My Daughter

My Daughter
Remember when you learned how to do this?

Friday, March 11, 2005

Sneaking a Quick Peak

Here we are on the upward slope of Hubbert’s Curve producing the most oil ever, at close to the highest prices ever, and yet the supply business is not doing its job at the behest of demand. Profits drive business, and the oil business is not an exception. Recent news has oil companies turning down offers to exploit certain oil deposits in the Caspian Sea area and in offshore tracts in Mexico. Oil executives state that it is not profitable to extract those reserves.

Obviously, the oil business’s major players know about the coming peak of oil production and have a lot to lose if they make poor investment choices. Oil prices have doubled since 2001, but oil companies have increased their budgets for exploration only slightly. Where once there were seven major oil companies, now there are four. Oil companies now increase their reserve holdings by mergers and acquisitions, not new oil finds. And to cap it off, British Petroleum (BP) has changed their name to “Beyond Petroleum”.

Currently, half of the 7,000 vessels in the world's oil tanker fleet are aging single-hull ships, some of them built in the 1950s. These outdated oil tankers are fully booked, but they are also being decommissioned faster than the new double-hull ones are being built. In April 2000, the General Accounting Office released a report prepared by the U.S. Coast Guard that surveyed the U.S. owners of single-hull oil tankers. What they found was that most of these companies are not replacing their tankers at all. Likewise, U.S. refineries are working close to capacity, yet no new refineries have been constructed since 1976. The industry “spin” is that the legal/regulatory environment is in the way. No new refineries are being built because (at a cost of around $150 million, with a 2-3 year lag time) the oil companies know that there won’t be enough future oil production to repay for the capital cost of building the new refineries. Same for the oil tankers.

What this leaves us with is a “sneak preview” of the coming attraction, “Peak Oil: The Day the Earth Stood Still”. Supply bottlenecks, refining capacity shortfall, and no new projects coming on line to help alleviate falling reserve capacity will surely push oil to a more expensive level. And isn’t that what peak oil is all about? The end of cheap oil?

With world oil demand increasing in correlation to population growth and the emerging global players of China and India, having an energy supply/infrastructure shortfall predicated upon an anticipation of peak oil seems a bit ironic. The geological peaking of oil production may, or may not, be already with us. But the pitfalls of not preparing for it may soon be.

No comments: