Oct 062017
 
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Jean Renoir Les Grands Boulevards 1875

 

China’s Economic Boom Is About To Be Cut Short By Peak Oil (Ahmed)
A Volatility Trap Is Inflating Market Bubbles (BBG)
China Is In ‘Lock-down’ Ahead Of Its Most Important Meeting In Years (CNBC)
Bitcoin’s Rise Happened in Shadows of Finance. Now Banks Want In (BBG)
HSBC Traders Used Code Words to Trigger Front-Running (BBG)
US Rounds On Britain Over Food Quotas As Post-Brexit Trade Woes Deepen (Pol.)
Few Tears Are Being Shed In Quebec Over The Energy East Pipeline’s Demise (BBG)
Onshore Fracking To Begin In UK ‘Within Weeks’ (Ind.)
Catalan Separatists Squeezed Further as Spain Tightens Its Grip (BBG)
Apple Gave Uber ‘Unprecedented’ Access To Secret iPhone Backdoor (BI)
Tropical Storm Nate Kills 22 In Central America, Heads For US (R.)
Pesticides That Pose Threat To Humans And Bees Found In Honey (Ind.)
Tiny Pacific Island Nation Of Niue Creates Huge Marine Sanctuary (AFP)

 

 

From China’s government.

China’s Economic Boom Is About To Be Cut Short By Peak Oil (Ahmed)

A new scientific study led by the China University of Petroleum in Beijing, funded by the Chinese government, concludes that China is about to experience a peak in its total oil production as early as next year. Without finding an alternative source of ‘new abundant energy resources’ , the study warns, the 2018 peak in China’s combined conventional and unconventional oil will undermine continuing economic growth and ‘challenge the sustainable development of Chinese society’. This also has major implications for the prospect of a 2018 oil squeeze – as China scales its domestic oil peak, rising demand will impact world oil markets in a way most forecasters aren’t anticipating, contributing to a potential supply squeeze. That could happen in 2018 proper, or in the early years that follow.

There are various scenarios that follow from here – China could: shift to reducing its massive demand for energy, a tall order in itself given population growth projections and rising consumption; accelerate a renewable energy transition; or militarise the South China Sea for more deepwater oil and gas. Right now, China appears to be incoherently pursuing all three strategies, with varying rates of success. But one thing is clear – China’s decisions on how it addresses its coming post-peak future will impact regional and global political and energy security for the foreseeable future. The study was published on 19 September by Springer’s peer-reviewed Petroleum Science journal, which is supported by China’s three major oil corporations, the China National Petroleum Corporation (CNPC), China Petroleum Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC).

Since 1978, China has experienced an average annual economic growth rate of 9.8%, and is now the world’s second largest economy after the United States. The new study points out, however, that this economic growth has been enabled by “high energy consumption.” In the same period of meteoric economic growth, China’s total energy consumption has grown on average by 5.8% annually, mostly from fossil fuels. In 2014, oil, gas and coal accounted for fully 90% of China’s total energy consumption, with the remainder supplied from renewable energy sources. After 2018, however, China’s oil production is predicted to begin declining, and the widening supply-demand gap could endanger both China’s energy security and continued economic growth.

Read more …

“Zombie companies that would otherwise fail continue to be in business, refinancing at near-zero interest rates in bond markets.”

A Volatility Trap Is Inflating Market Bubbles (BBG)

A number of markets show not only elevated valuations, but also irrational behavior on the part of investors, including a suspension of traditional valuation models, an increase in trading volumes or “flipping” in the hopes of quick gains, and financial engineering. Potential bubbles can be found in emerging-market debt, technology stocks, U.S. high yield bonds, some sovereign debt, cryptocurrencies, properties — even art and collectibles. It is becoming clearer to economists and central bankers that even though we may be experiencing a long phase of growth, stretching the cycle with monetary stimulus inspired by crisis-era toolkits may be bringing several collateral effects. These include not only asset bubbles, but also a worsening of wealth inequality and a misallocation of resources.

Persistent low interest rates in the past have helped to roll forward an increasing amount of private and public debt to future generations, but this is no longer working. Economic fundamentals are different from the post-war period. Technology is deflationary. Demographics are no longer a tailwind, as there are fewer young people able to carry a higher debt burden in the future. The generation of so-called millennials is the first that will likely be poorer than their parents in the post-war period. Productivity is low as the economy suffers from hysteresis: a financial boom-bust cycle that can leave large swathes of the workforce out of the job market. The longer the debt cycle, the longer companies and workers develop business and skills in leverage-heavy sectors (e.g. finance, real estate, energy), the deeper the scars when the bust comes.

Often the misallocation is so large that low rates are necessary to keep people in their jobs: Zombie companies that would otherwise fail continue to be in business, refinancing at near-zero interest rates in bond markets.

Read more …

Xi will need drastic measures to tackle the debt disaster. But it may well be too late already.

China Is In ‘Lock-down’ Ahead Of Its Most Important Meeting In Years (CNBC)

Although the Chinese will head back to work and school on Monday, their country is expected to remain in a holding pattern ahead of a pivotal Communist Party Congress set to start later this month. “Commentators and markets rightly assume that the authorities are consumed by this transition and that all other policy matters are on the back-burner or in lock-down until after the Congress,” Freya Beamish, Pantheon Macroeconomics’ chief Asia economist, wrote in a recent note. The once-in-five-years meeting will usher in leadership changes that are likely to see incumbent President Xi Jinping extend his term and consolidate power. The coming years of Xi rule will be critical for the world’s second-largest economy as it grapples with the fallout from three decades of unbridled growth.

As Xi — the most powerful Chinese leader in decades — embarks on a new era, the meeting will review “faulty” outcomes from the economic reforms and review if China needs a new direction, said independent economist, Andy Xie. China undertook a series of market reforms in the last three decades that propelled the Communist country to the spot of the world’s second largest economy. Market watchers, however, are concerned about the nation’s debt-fueled growth, industrial overcapacity and capital outflows that may potentially spur a global economic crisis. The Communist Party has been working to steer outbound merger and acquisition activities over the last year, but major initiatives have slowed ahead of the Congress. That push is likely to pick up again in the fourth quarter, said Chunshek Chan, Dealogic’s global M&A research head.

No matter the macroeconomic concerns, the only thing on Beijing’s mind at this time is consolidating power in the country, Xie said: “It’s much more important now to strengthen the control of the Communist Party than anything else.” “The key is to have the Communist Party as a coherent organization to control everything in the society — that seems to be the case. The people at the top worry about the stability. Stability is always number one in China,” added Xie.

Read more …

“What are they going to do if bitcoin drops for a given client and they’ve given that client a ton of leverage on margin, and that client only has assets in bitcoin?”

Bitcoin’s Rise Happened in Shadows of Finance. Now Banks Want In (BBG)

At first, bitcoin was a way to make payments without banks. Now, with more than $100 billion stashed in digital currencies, banks are debating whether and how to get in on the action. Goldman Sachs CEO Lloyd Blankfein tweeted Tuesday that his firm is examining the cryptocurrency. Other global investment banks are looking into facilitating trades of bitcoin and other cryptocurrencies, according to industry consultants. Bitcoin has surged more than 300 percent this year, drawing the attention of hedge funds and wealthy individuals. “They’re clearly receiving interest from their clients, both from retail investors and on the institutional side,” said Axel Pierron, managing director of bank consultant Opimas. “It’s highly volatile, it’s highly illiquid when you need to trade large volumes, so they see the opportunity for a new asset class which would require the capability of a broker-dealer.”

But bitcoin presents Wall Street with a conundrum: How do banks that are required by law to prevent money-laundering handle a currency that’s not issued by a government and that keeps its users anonymous? The debate has played out in the open recently, with JPMorgan CEO Jamie Dimon and BlackRock CEO Larry Fink saying that bitcoin was mostly used by criminals, while Morgan Stanley chief James Gorman took a more measured stance, saying it was “more than just a fad.” On Wednesday, UBS Chairman Axel Weber, a former president of Germany’s central bank, said he was skeptical about bitcoin’s future because “it’s not secured by underlying assets.” There’s even tension within some banks. On the same day Dimon trashed bitcoin, calling it a “fraud,” his firm’s private bank hosted a panel stocked with cryptocurrency investors.

Handling bitcoin would invite scrutiny from every major U.S. regulator, according to Joshua Satten, director of emerging technologies at Sapient Consulting. “From the perspective of the U.S. Treasury, do you classify it as an asset class or a currency?” Satten said. “If banks are starting to manage and hold bitcoin for their clients, you would have the OCC and the FDIC looking at how they classify the assets on their balance sheet and how they state the assets for the portfolio of a client.” And banks need to avoid antagonizing governments that are increasingly concerned about this area. For instance, China is cracking down by shutting cryptocurrency exchanges. Then there’s the risk that stems from its high volatility and lack of correlation to other major assets. “What are they going to do if bitcoin drops for a given client and they’ve given that client a ton of leverage on margin, and that client only has assets in bitcoin?” Satten said.

Read more …

Greed.

HSBC Traders Used Code Words to Trigger Front-Running (BBG)

A group of HSBC currency traders in London and New York feverishly jumped ahead of a $3.5 billion client order after they were tipped off using the code words “my watch is off,” a U.S. prosecutor told a federal judge. The buying frenzy was launched after Mark Johnson, HSBC’s former global head of foreign exchange who the bank chose to lead the transaction, alerted the traders via phone call that was recorded, the prosecutor said Thursday in Brooklyn, New York. Johnson is on trial for fraud. After the trial recessed for the day, prosecutor Carol Sipperly told U.S. District Judge Nicholas Garaufis that the government wants the jury to hear the recordings on Friday, in which Johnson can be heard tipping off a trader in Hong Kong, a signal that she said eventually reached others on both sides of the Atlantic.

Prosecutors say Johnson and Stuart Scott, the bank’s former head of currency trading in Europe, along with these other traders, bought pounds before the transaction, collectively making the bank $8 million in illicit profit. Sipperly said the call involved Johnson, who was in New York that day, speaking to Scott who was in London, just before the Dec. 7, 2011, transaction for its client, Cairn Energy. “We actually have Mark Johnson telling Stuart Scott ‘Tell Ed my watch will be off,’” she said. “We have communications where the word ‘watch’ is used, and then within seconds, 20 seconds of ‘my watch is off,’ we have all that trading that’s been described. The word is instrumental in getting the information to the traders when it comes to their early front-running trades.”

Read more …

Things are getting messy.

US Rounds On Britain Over Food Quotas As Post-Brexit Trade Woes Deepen (Pol.)

The U.S. and other international trade heavyweights have dashed Prime Minister Theresa May’s hopes of a smooth Brexit by rejecting one of her core plans for reintegrating into global trade networks. Washington’s slap-down of Britain is the second big trade reality check for May in less than a fortnight. Only last week, the U.K.’s increasingly fragile position in trade disputes was exposed by the country’s inability to prevent new, ultra-high tariffs from the U.S. that could hit thousands of jobs in a plane factory in Northern Ireland. In a fast-developing second trade spat, Washington has teamed up with Brazil, Argentina, Canada, New Zealand, Uruguay and Thailand to reject Britain’s proposed import arrangements for crucial agricultural goods such as meat, sugar and grains after Brexit.

The fact that the U.K.’s opponents include the U.S., Canada and New Zealand is a significant setback because Britain is trying to style its former colonies as natural strategic and commercial allies after it has quit the EU. Since August, Britain and the EU have repeatedly insisted that they had reached an agreement on the terms under which Britain would buy in food from around the world after Brexit. Brussels currently negotiates all these quotas and tariffs on behalf of Britain and the 27 other EU countries jointly, but London will need to take independent control of these policies from March 2019. That creates a dilemma over how to divide up the EU’s current quota arrangements with other countries — agreed at the World Trade Organization — between the U.K. and the remaining 27. These tariff-rate quotas allow countries outside the EU to export certain goods into the bloc with reduced duties, but only up to a maximum limit.

The argument from Britain and the EU is that the rest of the world will be “no worse off” after Brexit — a key legal defense in trade disputes — if the EU’s quotas are simply reduced, and Britain takes a share of them. British Trade Minister Liam Fox told POLITICO in an interview that Britain had agreed to take a portion of the EU’s quotas based on the U.K.’s average consumption over the last three years. America and the six other big food exporters, however, wrote an unusually sharply worded letter of complaint dated September 26 to the U.K. and EU representatives at the World Trade Organization over the terms of such an arrangement. “We cannot accept such an agreement,” reads the letter, seen by POLITICO. The seven countries dispute the legal defense that the proposed post-Brexit arrangement would leave them “no worse off.”

Read more …

Transporting oil across thousands of miles just so you can sell it to Europe. Insane.

Few Tears Are Being Shed In Quebec Over The Energy East Pipeline’s Demise (BBG)

TransCanada had applied to build Energy East three years ago, seeking to open access for Western Canadian oil producers to the Atlantic Ocean for exports to Europe. It faced intense opposition in Quebec, where Premier Philippe Couillard said the C$15.7 billion ($12.5 billion) line posed a significant risk to its freshwater resources. Quebec has long required that TransCanada meet seven conditions before allowing construction of the pipeline. Among other demands, Quebec insisted that the project be subject to an environmental assessment and that TransCanada must guarantee an emergency plan in case of a spill, consult with communities including aboriginal groups along the route and ensure the project doesn’t reduce the province’s gas supply. Last month, TransCanada asked Canadian regulators for a 30-day suspension on its applications for the Energy East and Eastern Mainline projects, adding to doubt about the future of two major pipelines that the nation’s energy producers had hoped for.

The latest delay meant the writing was on the wall, Quebec Energy and Natural Resources Minister Pierre Arcand said Thursday. “We’re not the promoters of the project. The promoter made a commercial decision,” Arcand told reporters at the provincial legislature. “When they decided to suspend the project about one month ago, I thought we were inevitably going to go toward this decision.” Energy East “was supposed to cross more than 700 bodies of water,” Quebec Environment Minister David Heurtel said separately in Quebec City. “This is a project that raised a lot of questions. We were still in the process of getting answers to our questions” from the company, he said. TransCanada’s decision “is great news,” Jean-Francois Lisée, head of the separatist Parti Quebecois, the official opposition in the provincial legislature, said in Quebec City. “Quebec’s territorial integrity is no longer threatened.”

Read more …

Feels like the Middle Ages.

Onshore Fracking To Begin In UK ‘Within Weeks’ (Ind.)

Fracking for shale gas will begin in the UK within weeks, the company undertaking it for the first time has announced. Third Energy said it plans to complete five fracks in North Yorkshire before the end of 2017. The controversial technique involves injecting liquid into underground rock at high pressures in order to create cracks that release trapped gas. This is then collected and used to generate electricity. Fracking has been vocally opposed by environmental campaigners but permits to use the technique have been approved by government ministers. Alan Linn, Third Energy’s technical director, said the final sign-off needed for fracking to begin was ‘imminent’.

Read more …

Vote count to be published today?!

Catalan Separatists Squeezed Further as Spain Tightens Its Grip (BBG)

Spanish Prime Minister Mariano Rajoy convenes his cabinet on Friday as the financial and political squeeze on the separatist government in Catalonia tightens. After a week of political drama that rocked financial markets, Rajoy will meet with his ministers in Madrid as events 600 kilometers (370 miles) to the northeast in the Catalan capital Barcelona threaten to spiral still further out of control. The region’s president, Carles Puigdemont, risks economic damage and European isolation if he pushes ahead with plans to declare Catalan independence based on a referendum that breached Spain’s constitution. CaixaBank, the symbol of the region’s financial strength, may follow Banc Sabadell in abandoning Catalonia when its board meets Friday.

For his part, Rajoy and his minority government will be loathe to risk a repeat of Sunday’s scenes of police beating peaceful voters that drew international condemnation and inflamed the separatist cause. With options to quell an increasingly bitter constitutional dispute fast running out, events may come to a head on Monday. That’s when Puigdemont had sought to evaluate the result of the independence vote at a session of the regional parliament – until it was suspended by the Spanish Constitutional Court. That means Rajoy may again have to send in the police to enforce a court ruling, and Puigdemont must decide if he’s ready to again defy the law. “There will be some formula for the Catalan Parliament to convene and hold its meeting as planned,” Jordi Sanchez, who heads the most powerful group among the separatists, known as the Catalan National Assembly, said in an interview in Barcelona. “There will be a plenary session.”

As anti-independence organizers plan rallies for this weekend in Madrid and in Barcelona, Catalan separatist are seeking to avoid an immediate declaration of independence. There’s a divide in the movement’s leadership, with most leaders keen to delay that leap into the unknown to create more time for a negotiated settlement, according to two people familiar with their plans. Puigdemont’s mainstream separatist group is concerned that a move toward independence would send the economy into a tailspin, the people said. But following Sunday’s illegal referendum on secession – which the regional government said won the support of 90%t of 2.3 million voters – hardliners from the anarchist party CUP are demanding a quick break with Spain.

Read more …

What a surprise. Apple is an Uber investor.

Apple Gave Uber ‘Unprecedented’ Access To Secret iPhone Backdoor (BI)

Uber’s iPhone app has a secret backdoor to powerful Apple features, allowing the ride-hailing service to potentially record a user’s screen and access other personal information without their knowledge. The existence of Uber’s access to special iPhone functions is not disclosed in any consumer-facing information included with Uber’s app, despite giving the company direct access to features so powerful that Apple almost always keeps them off limits to outside companies. Although there is no evidence that Uber used this access to take advantage of the iPhone features, the revelation of the app’s access to privileged Apple code raises important questions for a company already under investigation for a variety of controversial business practices.

Uber told Business Insider the code was not currently being used and was essentially a vestige from an earlier version of its Apple Watch app, but it set off alarm bells among experts. “Granting such a sensitive entitlement to a third-party is unprecedented as far as I can tell, no other app developers have been able to convince Apple to grant them entitlements they’ve needed to let their apps utilize certain privileged system functionality,” Will Strafach, a security researcher who discovered the situation, told Business Insider. [..] Apple became an Uber investor through its investment in Chinese ride-hailing company Didi Chuxing. In 2016, Didi merged with Uber’s Chinese subsidiary.

Read more …

It ain’t over.

Tropical Storm Nate Kills 22 In Central America, Heads For US (R.)

Tropical Storm Nate has killed at least 22 people in Central America as it battered the region with heavy rain while heading toward Mexico’s Caribbean resorts and the US Gulf Coast where it could strike as a hurricane this weekend. Several offshore oil rigs in the Gulf of Mexico were evacuated and others had shut production ahead of the storm. In Nicaragua, at least 11 people died, seven others were reported missing and thousands had to evacuate homes because of flooding, according to the country’s vice president, Rosario Murillo. Emergency officials in Costa Rica reported that at least eight people were had been killed, including two children. Another 17 people were missing, while more than 7,000 had to take refuge from Nate in shelters.

Two youths also drowned in Honduras due to the sudden swell in a river, while a man was killed in a mud slide in El Salvador and another person was missing, emergency services said. “Sometimes we think we think we can cross a river and the hardest thing to understand is that we must wait,” Nicaragua’s Murillo told state radio, warning people to avoid dangerous waters. “It’s better to be late than not to get there at all.“ Costa Rica’s government declared a state of emergency, closing schools and all other non-essential services. Highways in the country were closed due to mud slides and power outages were also reported in parts of country, where more than 3,500 police were deployed. The National Hurricane Centre said Nate could produce as much as 51 cm (20 inches) in some areas of Nicaragua, where schools were also closed. Nate is predicted to strengthen into a Category 1 hurricane by the time it hits the US Gulf Coast on Sunday, NHC spokesman Dennis Feltgen said.

Read more …

Slow motion mass suicide.

Pesticides That Pose Threat To Humans And Bees Found In Honey (Ind.)

Three-quarters of the honey produced around the world contains nerve agent pesticides that can harm bees and pose a potential health hazard to humans, a study has shown. Scientists who tested 198 honey samples from every continent except Antarctica discovered that 75% were laced with at least one of the neonicotinoid chemicals. More than two-fifths contained two or more varieties of the pesticides and 10% held residues from four or five. Environmental campaigners responded by demanding a “complete and permanent” ban preventing any further use of neonicotinoids on farm crops in Europe. Experts called the findings “alarming”, “sobering” and a “serious environmental concern” while stressing that the pesticide residue levels found in honey generally fell well below the safe limits for human consumption.

However, one leading British scientist warned that it was impossible to predict what the long term effects of consuming honey containing tiny amounts of the chemicals might be. Dave Goulson, Professor of Biology at the University of Sussex, said: “Beyond doubt … anyone regularly eating honey is likely to be getting a small dose of mixed neurotoxins. “In terms of acute toxicity, this certainly won’t kill them and is unlikely to do measurable harm. What we don’t know is whether there are long-term, chronic effects from life-time exposure to a cocktail of these and other pesticides in our honey and most other foods.”

[..] The new research published in the journal Science could not have come at a more sensitive time in Europe. EC policymakers are right now discussing whether to make the ban permanent and more wide ranging. A total ban would have a huge impact on cereal growers in the UK. For the study, an international team of European researchers tested almost 200 honey samples from around the world for residues left by five different neonicotinoids. [..] While in most cases the levels were well below the EU safety limits for human consumption, there were exceptions. Honey from both Germany and Poland exceeded maximum residue levels (MRLs) for combined neonicotinoids while samples from Japan reached 45% of the limits.

Read more …

“This commitment is not a sacrifice, it is an investment in the certainty and stability of our children’s future..”

“..the palm-dotted island’s name in the local language means “Behold, the Coconut”..

Tiny Pacific Island Nation Of Niue Creates Huge Marine Sanctuary (AFP)

The tiny Pacific island nation of Niue on Friday announced the creation of a huge marine sanctuary, saying it wanted to stop overfishing and preserve the environment for future generations. While Niue’s landmass is only 260 square kilometres (100 square miles), its remote location about 2,400 kilometres northeast of New Zealand means it lays claim to vast tracts of ocean. The government said that 40% of its exclusive economic zone, about 127,000 square kilometres representing an area roughly the size of Greece, would be set aside for the marine sanctuary. Premier Toke Talagi said his government wanted to stop the depletion of fish stocks and give the ocean space to heal to protect the environment for the next generation.

“This commitment is not a sacrifice, it is an investment in the certainty and stability of our children’s future,” he said. “We simply cannot be the generation of leaders who have taken more than they have given to this planet and left behind a debt that our children cannot pay.” Known locally as “The Rock”, Niue was settled by Polynesian seafarers more than 1,000 years ago and the palm-dotted island’s name in the local language means “behold, the coconut”. The British explorer captain James Cook tried to land there three times in 1774 but was deterred by fearsome warriors, eventually giving up to set sail for more welcoming shores and naming Niue “Savage Island”.

Read more …

Jul 192016
 
 July 19, 2016  Posted by at 3:13 pm Finance Tagged with: , , , , , , ,  14 Responses »
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M. King Hubbert

It’s been a while since we posted an article by our friend Euan Mearns, who was active at The Oil Drum at the same time Nicole and I were. Is it really 11 years ago that started, and almost 9 since we left? You know the drill: we ‘departed’ because they didn’t want us to cover finance, which we said was the more immediate crisis, yada yada. Euan stayed on for longer, and the once unequalled Oil Drum is no more.

On one of our long tours, which were based around Nicole’s brilliant public speaking engagements, we went to see Euan in Scotland, he teaches at Aberdeen University. I think it was 2011?! An honor. Anyway, always a friend.

And there’s ono-one I can think of who’d be better at explaining the Peak Oil Paradox in today’s context. So here’s a good friend of the Automatic Earth, Euan Mearns:

 

 

Euan Mearns: Back in the mid-noughties the peak oil meme gained significant traction in part due to The Oil Drum blog where I played a prominent role. Sharply rising oil price, OPEC spare capacity falling below 2 Mbpd and the decline of the North Sea were definite signs of scarcity and many believed that peak oil was at hand and the world as we knew it was about to end. Forecasts of oil production crashing in the coming months were ten a penny. And yet between 2008, when the oil price peaked, and 2015, global crude+condensate+NGL (C+C+NGL) production has risen by 8.85 Mbpd to 91.67 Mbpd. That is by over 10%. Peak oilers need to admit they were wrong then. Or were they?

 

 

Introduction

 

It is useful to begin with a look at what peak oil was all about. This definition from Wikipedia is as good as any:

Peak oil, an event based on M. King Hubbert’s theory, is the point in time when the maximum rate of extraction of petroleum is reached, after which it is expected to enter terminal decline. Peak oil theory is based on the observed rise, peak, fall, and depletion of aggregate production rate in oil fields over time.

Those who engaged in the debate can be divided into two broad classes of individual: 1) those who wanted to try and understand oil resources, reserves, production and depletion rates based on a myriad of data sets and analysis techniques with a view to predicting when peak oil may occur and 2) those who speculated about the consequences of peak oil upon society. Such speculation normally warned of dire consequences of a world running short of transport fuel and affordable energy leading to resource wars and general mayhem. And none of this ever came to pass unless we want to link mayhem in Iraq*, Syria, Yemen, Sudan and Nigeria to high food prices and hence peak oil. In which case we may also want to link the European migrant crisis and Brexit to the same.

[* One needs to recall that GWI was precipitated over Kuwait stealing oil from Iraq, from a shared field on the Kuwait-Iraq border, leading to the Iraqi invasion of 1991.]

The peak oil debate on The Oil Drum was a lightning conductor for doomers of every flavour – peak oil doom (broadened to resource depletion doom), economic doom and environmental doom being the three main courses on the menu. The discussion was eventually hijacked by Greens and Green thinkers, who, not content with waiting for doomsday to happen, set about manufacturing arguments and data to hasten the day. For example, fossil fuel scarcity has morphed into stranded fossil fuel reserves that cannot be burned because of the CO2 produced, accompanied by recommendations to divest fossil fuel companies from public portfolios. Somewhat surprisingly, these ideas have gained traction in The United Nations, The European Union and Academia.

It is not my intention to dig too deeply into the past. Firmly belonging to the group of data analysts, in this post I want to take a look at two different data sets to explore where peak oil stands today. Is it dead and buried forever, or is it lurking in the shadows, waiting to derail the global economy again?

 

 

The USA and Hubbert’s Peak

 

The USA once was the poster child of peak oil. The Peak Oil theory was first formulated there by M. King Hubbert who in 1956 famously forecast that US production would peak around 1970 and thereafter enter an era of never-ending decline (Figure 1). Hubbert’s original paper is well worth a read.

Figure 1 From Hubbert’s 1956 paper shows the peak and fall in US production for ultimate recovery of 150 and 200 billion barrels. The 200 billion barrel model shows a peak of 8.2 Mbpd around 1970 that proved to be uncannily accurate.

Looking to Figure 2 we see that Hubbert’s prediction almost came true. US production did indeed peak in 1970 at 9.64 Mbpd while Hubbert’s forecast was a little lower at 8.2 Mbpd. The post-peak decline was interrupted by the discovery of oil on the N slope of Alaska and opening of the Aleyska pipeline in 1977 that was not considered in Hubbert’s work. Herein lies one of the key weaknesses of using Hubbert’s methodology. One needs to take into account known unknowns. We know for sure that unexpected discoveries and unexpected technology developments will occur, it’s just we don’t know, what, when and how big.

Figure 2 In red, US crude oil production from the EIA shows progressive growth from 1900 to 1970. The oil industry believed this growth would continue forever and was somewhat aghast when M. King Hubbert warned the party may end in 1970 which it duly did. The discovery of oil in Alaska created a shoulder on the decline curve. But apart from that, Hubbert’s forecast remained good until 2008 when the shale drillers and frackers went to work. Hubbert’s 1970 peak was matched by crude oil in 2015 and exceeded by C+C+NGL that same year.

Following the secondary Alaska peak of 8.97 Mbpd (crude oil) in 1985, production continued to decline and reached a low of 5 Mbpd (crude oil) in 2008. But since then, the rest is history. The shale drillers and frackers went to work producing an astonishing turnaround that most peak oil commentators, including me, would never have dreamt was possible.

Before going on to contemplate the consequences of the shale revolution, I want to dwell for a moment on the production and drilling activity in the period 1955 to 1990. 1955 to 1970 we see that total rigs* declined from 2683 to 1027. At the same time crude oil production grew from 6.8 to 9.6 Mbpd. It was in 1956 that Hubbert made his forecast and in the years that followed, US production grew by 41% while drilling rigs declined by 62%. No wonder the industry scoffed at Hubbert.

[* Note that Baker Hughes’ archive pre-1987 does not break out oil and gas rigs from the total.]

But then post 1970, as production went into reverse, the drilling industry went into top gear, with operational rigs rising sharply to a peak of 3974 in 1981. But to no avail, production in the contiguous 48 states (excluding Alaska) continued to plunge no matter how hard the oil and its drilling industry tried to avert it. Hubbert must surely have been proven right, and his methodology must surely be applicable not only to the US but to the World stage?

The oil price crash of 1981 put paid to the drilling frenzy with rig count returning to the sub-1000 unit baseline where it would remain until the turn of the century. The bear market in oil ended in 1998 and by the year 2000, the US drilling industry went back to work, drilling conventional vertical wells at first but with horizontal drilling of shale kicking in around 2004/05. Production would turn around in 2009.

Those who would speak out against peak oil in the mid-noughties, like Daniel Yergin and Mike Lynch, would argue that high price would result in greater drilling activity and technical innovation that would drive production to whatever level society demanded. They would also point out that new oil provinces would be found, allowing the resource base to grow. And they too must surely have been proved to be correct.

But there is a sting in the tail of this success story since drilling and producing from shale is expensive, it is dependent upon high price to succeed. But over-production of LTO has led to the price collapse, starving the shale drilling industry of cash flow and ability to borrow, leading to widespread bankruptcy. In fact informed commentators like Art Berman and Rune Likvern have long maintained that the shale industry has never turned a profit and has survived via a rising mountain of never ending debt. Economists will argue, however, that improved technology and efficiency will reduce costs and make shale competitive with other sources of oil and energy. We shall see.

Herein lies a serious conundrum for the oil industry and OECD economies. They may be able to run on shale oil (and gas) for a while at least, but the industry cannot function properly within current market conditions. Either prices need to be set at a level where a profit can be made, or production capped to protect price and market share. This of course would stifle innovation and is not likely to happen until there are queues at gas stations.

 

 

2008-2015 Winners and Losers

 

BP report oil production data for 54 countries / areas including 5 “other” categories that make up the balance of small producers in any region. I have deducted 2008 production (barrels per day) from 2015 production and sorted the data on the size of this difference. The data are plotted in Figure 3.

Figure 3 The oil production winners to the left and losers to the right, 2008 to 2015. The USA is the clear winner while Libya is the clear loser. About half of the countries show very little change. Click chart for a large readable version.

What we see is that production increased in 27 countries and decreased in the other 27 countries. One thing we can say is that despite prolonged record-high oil price, production still fell in half of the world’s producing countries. We can also see that in about half of these countries any rise or fall was barely significant and it is only in a handful of countries at either end of the spectrum where significant gains and losses were registered. Let’s take a closer look at these.

Figure 4 The top ten winners, 2008 to 2015.

The first thing to observe from Figure 4 is that the USA and Canada combined contributed 7.096 Mbpd of the 8.852 Mbpd gain 2008-2015. That is to say that unconventional light tight oil (LTO) production from the USA and LTO plus tar sands production from Canada make up 80% of the global gain in oil production (C+C+NGL). Iraq returning to market in the aftermath of the 2003 war makes up 18%. In other words expensive unconventional oil + Iraq makes up virtually all of the gains although concise allocation of gains and losses is rather more complex than that. Saudi Arabia, Russia, The UAE, Brazil, China, Qatar and Colombia have all registered real gains (5.258 Mbpd) that have been partly cancelled by production losses elsewhere.

Figure 5 The top ten losers, 2008 to 2015.

Looking to the losers (Figure 5) we see that Libya, Iran, Syria, Sudan and Yemen contribute 2.828 Mbpd of lost production that may be attributed to war, civil unrest or sanctions. I am not going to include Venezuela and Algeria with this group and will instead attribute declines in these countries (0.979 Mbpd) to natural reservoir depletion, although a slow down in OECD technical assistance in these countries may have exacerbated this situation. That leaves the UK, Mexico and Norway as the three large OECD producers that register a significant decline (1.687 Mbpd) attributed to natural declines in mature offshore provinces. Let me try to summarise these trends in a balance sheet:

Figure 6 The winner and loser balance sheet.

We see that these 20 countries account for 8.463 Mbpd net gain compared with the global figure of 8.85 Mbpd. We are capturing the bulk of the data and the main trends. In summary:

  • Unconventional LTO and tar sands + 7.096 Mbpd
  • Net conventional gains + 2.592 Mbpd
  • Net conflict losses -1.225 Mbpd

The sobering point here for the oil industry and society to grasp is that during 8 years when the oil price was mainly over $100/bbl, only 2.592 Mbpd of conventional production was added. That is about 3.1%. Global conventional oil production was all but static. And the question to ask now is what will happen in the aftermath of the oil price crash?

One lesson from recent history is that the oil industry and oil production had substantial momentum. It is nearly two years since the price crash, and while global production is now falling slowly it remains in surplus compared with demand. This has given the industry plenty time to cut staff, drilling activity and to delay or cancel projects that depend upon high price. In a post-mature province like the North Sea, the current crisis will also hasten decommissioning. It seems highly likely that momentum on the down leg will be replaced by inertia on the up leg with a diminished industry unwilling to jump back on the band wagon when price finally climbs back towards $100 / bbl, which it surely will do one day in the not too distant future.

For many years I pinned my colours to peak oil occurring in the window 2012±3 years. Noting that the near-term peak was 97.08 Mbpd on July 15 2015 it is time to dust off that opinion (Figure 7). The decline since the July 2015 peak is of the order 2% per annum (excluding the Fort McMurray impact). It seems reasonable to presume that this decline may continue for another two years, or even longer. That would leave global production at around 92 Mbpd mid 2018. It is nigh impossible to predict what will happen, especially in a world over run by political and economic uncertainty. Another major spike in oil price seems plausible and this could perhaps destabilise certain economies, banks and currencies. Should this occur, another price collapse will follow, and it’s not clear that production will ever recover to the July 2015 peak. Much will depend upon the future of the US shale industry and whether or not drilling for shale oil and gas gains traction in other countries.

Figure 7 The chart shows in blue global total liquids production (C+C+NGL+refinery gains+biofuels) according to the Energy Information Agency (EIA). The near term peak was 97.08 Mbpd in July 2015. The decline since then, excluding the Fort McMurray wild fire impact, is of the order 2% per annum. In the current low price environment, it is difficult to see anything arresting this decline before the end of next year. In fact, decline may accelerate and go on beyond the end of 2017. The dashed line shows the demand trajectory and scheduled balancing of supply and demand by the end of this year. By the end of next year the supply deficit could be of the order 3 Mbpd which on an annualised basis would result in a stock draw of 1.1 billion barrels. But remember, forecasts are ten a penny 🙂

 

 

Concluding Thoughts

 

  1. M. King Hubbert’s forecast for US oil production and the methodology it was based on has been proven to be sound when applied to conventional oil pools in the USA. When decline takes hold in any basin or province, it is extremely difficult to reverse even with a period of sustained high price and the best seismic imaging and drilling technology in the world.
  2. On this basis we can surmise that global conventional oil production will peak one day with unpredictable consequences for the global economy and humanity. It is just possible that the near term peak in production of 97.08 Mbpd in July 2015 may turn out to be the all-time high.
  3. Economists who argued that scarcity would lead to higher price that in turn would lead to higher drilling activity and innovation have also been proven to be correct. Much will depend upon Man’s ability to continue to innovate and to reduce the cost of drilling for LTO in order to turn a profit at today’s price levels. If the shale industry is unable to turn a profit then it will surely perish without State intervention in the market.
  4. But from 2008 to 2015, oil production actually fell in 27 of 54 countries despite record high price. Thus, while peak oil critics have been proven right in North America they have been proven wrong in half of the World’s producing countries.
  5. Should the shale industry perish, then it becomes highly likely that Mankind will face severe liquid fuel shortages in the years ahead. The future will then depend upon substitution and our ability to innovate within other areas of the energy sector.

 

 

Related reading:

 

From Rune Likvern:

The Bakken LTO extraction in Retrospect and a Forecast of Near Future Developments

Bakken(ND) Light Tight Oil Update with Sep 15 NDIC Data

Are the Light Tight Oil (LTO) Companies trying to outsmart Mother Nature with their Financial Balance Sheets?

From Enno Peters:

Visualizing US shale oil production

Dec 232014
 
 December 23, 2014  Posted by at 11:01 am Finance Tagged with: , , , , , ,  16 Responses »
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John Vachon Hull-Rust-Mahoning pit, largest open pit iron mine in the world, Hibbing, Minnesota Aug 1941

This is another entry by our friend Euan Mearns, orginally posted at Energy Matters.

Euan: A few commenters have mentioned peak oil recently. I am cautious about making forecasts and predictions and prefer instead to observe and document the data as the peak oil story unfolds. I have in fact published a couple of charts recently illustrating aspects of peak oil, one showing a possible peak in the rest of the world that excludes N America and OPEC (Figure 1). The other showing the undulating plateau in conventional crude + condensate that has persisted since 2005 (Figure 2). In my last post on oil price scenarios two of those showed global oil production capacity 1 to 2 Mbpd lower in 2016 than 2014. If that comes to fruition, will we have passed peak oil but does it matter?

Figure 1 Global oil production has been split into three geo-political categories: 1) USA and Canada, 2) OPEC and 3) the Rest of the World (RoW). RoW production bears the hallmarks of having peaked in the period 2005 to 2010 and this has consequences for oil prices, demand and prosperity in parts of the world, especially the OECD. Most of the growth in oil supply has been in the USA and Canada where the market has been flooded with expensive oil. Data are crude oil + condensate + natural gas liquids (C+C+NGL) and exclude biofuels and refinery gains that are included by the IEA in their total liquids number.

The current “low oil price crisis” is providing a clear and new perspective on the nature of the peak oil problem. If low price does indeed destroy high cost production capacity then this will raise the question if the high cost sources can ever be brought back? IF low price kills the shale industry can it come back from the dead?

Figure 2 Conventional crude oil + condensate production has been on an undulating plateau just over 73 million barrels per day (Mbpd) since May 2005, that is for almost 10 years and despite record high oil prices! Note that chart is not zero scaled in order to amplify details. Click chart for large version.

The response of the oil price to scarcity in the period 2002 to 2008 was for it to shoot up. And the response of the energy industries to scarcity and high price was to develop high cost sources of energy – shale oil and gas and renewables. The longevity and permanence of these new initiatives has always been dependent upon our ability and willingness to pay. Of course, most of us who have cars continued to use them but have perhaps subliminally modified our behaviour through driving less or buying more fuel efficient vehicles. OECD oil consumption has at any rate been in decline and robust economic growth has been elusive. Is this due to the peak oil story unfolding?

The global finance and energy system is unfortunately rather more complex than that. The creation and expansion of debt is of course central to creating demand for oil and other energy sources. Without QE the global economy may have died in 2009 and demand for oil with it. Gail Tverberg produced an interesting chart that may illustrate this point (Figure 3). However, back in 2008 / 09 OPEC trimmed 4 Mbpd from their production and this equally explains why the price rebounded so strongly then. The end of QE3 may have contributed to the recent fall in demand, but the price has fallen so precipitously because OPEC has not compensated by reducing production.

Figure 3 QE appears to have impacted demand for oil and may have created the lines of credit enabling energy companies to produce high cost gas and oil at a loss. But the oil price has been equally controlled by OPEC controlling supply. Chart by Gail Tverberg.

The big picture is made even more complex by climate concern and a growing raft of energy policies in Europe and the USA designed to reduce CO2 emissions while singularly failing to do so meaningfully. And so at a time when clear engineering thinking was required on how to tackle the potential impacts on society of energy scarcity in the global economy we got instead ‘Green Thinking’. Future generations will look back on this era with bewilderment.

Against this backdrop, I will now move on to the main topic of this post which is the concept of broken markets and Hubbert’s peak. For those who do not know, Hubbert’s peak is peak oil by another name and while wise guys may want to invent a multitude of definitions I will stick to the simple definition of the month or year when global oil production reached a maximum volume or mass and thereafter went into inexorable decline. The impact of this on Mankind is normally expected to be negative since oil is the lifeblood of the global economy. The reason for this happening could be because we discovered something better than oil that substituted oil out of existence (that wouldn’t be bad) or because of scarcity oil became too expensive to produce (perhaps where we are now) or because Greens in government like Ed Davey and Barack Obama set out to undermine the fossil fuel industries which just a few years ago I would have found impossible to believe. We live in interesting times.

The world economy as we know it runs on fossil fuels and in particular a relatively small number of truly gigantic fossil fuel reserves such as the Ghawar oil field in Saudi Arabia, the Black Thunder coal field in Wyoming and the Groningen gas field in The Netherlands. Both Ghawar and Groningen are showing signs of age, along with the hundreds of other super giant fossil fuel deposits. The stored energy in these deposits flows out at enormous rate and at little financial or energy cost. It is these vast energy supplies and surpluses that provide the global economy with economic surplus. It is indeed the lifeblood. But the world has run out of these super giant deposits to exploit and we are finding it increasingly difficult to find large enough numbers of their smaller cousins to keep the wheels of the global economy well oiled ;-)

The focus has thus turned to low grade resource plays. The resource plays offer near infinite amounts of energy but require large amounts of effort to gather that energy. The ERoEI is lower than what went before, perhaps much lower, but for so long as the energy return is positive, we have indeed learned that Man’s inventiveness and commitment can exploit these resources. One of the main questions I want to pose here is, is it possible for these resource plays to participate in the global economic system as it has existed for many decades that has become known to us as capitalism?

The first example of broken energy markets I want to look at is wind power. Both onshore and in particular offshore wind are expensive forms of intermittent electricity. Wind advocates will argue that the intermittency does not matter and will point gleefully to the low electricity prices achieved when the wind blows strongly across Europe resulting in over-supply that dumps the price. Wait a minute though, high cost and low price is a toxic mix that does not jive with capitalism. The more wind resource installed on the system the greater the size the unusable surplus and economic penalty becomes.

Why have the wind producers not gone out of business? It’s because the markets are rigged such the wind producers are given priority to market and receive a guaranteed price. This is a monopoly! The consumers don’t benefit because they have to pay the guaranteed price to the wind monopoly. The losses end up in the hands of the traditional generators who see their prices dumped and need to chew on the losses whilst providing the invaluable balancing services for free.

Providing back up services for when the wind doesn’t blow is another problem newly addressed in the UK with the new “capacity market”. The government is calling this a ‘market’ while it is in fact a component part of the wind monopoly. Companies are being paid to maintain generating capacity on stand by to cover periods when the wind doesn’t blow. Again the consumer has to foot the bill. One day quite soon, UK and other European governments are going to have to explain to their electorates why they have distorted the electricity market so badly, delivering a monopoly to wind producers, destroying the traditional market participants with the bill being met by the consumer who receives zero benefits. This can only be explained if it is underlain by rampant corruption or sheer stupidity.

The second example of a broken energy market I want to explore is the US shale industry. This shares certain characteristics with the wind industry in that it is a high cost but potentially very large resource. But the mechanism for integration of this resource into the market is rather different. The problem with shale gas is that over-supply has resulted in the US gas price being dumped below the level where many shale operators can make a profit. Consumers in this case benefit through getting both secure and low priced gas. But the shale operators have reportedly racked up large losses that have been covered by expanding debt. These losses may yet come home to roost with the consumer if debt defaults result in a new credit crunch where the debts are socialised via government bailouts of the banking sector.

If it were possible to produce shale gas at $1 / million btus then everyone would be happy. Consumers would be getting secure and cheap energy and producers would be making handsome profits to distribute to shareholders. That is how capitalism is supposed to work. The system as it has operated seems broken.

US Light tight oil (LTO) production appears now to have created the same problem for the liquids plays where the entrance of expensive liquids in the market have contributed to the crash in the oil price. This has created risks for the LTO operators. It remains to be seen if the LTO sector sees mass insolvencies and default on loans that may socialise these losses. The introduction of high cost LTO has also undermined the whole of the higher cost component of the conventional oil sector. If LTO could be produced in large quantities for $20 / bbl then there would be no problem since this source would go on to substitute for the higher cost conventional sources of supply. But with costs closer to $60-$80 this is not going to happen. The conundrum for capitalism is the introduction of large quantities of higher cost energy to the system.

At this point I have to admit that nuclear power may be subject to similar limitations. It is difficult to view the Hinkley Point new nuclear build in the UK as a triumph for the consumer or the country. A better way to manage such enormous capital expenditure on vital infrastructure is via the state. The costs may eventually be socialised to the tax payer, but at least the energy is reliable and amongst the safest forms of power generation ever developed and the taxation system distributes costs in an equitable way.

A form of society could undoubtedly exist powered by nuclear, wind and shale gas. But it would be a society supported by the state with far larger numbers working in the energy industries than now, producing lower surpluses, the energy production part perhaps running at a perennial loss. Those losses have to be covered by either higher price or via the taxation system. Either way, the brave new world that awaits us will be characterised as the time of less that will be in stark contrast to the time of plenty many of us enjoyed during the 20th Century.