IEA Whistleblower Buoys Peak Oil Theory

There's a terrific piece in the Guardian today entitled "Key oil figures were distorted by US pressure, says whistleblower." The gist of the story is that the IEA has been intentionally overstating future oil supply estimates in order to prevent a panic. Some key passages:

"The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year," said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. "The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this.

"Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources," he added.

A second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organisation was that it was "imperative not to anger the Americans" but the fact was that there was not as much oil in the world as had been admitted. "We have [already] entered the 'peak oil' zone. I think that the situation is really bad," he added.

This is huge news as many of the Peak Oil doubters had depended on IEA data to bolster their case. It also speaks to the unreliability of official statistics. If non-OPEC data is being so severely manipulated, just imagine how absurd OPEC numbers must be.

The days of inexpensive and easily accessible oil are over. There is still plenty of oil buried very deep offshore West Africa, Brazil, and in the Gulf of Mexico. Other deep plays are sure to be discovered as well, and the Arctic region holds great promise. The tar sands also hold a great quantity of oil. None of these plays, however, are inexpensive. High oil prices will be required to justify the investment needed to explore and develop these reserves.

These high oil prices will also be the incentive the market needs to develop alternative energy sources. The higher the price of oil goes, the more competitive the alternatives become. Still, this shift will take decades. In the meantime, higher oil prices will be a boon to much of the traditional energy sector.

We are long a number of E&P and energy service stocks. There will be bumps along the way, but energy should be a winner in the coming decade.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

A Saudi Oil Subsidy?

Saudi Arabia is proposing that the developed world compensate the kingdom for any global warming-related decline in the demand for crude oil. You have to love the thinking: We expect to be paid a lot of money for our oil one way or another. Either demand outstrips supply and prices stay high, or demand falls short and you make up the difference. Heads I win. I said heads I win.

Maybe we should just subsidize everyone anytime demand for their product falls. Perhaps we should have been paying off the buggy whip manufacturers these past 100 years since they were unfairly disadvantaged by the automobile firms. Should we all compensate Canada if we ever stop building houses out of lumber? Or bail out the French if people stop drinking wine? Or compensate the U.S. if... Bad example. The only thing we're good at manufacturing these days are loans and dollar bills.

Of course, the Saudis can't really be serious. They'd still be a fourth world backwater sand lot if it weren't for oil. They've had decades to put that wealth to work in diversifying their economy rather than paying off all of their princes. I think their latest census showed one out of every three people was a prince. The other two either worked for a prince or were a king.

The Saudis know that this proposal will never fly, but this is how you negotiate. You never come to the table with what you reasonably expect. If I want a new set of golf clubs, I don't ask my wife for a new set of golf clubs. I tell my wife that we should sell the house and buy a newer more expensive home right on the golf course. Voila. I get a new set of golf clubs.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Chart Of The Day: Cantarell

Last year, I wrote about the likely peaking and production decline of some of the world's largest oil fields. The best example remains the once-giant Mexican Cantarell field. The following graph of production from Cantarell is simply stunning. Production from this one field has fallen one million barrels per day in just the last few years.



Much has been made lately of some recent exploration successes offshore Brazil and in the Gulf of Mexico. Many are claiming that these successes prove that the threat of Peak Oil is false. When it comes to the Peak Oil theory, however, the key point to remember is that it refers to easily recoverable oil. Higher oil prices will be necessary to support the very costly exploration and development efforts necessary in the deepwater and (eventually) Arctic frontier plays. The future production decline from the world's aging major oilfields will need to be replaced, and the most likely source will be much higher-cost less-traditional sources.



Disclosure: Aspera Financial, LLC is long a number of energy-related stocks and natural gas.

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The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Why Did Oil Fall $3.69 Today?

U.S. crude oil for September delivery fell $3.69 to settle at $121.41 per barrel today on the New York Mercantile Exchange. Why?

According to an Associated Press article:

Oil initially turned lower after the Commerce Department reported that consumer spending fell in June as shoppers dealt with higher prices for gasoline, food and other items. That bolstered analysts' arguments that a U.S. economic slowdown is forcing Americans to scale back on energy use.

A number of other news sources essentially attributed the oil price decline to the same report. The problem with this is that the Commerce Department report was released at 8:30 a.m. As shown in the intraday chart above, oil didn't start falling until after 10:00 a.m. In fact, it first rose following the release of the report.

Bloomberg takes a stab at it:

Crude oil fell for a second day amid speculation Tropical Storm Edouard will skirt most offshore oil facilities as it approaches the coast of Texas.

I checked the status of Edouard before 8:30 a.m this morning on the Weather Channel, and it was very clear at that point that Edouard wasn't going to cause much of a disruption for the Gulf of Mexico energy complex. Edouard developed fairly quickly. We didn't have a $4 rise in oil attributed to Edouard, so it's hard to believe that the fall in oil today can be attributed just to Edouard.

Next, Business Week gives it a shot:

A report that Iran's chief nuclear negotiator Saeed Jalili and the European Union's foreign policy chief, Javier Solana, had called on Monday for a "positive air" over Iran's nuclear issue and would continue to keep communication open was also weighing on oil prices.

This is just laughable. Iran has been in the news practically every day with alternating stories of their openness to talks and their insistence that they won't be giving up their nuclear program. This doesn't even qualify as news anymore. Jalili and Solana are going to have to do better than "positive air" to have a real impact on oil prices.

The fact is that something happened at 11:30 a.m. that sent traders running for the exits. I couldn't pinpoint any specific item that came out at that time. It could have just been a large seller with other traders jumping on board. The issues mentioned above may have fed the sell-off, but they didn't cause it. The other key point is that there was a sell-off across the board in commodities yesterday, not just in oil. Natural gas, corn, base metals, wheat, and soybeans were all hit. Even commodity-related companies that benefit from lower energy prices (like fertilizer firms) were hit hard.

The lesson here, as I've cautioned before, is to be careful about what you read from "reliable" sources. Many writers and investors explain away the actions in the financial markets with a ridiculous degree of certainty when they should be using words such as "perhaps", "maybe", and "possibly". Maybe we'll perhaps possibly even find them some day admitting that they just don't know.

Yes! There Is Intelligent Life In D.C!

I'm in a slight state of shock at the moment. It isn't terribly often that I agree with something that comes out of the mouth of a senior government official, regardless of the administration. However, I just read the transcript of a speech that Under Secretary for International Affairs, David H. McCormick, recently made concerning the oil market.

I don't know where this government employee gets off thinking clearly and making sense. Perhaps you're still permitted these luxuries when you're a mere Under Secretary. Perhaps he's positioning himself for a cozy job at a think tank in a few months. Perhaps he was drinking. Regardless, the piece is a little dry, but Mr. McCormick does a very nice job of summarizing what's been happening in the oil market in recent years.

If you'd like a nice little primer, the full article can be found here.

Oil Supply - The Little Engine That Cantarell

Nobody can consistently predict where short-term oil prices are headed because they just can't know what new news is coming or just how trigger-happy the traders will be on any given day. The near-term fundamentals are only slightly less muddy. Clearly we're experiencing some degree of demand destruction as the global economy weakens, people drive less, and alternative energy substitution makes a very small dent. On the other hand, growth in China, Russia, and India is still robust with more and more people in these countries trading in their bicycles and rickshaws for cars every day. It doesn't hurt that Tata Motors is now mass-producing a $2500 car for the Indian market. Also, it was recently reported that the Russian car market is now the largest car market in Europe by sales, with a 41% year-over-year increase in sales in the first 6 months of this year.

As for supply, Saudi Arabia claims to be ramping production, but no independent verification of Saudi oil statistics exists. Aside from the recent large discovery offshore Brazil by Petrobras, there have been no super-major oil discoveries in over 30 years, so it's really difficult to argue that there's a meaningful amount of easy oil left to be found. Demand, of course, has grown steadily over these past few decades while the existing major discoveries from the 1970's and earlier have been gradually depleting. Additionally, who knows when Bush or Ahmadinejad will provide the next school yard shove and again inflame the fears of further Middle East turmoil and possible oil supply disruption.

The largest oil field in the world is the Ghawar field in Saudi Arabia. As mentioned above, no one outside of Saudi Aramco and the royal family really knows the true size of the field or its production trends. There are some prominent voices, most notably Matthew Simmons, who've raised serious questions about the sustainability of production from the field. I highly recommend his book, Twilight in the Desert. Whether or not Ghawar is actually in decline, it would be difficult to argue that the Saudis will be able to sustainably produce at rates much higher than current levels given what anecdotal evidence we do have.

Since we don't have good numbers with which to analyze Ghawar, let's turn to the second and third largest fields. Number 2 on the list is the Burgan field in Kuwait which began producing in 1946. In the fall of 2005, the chairman of the Kuwait Oil Company admitted that the field would only be able to sustain production of 1.7 million barrels of oil per day versus the 2.0 million they had hoped for. It turns out that production above 1.7 million barrels was actually damaging the field. Although production from Burgan may remain flat for many years to come, it certainly seems to have peaked.

Number 3 on the list is the Mexican super-giant, Cantarell, located in the Bay of Campeche in the Gulf of Mexico. The production changes in this field have been dramatic. The field was discovered in 1976 and began producing in 1979. By 1981, the field was already producing 1.16 million barrels per day. 14 years later the field was only producing 1 million barrels per day, and the Mexican government decided to make a major investment to further develop the field. This included drilling new wells, installing new platforms, and constructing the largest nitrogen extraction facility in the world in order to inject nitrogen into the field in order to help "lift" the oil.

The investment seemed to pay off. By 2001, the field was producing 2.2 million barrels of oil per day. By January of 2006 this figure had declined to a still healthy 1.99 million barrels, but the decline has accelerated since then. In December of 2006, production was down to 1.44 million barrels per day. The latest figures for May of 2008 show yet another tremendous decline to 1.04 million barrels per day. Given domestic oil demand growth and faltering supply, the day when Mexico ceases to be an oil exporter seems to be drawing near. (By comparison, some of the largest deepwater fields produce about 250,000 barrels per day, and the average U.S. well produces all of 10.5 barrels per day).

Yes, there is still plenty of oil out there, but the easy oil has largely (not completely) been tapped. Much of the oil that still exists is expensive to reach and produce. Even the recent mammoth discovery by Petrobras will cost untold billions to develop given the depth of water and the total depth at which the field lies. Sustained high oil prices will be necessary to warrant the investment needed to develop these more challenging reserves that exist in the tar sands, the oil shale, the deepwater, and the Arctic. Over time, rising demand and higher exploration and development costs will provide some strong price support to crude.

In the short-term anything can happen. We certainly should expect to see pull-backs, as we've seen over the last couple of days. a 20-30% retracement in the price of oil would hardly be surprising if a near-term production boost (from the Saudis) runs head-on into slackening demand and an easing of tensions with Iran. There are plenty of weak momentum hands in the energy play currently, and it wouldn't take much to shake them out. But with oil becoming more difficult and expensive to extract and with more people in developing countries wanting a piece of the "American dream," the intermediate-term (at least) outlook still remains bullish.

With that in mind, from an investment perspective, I have had and plan to keep a core energy position diversified across a number of favored energy securities and ETFs. When oil and and oil-related shares are sold-off, I'll continue to step in and augment the core position with an eye towards selling this "non-core" addition on the following run. I've been patiently waiting for this next opportunity to buy. Hopefully, George and Mahmoud will keep their mouths shut for a few days, and the sell-off in oil of the last two days will continue and provide the next good entry point. If a strong market rally accompanies this oil sell-off, I may be rebuilding my overall short (not in energy) position soon as well.

Disclosure: The Rubbernecker is long energy-related shares and short rickshaws.