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Shell leader discusses U.S., world's energy future
Jim Fuquay, Star-Telegram (North Texas)
John Hofmeister doesn't sound much like an oilman when he embraces the science behind climate change, advocates government regulation of carbon-dioxide emissions and backs a federal role in creating a "culture of conservation" to reduce energy use.

The president of Houston-based Shell Oil Co. does sound like an energy executive, however, when he calls for more offshore drilling, supports the development of unconventional petroleum deposits, such as Canada's oil sands, and says the world must simply accept that fossil fuels are going to continue to provide most of the world's energy for the next 40 years.

...Peak oil (the theory that oil production worldwide is in an irreversible decline) is still an open question. The National Petroleum Council recently said we are a long way from peaking. You need to look at the assumptions. Easy oil production has peaked. Producers should be allowed to drill the entire U.S. Outer Continental Shelf, which holds an estimated 110 billion barrels of crude oil. And the Canadian oil sands and U.S. oil shale deposits, both estimated at the equivalent of a trillion barrels, should be developed.
(7 November 2007)
The public position of the oil industry seems to be changing. Peak oil is no longer the province of cranks, but is now "an open question," according to Hofmeister. -BA

Much higher oil prices seen in U.S. future
Peak oil expert says coping will be hard
Roger Fillion, Rocky Mountain News
Steve Andrews is betting the jump in oil prices is far from over.
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He's convinced oil prices are headed much higher because global oil output is at or near its maximum peak, if it hasn't already peaked.

As co-founder and acting executive director of the Denver-based Association for the Study of Peak Oil-USA, Andrews is winning converts.

His group is the U.S. branch of a global organization. Peak oil proponents include geologists, physicists, oil industry

...Q: Do you think world oil output has peaked?

It's possible. I would put the odds at 30 percent or so that we've already hit our peak. There's a good chance that within the next five years we could produce a bit more. Right now the world is producing 85 million barrels of oil a year.

Q: How will we know if output has peaked?

Back in 1970 U.S. oil production peaked. For two full years after that, the oil industry's main trade publication assumed production would increase - when in fact production fell slightly. It will only be clear in the rear-view mirror.

...Q: How can people prepare?

At the individual level it's going to really make sense to live closer to work so you have more travel options, such as carpooling. Bicycling will fit in. Some people will likely switch to motorcycles and motorbikes. That will probably be in about five or 10 years. And people will rely more on mass transit such as buses and light rail. People will be creative.

...Q: Is there any solution to the peak oil scenario?

We don't use the word solution because it implies a silver bullet that's not out there. The transition to come is likely to be protracted and rather painful. We use the phrase silver BBs instead of silver bullets because there will be lots of intelligent responses that people, businesses and cities can make.
(7 November 2007)

On the Road to $100: The Historical High for Oil is Actually $99.04 Per Barrel; “Back to the Future”
CERA, an IHS Company
Cambridge, Mass. -- With eyes focused on whether and when oil breaks through the $100 barrier, it turns out that $100 a barrel is really $99.04, at least in terms of the all-time record, according to Cambridge Energy Research Associates (CERA).

CERA, an IHS company, finds that the inflation-adjusted high of $99.04 in today's dollars -- $39.50 in 1980 dollars - was reached during the spring of 1980 when geopolitical turbulence in the Middle East, and Iran in particular, created acute uncertainty about the reliability and adequacy of oil supplies from the world's most important oil exporting region.

"Today's high prices have a ‘back to the future' quality," said Daniel Yergin, chairman of CERA and executive vice president, IHS. "Rising tensions today between Iran and the United States are, as in 1980, at the center of worries about oil supply."
(6 November 2007)
Here's guessing that there are animated discussions within CERA about whether to change their skeptical line on peak oil. After all, several oil industry figures have already broken ranks, and $100 oil is within sight. PR experts usually suggest making an honest admission and then decisively changing course (rather than dragging out a messy controversy). -BA

Countdown to $100 oil (52) - buying protection (with a HRC plug)
Jerome a Paris, Daily Kos

Scramble to insure against more oil price rises

Energy consumers and speculators are scrambling to take out options contracts to insure themselves against oil prices rising above $100 a barrel – a further sign of growing expectations of a spike in the crude market.

Some have even taken out contracts to protect themselves against prices rising to $250 a barrel in the next two years. (...) The strong flows in call options – contracts that give the right to buy at a predetermined price and date – are boosting short-term oil prices as the banks that sell them have to hedge some of their positions by buying crude oil in the spot market.

... The open interest in Nymex December 2010 call options at $100 a barrel rose on Monday to 24,903 contracts, double the level of the start of the year. (...) The open interest at the December 2007 call option at $100 a barrel is unusually high at 48,032 contracts. As banks cover their positions, that could push the spot price towards $100 a barrel.

...This page by FreeCharts will give you an idea of the number of contracts being traded overall at various maturities (which include all 'plain vanilla' forward sales - the same at a future date at a price agreed today - and all sorts of other more sophisticated options). The symbolic $100 lebel is clearly in all traders' minds.

The "it's speculation" meme has been doing the rounds and is regularly repeated in the comments here.

Well, speculators, usually, only accelerate underlying trends: by betting that a given price will be reached in the near future, they effectively bring that price about faster. The important thing to note is that this pays off only if the underlying trend is correct: people are betting real money (even if not necessarily always their own...) on something happening, and that means these bets have to have some basis in reality. What people mean when they blame speculation is that they think that the markets are overshooting - i.e. in betting on higher prices, they keep on betting beyond what the "real" price should be, until others finally bet against them and bring the prices down to that underlying equilibrium level. Overshooting is a regular feature of markets, just as crowds movements take a life of their own (including occasionally all the way to stampedes), driven by fashion, herd behavior or fear of losing out on a 'certain' trend.
(6 November 2007)

Of Speculators and Cartels:
Who Determines the Price of Oil?
Ralph Nader, CounterPunch
Question of the day: who and what is determining the price of oil and your gasoline and home heating bills? Don't ask Uncle Sam, because George W. Bush and Dick Cheney are running a regime marinated in oil that does not issue reports which explain the real determinants of petroleum pricing beyond the conventional supply-demand curves.

First, let us create a historical framework to provide some background. In the good 'ole oil days, before the producer-countries' cartel in the Third World gained pricing power, there were seven giant oil companies called the 'seven sisters' led by Standard Oil (now Exxon) and Shell. As chronicled in Robert Engler's classic book, The Brotherhood of Oil, they were able to affect pricing through extra-market means. Economists called them a tight oligopoly.

...Today, a third party has moved to the table-the New York Mercantile Exchange, a similar operates in London and a new one in Dubai. There, boisterous traders buy and sell futures contracts on the delivery of oil. But as Ben Mezrich, the author of the new book Rigged said recently, the dollar amounts of these futures contracts are far far larger than the actual oil deliveries they represent as they turn over and over at the Mercantile Exchange.

So now the critical resource of oil is driven by speculation at ever higher abstract electronic levels of futures trading. Increasingly, the distance becomes greater and greater between this abstract trading (fueled by rumors of storms in the Gulf of Mexico, or some possible political turmoil in a region of the world, or some other frightful excuse for bidding up) and the physical supply and demand for oil and its refined products.

These oil gamblers in New York and London try to justify their frenetic daily bidding by saying that these futures markets provide liquidity, and a clear price for oil. Alright, but who benefits when, how and where?

Certainly, the strain between physical supply and demand in recent years does not explain such extreme volatility. With OPEC countries down to supplying only 40 percent of the world production, Chinese demand for oil growing fast, and the expansion of production by Saudi Arabia and others to meet this demand, crude oil supplies are not tight enough to explain such pricing behavior.
(6 November 2007)
Kenneth Deffeyes has pointed out that volatility increases markedly when a resource is in short supply. Events that otherwise wouldn't affect prices much, begin to do so when demand and supply are tightly balanced. -BA

Peak Oil Again?
Is "social meltdown" imminent?
Ronald Bailey, Reason Magazine
Crude oil prices hover between $90 and $100 per barrel and U.S. gasoline prices are again north of $3 per gallon. Since 2002, the price of a barrel of oil has risen more than four-fold. Are we running out of oil?

A new report by the German think tank Energy Watch Group (EWG) says so. The EWG report argues that the world reached the peak of oil production last year and supplies will fall from about 81 million per day now to just 39 million by 2030. "The world is at the beginning of a structural change of its economic system. This change will be triggered by declining fossil fuel supplies and will influence almost all aspects of our daily life," declared EWG founder Joerg Schindler. This fast onset of oil supply shortfalls, warns the EWG report, could trigger the "meltdown of society."

At the heart of the EWG analysis is its drastic downward revision of estimated world oil reserves.

...Higher prices do generally mean that supplies are becoming relatively scarcer. So what is causing today's scarcity? Most people have forgotten that by the mid-1990s, the price of oil dropped to around $10 per barrel. Why? Because the world was awash in oil relative to demand. The oil crisis of the 1970s provoked so much field development that there was a 25 percent excess capacity. Low prices also meant that there was very little incentive to invest in projects to increase supply. For example, when oil prices collapsed in the 1980s, the number of exploratory drilling rigs in the United States fell from 4500 to under 1000.

At the beginning of the 21st century, economic growth in India and China surged after they finally managed to shrug off the shackles of socialist planning. Strong world economic growth soaked up the excess production capacity, which has now fallen to around 2.5 million barrels per day. Generally a cushion of 5 million barrels per day is necessary to keep prices low. Most of the excess capacity is in Saudi Arabia. The world currently consumes about 86 million barrels per day.

...Instead of the "meldown of society," a likely and painful scenario is that greedy and incompetent government oil producers will continue to under-invest, causing a shortfall in supplies that will drive up prices and provoke a global economic slowdown. Expensive oil also encourages consumers and businesses to invest in energy efficiency that will combine with the slowdown to cut demand. Reduced demand will drive down oil prices as steeply as they rose. Some day peak oil production will be reached, but most oil reserve estimates suggest that there are good reasons to doubt that that day is now at hand.

Ronald Bailey is Reason's science correspondent.
(6 November 2007)
It's interesting to compare Ralph Nader and Ronald Bailey's analyses. Both find an someone to blame, appropriate to their political positions. Ronald Bailey focuses on "greedy and incompetent government oil producers." Nader blames speculators, oil companies and "oil-indentured politicians." -BA