Politicians… as Usual… Are Wrong on Oil

BCFS

Just ignore anything thing that comes out of a politician’s mouth when discussing oil prices, whether that politician may be President Obama or Denny “I do believe I fell off my horse” Rehberg.  For that matter you can also ignore Faux News’ claim that financial speculation is the key culprit of high oil prices because the reality is that the main driver behind oil prices is a lack of sufficient supply.

The Oil Drum has a great analysis (which continues in the comments) up at their site that comes to this very conclusion.  It’s a long, and a very technical post, but well worth the read.

The basic problem the world is facing in the short-term is that the great oil exporters aren’t so great anymore.  You see, the major exporters have been massively developing their countries over the last 20 years trying to diversify their economies away from a dependence on oil exports.  This has strangely had the reverse effect of making their economies more reliant on oil.

In 2005 total world exports were 40.8 million barrels per day (mbpd) as compared with 35.7 mbpd in 2009, a  12.5% decline in only a matter of 4 years.  While data might not be available for 2010, the news only gets worse.  Both Russia and China have instituted export restrictions so as to support their domestic economies.  This will lead to a further reduction in total oil exports.  The news out of Russia, being the world’s second largest oil producer, does not bode well for the oil importing countries of the world.  Add in the fact that Saudi Arabian oil production peaked in 2005 and Russia peaked in 2007.  No country can replace these two producers and so the decline in world exports will continue and with it prices at the gas station here in America will continue to rise.

Two additional variables complicate the situation.  The first is political.  Already the Arab Spring is effecting oil exports coming out of the Middle East.  But on-top of the unrest directly leading to reductions in oil production regimes that are desperate to hold on to their power are already starting to spend oil revenue on social programs with the aim to buy the silence of their populace.  That leaves less money to invest in future oil production and will lead to an otherwise faster decline in production.

The second, is the economic principle of diminishing returns on investment.  This is an economic fact that was drilled into my head in economics class.  Usually, this principle is couched in the terms of labor vs. capital.  Each additional laborer produces a certain amount of profit, add too many workers and that rate of return decrease and will eventually go negative.  Same with capital.

Energy markets are subject to the same principle but in a slightly different manner.  The principle here is “energy returned on energy invested” (EROEI).  Back in the day when oil was first discovered, the EROEI was in the range of 30-50, meaning for every unit of energy expended in production, 30-50 units of energy were actually produced.  Now however, we are down to the point of extracting oil at an EROEI under 10, with tar sands right about 5.  So we are reaching the point of having to expend a lot more energy and money to get just a little bit of energy in return.

Now, You can take this principle and expand it a bit further.  Lets take for example infrastructure investment, in this case our national highway network.  Because this type of investment is public, the return on investment would be the total economic activity spurred by said investment, ranging from the construction jobs created directly from the investment to the development of real estate on former farmland and the sale of cars that fill up said highways.

Between 2004 and 2008 23,300 miles of additional roadway were built in America.  Now the first 23,300 miles that were built in the system way back under Truman contributed much more to the economic prosperity of our country than the last 23,300 miles.  Why is that?  It’s because of all that previous investment.  Not only is that last 23,300 miles a marginal amount at this point compared with all that previous investment,  but all those thousands of miles already built require a lot of investment each and every year just to maintain.  All the maintenance required to keep up that old investment takes away from the ability of a nation to invest in new infrastructure.

This same phenomenon is occurring in places like Saudi Arabia.  Once you’ve gotten to all the easy oil, you have to spend an increasing amount of money just to tread water.  From The Oil Drum:  Saudi Arabian oil officials met with Halliburton to discuss plans to boost their oil-directed rig count by roughly 30%.

According to a Saudi oil official interviewed by Reuters, the investment in new drilling rigs “is not to expand capacity. It’s to sustain current capacity on new fields and old fields that have been bottled up.” (1) This news on its own should be troubling as it infers that the Kingdom is facing significant declines on currently producing fields. Even more troubling is the recent statement by another senior Saudi oil official that the Kingdom “expects oil production to hold steady at an average of 8.7 million barrels per day to 2015.”

Increasing investment by 30% just to stay barely above water.

Drill-Baby-Drill!

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  1. Ingemar Johansson

    “Now however, we are down to the point of extracting oil at an EROEI under 10, with tar sands right about 5. So we are reaching the point of having to expend a lot more energy and money to get just a little bit of energy in return.”

    Like in corn ethanol?

    • Steve W

      Another bad idea, Swede. When it comes to fuel, though, not necessarily when it comes to spirits.

      But producing ethanol from Jerusalem artichokes (also known as sun chokes) is a pretty good idea, as is producing ethanol from sugar cane.

  2. carfreestupidity

    Ingy… Corn ethanol is much worse actually. The EROEI of corn ethanol is less than 1, meaning that it takes more energy as an input to produce the output of corn ethanol.

    Ethanol from sugarcane has a EROIE of about 8, better than tar sands.

    Taking into account the differences in the externalities produced by these products is also important. Tar sands produce a lot more pollution because of the heavy refining required (all that refinement is part of the reason the EROIE is so low) and also completely destroys the ecosystem dirrectly adjacent to the extraction point.

    On the other hand, using crops for ethanol requires inputs such as fertilizers which pollute the ground water, again destroys the ecosystem through the application of crop monocultures, and takes agricultural land out of production for growing food.

    Damned if you do, damned if you don’t.

  3. Ingemar Johansson

    On the “Diminishing Returns” theory. From your link.

    ” A common sort of example is adding more workers to a job, such as assembling a car on a factory floor. At some point, adding more workers causes problems such as getting in each other’s way, or workers frequently find themselves waiting for access to a part. In all of these processes, producing one more unit of output per unit of time will eventually cost increasingly more, due to inputs being used less and less effectively.”

    Now lets apply that to Williston ND. In eastern ND there’s about 170 working oil rigs. Unemployment @ 2%. While there is a problem of lodging there isn’t a problem of any one tripping over any one else.

    Then there’s the security aspect. Producing and purchasing more domestic oil makes us less dependent on countries who don’t have our best interests. Hugo’s threatened many times to cut us off.

    What about trade defecits? Even tho we didn’t ship our domestic oil overseas wouldn’t it be better to reduce the flow of dollars overseas. Hell, you guys are always complaining ’bout Chinese crap.

    Looking at the arguments in the comments (Oil Drum) you can say that there’s no cut and dry solutions and complexity rules the day.

    • carfreestupidity

      What?! where is the one liner or the you tube video? Are you off your meds or something Ingy? ; ) Glad to see you participating in some substantive debate.

      “While there is a problem of lodging there isn’t a problem of any one tripping over any one else.”

      While this is true, no corporation would be stupid enough to actually have that happen. After all, they are in the business of making mad profits, and to have unproductive workers is to lower quarterly earnings.

      I would also add the argument that diminishing returns is at work in the setting you describe. Since there is a limited (inelastic) supply of physical capital in rural environments (e.g. lodging, restuarants, grocery stores, gas stations, etc.) limited by the long-term population of a rural town, An influx on the scale that oil exploration and production brings to an area in the short-run drives the prices up on all goods and services in the area and probably even raises the cost of labor locally because of a shortage in workers to provide services to the oil workers.

      Therefore, for every additional oil worker brought in to work the fields raises demand on the already constrained supply of just about everything. Thus, every additional oil worker added at the margins adds to the inflationary pressure and raises the corporation’s cost of doing business.

      This type of diminishing return per worker logically puts the breaks on further development until the logistical and supply constraints can be addressed.

      • Ingemar Johansson

        In case you haven’t noticed I have terrible typing skills. Cut, pasting, and utubes are my friends.

        Back to DR’s. It seems to me that the ample Bakken fields do have growing pains, but not to the extent that you wish for. At this time houses are being built along with new hotels. Self contained “Man Camps” are being brought in by the exploration companies. Come to think about it supplies that would have normally been purchased in a booming or stable economy will not reach their expiration date because it’s being shipped north.

        Let’s look at the North Slope. No mom/pop grocery stores. No nothing, except company supplied room and board.

        Same with off shore, only worse. This regime cancels permits, the floating rigs leave that area of the gulf for more friendly waters, lets’ say off the coastline of Brazil.

        Saturation point reached. Hardly.

    • carfreestupidity

      I should also add that even if we were to drill for oil in every single spot and suck dry every last ounce of recoverable oil in the short run we still wouldn’t get anywhere close to replacing oil imports. You might dent imports by a few percentage points, but what you’ll end up with in the end is domestic oil supply depleted even faster and then we are back to relying on imports.

      Lower 48 oil production peaked in the early 70s and Alaska peaked in1988, we will never (no matter how much investment and technology we throw at the problem) reach those production levels again.

      Let me ask you this, when would it be better to take full advantage of our remaining oil supplies here at home? Right now and over the course of the next decade to ease our current economic doldrums or once the full affects of peak oil become apparent and we can fall back on our domestic supply to cushion the blow?

      • Ingemar Johansson

        Let me be blunt. Oil shale development scares the shit out of smart environmentalists. I’m even thinking it scares conventional oil companies, mostly they’ve missed their opportunity.

        Take your Oil Drum article. That could have been written by some one or company who won’t profit one nickel from it’s development. Oil shale has a more defined location with few lease holders. It’s no secret that the US/Candian OS contains billions gals. of oil. And that’s based off the existing tech.

        There’s tons of environment regulations preventing the building of new refineries. OS is all new, meaning build-able before the govt. screws it up.

        Why the all out war? Why are we hearing nightmarish stories of cancer stricken Indian tribes. Why are we protesting the moving of OS related equipment? Why are industry scholars and academia saying this won’t pencil?

        Why the hell do you care? If I ran the Sierra Club I’d say roll them bones and go belly up, especially if the first one on line in Canada. They go bust and Colorado or Utah will never happen.

        Not the case, there’s profit to be made. And that’s whats really scary.

  4. Pogo Possum

    I just did a search for jobs on the North Dakota Job Service.

    I searched for all jobs in Williams County (population 21,136) North Dakota that boards northeastern Montana and is a growing area in the Bakken oil patch. (Note: I used the most recent census data I could find that was the preliminary census data as of July, 1 2010.)

    Here is what I found:

    “Your search found more than 500 jobs. Listed below are the 500 most recent, representing at least 840 position(s), that matched your criteria.”

    http://www.ndworkforceconnection.com/jobbanks/joblist.asp?session=jobsearch&geo=3804000105&t=q&faqq=&geotype=&city=&zip=&radius

    I then ran the same criteria and filtered it for jobs requiring “0 months of previous experience or less” and came up with this:

    “Your search found 233 job(s), representing at least 683 position(s),that matched your search criteria.”

    I ran another search with the same criteria but filtered it for jobs that paid at least $30,000 per year:

    “Your search found 167 job(s), representing at least 408 position(s), that matched your search criteria.”

    I then upped it to $40,000 per year:

    “Your search found 118 job(s), representing at least 310 position(s), that matched your search criteria.”

    Finally, I did a search for all of Williams County with just the word “oil” in the word filter and found this:

    “Your search found 318 job(s), representing at least 831 position(s), that matched your search criteria. “

    I went to the Montana Job Service web site. While it couldn’t find similar search filters for jobs, the results speak for themselves.

    I searched for all job listings in Richland County (population 9,392) Montana. Richland County boarders Williams County and is also in the Bakken.

    A quick search for all listed jobs came up with 248 listings. (I assume the number of positions is higher just like on North Dakota’s search site.)

    I did the same search for Missoula County (population 109,327) and came up with 294 listings.

    I just completed a week tour of eastern Montana. Every restaurant I visited was full any night of the week. There were “help wanted” signs hanging in every town. People were cautious but extremely optomistic about their futures and greatful for oil.

    If you need a job, head to the Bakken.




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