James Hamilton on Saudi oil production

oil_well23.jpgClear Thinkers favorite James Hamilton is thinking about Saudi Arabia’s oil production and that always makes for interesting reading:

Saudi oil production is now down more than 10% from its peak level in 2005; . . . this decline in production has followed an erratic pattern, beginning in October 2005 when oil was selling for $62 and continuing through July 2006 when oil briefly touched $75, making it difficult to see these cutbacks as an effort to stabilize oil prices; . . . the production decline coincided with a doubling in the number of oil rigs employed in Saudi Arabia since 2004 and tripling since 1999.

Has Saudi oil production peaked? Read the entire post. Is Matt Simmons right after all?

Peak Oil — Much ado about nothing?

peak_oil_flat.jpgVaclav Smil is a distinguished professor of economics at the University of Manitoba and, based on this TCS Daily op-ed, doesn’t think much of Peak Oilers, including well-known Houston-based Peak Oil advocate, Matt Simmons:

Simmons claims that Saudis have falsified their oil reserve data so much that in reality they have only a fraction of the claimed oil left in the ground, and that their, and the world’s, largest oilfield, al-Ghawar, has been so damaged by waterflooding (used for enhanced recovery of oil) that it faces imminent and massive extraction downturn. And yet Saudis will be investing nearly $50 billion between 2007 and 2011 to get this nonexistent oil to the global market. Perhaps they know something that Simmons is not aware of (these days it is, after all, de rigueur to say only bad things about Saudis).

Smil concludes by reminding us of something that is not well understood by the political forces that frequently attempt to heap even more taxes on the energy industry — that is, that investing in oil and gas exploration is not necessarily the lucrative long-term investment that many believe:

Finally, a practical reminder: If there is an imminent peak of oil extraction, should not then the prospective shortage of that increasingly precious fuel result in relentlessly rising prices and should not buying a barrel of oil and holding onto it be an unbeatable investment? But a barrel of a high-quality crude, say West Texas intermediate, bought at $12.23/b in 1976 as a nest-egg for retirement and sold before the end of 2006 at $60/b would have earned (even when assuming no storage costs) about 1.2% a year, a return vastly inferior to almost any guaranteed investment certificate and truly a miserable gain when compared with virtually any balanced stock market fund. And a freedom-at-55 investor who bought that barrel at 30 years of age in 1980 and sold in 2005 would have realized a nearly forty per cent loss on his precious investment. Being a true believer in imminent peak oil may be fine as a provocative notion but not as a means of securing a comfortable retirement.

Baby talk on energy?

WSJ%20logo2.gifSo, I think it’s safe to say that, after this blog post, Cato’s Jerry Taylor is not going to be asked to contribute a piece to the Wall Street Journal’s ($) next special section on alternative energy:

One could spend a lifetime slamming dross in the news pages of the Wall Street Journal – particularly when it comes to energy. Only the driving need to be more productive with my time keeps me from doing so on a daily basis. But when something as bad as this insert comes along, something must be said.

Taylor is not impressed with Houston-based Peak Oil advocate, Matt Simmons, either:

Moving right along, page two features recommended readings from Matthew Simmons, the most prominent proponent of the idea that the worldís oil fields are about to run dry. This, to put it charitably, is a minority perspective among oil analysts. That the Journal turns to someone like Simmons – and only Simmons – to lay in print the groundwork for readers interested in knowing more about the oil industry speaks volumes. Much more intelligent conversations about oil with Daniel Yergin and Robert Mabro are briefly referenced as on-line supplements.

Then, Taylor takes off on the John Biers article about Houston’s leadership in promoting alternative energy initiatives:

Reporter John Biers mails in a vacuous piece titled ìTexasí New Teaî about how Houston is poised to become the center of the renewable energy biz, transforming the former oil town into the international headquarters of Big Green, Inc.. While his article might as well have been written by the cityís Chamber of Commerce, it would be nice to provide some perspective. For example, how much capital is flowing in to Houston to underwrite renewable energy investments versus how much capital is glowing in to Houston to underwrite fossil energy investments? I can guarantee you that the dollars associated with the latter are light years beyond those associated with the former and that rising oil prices are doing far more for the cityís economic health than anything else. He might have also asked how much of that venture capital is being driven by government regulation and subsidies. The answer would be ìall of itî – which speaks volumes about how precarious those investments might be.

Here is Taylor’s entire piece. Enjoy.

The ethanol con

ethanol.jpgWhile President Bush on one hand made a productive health care finance proposal in his State of Union Address last week, his big push for alternative fuel development was not as well-conceived. As this OpinionJounal op-ed notes, the development of ethanol as an alternative fuel source has been mostly a con job of epic proportions.

[F]ederal and state subsidies for ethanol ran to about $6 billion last year, equivalent to roughly half its wholesale market price. Ethanol gets a 51-cent a gallon domestic subsidy, and there’s another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it–despite recent high oil prices.

Jerry Taylor of the Cato Institute has done a ton of work exposing the ethanol boondoggle, and this recent post links several of his works. The ethanol con is a quintessential example of special interests manipulating market conditions and political rhetoric to capture a windfall that would not otherwise be available. It’s also a reminder to all of us to grab our pocketbooks whenever we hear a government official touting the next big government program to develop something at a supposedly cheaper or more stable price than what the markets are providing.

And about those declining oil markets

oreillyconfused6.jpgCrude oil fell to $50 a barrel earlier this week, the lowest price since early 2005 and a continuation of a steady decline in price since the market hit $80 a barrel last year. Why those greedy oil companies would continue to allow crude oil prices to fall after last year’s election (rather than simply before) has not yet been explained by the O’Reilly-type conspiracy theorists, but Clear Thinkers favorite James Hamilton analyzes the data and concludes that there has not been any dramatic shift in the underlying market forces that would explain the decline. Professor Hamilton believes that fundamentals generally drive the price of oil, so he notes the trendy belief that speculators in the oil markets drove last year’s price hike:

What about attributing the run-up in oil prices almost to $80 a barrel, and now the latest drop back near $50, entirely to speculation, without any reference to fundamentals? The reason Iíve resisted that hypothesis is that itís based on the premise that the folks who manage these funds are just throwing their money away.

Thus, Professor Hamilton observes:

Until U.S. and Chinese oil demand are kept in check, and until big production increases are forthcoming, it’s hard for me to see how the price could continue to plunge.
My advice to would-be speculators remains that fundamentals are ultimately what must drive the market. Anyone who believes otherwise should not expect to hang onto their wealth for long.

Check out the entire post, as well as some of the insightful comments.

Hugo Chavez’s odd charitable venture

citgo113006.jpgThis OpinionJournal editorial reviews the rather odd arrangement under which Houston-based energy company Citgo — which is controlled by the Socialist Venezuelan government of Hugo Chavez — supplies home heating oil to former Democratic Congressman Joseph P. Kennedy, II’s Citizens Energy Corporation at a 40% discount. The nonprofit Citizens passes the savings onto the poor and contends that it helps 400,000 homes in 16 states that would otherwise have trouble heating their homes.
The OpinionJournal piece scours Kennedy for playing nice with Chavez, but the article fails to mention the oddest aspect of this supposed charitable venture. The poorest of the U.S. citizens who will receive the discounted price on the home heating fuel that Citgo sells to Citizens are far wealthier than the poor people of Venezuela, four out of 10 of whom survive on $2 a day or less. How does it make sense for Chavez and Kennedy to sell oil at a 40% discount to people in the U.S. who are far richer than Chavez’s constituents in Venezuela? Sort of sounds like taking from the poor to give to the not-as-poor to me.
By the way, as noted in this earlier post, don’t worry too much about Chavez cutting off Venezuelan energy supplies to the U.S. We’ll be just fine without them.

Why it’s not a good idea to soak the energy companies

mars6.jpgWhen you meet someone who doesn’t quite get the correlation between high energy company profits and the capital-intensive nature of oil and gas production, pass along this NY Times article to them:

As oil consumption grows and access to most oil-rich regions becomes increasingly restricted, companies are venturing farther out to sea, drilling deeper than ever in their quest for energy. The next oil frontier ó and the next great challenge for oil explorers ó lies below 10,000 feet of water, through five miles of hard rock, thick salt and tightly packed sands.
ìItís not a place for the timid,î said Paul K. Siegele, the vice president for deepwater exploration at Chevron, which commissioned a survey by the Neptune. ìItís a place where a lot of people have lost their shirts.î
To picture the challenge, imagine flying above New York City at 30,000 feet and aiming a drill tip the size of a coffee can at the pitcherís mound in Yankee Stadium. Then imagine doing it in the dark, at $100 million a go.
Even after hitting pay dirt, it will take another decade and billions of dollars to transform oil from these ultra-deep reserves into gasoline. Some of the technology to pump the sludge from these depths, at these pressures and temperatures, has not yet been developed; only about a dozen ships can drill wells that deep, and no one knows for sure how much oil is down there.
While most people regard affordable and abundant supplies as an essential element of the nationís prosperity, few realize how complex and costly the quest has become, even in the nationís own backyard. At the same time, some experts argue that the industry is nearing the limits of what it can do to maintain a growing supply of fossil fuels.

Amen. Read the entire article.

Scarcity rents and oil prices

oilmantissm.jpgClear Thinkers favorite James Hamilton is thinking about oil prices again, and that’s always a good thing. This time, Professor Hamilton examines the impact that scarcity rents are having on oil prices as the markets increasingly adjust for the risk of resource exhaustion:

My own view is that, for most of the past century, Dave [Cohen’]s inference is exactly correct — the resource exhaustion was judged to be sufficiently far off as to be ignored. However, unlike those whom Dave terms the Cornucopians, I do not infer that the next decade will necessarily be like the previous century. Certainly declining production from U.S. oil reservoirs set in long ago. And if one asks, why are we counting on seemingly geopolitically unreliable sources such as Iraq, Nigeria, Angola, Venezuela, and Russia for future supplies, and transferring vast sums of wealth to countries that are covertly or openly hostile to our interests, the answer appears to me to be, because we have no choice. Resource scarcity in this sense has already been with us for some time, and sooner or later the geological realities that governed U.S. oil production are also going to rule the day for the rest of the world’s oil producing countries. My expectation has accordingly been that, although scarcity rents for oil were irrelevant for most of my father’s lifetime, they would start to become manifest some time within mine. And I have been very interested in the question of when.

Read the entire post, and then try to resist calling your commodities broker. ;^)

More on that energy price conspiracy

o'reillyhand7.jpgA couple of weeks ago, this post noted the news stories about some pundits were floating the theory that the recent slide in energy prices was a dark conspiracy of powerful political forces that were attempting to ensure the victory of the evil capitalist roaders in the upcoming mid-term elections. Bill O’Reilly was probably pleased with these reports.
Subsequently, a week or so ago, Clear Thinkers favorite James Hamilton shot down a similar report that Goldman Sachs was really behind the price decline.
But absurd conspiracy theories do not die easily in American society. Last Friday, this Washington Post article again channels the conspiracy theory, this time pointing toward a new bogeyman, Saudi Arabia:

According to this theory, the Saudi government is doing Bush a favor by trying to bring down prices before the election. The evidence? Some say the Saudi government has a long-standing relationship with the Bush family. They also cite the 2004 book by author and Washington Post assistant managing editor Bob Woodward, “Plan of Attack,” which said that then-Saudi ambassador to the United States, Prince Bandar bin Sultan, promised to keep oil production high enough to moderate fuel prices and bolster the U.S. economy during the presidential election year.

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Demagoging Amaranth

natural gas terminal.jpgFollowing on this earlier cue, NY Times business columnist Gretchen Morgenson contends in this column (Times Select, registration required) that Amaranth Advisors, LLP’s loss of $6 billion or so last week on the natural gas trading market is conclusive proof that energy markets are in need of more government regulation:

Many of Amaranthís monster trades in the natural gas markets were conducted on over-the-counter markets or with so-called voice brokers and so were not on regulatorsí radar screens.
It is too soon to tell what role Amaranthís gamble had on natural gas prices. But speculators played a significant role in the astonishing rise in energy prices in recent years.
Such is the conclusion of a compelling Congressional report produced in June by the Senateís Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs. The 49-page report detailed the explosion in energy speculation on unregulated trading markets and recommended eliminating the so-called Enron loophole that put electronic energy trading off the regulatory reservation.

See how easy that was? Just associate “Enron” with a company that suddenly lost about 2/3rd’s of its assets and, presto! — you have the need for more government regulation of trading markets without any analysis whatsoever of whether such regulation would ultimately be more expensive than the cost of the allowing markets to allocate loss. Indeed, how one earth would it have helped had Amaranth made filings with the CFTC? Does anyone really think that such a requirement would have prompted Amaranth to modify its trading practices?
As noted earlier here and here, allowing investors to make bets in energy trading markets — although not widely understood by the general public — is tremendously beneficial in forecasting energy prices. Not only will greater regulation of those markets likely undermine those benefits, Morgenson’s dubious assertion that speculation in energy markets has caused an increase in natural gas prices is based upon a Senate report that, as noted earlier here, is a sham that was essentially produced by the regulators to feather their nest.

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