Sniffing for the Peak

My dog used to be able to smell the ocean from one hundred miles away. She would sleep in the back of the truck in relative boredom while we did the ski expedition to Colorado or Utah from California.

But as soon as we started down the Cajon Pass and that salt air from the Pacific was blowing against the mountains of the LA basin, that dog would pop up and start whining and barking like crazy. She knew we were going back to the beach.

That crazy dog used to follow me when I surfed Rincon. I would catch a wave on the outside point and ride it all the way into the bay and she would run along barking and howling the whole way. I don't know how she could tell which surfer was me, but she could.

Just like I still don't understand how that dog could sniff the slightest little bit of salt air and tell that the beach was not far away. She just could.

Lots of people are sniffing for the Peak in oil production right now. The game is on. And it's an interesting question. What pieces of data will be the definitive sign that world production has peaked and entered irreversible decline? Nobody knows.

During my almost daily discussions of Peak Oil with clients, they often ask how they will be able to tell we have reached the Peak? The usual answer is to paint a picture of the graph of world oil production. Go back 150 years to Drake and move forward to 87 million barrels per day in June 2008. Maybe 1.3 Trillion barrels total produced over the last 150 years, maybe about the same left. Plotted on a graph with one year tick marks makes it pretty tough to tell that global production is dropping off at all. As Simmons has pointed out, the numbers are pretty coarse and most are highly political. As a matter of national security, what country is going to release info that reveals a Peak? Nobody!

Hubbert said that it took about 3 years to definitively reveal the Peak in US production back in January 1971. And the global production curve is bigger and therefore by definition more coarse. And everybody knows that statistics are routinely manipulated to support various politics and policies. Maybe a "1987 Black Monday" can be readily identified on a chart but the Peak of global oil production is not expected to be anything so dramatic. That's the problem.

So, we wait. And wonder. Sniffing the air for the first scent.

How about this? When you turn on the evening news, meaning mainstream American propaganda at it's finest, and the talking heads are babbling about a Saudi Aramco executive who has just admitted that production in the Ghawar oilfield has Peaked, then you will know that global production has peaked. Simple. As Saudi goes... so goes the world. Do I expect that to ever happen? No, of course not. There would be a panic.

The follow up question to "How do I tell that oil has Peaked" is, "Will there be an economic crash?" Well, think it through for yourself. Consider the Strategic Petroleum Reserve in the US. Why is there such a thing? Well, the August 2006 US GAO report on the SPR clearly states that "even small disruptions in supply can cause large increases in [oil] price." What the GAO report does not discuss is a permanent "disruption in supply." Like from Peak Oil. The SPR was designed to guard the economy from disruptions like a Hurricane or a closure of the Strait of Hormuz. It cannot possibly guard the economy against a permanent decline in global production! 

Will that lead to an economic collapse? Well, it depends. Do you believe that governments or corporations can implement a scaled-up replacement energy supply in an extremely short time? If you do, then I would have to ask you why we are waiting? Why would any government or corporation take even a slight risk of something as serious as a large scale, perhaps global economic collapse? This is a real life disaster flick that we all are going to having a starring role!

Meanwhile, back at the ranch, some of us are sniffing for the Peak. Is that barking that I hear?

News Flash: Malaysia to Remove Price Controls

Wow!

Check out this BBC article: http://news.bbc.co.uk/2/hi/business/7432754.stm

Malaysia is planning to remove price controls on oil in August 2008.

Question is, will Iran remove price controls sometime soon?

What is Peak Oil anyway?

"Peak Oil" refers to the developing global crisis caused by the "peak" in the world's oil production. Credible evidence from professional experts suggests that world oil production may have peaked and may now be entering a permanent decline. Many countries already had a peak in their oil production many years ago. The USA peaked in 1971! That is why the US has had to import more and more oil.

Peak Oil does not mean we are "running out." It also does not mean that big bad oil companies are playing mean games. It means we are half-way through the fixed amount of oil in the world and less oil will be available for all countries to share in the future.

This is a huge problem. Demand is expected to exceed available supply.

Unfortunately Peak Oil is happening right at the time in history when countries like China and India are expanding their economies and demanding more oil.

Not only will demand exceed supply, but there are no other sources of energy that can be substituted quickly enough or on a large enough scale to make a significant difference.

Two of the biggest potential dangers from the impact of Peak Oil are scary.

First, Peak Oil may cause a global economic collapse. May. It depends on how fast the world can adapt to the gap between demand and supply.

Second, Peak Oil may cause a "dieoff" of thousands, millions or billions of people. May. It depends on how fast the world can adapt to the shortfall in pesticides and fertilizers made from oil that help feed most of the world. Global food production is directly dependent upon oil.

There are lots of other interesting consequences of Peak Oil.

For example. What happens when transportation costs skyrocket in the near future? If diesel fuel rises to say, $25.00 per gallon, if you can get it at all. How would that impact the business model of say an online bookseller that depends on impulse buying supported by cheap delivery costs? Would people still buy very many books if the cost to ship one book was maybe, $100.00? I don't know. That's what makes it interesting.

What about the "travel" industry or "travel economies"? How many people could continue to afford to fly somewhere for a vacation if the costs were 5 or 10 or 20 times higher? For example, the economies in the Caribbean are 90% dependent upon tourism. What effect will Peak Oil have on them? Will it really work in the long run for Dubai to be dependent upon tourism once their oil runs out?

What about air travel itself? The question is already being asked in academic circles, "Will my grandchildren ever fly on an airplane?" 

One of the key questions that has received little, if any, consideration is the question of the future of the World Wide Web itself. Many people think of the web as merely cyberspace. A virtual world only. But the web has hardware and software and peopleware that make it alive. All that infrastructure is dependent upon cheap energy from oil. Somebody has to lay the fiberoptic cables and maintain the servers and repair the transoceanic cables. How long could the web keep going if a maintenance worker can't earn enough to support his family's energy budget or the company he works for can't afford the fuel costs to power his maintenance van? Who will support the web then?

One of the most critical questions about Peak Oil is how rapid will the decline be? Nobody knows. It might be only about a 3% per year decline. But Mexico has already had a decline of 14 or 15 percent per year in the Cantarell Oilfield. Could that happen to the world. No, not really.

Global supply is too diversified to be effected by the decline of just one  field. 

But what if the world's largest oilfield, The Saudi Ghawar field suddenly enters decline and drops 15% or 20% per year? They are already injecting about 7 million barrels of water a day into Ghawar to keep the reservoir pressure up. And the water cut in Ghawar may be 30% or more in most wells.

What if several of the world's largest oilfields enter decline in a short period? Not only would increasing world demand go unmet but supply would drop even further and more rapidly. Time is the key factor. Nobody knows how much time we have. The EIA is currently conducting a revision of their analysis of the world's 400 largest oilfields' production and reserves. Maybe by November 2008 some better numbers will be available. But don't hold your breath. The world's production statistics and reserves are politically manipulated for many reasons.

We probably won't know that global oil production has peaked until several years afterward. Definitive evidence might not be available for 10 years or so. It took about 3 years to confirm the US peak.

Peak Oil is already affecting everybody. Awareness of Peak Oil is the first step to creating a solution.

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Missing the Big Picture

The cool thing about Peak Oil is that it makes you think. It makes you ask questions. What am I doing, and why? How do I fit in? What is my "footprint," and I don't mean just carbon.

But we live in a world where many things are compartmentalized, specialized. People tend to focus in on one little part and miss the big picture. As an example, I was recently teaching an 11 year old the "lift equation." The formula that explains the relationship of the factors that make things fly. 

Flight is one of man's greatest achievements and it still amazes me every time I execute a takeoff, or landing. In the course of the discussion about the "four forces," you know, gravity, lift, thrust and drag, we used substitution to explore the magic of one of the natural effects that God hardwired into the universe, lift. The key thing to understand about the lift equation is that lift varies with the square of the velocity. This is an incredible thing, somewhat similar to the power of compound interest.

If you double the velocity (airspeed) from 50 knots to 100 knots you don't just get double the lift. The lift increases from 2500 units to 10,000 units! I think this is very impressive and demonstrates a real world example of the power of an exponent that you just don't get by cranking through your algebra homework and getting an "A" on a typical math exam.

The interesting part was when the 11 year old asked me, "Is this math or science?"

"What a great question," I answered. "What do you think?"

I then realized that the education system this 11 year old was participating in had taught him that things are separate. You take one class for math and another for science. He hadn't really seen the connection between the two before.

Check out this video of Mark Bittman talking about food. He makes an interesting exploration of the US system of "industrialized" food production. And he presents some impressive numbers and even gets you thinking about global warming by proposing that cows (and the associated problems with industrialized food production) are affecting humanity in a similar way to how the threat of nuclear war affected humanity(and still does).

But he doesn't seem to make the connection between food production and Peak Oil. Or food production and sustainability.

This is very typical. Many otherwise intelligent people just aren't making the connection. The awareness of the Peak Oil problem just isn't mainstream. The new media darling is global warming. Not Peak Oil.

Mr. Bittman proposes that "the current health crisis *** is a little more the work of the Evil Empire." This is a veiled comment about the endemic corruption in the US and the system of corporate lobbyists influencing government policies.

The good news, he points out, is that animal products and junk food are not necessary for health. Bravo! And he explains that "marketing has created an unnatural demand(for animal products and junk food)."

Bittman goes on to explain the history of food in the US and effectively reminds us that in 1900 all people ate locally produced food. Interesting. Especially since that is what Peak Oil experts are suggesting will be part of the solution. Producing food locally.

I liked this presentation but it is a good example of the danger of compartmentalization and specialized study causing intelligent people to miss the big picture.

Bittman is right. Global warming could have catastrophic impacts on humans (IF global warming is happening, IF it is caused by men. We don't even know if there is such a thing as a climate!). But he misses the big picture concept that we can't fix global warming if we don't have any ENERGY!!! It is going to take huge amounts of energy to change the systems we use that caused the global warming in the first place. That is why Peak Oil is so important.

This is not a case of picking one football team over the other. Peak Oil and Global Warming are infinitely more complicated. But that is the challenge that America faces. American culture is permeated with a value system that places great emphasis on football, or NBA basketball and intentionally ignores real world things like the asteroid of Peak Oil.

So check out the video of Mr. Bittman. But remember to fill in what is missing. The fact that Peak Oil is the gorilla that is going to overpower other issues like eating "too much" animal products and junk food.

As a matter of fact, Peak Oil will "solve" the problem of eating too many animal products simply because the crash after the Peak will prevent the business as usual continuation of industrialized food production. There will still be some animal food production, probably through channels like Permaculture. But depending on how rapid and severe the oil crash becomes, industrialized food production will change radically and eventually will be forced to sustainability. That will be good in the long run, maybe on the 50 to 100 year scale. The problem is in the medium term with the Peak Oil crash.

 

Oil History Village? Not!

Here's one for all you "investors" out there in PeakOilLand. Just in case you aren't getting those stellar returns you were promised in your latest pre-IPO scam, ponzi, pyramid or multi-level nutritional supplement company "business opportunity."

How about us all investing in an "Oil History Village." Yeah!!!

This would be big fun. Or like my neighbor in Hawaii used to say, "Beeg fun Brudda!"

We can have old drillbits, hardhats, buckets of pipedope and other tools of the trade on display. Maybe a little shower to douse tourists with real drilling mud so they can get a taste of roughnecking. A splash of diesel in the face would be really authentic.

The foodpark can feature manifold burritos (burritos heated on top of the exhaust manifold of a diesel generator) and lunchboxes with weekold sandwiches just like the ones flown out to wildcat rigs by helicopter.

Just add a cup of "roughneck coffee" (4 cans of Folger's per gallon), a can of Skoal, swearing lessons, and a nosepicking manicure to give folks the real feeling of the oilpatch.

Or maybe a cool interactive simulated drilling floor funstation where civilians can attempt to throw the spinning chain and try to keep their fingers from getting chopped off. You could come up with a points system with points added for making hole and points subtracted for twisting off the bit and going fishing! Imagine the thrill of drilling into a high pressure gas zone without any blowout preventers and running to jump 80 feet into the cold ocean or sliding down the angel line into a patch of cactus in order to escape being burned alive! We're talking Survivor on steroids.

How about an authentic drilling mud "reserve pit" swimming adventure? You could let the park guests test their survival skills by attempting to negotiate their way across 200 feet of old drilling mud, raw sewage, abandoned sacks and drums full of caustic chemicals, 4 months of accumulated trash from a real drilling rig and varying concentrations of hazardous waste while swimming in oil soaked coveralls, boots, gloves and a hardhat. Do you think we should issue complimentary safety glasses and install eyewash stations at each end?

Maybe an "oil futures pit" where amateur traders could try to beat a Gordon-Gekko-like artificial intelligence opponent and experience the satisfaction of crashing the economy of a whole country or the buzz of getting arrested for insider trading?

You could get the park visitors some decent exercise by sending them out driving on the "back four thousand acres" of desert scrubland in Hummers purposely low on fuel and letting them enjoy a stimulating "reality show experience" by making them huff it back to town in the hot sun and then trying to carry a full gas can back to save their families!

What about the psychological drama you could create by letting ignorant tourists handle live samples of various well logging radioactive materials? A little Cobalt 60 anyone? What a fantastic way to help people bond with former oilfield services employees who were exposed to excessive doses of radiation. Nothing like a nice exposure to some thermal neutrons to give you something to keep you up at night wondering about cancer treatments.

Imagine the great entertainment value people would get from the boardgame, not to mention the 3D videogame. Why would anybody want to keep playing GrandTheftAuto when instead they could create an avatar, assassinate innocent indians and destroy the rainforest building drilling pads and pipeline easements? They could enjoy the administrative side of the oil biz with a "LandMan" avatar that goes out and gets unsuspecting landholders drunk enough to sign over their mineral rights! Whoopee! Or, best of all, an "Oil Company CEO" avatar that comes equipped with a country club membership, stock options, excort service expense account, corporate jet and congressional investigation subpoena.

I know, I know. It's a brilliant plan. But I have to admit I stole the concept. I read a May 22, 2008 New York Times article titled "As Oil Prices Rise, Nations Revive Coal Mining" and learned about a town in Japan, Yubari, that created their own funpark, "Coal History Village" which, unfortunately, "failed to attract tourists."

Hey, no problem. These guys were just ahead of their time. Never mind that the town went BANKRUPT due to the failure of this obviously ingenious plan. Maybe a little updated market analysis and recast Pro Forma Financials could whip their numbers into shape. No matter. They just picked the wrong commodity. Coal isn't nearly as fun as oil.

We could design a really awesome roller coaster and name it, are you ready for this, "The Plummet after the Peak." Just bend the track around to follow the Hubbert curve or maybe you could have different sections memorializing various countries' oil production history curves to give people that great nostalgic feeling of the age of oil. I bet the most popular part of the track would be the Russian history with it's two prominent humps.

Hmmm...What's that feeling? I think I'm turning Japanese! I guess I better get busy buying up the domain names and drafting the Private Placement Memorandum huh?

DISCLAIMER: the above information does not represent an offer to sell securities. Investors should seek independent counsel prior to investment. Past performance is no guarantee of future results.

Richard Heinberg

Hey all you Peak Freaks out in Peak-land!

I just escaped from the Church of the Bakken Formation and I thought we could drink some Kool-Aid together and watch some old Peak Freak videos.

Check out this classic Richard Heinberg clip. Sorta like watchin' an ol John Wayne movie ain't it? This is only one year old and it already seems ancient considering the turbo spike in oil prices in 2008.

This is plenty of stuff to think about for one daily post. Tune in again soon and please subscribe.

Bakken Be Thy Name

I used to have a Merrill Lynch broker that would call me every week. He was just itching to sell me some goodies.

It didn't faze him for me to explain that my duty as a fiduciary prevented me from taking any risk with the funds under my care. It wasn't his problem if I got sued for Breach.

I could have told him to buzz off and just send me the monthly statements but I humored him and found it intriguing listening to his "hot tips."

He was a "stock picker." You know the type. Always hyped up on something.

I used to meet a lot of stock pickers when I was jumpseating around the world. You might be surprised how many pilots claim to have the latest dope and the hot tip of the century. Or the business dudes waiting for their flights. Kinda like getting tips from a New York City cab driver. Maybe George Soros' chauffeur would be a reasonable source but never yesterday's news from some amateur. How about getting a tip from some big talker in the locker room at the gym? Too funny. It's good entertainment but doesn't constitute an investment strategy.

I like technical investing just fine. Reading the charts. Memorizing the patterns. The new software packages give the individual investor some good tools.

I like fundamental investing just fine also. Ordering the annual reports. Doing the Free Edgar thing. Picking apart the financials and insider trades. I dig the Bill O'Neill momentum investing and enjoy reading IBD. It's all lovely. I get to hear about all the latest wall street stuff when "investors" come to the world of real estate and we help them out with a strategy.

It's been a real hoot the last couple of months with all the activity happening on the Bakken formation. I get lots of newsletters. Some are authoritative. Some are whacky, just for perspective. It has been real amusing hearing all the media hype about the "billions of barrels."

Been there, done that. That applies to the Williston Basin and the Dakotas for me. I punched some holes up there way back in the day. And I'm as happy as any oilhand that there is a mini boom going on up there again. Great. Every lil bit helps. Too bad we didn't pay more attention to US stripper wells over the last ten years...but that is a subject for another post.

Bakken is the new God. Bakken be thy name. Bakken this, Bakken that. It reminds me of that Merrill trader squawking at me with his hot tips. Did they sacrifice any virgins yet?

I got one newsletter that had this real simple graphic that showed the 260 Billion barrels in Saudi and the 20 Billion in the USA and then they just magically tagged on another 200 Billion barrels.

200 billion barrels! Do they have any idea how much magic go-go juice that would make?

It just shows how totally off base their thinking is.

I got another newsletter that claimed 500 Billion Bakken Barrels and suggested that the US could completely eliminate oil imports! This seemed really amazing to me until I thought about the snake oil salesmen that have been ripping people off throughout the centuries. My great grandmother told me some stories that have helped keep me out of trouble over the years.

If I remember right the USGS report discussed 3 billion. I guess it's all relative right? Nope, that's not even what Mr. Einstein said, it was space and time. But hey, 3 billion, 200 billion, what's a few billion here and there when it comes to rebalancing a portfolio?

It is sad really that all the stock tipper boys have to resort to such ridiculous tactics to squeeze some more fees out of their shrinking clientbase.

The sheer scale of the fraud is one thing but then there is the "new technology" fantasy angle as well. The idea that some "new" technology like horizontal drilling and frac-ing will come to the rescue and magically suck blood out of the stone. Unbelievable. Sort of a modified pump and dump scheme, huh?

I guess that goes with the times. Last month I had two new real estate clients get caught up in the drama just before they got to me. One got into a pyramid and the other into a ponzi. Unfortunately they were successful business people who never happened to get any education on those basic scams and couldn't recognize them. At least they didn't get taken by the stock pickers yet.

So there you go. The Church of the Bakken Formation. Hallelujah! Bakken be thy name. God bless all of them. I think it is neat that some of those ranchers who inherited grandad's spread are going to get some nice royalty checks. I always enjoy getting those things in the mail.

Maybe there is water or methane on the moon and Bill Stone will pull it out of there, maybe not. Maybe Mr. Putin will snag the Arctic, maybe he won't. But inventing a new Saudi Arabia just to avoid dealing with the Peak is pretty weak, even for wall street.

But I hope the parishioners of the Church of Bakken will think carefully before tithing too much of their net worth to the holy men.