The Best Place to Look for New Oil Is In an Old Oil Well

About 80% of the conventional oil being produced today comes from fields discovered before 1973.... Yet 65% of the original-oil-in-place remains trapped. _OilVoice

How would you go about getting the remaining 2/3 of crude oil out of old oil wells? Sometimes you can't, but in many cases it is more economical to squeeze more oil out of exiting well -- using enhanced recovery methods -- than to find and drill new wells, or to convert other feedstocks into crude oil.

Oil Voice

According to the chart above, different methods of enhanced oil recovery vary wildly in terms of cost per oil recovered. They also vary widely in terms of average oil recovered, and the potential for further oil recovery after the technique has been utilised.

Techniques of Enhanced Oil Recovery

Potential Microbial Enhanced Oil Recovery Processes A Critical


Microbial oil recovery is one of the least utilised, but promising, techniques. Here is more on the "Titan Process," listed in the topmost chart above as the most economical method of recovery of those listed.

More than 20,000 wells are abandoned every year in the U.S. as they become non-commercial. Approximately 285,000 shut-in wells in the U.S. are potential targets for MEOR revival. Internationally there are about 800,000 more shut-in wells, a significant percentage of which may benefit from the Titan Process.

...The Titan Process is unique because it does not require the microbes to excrete anything. The microbes are induced to become interactive with trapped oil causing it to break into smaller droplets with reduced interfacial tension (“frictional” effects between oil and water), so that oil can flow more freely through the rock formation. The oil characteristics do not change, but the flow characteristics and relative permeability to oil are significantly improved. _OilVoice

Bit Tooth Energy

As you can see, microbial oil recovery has a lot of room to grow, compared to other EOR techniques. The same is true for other up and coming EOR approaches -- such as nanotechnology EOR.

The many different possible ways to produce crude oil and crude oil substitutes offer many potential investments for energy observers. Oil field service companies that provide services such as fracking and EOR are particularly attractive at this time -- as long as Obama and other energy starvationists do not shut them down.

Russian Oil Production to Decline Despite Vast Resource

Russia has the largest land area of any nation. Its land is not only vast, but rich. Oil, gas, base minerals, diamonds, precious metals, high quality timber, vast freshwater resources -- Russia has it all.

But due to corruption and bad management, most of Russia's production infrastructure still dates to the Soviet era, old and decrepit. The same is true for most of Russia's vaunted military infrastructure. And worst of all, the core population of ethnic Russians is shrinking -- being replaced by Central Asian immigrants with divided loyalties.

And so Russia's oil production is doomed to go the way of Mexico's, if Russia refuses to spend the necessary amount to upgrade its production infrastructure.

While a decade of rising oil output and prices fueled the resurgence of the Russian economy and the Kremlin, a tougher future beckons. The International Energy Agency forecasts a slight decline in Russian oil output for the next two decades. _WSJ

The corrupt Putin oligarchy is indistinguishable from a third world dictatorship in the way that it is stripping the country's natural resources for the enrichment of top officials and their close crony connections.

Russia's western Siberian fields—60% of the country's current output—are a declining Soviet legacy. Offsetting this with new fields in areas like the Arctic offshore will be challenging and, hence, expensive.

Lower exports and rising costs point to smaller margins for oil companies—and a smaller take for a state whose dependence on energy revenue has increased. Unless Russia can crack modernization and diversification for its economy, this represents a crisis in the making. _WSJ

If oil production and oil income decline, there will be less booty to pass around the table of kleptocrats. That would likely shift the attention of the oligarchs to the scavenging of other parts of Russia's infrastructure -- the military in particular.

The comparison of Russia with Mexico is not as far fetched as one might think. The same loss of control of vast parts of the landscape to criminal organisations that one sees in Mexico, is taking place across large areas of Siberia -- extending even West of the Urals. Of course in Siberia, Chinese interests are also beginning to insinuate themselves in a large way. Moscow -- like Mexico City -- is losing its ability to control outlying areas.

One of the worst things that could happen is that the Russian government could intentionally or unintentionally lose control of its nuclear arsenal. Should that happen, Russia and the rest of the world would have much more to worry about than the price of oil.

Residual Oil Zones -- Up to 100 Billion Barrels Oil in US

Billions of barrels of oil that could increase domestic supply, help reduce imports, and improve US energy security may be potentially recoverable from residual oil zones, according to initial findings from a study supported by the US Department of Energy’s Office of Fossil Energy.

Residual oil zones, called ROZs, are areas of immobile oil found below the oil-water contact of a reservoir. ROZs are similar to reservoirs in the mature stage of “waterflooding,” in which water has been injected into a formation to sweep oil toward a production well.

In the case of ROZs, the reservoir has essentially been waterflooded by nature and requires enhanced oil recovery (EOR) technologies, such as CO2 flooding, to produce the residual oil.

DOE estimated in 2006 that ROZs could contain 100 billion bbl of the 1.124 trillion bbl of technically recoverable oil in place in US reservoirs (OGJ, Mar. 13, 2006, p. 30). _OGJ_via_Peakoil.com

The actual amount of ultimately recoverable oil in the US is likely to be far higher than the official 1.124 trillion bbl of technically recoverable oil estimated by the US DOE. But that is the way it always seems to be: there always seems to be much more oil & gas in the long run than was first estimated.

UTPB will further delineate the presence and size of ROZ areas in the Permian basin of Texas and New Mexico using geophysical well logs and well test data, core and fluid samples, and water chemistry data. Researchers will also determine if 3D seismic can be used to identify the higher-quality portions of the ROZ resource to assist small oil producers in the Permian basin and other US ROZ basins.

According to OGJ’s 2012 worldwide EOR survey, US CO2-EOR production is 350,000 b/d of oil (OGJ, Apr. 2, 2012, p. 57). Nine industry ROZ CO2-EOR pilot projects in the Permian basin of Texas account for 10,000 b/d of oil. Results and findings from DOE-supported research should help to increase recovery from this domestic resource and create American jobs, the Office of Fossil Energy said. _OGJ _ via _ PO.com

Advanced methods of oil recovery are being developed every day, increasing yields, reducing ultimate costs, and pushing back peak oil doom with every new innovation.

Once the widespread use of cheap high quality heat from scalable and site-based high temperature gas cooled reactors (HTGRs) becomes available, I would not want to be known as a peak oil doomer in public. Oh the humiliation!

Schlumberger Invests $1 Billion Yearly in R & D

Schlumberger invests roughly $1 billion a year in research and development, a level it maintained even during the slump after the 2008 financial crisis. That is as much as the mighty ExxonMobil spends; as a share of sales, five times more. The big OFS companies now probably file more patent applications than the oil majors, whose technological skills are largely interpretive. _Economist

Innovations in directional drilling, advanced hydraulic fracturing, and increasing ability to drill more deeply into more types of terrain, are advancing the art of oil production worldwide. The companies which are pushing these technologies the most quickly are largely to be thanked for the revolutions in production across North America -- and in the deep ocean.

Oilfield services (OFS) firms such as Schlumberger are the unsung workhorses of the oil industry. They do most of the heavy lifting involved in finding and extracting oil and gas. They are far less well-known than the oil firms that hire them, but immensely lucrative. Schlumberger, with headquarters in Paris and Houston, earned profits of $5 billion on revenues of $40 billion last year. Its market capitalisation has risen fourfold in the past decade, to $91 billion. That is bigger than several international oil companies, including ENI ($82 billion), Statoil ($75 billion) and Conoco-Philips ($71 billion).

With the price of oil so high, firms are scrambling to pump it out of ever more remote and costly crevices. Over the past decade the oil industry’s annual spending on exploration and production has increased fourfold in nominal terms, while oil production is up by only 12%. The big services companies, which invest heavily in technology (see chart), have been growing by around 10% a year. According to McKinsey, a consultancy, OFS companies grossed around $750 billion last year.

The oil business is likely to grow even more dependent on brainy OFS firms. Global production from mature oilfields is falling by between 2% and 6% a year. In the North Sea it has declined by 6% a year on average since 1999. With global demand for oil growing by 1-2% a year, there are persistent fears of a supply shock. Hence the current high oil prices: even after a 20% fall in recent months, Brent Crude is now around $100 a barrel. Oil firms are searching harder in more remote places, such as the Arctic and the deep seas off Brazil. Operating in such places will require yet more snazzy technology.

Schlumberger is planning more of what it is best at: pushing the technological boundaries of extracting the black stuff. It has recently been busy making acquisitions—including of Smith International, an American drill-bit company, for $11.3 billion—which have given it know-how in most segments of exploration and production. It now hopes to re-engineer the entire process.

The prize of increased efficiencies—delivered in barrels of money, not oil—could be vast. A big deepwater drilling rig costs half a million dollars a day to rent, and can take three months to drill a complicated well. Any OFS company that can shave a few days off that time will be in the money. Drilling is thrilling, and getting more so. _Economist

Investment into innovative oil production and recovery technologies is one of the reasons why peak oil has been pushed back many decades past the time that peak oilers began to predict it. While cultists are chanting "EROEI - EROEI . . ." in darkened cloisters, more ambitious men and women are busy at work, solving problems.

It is a difference in philosophy and outlook, between the doomers, and those who have important things to do.

Russia's Dysfunctional Economy Hurts Its Energy Sector

Russia is a difficult country to analyse. It is the largest nation on Earth, rich in natural resources and human resources. And yet it is burdened with dysfunctional government, a dysfunctional economic and legal system, and an atmosphere of vague despair that lingers despite multiple changes in leadership over the decades.

The Russian market this spring fell faster than other so-called BRIC countries of Brazil, Russia, India and China and since mid-March is down 18.8 percent. Global oil prices have slumped, reducing expected earnings.

But even taking earnings into account, investors take a dim view of Russian equities. The Russian stock exchange now trades at an average price to estimated earnings ratio of 4.28, compared with the MSCI Emerging-Markets Index average.

It is a glum statistic for Russia, particularly as President Vladimir V. Putin is planning a wide-ranging sale of state assets to raise money for increased military and social spending promised during his campaign. The price-to-earnings ratio comparison means that, statistically, a company that mines gold or pumps oil in Russia is worth less than half as much as a company that extracts the same amount of gold or oil just as efficiently in Brazil or Indonesia.

For all the value in the Russian economy, this wealthy industrial superpower cannot convince investors that it is safe place to put money — even an oil company is a hard sell. _NYT

No wonder. When wealthy Russia cannot convince insurance companies to insure joint projects inside Russia, of course it will not be able to convince most investors to take the huge risks of exposing valuable assets to the kleptocratic Russian bear. The Russian government treats all assets -- public or private -- as its own little treasure chest of goodies.

Sergei Aleksashenko, a former deputy finance minister, said in an interview that Russian energy companies are routinely subjected to this “system of unofficial requests,” from the Kremlin — for financing everything from presidential palaces to ski resorts to military installations.

“It doesn’t really matter what it is for,” Mr. Aleksashenko said. “You receive a request and you cannot refuse.” _NYT

Mr. Putin and his friends have their fingers in all the concentrations of wealth and power inside the country. The corruption takes place overtly and covertly, legally and quasi-illegally. It is organised crime on a massive scale, and shows no sign of being curtailed -- particularly as long as weak and inept clowns such as US President Obama are in charge of the western bloc.

Based in the Siberian city of the same name, Surgut is a private company but managed by a Soviet-era director who is close to Mr. Putin. It sells much of its oil, about $127 million a day based on average prices for Russia’s export blend oil, Ural Crude, last year, to a similarly opaque commodities firm called Gunvor based in the Netherlands and co-owned by Gennady Timchenko, another longtime acquaintance of Mr. Putin.

The company has emphasized other measures of success than stock price, including high salaries for employees and a favored statistic of Soviet oil ministers but not modern petroleum analysts: the number of meters of well bore drilled. Surgut has yet to publish its 2011 annual financial report on its Web site but, in a press statement, made public that it had drilled 4.75 million meters last year.

The owners of 70 percent of the company remain a mystery. In conference calls with analysts, the company has said its own executives own a majority of the shares... _NYT

More at link above.

Russia is undergoing a demographic collapse of its core population. The country is a public health disaster. Its military and military-industrial infrastructures are rusting and crumbling under the weight of corruption, neglect, and nepotistic incompetence. And Russia's energy infrastructure -- desperately in need of foreign capital and expertise -- is going the same way of slow motion collapse. Unless something of significance changes.

Stay tuned.

Daniel Yergin on Iraq's Oil Boom

Energy Insights Global Oil Production Review Iraq's resurrection from oil death has provided an interesting side story to the energy and oil news worlds. Under corrupt national oil companies, expensive infrastructure often rusts into oblivion, through neglect and political malfeasance. But under Iraq's new regime of international competing bids and producers, there is much more incentive for the foreign producers to maintain expensive equipment, and to be more careful of the oil resource in the ground.

Here are some excerpts from a long a rambling interview of Daniel Yergin, conducted by someone who obviously knows more about political agendas than about energy.

And Daniel Yergin joins us here in Studio 3A. Nice to have you back on the program.
DANIEL YERGIN: I'm delighted. Thank you.
CONAN: And how promising are these numbers about Iraq?
YERGIN: Well, it's been a long time coming. What it means is Iraq is back to where it was in 2001 so - but it's certainly an improvement. It's coming at a time when sanctions are going in place on Iran, and there's a premium on supplies coming from other countries, and Iraq is one of those countries.
CONAN: Iraq always said to have enormous reserves that could make it, well, almost on a par with Saudi Arabia.
YERGIN: Yeah. Well, that will take a very, very long time. There are very optimistic numbers out there from the Iraqi oil minister and others that would get it on a par, but it's a very big job to even get it to, say, maybe a little more than half of what Saudi Arabia is. It's going to take a lot of investment and time. But, as you said, those resources have been there for a very long time, and the reason they haven't been developed is what's happening aboveground.
CONAN: And that's the politics, and it's certainly not solved by any stretch of the imagination. It continues to be violent but a great deal less.
YERGIN: Yeah. That's right. There's less violence, I mean, is a key thing. And one of the things I really - I talk about in "The Quest" was that it turned out that the oil situation in Iraq after the war began was much worse. It was worse not because of the aged fields - and these were very aged fields. There were control rooms and refineries that have been built by the Americans in the 1950s but because of the sabotage, the destruction, the rampant looting and all of those things sent the Iraqi production way down, and it's been rebuilding now. Foreign companies are coming in and bringing capital and technology to get these fields up. And so that's why we're seeing this boost.
CONAN: Foreign companies, you mentioned, not very many American companies.
YERGIN: No. If you remember, there's all the talk about American companies being there. There are very few there. I think the American companies looked at the economic terms, and many of them just decided this is very tough, that we can't make money doing this. So you have - it's really like a sort of mini United Nations. You have Chinese. You have Indian. You have Russian. You have a couple of American, a lot of European companies there. And they're all working because they want to get a foothold in what might be, you know, this major new oil production opportunity.
CONAN: And much of this new production - and we mentioned the production - the loading platform off of Basra - is in the southern fields and the Shia areas in the south. There's also contentious politics involving the northern fields in Kurdistan.
YERGIN: Absolutely. Kurdistan - the Kurdistan oil minister was here recently. It's the autonomous region. And he holds out a vision that Kurdistan itself could become a major source of oil. It was an area that under the Saddam time was really ignored for exploration because Saddam didn't want to put money and resources into the Kurdish area. And the Kurdish minister, Dr. Ashti, told this story when he was here the other week, about how, when they were negotiating Baghdad for 2006 for who would have the oil fields, the Iraqis in the south said, oh, there's no oil there. And so he said just give me those mountains.
(SOUNDBITE OF LAUGHTER)
CONAN: So as Iraq re-emerges as a major player, as you mentioned, the sanctions on Iran had made it difficult and reduced Iranian exports. But in your book, "The Quest," you talk about the competition between Iran and Iraq as a major limiting factor, eventually, on Iraqi production.
YERGIN: I think that's the case. It's a historic - really tell the story of the historic struggle over who will dominate the Gulf. And, of course, now it is a Shia-Iranian more friendly regime in Iraq. And as soon as Iraq raised its estimates of its reserves, like the next week Iran said, well, our reserves are larger and the Iranians are not going to particularly welcome a big increase in Iraqi production, and I think is, you know, things have calmed down. On May 23rd, the U.S. and the Iranians are going to meet in a neutral city, Baghdad, to discuss nuclear sanctions and the nuclear program, but the Iranians have a lot of influence over what happens in Iraq.
CONAN: In the meantime, the diversity of oil around the world, it would seem that the Middle East had a chokehold with its, what, 25 percent of proven world reserves. That has been reduced.
YERGIN: It is. You know, I'd say, you know, there always a surprises that's happened in world energy and world oil, and I think the biggest surprise right now is what's happening in the United States. I was looking just before the show, and I think you can expect that as large as the increase in Iraqi production will be this year, that will have about the same size increase in the United States. And if you'd said that four, five years ago, that would have seemed fantasy.
CONAN: And this largely due to the fracking process and oil shale?
YERGIN: Yeah. Yeah. Yes. Well, yes.
CONAN: Shale oil, excuse me.
YERGIN: Well, it's very confusing, oil shale, shale oil. Tidal oil seems to be the term people are using, but this is what has turned North Dakota into the third largest oil-producing state in the country. And, you know, you don't think of North Dakota as the oil patch before.
CONAN: In the meantime, we also have Venezuela. Its reserves growing as discoveries increase there. And Brazil, emerging offshore as one of the great oil producers in the world.
YERGIN: Yeah. That's one of the things I really focused in on the quest because, you know, people don't think about Brazil. They think about it in terms of ethanol, but the growth of Brazilian production has been a big deal. Just about a month ago, the president of Brazil was here in Washington and was telling the story that people in the '70s and '80s said, we have to develop ethanol because we have no oil. It turns out Brazil now has a lot of oil, and that offshore oil in what's called the pre-salt, which is - was challenging - it was a frontier to get through it, now holds the prospect that Brazil could be producing twice as much oil as Venezuela in a decade or so if things go on track. And we never kind of thought of Brazil as energy power before.
CONAN: And through all of these developments, the arguments over the environments continue, how much degradation is caused by the fracking process. That's a particular controversy in this country involving natural gas, as well oil production. And the greater argument over how much burning all of these combustibles - oil, gas, everything else - is contributing to global warming.
YERGIN: Well, I think we have to divide it into two parts. I mean, we have, you know, maybe the most important climate policy we have in the country. One of the most important is the fuel efficiency standards for cars. So it's a question, where is that oil going to come from? Do we want it to come from Venezuela, or do we want it come from Canada, even though we - our peak demand has gone down. And on the environment, in terms - I was under the committee that reported for President Obama last year on the environmental aspects of shale gas. And I think the conclusion of the administration is that these are all manageable, and there're pragmatic solutions to something that is really changing the energy position of the United States.
CONAN: Our guest is Daniel Yergin, chairman of IHS CERA and author of "The Quest: Energy, Security, and the Remaking of the Modern World." And let's see. We got some callers in on the conversation. 800-989-8255. Ken is on the line, calling from San Rafael in California.
KEN: Hi. My questions is this. You know, we have increased our supply of natural gas and oil through fracking. How much natural gas - and I think that's probably a bigger issue now because we convert everything to natural gas if we chose - to - is coming from non-fracking, because we're seeing that the side effects of fracking may be untold at this point. And how much of our natural gas is offshore on the East Coast because in the 1950s, there was a study done that said we have enough natural gas off the East Coast alone to supply the United States under full production for at least 100 years.
YERGIN: Well, I think off the East Coast of the United States there's really been no modern exploration because activities ceased several decades ago. And natural gas, about 37 percent of our total production now is shale gas. And a decade ago, it was about 2 percent. So it's really grown quite phenomenally. And the other thing, supplies have grown so rapidly that the price of natural gas has really collapsed. So people know how much they're paying more for gasoline, but if they'll look at their natural gas bills at home, they'll see that those bills have gone down.
CONAN: There was a - and thanks very much for the call, Ken. There was an interesting story in the paper the other day, an import terminal that had been built in Maryland to bring in natural gas that people are saying, this needs to be redeveloped so we can export natural gas to places like Japan where it's - you can get a good price for natural gas.
YERGIN: Yeah. Well, exactly, the Japanese because they - basically, every single - all 54 nuclear power plants in Japan are now shut down. They are scouring the world for natural gas supplies in form of liquefied natural gas. And what it shows in the development here is that because of these technological breakthroughs, we were - five years ago, we were going to be a big importer. We were going to spend $100 billion a year importing natural gas, liquefied natural gas. Now, we have so much and prices have collapsed so much that, indeed, there are these projects and proposals to actually - we would join the queue of LNG exporters.
CONAN: And at the moment, there's no place to put all the natural gas.
YERGIN: Well, right. We're very close to actually running out of storage room.
CONAN: Let's see if we got another caller in. Randy is with us from Elkhart, Indiana.
RANDY: Hi. If we had started 30 or 40 years ago aggressively to drill oil, we would have the same problem that we're having with natural gases right now, I think. Do you think we're better off for having waited and kept all that oil in the ground all this time?
YERGIN: Well, I think it was a question of people knew the oil was sort of there, but it was just - it was not thought to be economically possible to do it. So I think what's happened is that the technology, how to evolve, how to develop, and it was about 25-year period, looking at decades you're talking to, for this technology to mature where it is today. And it really has only taken off in the last three, four, five years.
RANDY: But do you think we're better off for having it in the ground, we've been better off lowering oil prices then, or...
YERGIN: Oh. Well, I think, you know, history is what it is. I think that we've been done - I mean, what we do have the opportunity now is to have more of our production domestically. And I think what's become clear - and I think this has been very important to the Obama administration as well to the Republicans - is recognizing that it's not just we're not importing oil, it's not just energy security, but it turned out that there's a big economic development job component. President Obama mentioned 600,000 jobs from shale gas in his State of Union address. And I think it's part of this kind of changing discourse we're having about energy in our country.
CONAN: Randy, thanks very much.
RANDY: Thank you.
CONAN: We're talking with Daniel Yergin. And CERA, isn't that used to be Cambridge Energy...
YERGIN: Research Associates, and that's compressed.
(SOUNDBITE OF LAUGHTER)
CONAN: Oh, that's compressed, like everything else. You're listening to TALK OF THE NATION from NPR News. Ralph is with us. Ralph from Raleigh in North Carolina.
RALPH: Hi. I got a quick question. You just mentioned Brazil. I'm wondering about how the whole BRIC thing works out, Brazil, Russia, Indian, China pact. And who are the biggest consumers of Brazilian gas?
YERGIN: Well, it's really Brazilian oil. I mean, Brazil's an exporter of oil. It's actually run short of ethanol. It's now importing ethanol from the United States. But it is interesting. You take those four countries, you - they really symbolize the change in the global economy that's occurred, the change of where income growth is and so forth. And you've seen - so you see this growing trade between Brazil and China.
When the president of Brazil was here, she remarked that in the '70s, China used to export oil to Brazil. Now, Brazil exports oil to China, along with a lot of other raw materials. But the big market, the one that created what I called in "The Quest," the demand shock is, of course, China, which has grown so fast, and its oil consumption now is about half of the United States. They sell more new cars every year in China than in the United States, and that kind of - it's a sign post to the future.
CONAN: Ralph, thank...
RALPH: Paul Krugman had talked about that before. I guess, you know, with the oil production, I'm wondering, geopolitically, you know, that's something that the United States needs to look at, you know, that relationship alone, not just China but with Russia and India as well.
YERGIN: Well, I think that geopolitics are always part of energy and, you know, Russia is a big exporter of natural gas to Europe. It's critical to its budget. And, you know, there's - oil is one of the issues in the U.S.-China relationship, energy in general, and I think it's something that we have to kind of pay attention to and manage it so it kind of stays a commercial issue and doesn't become a strategic, competitive issue, because that won't be good for anybody.
CONAN: Ralph, thanks very much.
CONAN: Daniel Yergin, thank you so much.
YERGIN: Thank you.
CONAN: I appreciate it. Daniel Yergin, a Pulitzer Prize winner for "The Prize." His most recent book, "The Quest: Energy, Security, and the Remaking of the Modern World." _Interview w/ Daniel Yergin _ NPR.org

Are Oil Company Profits Excessive, Even In an Oil Price Bubble?

When global oil prices rise, so do oil company profits. And yet, oil companies do not control global oil prices. Market prices depend upon supply, demand, the value of the dollar, political policies and actions, and the market's machinations in response to investors' actions.

EnergyTribune

The global price of crude oil – the critical factor that many things collude to affect – translates directly into higher gasoline prices at the pump. We all know this. But, contrary to popular belief, the major oil companies have little control over the price, high or low. Nobody complains about low prices and low profits, the economic knock-on effect of high oil profits. But high oil profits, which mean new exploration, cheaper domestic shale production, not to mention the economic ripple effect (often forgotten) of high profits on pensions, stocks etc, almost always means the proverbial hits the media fan every time there’s even a whiff of large oil profits in the air. But honing in with venom on Big Oil or Big Gas, a much-beloved pastime of politicians, simply helps skew Joe Public’s opinion as to how the economics and the markets work.

...energy industry profit margins are cyclical. According to Robert Bradley Jr., CEO for the Institute for Energy Research, between 2006 and 2010, the largest oil companies averaged a profit margin of around 6.5 percent. As Bradley states, “This pales in comparison to profit margins in just about every other industry” the “pharmaceutical industry, for example, routinely averages a profit margin of about 16 percent. The soft drinks market is even more lucrative.” In short, oil companies in the States make around 7 cents per gallon, while the U.S. Government “extracts more than 48 cents, on average, per gallon...nearly seven times more out of the drivers’ wallets via taxation than Big Oil”...

...When it comes to understanding how the energy markets work, focusing on times of larger profits may light a fire under the anti-capitalist left and green activists. But that should not sway Joe Public to go to war against their imaginary pantomime villain. The sheer fact of the matter is that the real Mr Big behind the oil profiteering racket is Big Government, not Big Oil. But it’s just not in the interest of the anti-capitalist Big Green to target high-taxing, good-cause, Big Government oil profiteers; that’s the goose able to lay their leftist social engineering ‘eggs’. _EnergyTribune

US President Obama will say anything to get re-elected. He has a great deal more to do, before he is finished with the US economy and US industry.

A Word about Oil Prices

There is a great deal of discussion about why global oil markets are engaged in yet another price feeding frenzy. Some claim it is simply supply and demand. Others point out that both "supply" and "demand" can be manipulated in many ways. Others point to international tensions in the middle east, particularly Iran. Yet others point to Wall Street and blame the bankers. And not just a few in the US are pointing fingers at Barack Obama's broad agenda of energy starvation as being a significant factor in price increases. But where does the truth "lie?"

A speculator purchasing vast futures at higher than the current market price can cause oil producers to horde their commodity in the hopes they'll be able to sell it later on at the future price. This drives prices up in reality -- both future and present prices -- due to the decreased amount of oil currently available on the market.

Investment firms that can influence the oil futures market stand to make a lot; oil companies that both produce the commodity and drive prices up of their product up through oil futures derivatives stand to make even more. Investigations into the unregulated oil futures exchanges turned up major financial institutions like Goldman Sachs and Citigroup. But it also revealed energy producers like Vitol, a Swiss company that owned 11 percent of the oil futures contracts on the New York Mercantile Exchange alone [source: Washington Post].

As a result of speculation among these and other major players, an estimated 60 percent of the price of oil per barrel was added; a $100 barrel of oil, in reality, should cost $40 [source: Engdahl]. And despite having an agency created to prevent just such speculative price inflation, by the time oil prices skyrocketed, the government had made a paper tiger out of it. _HSW: Oil Speculation and Oil Prices

Inflation Adjusted Crude Oil Prices
As you can see from recent history, oil price shocks are nothing new to global markets. In fact, as you can see from the chart above, oil prices are not yet back to last April's (2011) highs -- the most recent price scare.

What about oil futures and oil prices? Many people suggest that if oil futures speculators do not take delivery of oil contracts, that they cannot influence the real price of oil. But that is not necessarily the case:

A speculator betting on a single futures contract will have no effect on the market. A speculator with a sizable amount of capital to put to work however, can purchase a stake that is sizable enough to sway the market, and is considered the major factor in how oil futures raise prices.

As speculators purchase on rumor rather than fact, a speculator purchasing a large amount of futures at a price that is higher than the market value of oil currently can lead to the hoarding of the commodity by producers in the hopes that the commodity can be sold for a higher price in the future.

As the supply of oil is reduced by these actions on the part of the producer, this leads to a realized increase in the price of the commodity both in the present as well as the future. An investment firm as well as oil producers stand to make a huge profit, as an estimated 60% of oil’s per barrel price is the result of speculation on the part of investment firms and other major players. _HowtoTradeStocks

Large scale, coordinated oil speculation would appear to be one way in which "oil demand" can be manipulated so as to drive up prices. There are several other ways in which this can be done, and we will look at some of those in later postings.

Those who think that oil speculators do not actually take delivery of oil may be in for a bit of a shock to discover that speculators have periodically stockpiled oil -- then strategically released stockpiles -- for some time.

The oil-storage trade is a trading strategy where oil tank owners and companies that lease storage buy oil for immediate delivery and hold it in their storage tanks, then sell contracts for future delivery at a higher price. When delivery dates approach, they close out existing contracts and sell new ones for future delivery of the same oil. The oil never moves out of storage. Trading in this fashion is only successful if the forward market is in "contango", that is if the price of oil in the future also known as forward prices are higher than current prices or spot prices. Storing oil became big business in 2008 and 2009,[1] with many participants—including Wall Street giants, such as Morgan Stanley, Goldman Sachs, or Citicorp—turning sizeable profits simply by sitting on tanks of oil.[2]

It has been estimated that one in twelve of the largest oil tankers are being used for the storage, rather than transportation of oil,[3] and that if lined up end to end, the tankers would stretch out for 26 miles. _Wikipedia

The actual proportion of tankers and oil depots used for speculative purposes is likely to fluctuate over time, according to prices and price-manipulating opportunities.

There is a great deal riding on oil prices. Hedge funds, pension funds, university endowments, foundations, big money NGOs, and more, are betting on oil prices going higher. The risk involved is significant, but with the deteriorating value of the dollar and the general stagnation in global economies, opportunities for significant returns on investment seem to be few and far between, the past few years.

While many analysts are scratching their heads as to how oil prices could increase in the absence of any clear increase in natural (as opposed to artificial) demand, Al Fin energy analysts believe that several concurrent factors are in play:

1. Russia is far more than a bystander in the current price runup More here
   
   International tensions tend to create a "defensive demand," a type of artificial demand which involves stockpiling oil in anticipation of future reductions in supply. Russia is best situated of all nations to both ramp up international tensions -- either directly or via proxies -- then to profit in several ways from a runup in energy prices.
2. OPEC has an interest in driving up the global price of oil as high as can be sustained by the markets.
3. National oil companies in many oil-producing countries neglect their oil production equipment and their oil fields, leading to artificial reduction in production and supply due to Oblomovism.
4. Official policies of "energy starvation" on the part of the US Obama administration and other western nations, leads to artificial reduction of supplies.
5. The rapid buildup of the "infrastructure to nowhere" better known as the "Great China Bubble" has led to an artificial demand surge. The Chinese government appears to be engaged in "doubling down" on this policy, despite early warning signs of impending turbulence.
6. The progressive decline in the value of the dollar creates an inexorably upward trend in oil pricing.

There are many more factors involved, of course. But it is enough to understand that the causes of the current oil price runup are many and varied.

What are the counter-vailing forces, seeking to drive oil prices downward again? The most significant force in the short-term is the desire of speculators to take profits. Once investors decide the house of cards is due for yet another inevitable collapse, the rats will get out while the getting is good.

In the intermediate term, demand destruction eventually sets in -- even in emerging nations, BRICs, and third world nations. But demand destruction in the advanced worlds of the North America and Europe never truly went away after the price runup of 2007-2008. And such demand destruction in North America and Europe is likely to add to the general economic doldrums both there and in exporting nations such as China.

In the longer term, high oil prices stimulate increased production of oil, increased exploration for new oil, better technologies for recovering more oil from existing fields, and better technologies for producing economical substitutes for crude oil. All of these price-stimulated supply increases put downward pressure on oil prices.

The entire dynamic is complex, with several opposing and reinforcing factors in play. It is best to expect to be surprised, and to be prepared, in case you are.

Cross-posted from Al Fin blog

Russian Mischief at Focus of Current Global Price Runup

Clearly, given their growing capability to produce and deliver oil wherever the market dictates, and the tie between the price of oil and price of gas in Russian supply contracts, it is in the clear interest of the Russians to push up the price of Brent crude. Therefore, could it be that the tumult around deliveries of Iranian oil is merely a smokescreen to escalate prices, and that some thing far more nefarious is taking place? _Learsy_HuffPost

Russia is having problems with its own ineptitude and corruption. It is also troubled by the threat of the coming global shale oil & gas boom. Other competitive pressures likely to arise in the near future include massive supplies of unconventional liquid fuels from GTL, CTL, BTL, bitumens, kerogens -- all eventually facilitated by high quality nuclear process heat.

It is clear that Russia had to take matters into its own hands in order to drive up oil prices -- one way or another.

As the NYTimes reported, "The Russian oil industry was already reaping the rewards of higher oil prices from Iranian tensions." The Russians have been cashing in brilliantly while rendering support to Iran by such acts as vetoing or emasculating any and all meaningful U.N. resolutions that would force Iran to comply with the terms of the U.N.'s International Atomic Energy Agency mandates. It is an open question whether this is being done in solidarity with Iran, or more malignly, to solidify Iranian intransigence on matters nuclear, in the hope that the European and other world consumers' boycott of Iranian oil has maximum impact, making Russian oil more sale-able at ever higher prices. _Learsy

Meanwhile, Russia is seeking the help of the international oil companies to upgrade its oil production and refining procedures and operations. Given how Russia has behaved toward international oilcos in the past after having received help and technology transfer, it is difficult to see how this turns out well for either western oil companies or western countries in general.

At the same time that Russia is ramping up international tensions over Iran in order to pull in greater oil profits, it is also looking for the world's sympathy by claiming that Russian oil fields are declining rapidly, to the point that Russia's oil production "has peaked" and in danger of rapid decline.

Yes, certainly we should all feel sorry for Russia, the nation that is enabling nuclear proliferation in Iran and driving the world to the brink of war -- all for oil profits that will go into the Swiss bank accounts of Russian oligarchs, insiders, and quasi-dictators. The nation that lets its oil fields go to crap out of neglct, asks western corporations for help, then abruptly nationalise any resources, technologies, and assets which the outsiders unwittingly leave within the kleptocratic reaches of the Russian government.

Russia's energy reserves remain vast, deep, and wide -- and largely unexplored and undiscovered. In the hands of competent organisations, Russia's hydrocarbon production would not peak for several more decades. But pay no attention to reality -- heed only what you are told by your masters.

Raymond J. Learsy thinks that Russia is manipulating global oil markets to the detriment of all of Europe:

So here we have Russia, a major supplier of oil and gas with an economy deeply dependent on the revenues received from the sale of those commodities. According to the NYTimes article, "And the taxes the Russian government has received from those sales have been a political windfall for Prime Minister Vladimir V. Putin as he campaigns to return as Russia's president. The extra money has helped further subsidize domestic energy consumption, tamping down inflation." Combine this with a Russia that is in large measure governed by that unique version of our Wall Street "ole boys network," the alumni of Russia's highly touted secret service, the KGB. The KGB helped form Putin and many of his associates in government. Here was an organization that was the nonpareil masters of clandestine intrigue, knows how to keep secrets, and now in a sense, is running the country albeit with the trappings of democratic governance.

Fast forward-only this week, "a group of brokers and traders successfully managed to manipulate an interest rate that affects loans around the world" (Please see "Traders Manipulated Key Rate, Bank Says," Wall Street Journal). If this could happen to interest rates, so widely traded throughout the world, just think what a KGB oriented Russia could do, and not with $6,500 at their disposal, but billions upon billions. It should not be a stunning surprise to those, be they government agencies, the press, or energy focused think tanks, that the traded price of Brent crude is being gamed. _Learsy

That would be an interesting "one-two!" play by the Russians, if we believe that they are so clever and manipulative. First ramp up international tensions over Iran, then behind-the-scenes, use a bit of leverage to shift global markets to their advantage.

We know the Russian government needs every bit of hard currency it can get, to keep its people happy, and to keep powerful insiders well compensated. But the price being paid by the Iranian people is severe, and has no apparent end-point.

Needless to say, the strategy is not guaranteed to work to the satisfaction of top Russian players, indefinitely. A lot of things could go wrong....

Meanwhile, behind the scenes in Russia, a demographic, infrastructural, and public health disaster continues to play itself out, below the happy Potemkin facade. Putin has a grand strategy, but it is built on a foundation that is slowly crumbling.

Oil Dictatorships Require High Oil Prices: Can They Hold?

Oil dictatorships from Saudi Arabia to Iran to Venezuela to Russia have grown dependent upon $100 a barrel oil, in order to placate their people with handouts, social welfare programs, and Potemkin Village styles of "prosperity and power." But there is a very real question as to whether these heretofore "masters of the oil universe" will be able to hold the line on oil prices over the long term.

Only three years ago, it was thought that Saudi Arabia – the largest oil exporter and second largest producer in the world – could generate large budget surpluses with oil at $70/barrel. In recent weeks, new estimates state that the country would need oil at $75/barrel just to balance the budget – never mind trying to post a budget surplus. The country’s oil minister has stated that the nation would work to stabilize prices at the $100/barrel level – which is a first. Saudi Arabia has traditionally held the role of OPEC moderate while Iran and Venezuela have been hawks who favor higher oil prices. Saudi Arabia has always balanced its need for oil revenues with the knowledge that if left unchecked, high oil prices have tended to precede recessions.

The reason for this change in policy would most likely be due to the country’s response to the uprisings across the Middle East last year. Fearing unrest, the government of Saudi Arabia has unveiled a huge increase to public spending that totals almost $130 billion. The Saudi commitment to stabilizing oil in the $100/barrel range should serve as a wakeup call for consumers and investors alike.

...it is not just Saudi Arabia that needs high oil prices to meet its spending commitments. Russia needs prices of over $100/barrel to balance its budget. Together, Saudi Arabia and Russia account for a little over 20% of the world’s oil production. It would be hard to argue therefore that these two major oil producers would be willing to bring down prices. _Financial Post

Of course, the higher the oil price, the more incentive for wildcatters and other entrepreneurs to come up with new sources of crude, and new substitutes for crude oil in all of its wide and various application markets.

One of the sources for new oil is shale oil -- a source with massive potential for new oil supply. Another source is the arctic.

“The race is on for positions in the new oil provinces.” That starting-gun quote was fired last week by Tim Dodson, executive vice-president of the Norwegian oil and gas company Statoil. The ‘new oil provinces’ are in the Arctic, which brims with untapped resources amounting to 90 billion barrels of oil, up to 50 trillion cubic metres of natural gas and 44 billion barrels of natural gas liquids, according to a 2008 estimate by the US Geological Survey. That’s about 13% of the world’s technically recoverable oil, and up to 30% of its gas — and most of it is offshore.

...On 17 January, Moe awarded 26 production licences for developed offshore oil areas in the Norwegian and Barents Sea to companies including Statoil, Total, ExxonMobil and ConocoPhillips. And the settlement in 2010 of a long-running row between Norway and Russia over their Arctic maritime boundary will allow more exploration in formerly disputed parts of the Barents Sea (see ‘Frozen fuels’). “There’s an ocean of new opportunities that we will grasp with both hands,” says Moe. _Nature

Of course, no matter how much oil & gas the USGS thinks is in the Arctic, there is certain to be much more. As long as prospectors are looking mainly "under the streetlights," they will find only a small portion of the world's oil.

Of course the oil and gas resource shrinks in relative magnitude next to the massive global methane hydrate resource, which is merely waiting for smart and wise humans to find safe and efficient ways to scoop it up.

More on the desperate need of oil dictatorships to maintain high oil prices.

It is quite easy for peak oil doomers to misapprehend the reasons for high oil prices and "stalled" oil production levels. That is because their brains can only hold one idea: peak oil doom. To consider the dozens of other more important factors involved, would entail a massive and intolerable cognitive dissonance, which must be avoided at all costs.

Ancient Oil and Mass Extinctions: Can We Connect the Dots?

Expansion to Extinction Over Last 540 Million Years
Mass extinctions have played an important role in the evolution of Terrestrial life. With each mass extinction, the way is cleared for the spread and adaptation of surviving species, and for the emergence of new species. But that is not what we will talk about today.

Recent findings in geochemistry have called into doubt some of the pet theories of climate scientologists scientists concerning acid oceans and mass ocean extinctions. Here is the abstract from the paper in PNAS:

Periods of oceanic anoxia have had a major influence on the evolutionary history of Earth and are often contemporaneous with mass extinction events. Changes in global (as opposed to local) redox conditions can be potentially evaluated using U system proxies. The intensity and timing of oceanic redox changes associated with the end-Permian extinction horizon (EH) were assessed from variations in 238U/235U (δ238U) and Th/U ratios in a carbonate section at Dawen in southern China. The EH is characterized by shifts toward lower δ238U values (from -0.37‰ to -0.65‰), indicative of an expansion of oceanic anoxia, and higher Th/U ratios (from 0.06 to 0.42), indicative of drawdown of U concentrations in seawater. Using a mass balance model, we estimate that this isotopic shift represents a sixfold increase in the flux of U to anoxic facies, implying a corresponding increase in the extent of oceanic anoxia. The intensification of oceanic anoxia coincided with, or slightly preceded, the EH and persisted for an interval of at least 40,000 to 50,000 y following the EH. These findings challenge previous hypotheses of an extended period of whole-ocean anoxia prior to the end-Permian extinction. _PNAS

More information on the study

The suggestion is that the ocean anoxia was secondary to the main extinction event, rather than being the cause. More study will be necessary to validate the isotopic techniques utilised. But this finding cannot but be a disappointment to the politically correct denizens of deep climate scientology science.

But what interests Al Fin know-it-all-o-tologists about this information, is how it may relate to the topic of the production and sequestration of ancient oil. Deep ocean anoxia is not only related to mass extinction events, it is also a component of oil formation in the deep seabed.

Sea bottom anoxia occurs routinely at the mouths of large rivers, where massive sediment routinely buries dead sealife that is constantly deposited on the seafloor. That is why rich oil fields are often found offshore of large river deltas -- either where the deltas are now, or where they were hundreds of millions of years ago.

An ancient oil sleuth must be able to backward-trace the movements of continents and great river valleys, in order to know where to look for such sediment-buried deposits.

Another cause of mass sediment burial of seafloor organic material, is massive volcanic activity. This would be particularly important to an ancient oil sleuth when a group of volcanoes might stay active for millions of years, in the same general vicinity upwind of river deltas or rich upwelling currents.

But in cases of mass extinctions, the large scale deep ocean anoxia occurring at the same time as massive deposition of organic material onto the seafloor, might be a particularly rich time for the initiation of large scale oil production.

When this process occurs over continental crust, the oil can be preserved for a very long time. If it occurs over oceanic crust, the oil may be subducted with the crust into the mantle, where it will likely be converted into short chain hydrocarbons, CO2, CO, and other forms of carbon. The short chain hydrocarbons may return to the crust, and may eventually be recovered economically. Diamond and graphite may also return to depths which allows humans to recover them economically.

Regardless, it is the ancient oil we are interested in. The challenge is to connect the extinction events, the ocean anoxia, and the ancient geographic patterns together, to provide the best guess for the locations of giant oil deposits which might conceivably still exist in an undiscovered, but ultimately recoverable state.

Humans have become accustomed to utilising the easy oil, and are just now getting good at recovering oil from the harsh, deep ocean environments. That is a good thing, because the Earth is 70% ocean-covered.

Still, some the planet which was once covered by oceans is now dry land, and such places -- if they fit the criteria above -- might be some of the first locations to check out.

First published at Al Fin, the Next Level
Postings from Al Fin blog on "Oil from ancient seas"

Big Wind Power: Is That All There Is?

Steven Hayward
The list of problems with big wind energy goes on and on. The graph above focuses on the tiny fraction of wind power capacity which is available at the time it is needed -- during peak demand hours. Utilities are forced to utilise fossil fuel backup power to make up for wind power shortfalls. Meanwhile, during off-peak hours when the energy is not needed, utilities are forced by law to buy wind power -- whenever it may be generated. The expense of these nonsensical policies is passed down to power consumers and taxpayers.

While the installed capacity of wind power on paper—that is, assuming the wind is blowing at the right speed—looks impressive, in the real world grid operators can count on only about 8 to 13 percent of that capacity being available during peak times. (The table below shows the percentage of wind capacity available at peak times by NERC region). The Department of Energy’s headline for this release tells the story succinctly: “Electricity Resource Planners Credit Only a Fraction of Potential Wind Capacity.” This is one reason why the greenhouse gas emissions savings from wind power will diminish with the further spread of wind power. _StevenHayward

Read more about the massive hoax that is being forced on North America, Europe, and the UK

Meanwhile, in the world of real energy, oil producers are contemplating the possibility of "peak demand." Prospects for global reductions in demand for oil are taking place at the same time that new oil discoveries are popping up from North America to South America to Africa to the Middle East to Southeast Asia, and beyond.

Some people within OPEC are getting worried. Paradoxically, peak oil doomers are circling the wagons, fighting off suggestions that the entire movement is based upon a technocrat's delusion.

If commodity prices do indeed decline, as expected by many, consumers could benefit from the interlude of price relief.

Brazil Not Wasting Time Developing Huge Offshore Resources

Image Source
While the US Obama administration carries on a de facto offshore oil moratorium, Brazil is rushing to develop its own vast offshore petroleum resources. Brazil is spending over $220 billion in an attempt to almost triple its offshore production from over 2 million bpd to over 6 million bpd in 2020. Brazil's oil industry faces tremendous challenges, working far offshore and deep under the surface.

...the technical and logistical challenges involved in tapping this oil are immense – the oil is under a layer of salt as far below the waves as commercial jetliners cruise above them. As a result, Petrobras, the Brazilian oil giant with a 30% stake in all sub-salt concessions, predicts that between 2011-2015, it will make $224.7 billion in investments – $127.5 billion of which is for exploration and production.

The fruits of those investments are already visible in the floating frontier towns.

“It is really impressive what is out here, 100km off the shore,” said Willem Van Beek, a Dutch “mud engineer” who drills the wells, from an oil platform at Espiríto Santos Basin recently. “It’s like a complete offshore city. You see thousands and thousands of lights.”

With reserves this big, Brazil is experiencing an oil boom: 50,000 people were at the Brazil Offshore bi-annual conference in the oil town of Macaé, in June this year. “Brazil is the biggest new front for oil in the world,” said Petrobras CEO José Gabrielli.

...Brazil’s platforms and rigs sit above 2,000 meters of water. The oil is anywhere between 2,000-7,000 meters below the sea bed and to get to it, engineers must drill through clay, then a variety of geographical formations like shale or calcium carbonate, before they hit a thick later of salt that can be thousands of meters thick.

“You have to develop new technology,” says Norman Gall, Executive Director of the Fernand Braudel Institute of World Economy (Instituto Fernand Braudel de Economia Mundial) in São Paulo, and a sub-salt expert. “You have to deal with processing the oil at these depths. You have all of these problems. That’s why it’s so expensive.”

...at depths like these, the water is close to freezing. “The temperature changes the viscosity of the drilling fluid,” says Van Beek. This, in turn, affects the oil, which is “very thick, like a syrup. The way to make it more fluid is by heating it up. They do injection wells. When you produce oil you produce gas. The gas is on top of the oil, so you pump it back in at the bottom of the reservoir and it forces the oil up.”

...The goal now is to move this processing under the sea. At its research centers like the giant CENPES, at the Federal University of Rio, Petrobras is developing technology to separate oil from water, gas and water on the seabed as part of a move to completely automate processing. Carlos Fraga, CENPES executive manager, told Brazil’s Valor Econômico newspaper that he would like to eliminate the need production platforms within a decade.

FMC Technologies plans to start operating a sub-sea separation unit for Petrobras in the Marlim Field, in the Campos Basin, later this year. “This is new technology, and these systems are supposed to run for 20 years, which is the life of an oil field,” says Gall. _Txchnologist

And still, Petrobras continues its intensive exploration for new resources

The ramp-up in production of Brazil's offshore parallels increased production slated for Canada's oil sands. Between the two developments, an increase of almost 10 million bpd is expected by close to 2020. If Venezuela could get rid of Hugo Chavez and allow international oilcos to develop its heavy oil deposits, another 5 million boepd could conceivably be added, if they started right away. And if the US could get rid of President Obama and his Department of the Interior Secretary Salazar, they could add another 5 million bpd by 2020 without too much trouble, using all available resources -- including kerogens, CTL, GTL, and offshore oil.

Combining these increases would yield an extra 20 million bpd in an energy climate where many analysts believed that oil production had peaked at around 85 million bpd in 2008. Realistically, of course, the western hemisphere will be lucky to add 10 million bpd to current production, due to political, manpower, technological, and logistical limitations. Particularly if the incompetents, Chavez and Obama, continue in office for several more years.

Global Oil Prices Likely to Drop for Multiple Reasons

Restoration of Libyan oil production likely to put downward pressure on overinflated Brent prices

Italian oilco Eni appears to be the first player likely to profit from a regime change in Tripoli

Ongoing problems in the European economy likely to reduce Euro oil demand even further

Economic problems of Europe and the US likely to impact BRICS adversely

Corrupt oil dictatorships such as Venezuela, Iran, Russia, etc. likely to suffer disproportionately due to overdependence on energy exports. Russia's problems go even deeper, into the core population's inability to sustain its own numbers

The global economy is increasingly an unstable house of cards, threatened by both debt and demography across the advanced world. Bad national leadership -- from the US to Russia to the EU -- is preventing the global economy from instituting crucial political and economic reforms.

The oil markets are particularly untrustworthy at this point in time, subject to powerful undertows and manipulations from powerful players, politicians, and investors. Do not bet your shirt on a belief in the monotonic increase in oil prices over time.

As long as oil prices remain close to $80 a barrel or higher, there will be a strong incentive for more oil production from multiple sources -- including unconventionals such as CTL, GTL, BTL, and KTL (kerogens to liquids). Despite the politically correct protests against the Canada oil sands pipeline to the Gulf of Mexico, Keystone XL, the pipeline is likely to be built. If the Obama regime rejects the pipeline in keeping with its "energy starvation" agenda, the administration that replaces Obama in 2013 will certainly approve the project.

Oil Price Spikes and Excess Volatility: Investors Always Welcome

Financial markets have always been subject to erratic swings in prices due to investor whims, notions, and panics. Commodities markets -- including oil markets -- have become more like equity markets in that jittery respect. Fast and powerful electronic trading platforms combined with a delusional mindset that says oil will always go up in price, biases oil markets in the upward direction. Particularly when the global economy is stuck in a stagnant funk thanks to generally dysfunctional policies of central banks and governments -- and big institutional investors are desperate for ways to increase portfolio asset value.

...supply, demand and geopolitical risks are no longer reliable tools for predicting commodity prices, and haven’t been since the early 2000s. At that time, two major trends converged and altered financial and commodity markets.

First, the advent of widespread Internet trading platforms radically increased the number of people with access to commodity markets, decreased the amount of time it took for an investment decision to impact the market and expanded the amount of money that could be applied to those markets. In particular, the creation of energy-indexed investment vehicles created additional demand for commodities by people who have no intention of ever taking delivery of the commodity.

Second, this technological evolution occurred just as America’s Baby Boomers, the largest generation in American history as a proportion of the population, approached retirement. For the most part, their children had moved away and their homes were paid for, while their earning power was the highest in their lives. Consequently, this demographic had large savings, and over the last 10 years those savings have become available for investment just as more options for investing it into commodities have opened up. Most of the developed world has a similar demographic bulge.

This created a problem for predicting prices. Industrial demand is fairly easy to predict, since it is based on — and highly constrained by — actual structural realities. If one has a good feel for an economy, one can reasonably predict whether economic activity is rising or falling and how industrial firms will react to that.

Not so with investors, who — almost by definition — trade on intuition as they seek to outthink the markets and each other. But perhaps most important, unlike the industrial world, the world of investors has no single or collective pulse to take. Even if there were, investors often respond to price shifts in a manner opposite to industrial players. Rising prices draw them rather than scare them away. After all, no investor wants to miss out on a winning trend. And so those investors have become the oil market’s price setters.

In any other market, the presence of a mass of new players would obviously have a distorting effect, but in the oil market, the inelastic nature of oil demand magnifies the investor presence. Since oil is so essential to modern life — needed for everything from transportation to making plastics, fertilizer or paint — industrial and retail demand for oil is actually fairly stable. The introduction of dynamic actors into a normally static system results in periodic and disproportionate price shifts....

...investors make the system sufficiently erratic that forecasting its activity, aside from noting that price crashes are inevitable, is largely impossible.

There is one final factor in play that is driving the markets, and in the past five years it has greatly magnified the role that investors play: an increase in the money supply.

Over the past six years, the global money supply has roughly doubled. There are any number of reasons to expand money supply, but the most relevant ones of late have been to ensure that there is sufficient credit to stabilize the financial system. However, governments have few means of forcing such monies to go in any particular direction. And since the entire purpose of professional investors is to shuffle money to where it will earn them the highest return, some of the money from an expanded money supply often finds its way into commodity markets. _Forbes

Conventional wisdom has long proclaimed that out of control futures markets cannot affect the real price of a commodity. In the distant past, that was approximately true. But modern traders have more sophisticated tricks up their sleeves than you would believe. And the largest of them are quite well connected with the political power structures in any advanced nation with significant financial markets.

Popular delusions of "peak oil" and "climate catastrophe" can only aggravate political and economic forces at the highest levels, leading to stacked dysfunction and snowballing misallocation in government policies and financial strategies.

Wildly fluctuating energy costs and periodic commodities crashes are nuisances, to be sure, and often impossible to ignore. Nevertheless, in terms of personal and group planning, it is best to treat such movements as distractions -- unless you have special insights into the particular swings that are taking place moment by moment on the global stage.

But beware. Almost everything you think you know, is wrong. Well, actually, everything you think you know is wrong, but I wanted to leave you with at least a little hope. ;-)

Are We Due for a Sharp Correction in Oil Prices?

The old adage “you can pay now, or pay later” applies to the crude oil market here. You can ignore fundamentals for only so long. In the short term supplies don`t really matter to traders, but there comes a time when fundamentals in the market supersede political and technical based analysis.

In the end, fundamentals have the ultimate and final say regarding price direction in the market. And over the next month, fundamentals will dictate that Crude Oil prices correct to a lower level from current levels.

This correction would actually be healthy for the oil market, if this fails to materialize, and oil prices stay high with continuing oversupply and weak demand, i.e., an artificial mismatch between supply, demand, and price, expect an even “healthier” and fundamentally more severe correction when market equilibrium reasserts itself. _Dian Chu_SeekingAlpha

Dian Chu's reasoning is two-fold: First, she sees oil storage opportunities for long traders beginning to fill up, making it increasingly difficult for them to take delivery. Second, she sees the beginnings of a demand destruction developing in the US and beyond, from currently artificially inflated prices.

...it doesn`t really matter what is occurring in the MENA (Middle East and North Africa), since over the next month at the next rollover, traders will have to sell any long positions because they cannot take delivery even if they want to.

Furthermore, because of the events transpiring in the MENA over the last couple of months, traders who normally don`t take delivery have taken delivery over the last two rollovers, due to ‘what if' scenarios where Saudi Arabia became a legitimate concern, and oil spiked to $130 a barrel. The fallout from this is that traders and investors who normally take delivery will not be able to during this next rollover, as there will literally be no more storage at Cushing.

...with these high prices we are starting to experience legitimate demand destruction. It seems with these high prices it is only a matter of time before we are again at the 368 million barrels of oil in U.S. storage facilities at the Commercial level. So the Oil Bulls can no longer point to Cushing as an anomaly, we are literally swimming in Crude Oil right now in the U.S. _DianChu

If you read the comments after Chu's article, you will find many peak oil doomers who have gone long and deep into oil futures. They are assuming that their years'- and decades'-old peak oil fantasies are irrefutable truth, and are staking much of their economic well-being on such assumptions and quasi-religious beliefs.

It is a dangerous game to play, particularly when so many crucially important factors involved are not open to public display and examination. Such persons eventually get themselves in so deeply that they are compelled to wish doom on their fellow citizens, just to prove they are right -- and to save their risky and poorly thought out investments.

Think of the futures market like a casino. Only bet what you can afford to lose.

Russia Desperate for Outside Expertise to Produce Oil&Gas

Prime Minister Putin's corrupt prosecution and dismantling of Yukos has left Russia's vast energy wealth in the incompetent hands of national companies. National companies typically lack the expertise to develop difficult fields, and to produce oil and gas at optimal levels, for maximum yields over time. Hence the recent deals by Rosneft with both BP and Exxon Mobil. Russia has vast energy wealth, but the demographic clock is working against Russia. It has to work fast to reap the benefits of a Siberia that is slowly slipping from its grasp.

The foreign partners put up the initial upfront cash, Rosneft contributes much of the deal in the form of its licences and the Russian group ends up with two-thirds of the economics. That may look like a good deal for Moscow, but it is really a reflection of reality. Resource-rich nations want to keep an increasing share of profit for themselves and are only cutting in foreigners when they have something distinctive to offer.

Of course, in BP's case, Moscow was also able to secure a stake in its partner, because of the U.K. company's vulnerable situation. BP wasn't the most popular company in North America after the Gulf of Mexico disaster. It also had more exposure to Russia than Exxon. The result is that Exxon has maintained its independence, whereas BP won't easily shake the niggling suspicion that Moscow will somehow, sometime find ways of increasing its influence. _FinancialPost

The US Obama administration has been sucking BP dry for a while, so now it is time for Russia to have a go.

Although the world economy is desperately dependent upon oil, world governments are not above using the extortion card which a monopoly on the use of force within their borders allows them.

2010 Crude Oil: 50 Billion Barrels Discovered, 30 Billion Barrels Used

CarpeDiem
With the price of oil hovering above $70 a barrel for over a year -- and around $90 a barrel for several weeks -- oil exploration companies can get to work discovering rich new oil fields. In 2010, more new oil was discovered than was consumed -- and we can expect that trend to continue as long as oil stays high -- above fundamentals. OPEC is sitting on considerable reserve production.

Iraq has barely begun to develop its huge fields using modern technology. Africa's rich fields are waiting for a political structure that is able to limit sabotage, theft and corruption. Mexico's leadership is finally admitting that its own graft and laziness has caused premature flagging of national oil production. Venezuela's production of its vast resources is artificially damped by an incompetent presidential boob. Russia's autocratic corruptocracy is reflected by incompetence at the oil field level -- Russian production could be much higher with competent oversight.

Bluntly put, the world is sitting on far more crude oil than it knows what to do with at this time. Human incompetence, corruption, and lack of skilled manpower and state-of-the-art equipment chokepoints contribute to the real disconnect and lag between moment-to-moment demand and instantaneous supplies.

Political peak oil: The only kind of peak oil you will ever see, except for peak demand, when oil is no longer needed.

Taken from Mark Perry's Carpe Diem blog:

Last year was a really good year for new oil discoveries, there were at least 14 major oil discoveries in Brazil alone totaling 13.5 to 26.7 billion barrels, here's a list below:

1. Well OGX-4-RUS:
100-200 million barrels
 – February

2. Well 1-OGX-3-RJS:
500-900 million barrels
 - February

3. Well 4-PM-53:
25 million barrels
 – February

4. Additions to Barracuda:
65 million barrels
 - February

5. Maastrichtian section of Well OGX-5:
30-90 million barrels
 February

6. Piranema:
15 million barrels
 - March

7. Wahoo:
300 million barrels
 - April

8. Franco:
4.5 billion barrels
 - May

9. Pipeline and Etna:-
1.4-2.6 billion barrels
 - May

10. Waimea and Fuji:
600 million-1.1 billion barrels
 - May

11. Carimbe:
105 million barrels
 - May

12. Brava:
380 million barrels
 - June

13. Libra:
3.7-15 billion barrels
 - October

14. Cernambi field at Iracema:
1.8 billion barrels
 -December

In addition, there were more than 30 billion barrels discovered in other parts of the world in 2010, including Iran, Russia, Norway(more), Mexico, Ghana, Iraq, U.S. (Texas, ND and Montana and Colorado), Falkland Islands, U.K., Angola(more) and Oman, bringing the total of new recoverable oil discoveries in 2010 to around 50 billion barrels. Brazil was the clear leader in 2010, with the oil found there representing up to half of all new global oil discoveries in 2010. With oil now selling now at close to $90 per barrel, we can expect even more discoveries in 2011.

_CarpeDiem