at roughly $7.75 a US gallon). With the UK Treasury taking about 60% of that, he notes that the costs are likely soon (as they continue to rise) to have a significant impact o the growth of the UK economy.

It's not just that it's inflationary. If Britain's businesses cannot afford to run their vans, then they will stop hiring, they will stop expanding, and tax yields will go down. It is not just for environmental reasons but for cost reasons that I am starting physically to ache for the age of the electric car. In theory, it should all be kicking off this year. Mitsubishi, Peugeot and Smart are offering electric models this month; next month it is Citroën; in March, Nissan and Tata come to market, and in April we in London are launching our Source London network of charging points.

As I mentioned last week, BP does not think that the market for electric and hybrid vehicles will have a material impact of liquid fuel demand within the next 20 years. And, despite the Mayor of London putting charging points around the town, and a friend of mine telling me that condo’s in Florida are already rewriting their bye-laws so that electric car owners will be billed for charging (at present power is within the condo fee) I suspect that they may be right. But BP also said that we must, increasingly, rely on OPEC. And, since OPEC puts out a monthly report on the situation, I thought it might be interesting to look at the most Monthly Oil Market Report.


The January Monthly Oil Market report (MOMR) from OPEC aims to predict the changes in the world market this year, rather than taking the longer view of either API or BP. However, since OPEC are the folks that potentially have the additional oil to bring to the market to match the growing levels of demand, their views, even in the short term, are critical.

They do expect demand to continue to grow, and just as we saw, in their estimate, a growth of 1.6 mbd in demand in 2010, they now see an additional growth of 1.2 mbd in 2011. However, in 2010, most of the growth (1.1 mbd) came from non-OPEC sources, whereas in 2011 the growth in that supply (to an average of 87.3 mbd) is expected to be only 0.4 mbd. They see demand for OPEC crude rising to 29.4 mbd from 20 mbd, for an increment of 0.4 mbd for y-o-y average changes. Which leaves the interesting question, , as to where that additional 0.4 mbd is going to come from? And the answer is that it is expected to come from an increase in the NGL from OPEC of that volume.

The OPEC executive believe that there is some 6 mbd in spare capacity within the member countries of the organization, and that this could “quickly” be made available to the market. They see OPEC production currently totaling 29.2 mbd, but expect that while that level will be sustained as we move into the spring, end user demand will fall below that level so that stocks will rise, in the short term. (They expect second quarter demand to be the lowest of the year). Looking back at last year, they report that the largest growth in demand was for diesel, with gasoline as second.

OPEC summary of global consumption for 2010.

Interestingly OPEC notes that sales of diesel powered vehicles have risen in Europe from 22% to just over 52% of all sales in 2010, though there was a drop of around 6% in the total number of cars registered in Europe.

Part of the need for a revision in the original estimates comes from the more severe winter that has happened this winter, beyond initial predictions. This has led to higher heating fuel demands.

Change in heating degree-days as a percentage of a normal winter (OPEC)

In India, because of a switch to natural gas from fuel oil, there has been an overall drop in oil demand, and while gasoline demand held steady other fuels fell.

Changes in Indian consumption over 2010 (OPEC)

Note that the above plot shows changes in demand over the year, the total Indian consumption is around 3.3 mbd.

Consumption within the Middle East, which tends to detract from exports, was seen as rising, overall by 2.3% or 160 kbd in 2010. That may rise to 200 kbd in 2011, largely driven by increased use in Saudi Arabia.

China, consumed some 8.7 mbd in November 2010. OPEC sees that for 2011 demand will average 8.8 mbd a growth of 0.6 mbd over the 2010 annual average, ending the year with a demand of 9.34 mbd. But they admit that the growth in Chinese demand has been significantly greater than their analysts had anticipated. Car sales in 2010 were an increase of 31% over 2009 numbers (some 13 million vehicles).

And in the countries of the FSU, where oil production is significantly increasing, so also is demand, with growth in demand of 2.2% being expected for 2010, or 0.1 mbd. Overall as the world economies recover OPEC anticipates that demand will also strengthen, and has had to raise its estimate both of consumption over the past year, and that predicted, in consequence.

Turning to the growth in supply, the largest increments in 2010 came from Russia (0.33 mbd), and the United States (0.44 mbd) but in 2011 those growths will sensibly be over. OPEC are also more inclined to assess future supplies with a degree of risk assigned to the estimates, and they see the risk of the estimates for Russia being erroneous as higher than for other non-OPEC countries. And they are not optimistic, at this time, over seeing large gains in production from Azerbaijan (40,000 bd) and Kazakhstan (70,000 bd), which is where BP anticipates growth.

OPEC supply relative to global demand

OPEC noted the relative inputs of petroleum products to the United States, and (going to the EIA ) that list, for last October, is:

Origin of US imports (in thousands of barrels/day (EIA)

Imports to China were led by Saudi Arabia, at 0.88 mbd, followed by Angola at 0.81 mbd and Iran at 0.43 mbd.

And welcome to 2010

Well I trust that New Year’s Night went well for you, and tht you are all set for a Prosperous New Year. But what of the future for energy in this coming year? It used to be the tradition in the part of the world where I come from that the first foot through the door after midnight brought a lump of coal, a piece of cake (or shortbread), salt and a small piece of money. This is a part of the Hogmanay celebration. They symbolized the coming of wealth, and a wish for enough heat for the year. The tradition was:

When presenting the lump of coal, the first-foot should say, 'Lang may yer lum reek', a traditional Scots good luck blessing for the long dark nights, literally translated as 'Long may your chimney smoke.'

Somehow I don’t see that going down too well in the halls of the current American Administration. But for the rest of the world, I would expect that the use of coal would continue to grow as it proves, as it has over the past centuries, to be the cheapest indigenous fuel for many countries, at a time when they need something to provide electricity.

Pakistan, for example, is seeing continued load shedding, although the current culprit is being identified as the need to de-silt the reservoirs that supply hydro-electric power to the nation. (There is some 6 hours of load shedding a day in the cities and 8 hours in rural regions). Additional gas pipelines into the country are significantly more than a year a way (if then). The US is promising to help.

Pakistan has developed virtually no new power-production capacity in nearly a decade, despite possessing significant hydroelectric and coal assets, U.S. officials said. Islamabad has also faced difficulties attracting foreign investors.

Pakistan suffers an estimated shortfall of about 2,500 megawatts of power. Mrs. Clinton said the U.S. experts will begin rehabilitating power stations along the Indus River. Washington will also help repair 11,000 agricultural irrigation pumps.

It will be interesting if this translates into coal-fired power. The lack of power is one of the problems that is considered to be contributing to the increased terrorism within the country. (No jobs, and thus encouragement to revolt against the government).

India has a somewhat similar problem, and is also looking at getting support from abroad to help out – the World Bank has, in the past, helped with funding new coal-fired power stations, and there are other plans for expansion. Putting these sorts of activities together leads me to concur that this will be a year that sees the international coal trade continue to grow. As the EIA projects in their reference case:

Source EIA

In regard to the second of the three traditional fossil fuels, namely crude oil, its price has regained significant territory over the past year and is now back to hovering around $80 a barrel. I anticipate that as China becomes more aggressive in the market that OPEC will be able to keep up with the increased demand over the next year but that, by the end of the year (failing any major economic disruption) the economies of the world will have continued to recover, and driving demand will rise with that recovery, to considerably shrink the OPEC surplus. Prices will therefore rise, and I would anticipate that sometime in the next year, whether transiently or more permanently, we will return to around $100 a barrel. That increase will get folks’ attention and may slow the recovery somewhat, but oil supply, while more constrained, will not be a major subject of concern this year. Those looking into the future, however, and that is what these pages will try to do, may see, by the end of the year some additional signs that 2011 will be a year where the balance between supply and demand becomes a lot tighter, and, as a result, small changes in conditions may have a more than usual impact on the market, and thus price.

Which brings us to the third and final of the three, namely natural gas. The situation there is going to get, I suspect, a little more complicated. The movement of increasing amounts of natural gas to China is going to tighten available markets a little, but with the additional liquefied natural gas (LNG) coming from Qatar and the Middle East, and the increasing amounts that will be available from the gas shales of the United States I don’t expect that there will be questions on supply, but instead more concerns that those producing the gas can make sufficient profit to stay in the game. That concern will be a little strengthened by the move in the United States to add increasing regulation to the practice of hydro-fracing the shale, without which the resource is not economic to produce. Depending on the relative astuteness of the different PR firms hired to conduct this battle, (and in the current doubts about climate change this may also provide a different field for the environmental warriors to brandish their credentials) this may or may not be a growing problem by the end of the year. With the general gay abandon with which politicians can shoot themselves in the foot, I would not be surprised to see this be a major debating ground in the political fields above the Marcellus shale. (The rest of the country will likely just be grateful to have a relatively inexpensive fuel source).

Renewable fuels will be a little more controversial this year, as new sites become a little more difficult to acquire and permit, and money for their development remains tight. I suspect that the problems will slowly develop more over the year, but that it won’t be made much of an issue until, again 2011, when, after the next set of U.S. elections are over, we will start to revisit some of these concerns with a little more panic in our voice. Until then the earlier uses of alcohol come to mind, and with that I lift my glass and the traditional dram of whiskey to wish you again, all the best!

Dr Chu, Dr Aleklett and the price of oil

There are a number of us who write about the situation in regard to the world supply of liquid fuels, and the future availability of those supplies. In general we began by gleaning our information from the internet, or each other, and from those relatively amateurish beginnings a community has developed to study the condition of “Peak Oil.” That community was immeasurably helped coalesce and grow by the conferences that began under the ASPO banner, with ASPO standing for the Association for the Study of Peak Oil. Kjell Aleklett began these conferences on the study of peak oil some years ago, and has watched the growth of the community (shepherding, as International President, where necessary) since then.

He has recently reviewed the papers given at the ASPO – USA conference in Denver, providing the type of coverage I would have liked to provide had circumstances been different.

Kjell is located outside Stockholm, in a University that I almost made it to earlier this year and has shown, through his graduate student’s dissertations, that it is possible to acquire and publish a wealth of information about the condition of the various aspects of future energy supply that cast a relatively realistic view of what we might expect in the future. (And if I don’t always agree about some of the conclusions – that is, after all, the underlying basis of scientific discussion).

I look at what he has been able to accomplish, and then I contrast this with the current U.S. Secretary of Energy, an individual who has the vast resources of one of the larger Departments in the United States Administration at his disposal. Their request for funding this year totaled some $25 billion. The imperatives of the Department are listed as:

• Support deployment and expand research of cost-effective carbon capture and storage,
• Accelerate technological breakthroughs with the Advanced Energy Initiative,
• Provide additional energy security expansion of the Strategic Petroleum Reserve,
• Foster scientific leadership with the American Competitiveness Initiative,
• Advance environmental cleanup and nuclear waste management,
• Maintain the safety and reliability of the nuclear weapons stockpile and continue
transforming the weapons complex, and
• Work with other countries to prevent the spread of weapons of mass destruction.

Today the Secretary noted that the rise in the price of oil to $80 a barrel was “making him nervous.”

Folk such as Dr Aleklett have studied the real situation in regard to the future of oil. Based on detailed studies of the actual rate of oilfield discoveries and oilfield production individuals such as Rembrandt Koppelaar (ASPO Netherlands) have been able to produce high quality analysis of the reality of the global oil situation that has caught the attention of groups such as Global Witness, who have in turn produced a report “Heads in the Sand” that documents some of the issues that the global economy faces as future supplies of crude oil are unable to meet demand.

The evidence that forewarns of a problem has been out there for a long time, Sites such as Energy Bulletin and The Oil Drum have documented the evidence that has come to show that non-OPEC production of crude oil has already likely peaked, and the ability of OPEC itself to much increase their production beyond another couple of million barrels a day or so is in serious question.

There is, in short, a problem, and in the United States the responsibility for resolving that problem sits at the desk of the Secretary of the Department of Energy. Who with all due respect should not be surprised at all by the current rise in the price of crude, and the path that the price will take in the future, yet he is!

At least it would if he were paying attention. Unfortunately, however, the listing of the priorities of the Department – given above – show that peak oil or the related issues over the supply volumes and prices of natural gas – are not that great a concern. In regard to coal, the Secretary is more energized in waving Dr Mann’s hockey stick curve relating to the inter-relationship between global warming and carbon dioxide levels (regardless of the uncertainties revealed by the Wegman review inter alia) and willingly ignores the lack of significant global warming since 1998, in order to push climate change activities (see list above) at the price of ignoring the coming crisis in fuel supplies.

Even the British Government have recognized that, while making the politically correct genuflection toward the motif of global warming, that they are responsible for the ultimate fuel supply security of the British Isles, and have gone ahead and permitted more coal mines. Reality has a nasty way of intruding into the discussions of ideology and mandating actions that provide realistic, rather than merely ideological, answers.

Unfortunately at the moment the United States does not seem as well served by its Administration in this area, since the Secretary seems woefully unaware of the underlying fragility of the energy supply situation. Sweden seems better served in this regard, since Dr. Aleklett does provide information to that government, and they seem more aware of the problem, and the steps needed to meet the situation.

Our Secretary sees the problem in a different light

"We've repeatedly said what the world wants and needs is stable prices," Chu said. "They have been inching up recently and it's a little bit concerning."

Oil price volatility can also harm the alternative energy sector, Chu said. He said the fall in energy costs after the oil price shocks of the 70s and early 80s wiped out many clean energy companies.

To help stabilize crude prices, Chu said the administration is working to improve market transparency. In particular, he said the Energy Department is focused on teaching developing countries how to compile energy data.

Um, yes I know, this is one of Matt Simmons pet peeves – but you know what – I don’t think it is really going to help assure our future energy supply, which might, just possibly be something in his job description.

There is a meaning to the current rise in oil prices, control of which has now been passed to the OPEC nations, at least in the short term. If the Secretary is not aware of this, it would be extremely unfortunate not only for him but for the nation, particularly if his on-the-job training meant that he was unprepared when the next phase of this rolls around in the next year or so. Maybe in the meantime he might sit in the odd seminar at Uppsala.

Crude Prices for the rest of the year

As the summer moves inexorably towards its close, debate still bubbles along on the future price of oil over the winter. Of course that brings in the question of what sort of a winter we’re likely to see, and that is also a bit controversial on the climate change front, but I’ll leave the arguments on that to the weekend. Suffice it to say that the current lower temperatures that we are seeing suggests that it is likely to be colder rather than not. If we look at the way the price of crude has varied, there are arguments which might suggest that it could go either way, over the next six months.

Crude oil price volatility.
If the world economy collapses much further then this can further reduce demand, and further slack can appear between available supply and demand. That surplus has been suggested to have the potential to be a “devastating glut”, with the potential to drive crude oil prices down to $20 a barrel. Is that likely? Well with all respect to those making such predictions, I don’t think so.

Certainly this all depends on the economy to a great extent, but we sometimes forget that this is the world economy that we are now discussing, and that there has been a general move to stimulate that economy, not just the efforts now finally starting to add money to the economy in the United States. And yes, suddenly, we are seeing some of that money appear. The pages listing opportunities for research in Energy are suddenly full of requests for proposals for very significant levels of support. And they are getting a lot of response.

The Advanced Research Projects Agency – Energy (ARPA-E) of the U.S. Department of Energy (DOE) completed the submission stage of its first Funding Opportunity Announcement (FOA) released April 27th, 2009. ARPA-E has received approximately 3,500 concept papers for the $150 million available as part of this FOA (DE-FOA-0000065).

The large number of submissions – “Concept Papers” - for ARPA-E’s initial FOA outstripped the expectations of industry observers and highlights America’s capacity for Energy technology innovation that can be applied to transformational research and development (R&D).

ARPA-E’s first solicitation is funded through the American Recovery and Reinvestment Act of 2009. The announcement is primarily aimed at prospective applicants who already have a relatively well-formed R&D plan for a transformational concept or new technology that can make a significant contribution if and when successfully deployed. Submitters of the most meritorious Concept Papers will be encouraged to submit Full Proposals. ARPA-E expects to provide responses to Concept Paper applicants by the end of the last week in July on whether a Concept is likely to form a basis of a successful Full Proposal. The deadline for Full Proposals is expected to be the end of August.

Given that illustration of the arrival of the stimulus monies by the end of the year, and presuming that it holds true also in other sectors of the economy, then there will be some cause for an underlying continuation of confidence. (As opposed to a sudden onset of fear that nothing is working). This will likely be sufficient to hold us away from a return to a collapse of the economy, and with that demand for oil and gas will not suffer much drop at the end of the driving season, and going into the heating season.

With relatively little change in demand the control on supply will reside in OPEC and given that they have been able to manage supply to get the price up to levels that they are comfortable with, I would expect that to continue. Now OPEC does not have instant control of prices, oil supplies take a certain time to get from supplier to user, and for oil to be refined, moved and sold so there will be some fluctuations, as transient imbalances along that route play into speculation and the like. Overall, however I still look to prices rising slightly through the fall.

There are, however, so many political strings to this that making a very confident statement of the future is a path paved with peril. The eventual fate of the Waxman Markey legislation may have an influence on public and industrial perception, depending on how it turns out. Further the degree of international cooperation that this Administration is able to achieve towards their goal, and in building and maintaining public confidence is going to also play a critical part.

I note, for example, that Secretary Chu is currently in China and has agreed to a joint research center on Clean Energy.

The Center would facilitate joint research and development on clean energy by teams of scientists and engineers from the U.S. and China, as well as serve as a clearinghouse to help researchers in each country. Priority topics to be addressed will initially include building energy efficiency, clean coal including carbon capture and storage, and clean vehicles. The U.S. and China together pledged $15 million to support initial activities.

However in the scheme of things, this is not a lot of money at the moment.

Rather, given the rising demand for fuel in Asia, because they are buying more cars and will drive them, and the stabilizing demand for gas elsewhere, I don’t see a sufficient drop in demand that can’t be controlled by OPEC, and I expect that they will continue, therefore to control price, for at least another year.

A gentle cough toward the New York TImes

The NYT sees the current movements in oil prices as being extremely volatile, with “no signs of slowing down.” This implies that the world can expect that not only will prices rise above current levels, but that they can equally well drop to levels down around $30 a barrel.

In my own mind, accepting there is some transience in price, given not only the variations we are now seeing in demand because of the global slowdown in the economy, but also because of the time factor in moving supplies, the market has much less volatility and much greater rationality in performance than it is being given credit for.

Starting with the collapse of the oil price last year, and with demand dropping due to the recession the world was, transiently, in a period where there were was a significant surplus of production. But as that became evident, so OPEC moved to cut back production, so that the dramatic drop in price that signified over production was only transient in nature. At the time OPEC commented that an oil price in the $65 - $75 range would be a fair one, and one that they could live with. It would appear that they now have sufficient control of the market that they can achieve, and hold that price. However that only holds true for the short term.

It is being increasingly accepted that non-OPEC producers cannot, overall, further increase their production, and that, instead, from this point forward, non-OPEC supplies will decline, albeit in the short term only slowly.
Thus control of the supply moves to OPEC, and by cutting back on supply, to match demand, they were able to stabilize, and then gradually force an increase in the price, to a level that they remain comfortable with. I expect that, over the next year, they will be able, by adjustments in supply, be able to sustain the balance and thereby stabilize the price of crude at levels they are comfortable with. As I noted recently there are some indications that the drop in demand for transportation fuel has reached bottom, and is picking up, not only in the United States, but with the increases in vehicle numbers in China and India, also globally.

Unfortunately, the ability of OPEC to further increase supply, bringing their production back to the highest levels of 2008, will not potentially, be able to overcome the decline in non-OPEC production for long – even though we are talking about differences of only on the order of 1 mbd. Because as soon as that inequality re-establishes then I fear we will be back to the rising prices of oil that take it beyond OPEC control since they will be unable to pump the additional oil needed to hold the supply adequate to demand.

When will that occur, at present the leaves are too difficult for me to read, but I strongly suspect that it will be before the next Presidential election. Within that time frame I suspect we also will not see the volatility that the Times anticipates, but rather (with relatively minor perturbations) a slow but inexorable rise in price

P53. Pick Points

Half-a-dozen or so stories that might be of interest:

There does appear to be a little recognition out there now that oil prices have hit a floor, and may perhaps be bounding up a little. I suppose if I was that kind of blogger I would point to the post where I said so, but let’s be a little cautious a week or so longer. Ecuador thinks that the price should really be $80 (per barrel) but would be happy with $60. Although Shell admitting they weren’t replacing their withdrawals from reserves, might also have helped. With some of the excess oil that has been held in tankers now coming onto the market perhaps others are seeing the sort of signal that says we may now see a crawl back up in price. It was only a month ago that something like 80 million barrels was being held in these vessels, given that a VLCC (Very Large Crude Carrier) can hold up to 2 million barrels, and with 45 tankers having been used that way, there was a lot to ease back into the market. Shell sold their first two tanker loads (some 1.2 mb) back at the end of January and it seems that others are now also finding a sale.

The lower supply price for natural gas is now reaching the point (as winter demand dies) that supply companies are starting to pass on their savings to the customer. For example up in Canada, Enbridge Gas Distribution has just go permission to drop their price from 30.4 cents per cu.m to 23.5 cents. For a household using 3,000 cu m per year, this will save some $230. (That price converts to a drop from $8.60 to $6.65 per kcf). Similar things are happening in New Hampshire with the utility there, Unitil Corp, is getting a new rate of 69 cents per therm, (or $6.90 per kcf), which is down 26% on recent prices, and 56% from last summer’s peak ($15.50 per kcf). There are some out there, however, that have picked up the message I have mentioned here earlier, that as rigs drop off, so availability will again become tight, and thus prices could double again by next year. Next January’s futures are up 49% on April. However, while I was looking at a 20% shortfall some time into early next year, with the current fall in production, some are seeing 5% drops by the fourth Quarter. And looking back in history (which I favor)

The last time drillers stopped rigs at this pace was seven years ago, when futures advanced 86 percent. The world's biggest hedge funds have already started to close bets on a drop in prices, government data show. Natural gas tumbled 30 percent this year, the worst start since 2006, as sales weakened with the recession.

I usually only just look at the weekly EIA numbers for crude, gasoline and natural gas, (and those comments may be a few hours delayed since I am working in Sweden) but it is worth having a quick peak at the coal forecasts, which come out on Monday’s. For reference here are the current spot prices for coal:

Source EIA

In case you were wondering why most utilities are buying Powder River Coal from Wyoming. The amount of coal being produced and used is remaining fairly stable.

Source EIA

The blue line for last year shows record production levels, that are, at this time, not anticipated to occur this year because of the economy. However, when one looks at the international market, where last year saw record prices of up to $300 a tonne, (sometime I will start correcting for the difference between short tons (US) and metric tonnes (most others)), the market is currently looking at prices of around $115. Of course that view came from New Zealand, where a new coal offering was fully subscribed. Australia is hoping to settle, for the moment, at around $70. But those who think that the global slowdown will seriously reduce consumption, might want to consider that China’s imports were at the highest level in 22 months in February, at 4.88 mill tons, and with prices being bruited of $62.10 per ton in Newcastle, Australia, they may not be the only ones that come calling. (But part of the demand relates to internal Chinese politics over the price utilities will have to pay the mines for coal). It might also be worth noting that in order to sustain their economies both China and India are pouring money into infrastructure, and that means steel, and steel means iron, and iron means coal. India is going into elections this year, in case you had forgotten. However the number of ships lined up to take coal at Newcastle has dropped from 70, eighteen months ago, to 15.

Well having just skimmed around the big three tonight, I thought I’d leave room for a couple of pictures. Back when we went to Cork for the ASPO Conference , Colin Campbell laid on a piper to lead us in to dinner. Well I was led to where I was ended up deciding to eat tonight by pipers* in the Stockholm Gamla Stan.


Pipers in Stockholm

And then when I wandered back to the hotel, I found that the Royal Palace had been surrounded by a belt of snow about a street wide, and some 20 cm (8 inches or more) thick of artificial snow. Maybe they thought I missed it, or was expecting it (it was snowing when I arrived). Anyway, not a good picture in the light, but just to show, these are normally the steps up to the Royal Palace.

Snow covering the stairs into the Royal Palace

(it’s artificial, and 20 cm plus deep)
* I actually dined on moose, and cloudberries, just around the corner.

OPEC decisions, Cap and Trade, and Scientific Conclusions

The real impact, as opposed to the immediate market response, of the decision of OPEC not to cut their current levels of production will not be seen for some time. The impact will lead to a slow but steady increase in price if it is married with a more rigid compliance, by the OPEC partners with target production cuts, particularly if Russia stands by its commitment to redirect oil from export to domestic production, though there is some question as to whether the Russian cut is completely voluntary. The question out of this remains, however, how well discipline will be retained, through the summer, by the OPEC partners. Now this is, to a degree, a guessing game, and one has to offset the annual increase in gasoline demand as driving picks up for the summer, with the declines that arise out of the shrinking economy to first decide whether there will be increased demand to consume any surplus in the existing supply volumes, thereby increasing prices, before one begins. This is where, at the moment, opinions differ. What will happen first, an increase in demand, or the impatience in the OPEC nations to individually make more money by increasing production, while the rest of the group practice restraint.

My take at the moment is that the ability to show restraint has had an effect. Prices are beginning to rise, and this effect of the cuts has to have an effect on the thinking of those trying to sneak out additional supplies. Further, if Russia does go along with their proposed export cuts, then this is going to further reduce supply, even as China is still providing incentives to increase demand. But these factors take time to realize. Shipping volumes of oil from point A takes time, and the impact of stopping the tankers takes time also, before it has an effect. How long? About a month before the hypothetical becomes the real in this case, I suspect. The market will react in the next few days, and their result is more ephemeral, but will not, in the longer term stop the slow increase in prices that we have now been seeing for a while. Whether that increase will stop at the end of the summer is a whole different question, and for that we’re going to have to see, among other things, what happens with Russian supplies.


The second thread I would like to weave is that of the move toward cap and trade legislation. The early assumption that this would be a simple deal already seem unrealistic, and the forces lining up on either side have become more numerous that in earlier times.

In the five years since Congress last voted on climate change, there's been a 300 percent increase in the number of climate lobbyists, according to the Center for Public Integrity. There are now more than 2,300 lobbyists from 770 companies and organizations -- more than four lobbyists for every member of Congress.

And those lobbyists collected at least $90 million last year from 770 companies and organizations, including the American Coalition for Clean Coal Electricity, a group of 48 firms that spent a total of $9.95 million exclusively on the issue.
The explosive growth in energy lobbying was reported last month by the Center for Public Integrity, which noted that just 45 percent of the interests now weighing in on the issue were energy companies and manufacturers, compared with 70 percent in 2003. Finance and investment firms, which had virtually no role in the debate in 2003, now have about as many lobbyists as alternative energy corporations, according to its report, "The Climate Change Lobby Explosion."

At one time the President had, apparently thought to use reconciliation procedures (which require only a Senate majority) to get the legislature through, but:

By threatening to use the budget reconciliation process (which requires fewer votes) to pass climate legislation, the administration has kicked a hornet’s nest. Yesterday, 28 senators led by Robert Byrd warned the President not to try such a “backdoor” approach to such sweeping regulatory change.

The second type of opposition is more substantive. It started after the budget was unveiled, which included $646 billion in federal revenues from a yet-to-be-written climate bill. The lion’s share of that money–$63 billion out of $78 billion in 2012—is set aside for tax breaks, not for energy research or anything else directly related to the environment or climate change. Some $15 billion per year is earmarked for clean-energy research, exactly matching President Obama’s campaign pledge.
As Mr. Leonard notes, that kind of rebate has many environmentalists upset—what’s the point of a cap-and-trade plan to change energy behavior if consumers don’t feel a reason to change?

The note is from Andrew Leonard at “How the World Works.”. I have written earlier about the need for cap and trade money to cover some of the tax cut needs. The only change since then is a growing sense that this is not going to happen this year. Senator Reid has said he will divide the process, and this way well further weaken the chances of getting there this year. And then next year gets back into an election year, so it may, again, prove more expensive to try and get that final part of the process through.

And the revenue from the system, and its viability are vulnerable to the recession, and fall in power demands. Consider the experience in New England:

The complex arrangement, called a "cap and trade" plan, works like this: Power plants obtain emission allowances from states for every ton of carbon dioxide they emit, with plants that emit larger amounts having to obtain more allowances than cleaner ones. As the cap is reduced, there are fewer available allowances, pushing the price up and thus encouraging the dirtiest power plants to instead invest in cleaner technologies. Over time, cleaner power plants will then out-compete dirtier ones.

But with emissions now about 17 percent below the cap, allowances are not in particular demand, so market forces are not kicking in. Emission allowances are not expected to get high enough anytime soon to spark investment in clean energy.

The experience has been similar in Europe. So without the surety of income, and the political cost of putting up the price of power, this may be a lot longer coming, and all those lobbyists will just have to work that bit harder to get there.

And the final thought relates to President Obama’s comment earlier this week on scientific integrity:

But let's be clear: promoting science isn't just about providing resources - it is also about protecting free and open inquiry. It is about letting scientists like those here today do their jobs, free from manipulation or coercion, and listening to what they tell us, even when it's inconvenient - especially when it's inconvenient. It is about ensuring that scientific data is never distorted or concealed to serve a political agenda - and that we make scientific decisions based on facts, not ideology. 

By doing this, we will ensure America's continued global leadership in scientific discoveries and technological breakthroughs. That is essential not only for our economic prosperity, but for the progress of all humanity.



That is why today, I am also signing a Presidential Memorandum directing the head of the White House Office of Science and Technology Policy to develop a strategy for restoring scientific integrity to government decision making.

And is this where I ask how well that is going to be applied to the debate on climate change ? David Shaywitz has an interesting column on this (I really do read other papers) on Saturday, and I agree with a fair bit of what he says. He points out that the initial announcement of a research result gets lots of press, but should it prove wrong the correction rarely gets much of a mention. He discusses the paper by John Ionnidis who found that the majority of research findings published are in error, and

In this framework, a research finding is less likely to be true when the studies conducted in a field are smaller; when effect sizes are smaller; when there is a greater number and lesser preselection of tested relationships; where there is greater flexibility in designs, definitions, outcomes, and analytical modes; when there is greater financial and other interest and prejudice; and when more teams are involved in a scientific field in chase of statistical significance.

Mainly this was written about medical research, but it has considerable application, I would expect, in other fields. And so consider Shaywitz’ opinion

University researchers are in a constant battle for recognition and the rewards associated with success: research space, speaking engagements, funding and autonomy. Consequently, while academic research is often described as "curiosity-driven," the reality is messier . . . . . . since academic success is determined almost exclusively by the number and prestige of research publications, the incentives to generate results are exceedingly powerful and can encourage investigators to see patterns that may not exist, to disregard contradictory observations that might be important, to overvalue data that might be preliminary or unreliable, and to embrace conclusions that deserve to be viewed with far greater skepticism.

I leave you therefore with the thought that I did offer some conclusions in this post, but on the other hand, it is hard to see my reward in the list provided (grin).