Do You Worry about how Your Spleen Works?

A spunky rebuke of Peak Oil theory is found in the Canadian National Post: 

Note how the use of the term “skeptics” suggests that Peak Oil is the mainstream view, which it is not. The word also links unbelievers to beyond-the-pale climate change “skeptics.” Finally, the report suggests that these people are suggesting a “golden age of exploration and supply” although in fact the only relevant quote is from Peter Odell, professor emeritus of international energy studies at Erasmus University in Rotterdam, who merely says, “It’s an amazing turnaround from the gloom of the last 10 years. All these finds will take a long time to bring on stream, but it shows the industry is capable of finding more oil than it uses and shows we have not come to any peak.”
Peak Oil theory represents a combination of economic ignorance and moral rejection of markets as greed-driven and shortsighted. These all-too common attitudes usually go with a profound faith in effective government policy, despite the monumental weight of evidence to the contrary.

The seminal image for depletionists -as for apocalyptic climate change theorists — is that of the photo of the Earth taken from Apollo 17; seemingly dramatic confirmation of finite resources on a “small planet.” In fact, the interpretation of the Apollo picture is symptomatic of how far technology has outstripped our primitive assumptions about the way the world works. But then people don’t have to think about the vast, natural “extended order” of the economy any more than they have to worry about how their spleens work. (italics are mine)

Debate between economists and Peak Oilsters tends to be a dialogue of the deaf. Economists often seem to imagine that they are explaining a technical issue. They note that the alleged failure to “replace” production is in fact due to the way reserves are reported. They stress that startling new technologies –such as the ability to drill in thousands of metres of water to depths of more than 10,000 metres (as at Tiber), or 3-D computer seismic imaging, or horizontal drilling –are constantly finding new oil and gas, and producing more from old reservoirs.

Again, citing how often alarms over “the end of oil” have been sounded since 1880 holds no sway with Peaksters. Since they see oil supply as essentially “fixed” and economists as deluded and morally deficient, delays in the projected “crunch” will only make it all the more painful when it –inevitably –comes."

Let's Be Practical

Barry Eichengreen, a professor at Cal-Berkeley, writes an essay in The National Interest about the future of economics after the fallout from the last year's crisis:

"...Work in economics, including the abstract model building in which theorists engage, will be guided more powerfully by this real-world observation. It is about time.

Should this reassure us that we can avoid another crisis? Alas, there is no such certainty. The only way of being certain that one will not fall down the stairs is to not get out of bed. But at least economists, having observed the history of accidents, will no longer recommend removing the handrail."

An interview with T Boone Pickens

BP Finds Oil - Lots of It - 35,055 ft below the Earth's Surface

See all about it on Bloombergy TV:



Read All About It:
From the Wall Street Journal

From the Houston Chronicle

Hear All About:
On NPR's Marketplace

Robert Schiller on Human Nature Driving the Economy

from Charlie Rose

The KNOWN UNKNOWNS

There is a famous Pentagon briefing that has been lampooned quite a bit.  During this briefing Donald Rumsfeld steps to the podium to discuss the intelligence situation in Afganistan. He says:

"There are known knowns. These are things we know that we know. There are known unkowns. That is to say, there are things we know we don't know. But, there are also unknown unknowns. These are things we don't know we don't know."

He got a chuckle from some reporters. He got stares of confusion from others. As for me, I knew exactly what he was saying. And immediately I could relate it to my life. "Unknown Unknowns" in Secretary Rumsfeld's lingo, are things that we need to be worried about that we don't even know TO be worried about.
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When driving down the road, you know to stay on the right side as you crest a hill. There could be a car coming the other way. (Since you knew to be cautious, that is an example of a known unknown.)  But as you crest that same hill and fall into a sinkhole created by recent rainstorms, you experience an unknown unknown (you didn't even realize that you needed to be worried about such a problem).
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As individuals that are affected by the energy markets, we are all impacted by known and unknown unknown variables.  We are surrounded by known unknowns like hurricanes in the gulf or weekly storage inventory changes.  And these make the market move.  These variables have pushed the price of natural gas to 7-year lows.  There are also unknown unknowns, like when the subprime mortgage snowball gained such inertia that a massive commodity deleveraging sell off took place (4Q 2009).  The market did not even know to expect that one...it came out of nowhere, just like the sinkhole our car drove into in the previous paragraph.  Unknown unknowns push the market much more violently and much more significantly when they appear.  And no one can predict when they will arise and become important - that is the true nature and danger of an unknown unknown. 
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By this point, no doubt, my readers think I am as crazy as the reporters found Donnie Rumsfeld that day at the poduim.  But one of my favorite quotes from Charles Dow will help tie this together. 

"There is always a disposition in people's minds to think that existing conditions will be permanent. When the market is down and dull, it is hard to make people believe this is the prelude to a period of activity and advance. When prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one which [are] unlike its predecessors and give assurance of permanency. The one fact pertaining to all conditions is that they will change."

The market will change. It will fall into the pothole of some great unknown unknown in a similar fashion to how the great commodity bubble of 2008 was popped by the economic crisis. It will change all of a sudden, in a shocking fashion, and in a direction that very few anticipated. Consider this fact:
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In the last 10 years, natural gas has been this cheap twice.  Each time, within a year, the market traded near $10.  The first time was in 1q of 2000 when gasd was trading just above $2.00.  by December of 2000, when it traded for $9.73.The second time was in July of 2002, when gas was trading around $2.75.  By February of 2003, gas traded for $9.33. 
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Allow me some license to blend the statements of Secretary Rumsfeld and Mr. Dow: 

"The known unknown pertaining to all market conditions is that they will change."

Yergin on Oil's Future

Cap and Trade

Meet Cap 'n Trade from Marketplace on Vimeo.

Khurais Oilfield Opens - And Helps Us Comprehend Energy Instability

Khurais Oil Field - Ghawar's little brother - began production recently. Here is an article from the NY Times from a year ago that details the field and the development of the facility. It has been a remarkable undertaking, the scale of which should not be underestimated.

Khurais will produce 1.2 million barrels a day, which is about 1.5% of world demand (per the IEA). The IEA also conservatively estimates in the most recent World Energy Outlook that demand will grow at 1.2% per year worldwide.

Basically, we need the equivalent of 1+ Khurais each year, just to keep up with world oil demand growth. Sound like a challenge?

Alternatively, see what Forbes wrote about the Haynesville Shale...enough natural gas to last a decade...

Energy and Sustainability with the CEO of Coke

Watch this between the 10 and 13 minute mark. Interesting perspective.

Oil Market Update

Another Take on Peak Oil

Switching Horses on Oil Strategy

The WSJ reports on big oil's quandary...can't make new capital investment in exploration cause it just don't pay...

Thunder Horse, which started up in 2008, will provide 42% of BP's incremental upstream production over the next three years, according to analysts at J.P. Morgan Chase. Unfortunately, it is also one of BP's few discoveries of such scale in recent memory. Neil McMahon of Sanford C. Bernstein calculates that less than half of BP's additions to reserves over the past five years have come through its exploration efforts.

Malcolm Gladwell on Underdogs and Inliers

Malcom Gladwell is an author I enjoy greatly. And I recently found two pieces of his that are worth your time. One is about achieving success as an underdog. The next is about successful people who get missed by the media - "inliers" in his vernacular.

From the New Yorker:

Insurgents, though, operate in real time. Lawrence [of Arabia] hit the Turks, in that stretch in the spring of 1917, nearly every day, because he knew that the more he accelerated the pace of combat the more the war became a battle of endurance—and endurance battles favor the insurgent. “And it happened as the Philistine arose and was drawing near David that David hastened and ran out from the lines toward the Philistine,” the Bible says. “And he reached his hand into the pouch and took from there a stone and slung it and struck the Philistine in his forehead.” The second sentence—the slingshot part—is what made David famous. But the first sentence matters just as much. David broke the rhythm of the encounter. He speeded it up. “The sudden astonishment when David sprints forward must have frozen Goliath, making him a better target,” the poet and critic Robert Pinsky writes in “The Life of David.” Pinsky calls David a “point guard ready to flick the basketball here or there.” David pressed. That’s what Davids do when they want to beat Goliaths.

From Sports Illustrated:

Nick Faldo [is a golf inlier]. Think about it. He wins six majors. He's the dominant golfer of the late 1980s and early 1990s. But we don't mention him in the same breath as, say, Arnold Palmer, even though Palmer only won one more major than Faldo. And why? Because Palmer had Nicklaus and Faldo had, well, Scott Hoch, Mark McNulty and John Cook. Now imagine he comes along in the late '90s and goes toe-to-toe with Tiger Woods from the beginning. All of a sudden Faldo gets immeasurably magnified by the comparison. I'm not saying he'd beat Tiger. (Are you kidding?) But he's the perfect foil. I got a tape recently of the 1996 Masters, when Greg Norman had his epic collapse on the back nine. That tournament is always explained in terms of how Norman choked, as if there were something inside him that inevitably caused him to surrender a six-stroke lead. Nonsense. Surely the key to that whole collapse is that he's paired with Faldo, and Faldo in his prime was terrifying. He was surly and tough and charismatic and emotionally and psychologically bulletproof, and I feel like he'd do a better job of getting under Tiger's skin than anyone out there right now. What's the defining fact about Faldo? His ex-girlfriend once destroyed his Porsche with a 9-iron. The corresponding fact for Woods is that his favorite band is Hootie and the Blowfish. Hootie and the Blowfish? What's Faldo's favorite band? Joy Division? Or some kind of obscure Welsh thrash band too hard core for American radio?

Peak Oil Update

Here are three presentations by Matthew Simmons, the Twilight in the Desert guy.

Mr. Simmons is a big energy bull. The jury is still out as to whether he is full of bull. But his presentations are quite compelling.