OilVoice Magazine | May 2013

Edition Fourteen – May 2013

After gold, oil comes next Peak oil demand is already a huge problem Shipping crude oil by rail: A victim of its own success?

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OilVoice Magazine | MAY 2013

Adam Marmaras Chief Executive Officer Issue 14 – May 2013 OilVoice Acorn House 381 Midsummer Blvd Milton Keynes MK9 3HP Tel: +44 208 123 2237 Email: press@oilvoice.com Skype: oilvoicetalk Editor James Allen Email: james@oilvoice.com Director of Sales Terry O'Donnell Email: terry@oilvoice.com Chief Executive Officer Adam Marmaras Email: adam@oilvoice.com Social Network

Welcome to the 14th Edition of the OilVoice Magazine.

After a very long and persistent winter here in the UK, we're pleased to have put together one of our best ever editions. The web site traffic on the articles inside has been immense, and we expect record downloads for this edition too. Feel free to forward a copy of this PDF onto as many people as you like.

If you like what you read inside this edition, remember we have a dedicated page on the OilVoice site that contains all our featured authors.

Read their insightful commentary, and take a moment to visit their sites too.

Here's hoping for a long and hot summer, Happy Reading.

Facebook Twitter Google+ Linked In Read on your iPad You can open PDF documents, such as a PDF attached to an email, with iBooks.

Adam Marmaras CEO OilVoice

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OilVoice Magazine | MAY 2013

Contents Featured Authors Biographies of this months featured authors

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New Zealand Government moves to deter protests against oil and gas exploration

by Hayden Wilson

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Recent Company Profiles The latest Oil & Gas company profiles added to OilVoice Insight: East African Gas and LNG-on-LNG competition

by David Bamford Shipping crude oil by rail: A victim of its own success?

by Keith Schaefer Peak oil demand is already a huge problem

by Gail Tverberg After gold, oil comes next

by Andrew McKillop

8 10 11 16 26

Global impact of North American shale gas boom forces Qatar to shift focus

by Mark Young

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Aging giant oil fields, not new discoveries are the key to future oil supply

by Kurt Cobb

31

Tide turning for crude

by Andrew McKillop

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Scientific viewpoint or 'religious' belief: My cat explains energy optimism

by Kurt Cobb

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OilVoice Magazine | MAY 2013

Featured Authors Hayden Wilson Kensington Swan Hayden heads Kensington Swan’s Wellington based Government and Regulatory practice. He is an experienced litigator specialising in commercial and public law.

Keith Schaefer Oil & Gas Investments Bulletin Keith Schaefer is the editor and publisher of the Oil & Gas Investments Bulletin.

Gail Tverberg Our Finite World Gail the Actuary’s real name is Gail Tverberg. She has an M. S. from the University of Illinois, Chicago in Mathematics, and is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries.

Kurt Cobb Resource Insights Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude.

David Bamford Finding Petroleum David Bamford is 63. He is a non-executive director at Tullow Oil plc and has various roles with Parkmead Group plc, PARAS Ltd and New Eyes Exploration Ltd, and runs his own consultancy.

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OilVoice Magazine | MAY 2013

Andrew McKillop AMK CONSULT Andrew McKillop is a regular contributor to OilVoice.

Mark Young Evaluate Energy Evaluate Energy is a leading provider of efficient data solutions for oil & gas company analysis. Services include annual and quarterly financial data, M&A, worldwide E&P assets, Refinery and LNG databases and an emerging US/Canadian Shale Gas & Liquids offering.

d n a e iv s n e h e r p m For co . .. n o ti a r lo p x e l fu s s e c suc

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Interpret all available well and outcrop data within a globally consistent fram ework

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Produce a series of stratigraph ically-precise f acies maps, chronostratigraph ic charts and play schematics

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Access a comprehensive organi c geochemistry and petroleum fluids database

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Place local biostratigraphic sch emes into a r egional or global context to imp rove correlation

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Utilise a high-resolution geodyn amic plate model to aid prediction

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Integrate all data in a 3D form at for rapid regional assessments

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Integrate with seismic data to create play analyses and prospect genera tion.

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Cont ac if yo t us toda u y ticki need hel p ng of f your ex to-d ploration o list

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Now Explore For more information contact: Website: www.neftex.com Email: enquiries@neftex.com Tel: +44 (0)1235 442699 Facebook: www.facebook.com/neftex

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OilVoice Magazine | MAY 2013

New Zealand Government moves to deter protests against oil and gas exploration Written by Hayden Wilson from Kensington Swan The New Zealand Government recently announced proposed changes to the New Zealand Crown Minerals Act to establish tougher penalties for protestors damaging or interfering with oil and gas exploration activities in New Zealand's territorial sea and Exclusive Economic Zone (EEZ). These changes are controversial within New Zealand but should be welcomed by industry participants.

These changes come following protest activities against Petrobras's exploratory activities off the East Cape of New Zealand. In April 2011 Petrobras was using the Orient Explorer to conduct a seismic survey of the Raukumara Basin under a five year permit given by the New Zealand Government. A protester was arrested for positioning his vessel in front of the Orient Explorer while it was surveying a part of the basin within New Zealand's Exclusive Economic Zone. He was charged with operating a vehicle in a way that caused 'unnecessary risk' in breach of New Zealand's Maritime Transport Act 1994.

The Government has had difficulties prosecuting this case. It was initially dismissed by a lower court on the basis that the legislation did not extend to activities in New Zealand's EEZ. The High Court recently overruled this, holding that protesters can be charged with actions in the EEZ, and has ordered that this case continue in the lower court.

The New Zealand Government's legislative changes appear to be partly a response to this incident, but also a clear indication that they recognise the importance of exploration activity to ongoing national economic development. New Zealand, with sovereign rights of over more than 5.7m km2 of seabed, has significant offshore O&G potential which needs to be realised.

The new laws create two offences focused on protest activities at sea. These make it clear that protests in both New Zealand's territorial sea and its EEZ can be prosecuted. It will be illegal for a person (or an organisation, such as Greenpeace) to deliberately damage or interfere with exploration structures or exploration work. If they do, they may face up to one year in prison or a fine of up to $50,000 (or twice this amount if they are an organisation).

The changes also make it unlawful for protesters to enter what are called 'specified

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OilVoice Magazine | MAY 2013

non-interference zones'. These are areas up to 500 metres around structures or vessels being used to carry out exploration. If people enter these areas without a reasonable excuse they can be fined up to $10,000. Both the New Zealand Police and, significantly, the Defence Force are given powers to enforce these new laws.

These new offences have been the subject of criticism as protestors now face tougher penalties for interfering with exploration activities at sea compared with the penalties for protesting the same activities on land. Others have suggested that the changes significantly limit protesters' rights to freedom of expression and peaceful assembly.

The new offences will, however, deliver certainty to industry participants undertaking exploration activities off the New Zealand coast, as well as discouraging dangerous protests offshore. This will encourage exploration in New Zealand and also protect individuals on exploration vehicles and structures from significant potential health and safety risks as a result of protest activities. The new offences also demonstrate the significance the New Zealand Government places on attracting and retaining oil and gas industry participants to the country.

View more quality content from Kensington Swan

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OilVoice Magazine | MAY 2013

Recent Company Profiles The OilVoice database has a diverse selection of company profiles, covering new start-up companies through to multi-national groups. Each of these profiles feature key data that allows users to focus on specific information or a full company report that can be accessed online or printed and reviewed later. Start your search today!

Peyto Exploration and Development

IG Seismic Services

Gas

Seismic

Peyto Exploration & Development is a natural gas weighted E & P that is committed to building value through the exploration and development of high quality gas properties.

Peyto's OilVoice profile

Xstate Resources Oil & Gas Xstate Resources (XST) is an ASX listed company focussed on the oil and gas sector.

Xstate’s strategy is to generate value for shareholders through field development and production, from exploration and appraisal drilling in areas that:    

Have high prospectivity for oil and gas, Have the benefit of new data, e.g. 3D Seismic, Have access to oil and gas production and transport infrastructure, but Are relatively under-explored.

Xstate shares (ASX symbol: XST) and options (XSTO) are listed on the ASX

IG Seismic Services (IGSS) is a leading pure play, land and transition-zone seismic company, primarily servicing clients in Russia and the CIS. We offer:  

high-quality seismic acquisition data processing and interpretation services

We are the result of the combination of the Russian seismic assets of three leading companies, finalized in December 2011: 

 

GEOTECH Holding – The largest Russian seismic companies, its member companies have been operating at the top of the Russian oil and gas sector for over 70 years Integra – one of Russia’s foremost oilfield services companies Schlumberger – the world-leading oilfield services provider

By combining the global experience and technology of Schlumberger with the strong regional infrastructure and operational knowledge of GEOTECH and Integra, we are in prime position to capitalize on the favorable secular trends in the Russian and CIS seismic markets.

Xstate Resources' OilVoice profile IG Seismic Services' OilVoice profile

Archer Petroleum Oil & Gas

Wrangler West Energy Service

Archer Petroleum Corp. is an independent energy company focused on exploration and development in North America.

The Company's shares are listed on the TSX Venture Exchange under the symbol "ARK" and the DB Frankfurt exchange under "A6VA".

Archer Petroleum's OilVoice profile

Wrangler West is a Canadian junior crude oil and natural gas producer which explores for and develops natural gas and crude oil production assets in the Province of Alberta.

Since inception, the Company's mandate has been to use the drill bit to add shareholder value.

Wrangler West Energy’s OilVoice profile

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OilVoice Magazine | MAY 2013

Insight: East African Gas and LNG-on-LNG competition Written by David Bamford from Finding Petroleum East African gas discoveries have been enormous but the plan to export this gas as LNG faces considerable global competition for markets, most notably from North America.

Over the last 2 or 3 years, there have been some very significant gas discoveries offshore East Africa, so significant that they have not escaped the attention of our ever insightful media. Lots of bullish statements from CEOs might lead you to believe that this is gas is almost in production already, has world-beating reserves, will soon transform the economies of the countries involved etc.

A good example – Bloomberg TV’s piece on 17th Jan 2013 included: “Biggest natural gas discoveries in a decade” “Lures investors from steel billionaire Lakshmi Mittel to Royal Dutch Shell” “Mocambique has > 50Tcf; $800bn of value” “Will rival Qatar and Australia in scale of LNG” “The geography is almost perfect for (LNG) feeding the economies of China and India (this quoting Statoil’s CEO)” and elsewhere one can read similar expansive content regarding Tanzania.

At its heart is a failure to recognise the difference between prospective volumes, resources and reserves, and we all know we have to be especially circumspect with gas, mindful of the Shell reserves scandal of 10 or so years ago. The key is this: “The principles for booking of proved gas reserves are limited to contracted gas sales or gas with access to a robust gas market” (also courtesy of Statoil, as it happens).

With this in mind, we can look at where East African gas sits in the global LNG picture, and here I am indebted to the diligent work of the folk at Bernstein Research, summarised here for example.

When probable LNG projects around the world are ranked according to cost per mmbtu, and then cumulative capacity (in mtpa), it turns out that the advantaged projects all lie in North America. Significant numbers of projects are planned both on the west coast of both Canada and the USA and in the Gulf of Mexico and on the east coast. Clearly this LNG will head for Asia and Europe (in the main) respectively.

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OilVoice Magazine | MAY 2013

This is all about exporting shale gas from North America and it is worth noting that this is contentious, with E&P companies wishing to utilise their gas sooner rather than later and domestic consumers, especially in the chemicals industry, arguing that this will drive up the price they have to pay for their feedstock gas, which of course it will. Thus a lobbying battle is being fought in Washington with President Obama eventually planning to decree how much gas can be exported per annum from the USA. The immediate point is that East African LNG faces significant cost-advantaged competition. Bernstein’s results show Mocambique LNG as more expensive than North American and, for example, East Mediterranean LNG, but advantaged compared with some of the more ‘difficult’ Australian projects. On this basis, first exports are seen as occurring after 2020.

This is a fast moving picture and Tanzanian LNG does not (yet) appear in Bernstein’s reviews; perhaps (but note this is IMHO) it will have a similar cost base to Mocambique and commence slightly later?

A simple conclusion from all this might be that if Mocambique, Tanzania (and Kenya) seek rapid economic transformation from their hydrocarbon endowment, they might be better served by strongly promoting exploration for more rapidly developable oil, in addition to enabling the exploitation of existing onshore gas/condensate discoveries (in Tanzania, for example)

View more quality content from Finding Petroleum

Shipping crude oil by rail: A victim of its own success?

Written by Keith Schaefer from Oil & Gas Investments Bulletin Oil producers in Alberta have embraced the holy rail, shipping out by train car an estimated 120,000 barrels of oil per day (bopd) to refiners on the east coast and the U.S. Gulf.

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OilVoice Magazine | MAY 2013

Despite rail costs doubling pipeline tariffs, producers were able to get such a better price railing it past the mid-continent refineries all the way to the US East Coast and Gulf Coast–it made the logistics worth the time.

But just as Canadian rail use is set to soar again—you can boost that number to 200,000 bpd by the end of the year when several terminals are completed, say analysts—rail may no longer be economic. Rail could be a victim of its own success.

“In May or June, producers that have traditional access to pipe may see better netbacks than rail,” one oil and gas marketer told me last week. Netback is the industry word for profit per barrel.

Railing oil has been more profitable than transporting by pipe for a lot of Canadian producers since last summer–when the difference between US and Canadian oil prices widened. It has also been necessary, as producers have had to find alternate routes to market—rising oil volumes competed for limited pipeline space.

And while pipeline tariffs might be cheaper than rail, the additional fees add up: producers often have to shell out trucking fees to a pipeline-connected battery, plus diluent fees (diluent makes heavy oil flow in the pipe better) and perhaps a fee to remove water from the oil to bring it up to pipeline spec.

“The netback has been greater by rail—usually more than 10% better than the pipeline-connected alternative,” says Chris Cooper, CEO of Aroway Energy, a 1000 bopd producer in southern Saskatchewan. “In some months it can exceed 20%.”

Smaller producers without access to the financing needed for long-term (10-20 years) contracts on pipelines, make every penny count when marketing their barrels.

Cooper’s savings are diluent costs of $6/b and pipeline fee/tariffs of almost $1.50/barrel.

“The price paid for the crude shipped to the rail facility fluctuates on WCS prices,” Cooper says. “We were getting $45-$50 in Jan, we’re getting $66.72 today.”

Last year the rail rush was driven by limited pipeline capacity and the wide gap between the price for US oil and the price for Canadian oil. The difference between the two (or the difference in oil price between any two places) is called the “differential.”

There was some BIG differentials at Christmas 2012—Canadian light oil traded as low as $68/barrel and heavy oil at $48/barrel.

At the same time, refiners on the U.S. Gulf Coast and northeast were paying overseas prices for their heavy oil feedstock, around $110/barrel. That’s a big differential! So there was lots of room to spend $14-$18/barrel to rail it to a much higher priced market.

Fast forward to late April 2013. Light oil only has $3/bbl discount to WTI, trading at $86.13/bbl and heavy oil (WCS, or Western Canada Select) gets $71.431. Part of the reason for higher prices is seasonal; less oil gets produced in Canada in Q2

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OilVoice Magazine | MAY 2013

because of spring break up, so supply is less. But another reason is that rail has created a bigger demand by making Canadian oil available to more US refineries.

When Canadian crude was selling $40 less than its U.S. counterpart, rail made sense; producers paid $14/bbl to hit northeast refineries or $14-$18 to the U.S. Gulf Coast, where refineries paid Brent prices of up to $119/barrel.

However, when the Canadian-US arb tightens to $12-$14/bbl, like it is now, it may not be worth it.

In addition to the narrow differential, the cost to ship crude by rail, from loading prices to rental fees, has jumped in a classical supply-demand imbalance response.

Shipping oil by rail used to be the answer to tight pipeline capacity and cheap Canadian crude. But the question now is… has that train left the station?

WIDE DIFFERENTIALS MAKE RAIL SENSE Analysts and producers say shipping crude by rail, usually an expensive choice, made sense when West Texas Intermediate (WTI) was $20 per barrel less than Brent priced crude, and Western Canada Select was about $15 under WTI. Refiners on the U.S. Gulf Coast and the northeast U.S. and Canada pay higher international prices based on Brent, so when the difference between coastal and inland crude widens, the netback from rail is higher, especially if you can’t get pipeline capacity.

Last November, Southern Pacific was raking in $20-$30/bbl more by railing and barging its bitumen to Louisiana than it would have at the congested Cushing, Oklahoma hub. The junior oil sands producer paid $31/bbl to rail and barge its oil to a Louisiana refinery, compared to $8/bbl by pipeline. But a $20 differential from Brent and lower diluent costs made the move profitable.

Cooper says that typically, a company’s oil marketer negotiates and lines up rail loading space for crude trucking shipments out of the field. Even so, high demand has translated into waits of up to six months for rail loading space.

Once at the terminal the custody transfer is made and the producer gets paid a single price for its crude.

“If you’re bigger, doing like 10,000 barrels of oil per day, those operators probably have an ability to rent rail cars somewhere from somebody to get it to the right refinery; we’re too small to do that. Others have rail agreements and agreements to bring back diluent in the same cars.”

Approximately 19,000 tank cars were ordered by Canadian companies, according to Rail Theory Forecasts. The railcars are insulated to carry heavy crude but will not be delivered until 2014.

Most producers have opted to lease tank cars, for term contracts of up to five years

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on average, rather than build. They are taking advantage of the thousands of kilometres of railroad tracks which already exist, crisscrossing North America, connecting to industrial hubs, pipelines and waterways.

In Western Canada, transportation companies have been busy expanding and building new transload terminals to total about 16 facilities run by six major players – Canadian Pacific Railway, Altex Energy, Canadian National Railways, Torq Transload, Gibson Energy, Canexus Corp. and Keyera/Enbridge.

CP said in December it would be shipping 70,000 carloads of crude by the first quarter of 2013, out of Canada and the U.S. That’s up from 500 in 2009.

The company expects to transport 44.8 million barrels this year, based on about 640 barrels for each rail car, up from 8.3 million barrels of crude oil in 2011.

Three years ago rival Canadian National didn’t even ship oil. The railway firm moved some 3.2 million barrels of crude in 2011, an estimated 19.2 million barrels by the end of 2012, and could eventually handle 200,000 barrels a day or more.

The run for rail started in North Dakota when producers untapped tight oil reserves with horizontal drilling and multi-staged fracturing. Volumes exploded without enough pipeline capacity to move product to market.

By 2012 the number of U.S. trains moving oil soared to 233,811 carloads, up from 9,500 carloads just five years prior.

Keep in mind those numbers look to be derailed as the price of Canadian crude climbs and the netback to shipping by train drops.

View more quality content from Oil & Gas Investments Bulletin

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OilVoice Magazine | MAY 2013

Peak oil demand is already a huge problem Written by Gail Tverberg from Our Finite World We in the United States, the Euro-zone, and Japan are already past peak oil demand. Oil demand has to do with how much oil we can afford. Many of the developed nations are not able to outbid the developing nations when it comes to the world’s limited oil supply. A chart of oil consumption shows that oil consumption peaked for the combination of the United States, EU-27, and Japan in 2005 (Figure 1).

Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.

We can see an even more pronounced version of this pattern if we look at the oil consumption of the five countries known as the PIIGS in Europe: Portugal, Italy, Ireland, Greece, and Spain. All of these countries have had serious declines in oil consumption in recent years, as high oil prices have impeded their economies.

Figure 2. Oil consumption for Portugal, Italy, Ireland, Greece, and Spain, based on EIA data.

Oil consumption for the PIIGS in total hit its highest level in 2004, before the decline began. Peak oil consumption by country varied a bit: Portugal, 2002; Italy, declining since 1995; Ireland, peak in 2007; Spain, peak in 2007; Greece, peak in 2006.

Peak demand is very much related to jobs. Peak oil demand occurs when a country is not competitive in the world market-place, and because of this, loses industry and jobs. One reason this happens is because the country’s energy cost

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OilVoice Magazine | MAY 2013

structure is not competitive in the world market-place. With the run-up in oil prices starting about 2003, oil is by far the most expensive of the traditional energy sources we have available today. Countries that use a large percentage of oil in their energy mix can be expected to have a hard time competing, because of oil’s higher cost.

Figure 3. Oil consumption as percentage of energy consumption for selected countries, based on BP’s 2012 Statistical Review of World Energy.

Anything else that is done which raises costs for businesses will also have an impact. This would include “carbon taxes,” if competitors do not have them, and if there is no tariff on imported goods to reflect carbon inputs.

High-cost renewables can also have an adverse impact, regardless of whether the cost is borne by businesses, consumers or the government.  



If the cost is borne by businesses, those businesses must raise their prices to keep the same profit margins, and because of this become less competitive.

If the cost is borne by consumers, those consumers will cut back on discretionary expenditures, in order to balance their budgets. This is likely to mean a cutback in demand for discretionary goods by local consumers.

If the government bears the cost, it still must pass the cost back to businesses or consumers, and thus reduce competitiveness because of higher tax costs.

This importance of competitiveness holds, no matter how worthy a given approach is. If costs were “externalized” before, and are now borne by the local system, it makes the local system less competitive. For example, putting in proper pollution controls will make local industry less competitive, if the competition is Chinese industry, acting without such controls.

One issue in competitiveness is wage levels. Wages in turn are related to standards of living. In a global economy, countries with higher wage levels for workers, and higher benefit levels for workers (such as health insurance and pensions) will be at a competitive disadvantage. Countries that use coal as their prime source of energy will be at an advantage, because workers’ wages will tend to “go farther” in heating their homes and buying electricity.

Countries that are warm in the winter will be at a competitive advantage, because homes don’t have to be built as sturdily, and don’t have to be heated in winter.

Workers can commute by bicycle even in the coldest weather.

Energy usage (all types combined, not just oil) is far higher in cold countries than it is in warm wet countries. Countries that extract oil also tend to be high users of energy.

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Figure 4. Per capita energy consumption for selected countries for the year 2010, based on EIA data.

The difference in per capita energy usage among the various countries is truly astounding. For example, Bangladesh’s per capita energy consumption is slightly less than 2% of US energy consumption. This difference in energy consumption means that salaries can be much lower, and thus products made in Bangladesh can be much cheaper, than those made in the United States. This is part of our competitiveness problem, even apart from the energy mix problem mentioned earlier.

In my view, globalization brought on many of our current problems. Perhaps globalization could not be avoided, but we should have foreseen the problems. We could have put tariffs in place to make a more level playing field. See my post, Twelve Reasons Why Globalization is a Huge Problem.

Inadequate world oil supply isn’t exactly the problem. The issue is far more that the price of oil extraction is rising. The price of oil extraction is rising for a variety of reasons, an important one being that we extracted the easy to extract oil first, and what is left is more expensive to extract. Another issue is that oil exporters now have large populations that need to be kept fed and clothed, so they don’t revolt. This is a separate issue, that raises costs, even above the direct cost of extraction. There is no reason to believe that these costs will level off or fall, no matter how much oil the US produces using high-priced methods, such as fracking.

When oil prices rise, wages don’t rise at the same time. In fact, in the US there is evidence that wages stagnate when oil prices are high, partly because fewer are employed, and partly because the wages of those employed flatten.

Figure 5. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPIUrban.

The countries that are most affected by rising oil prices are the countries that use oil to the greatest extent in their mix of energy products. In Figure 3, that would be the PIIGS. The rest of the US, EU-27, and Japan would be next in line.

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OilVoice Magazine | MAY 2013

When oil prices rise, consumers need to balance their budgets. The price of oil products and food rises, so they cut back on discretionary items. Their smaller purchases of discretionary goods and services means that workers in discretionary sectors get laid off.

Businesses find that the price of oil used in manufacturing and shipping their products has risen. If they raise the sales price of the goods to reflect their higher costs, it means that fewer people can afford their products. This too, leads to cutbacks in sales, and layoffs of workers. Sometimes businesses decide to outsource production to a cheaper country, or use more automation, as a way of mitigating the cost increases that higher oil prices add, but automation or outsourcing also tends to reduce US wages.

The net effect of all of these changes is that there are fewer workers with jobs in the countries with high oil usage. This reduces the demand for oil in the high oil usage countries, both from business owners making goods and from the consumers who might use gasoline to drive their cars. This price mechanism is part of what leads to the oil consumption shift we see in Figure 1.

We are dealing with is close to a zero-sum game, when it comes to oil supply.

The amount of oil that is extracted from the ground is almost constant (very slightly increasing for the world in total). If prices stayed at the low level they were in the past (say $20 barrel), there would not be enough to go around. Instead, higher prices redistribute oil to countries that can use it manufacture goods at low overall cost.

Workers in factories making these goods are then able to afford to buy goods that use oil, such as a motor scooter.

Citigroup recently released a report titled, “Global Oil Demand Growth, – the End is Nigh.” Its subtitle says, The substitution of natural gas for oil combined with increasing fuel economy means oil demand is approaching a tipping point.

This is out-and-out baloney, for a number of reasons: 1. There are way too many of “them” compared to the number of “us,” for energy efficiency to make even a dent in our problem.

2. When we look at past oil consumption, changes in vehicle energy efficiency did not make a big difference.

3. Substituting natural gas for oil still leaves cost levels for the US, Europe, and Japan very high, compared to those for the rest of the world, where little energy is used.

4. There are really separate markets in many parts of the globe. Our market is collapsing because of high price. Perhaps increased efficiency and natural gas substitution will help low-cost producers until they reach a different limit of some sort.

Let’s look at these issues separately.

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OilVoice Magazine | MAY 2013

There are way too many of “them” relative to us, for energy efficiency to even make a dent in our problem.

If we look at world population, this is what we see: Figure 6. World population split between US, EU-27, and Japan, and the Rest of the World.

Using a ruler, we could probably make fairly reasonable projections of future population for each of these groups.

If we look at per capita oil consumption for the two groups separately, there is a huge disparity: Figure 7. Per capita oil consumption separately for the group US, EU-27, plus Japan, and for the rest of the world, based on BP’s 2102 Statistical Review of World Energy, and population statistics from EIA (since 1980) and Angus Maddison data. (earlier dates).

Per capita oil consumption for the EU, US, and Japan group peaked in 1973–a very long time ago. In recent years, it has been drifting down fairly rapidly, just to keep up with a slight per capita rise in oil consumption of the Rest of the World. Even with recent changes, per capita oil consumption of the EU, US and Japan group is more than 4.5 times that of the rest of the world.

If cars were made more efficient, more people could afford them. The market for cars is unbelievably huge, compared to today’s market, if costs could be brought down.

Furthermore, gasoline accounts for less than half of US oil consumption. Even if efficiency were improved to allow cars to use half as much fuel, it would save a little less than one-fourth of current oil consumption. How far would this oil go in satisfying the needs of 6 billion other people–and growing every year?

When we look at past oil consumption, changes in vehicle energy efficiency did not make a big difference.

If we look at per capita oil consumption in the US, split between gasoline and other oil products, we see that the big drop in oil consumption came from the drop in other oil products–that is the commercial and industrial part of US oil consumption.

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OilVoice Magazine | MAY 2013

Figure 8. US per capita consumption of oil products, split between gasoline and other. Total consumption from BP’s 2012 Statistical Review of World Energy. Gasoline consumption from EIA. (Amounts include biofuels.)

Difference by subtraction.

The amount of fuel used for gasoline has stayed in the 10 to 12 barrels a year per capita band, since 1970, in spite of huge improvements in vehicle efficiency.

I recently wrote a post called Why is US Oil Consumption Lower? Better Gasoline Mileage? In it, I looked at the decrease in US oil consumption between 2005 and 2012. I concluded that the majority of the decrease in consumption was due to a drop in commercial use. Only 7% was due to an improvement in miles per gallon for gasoline powered vehicles.

Substituting natural gas for oil still leaves the US (as well as Europe and Japan) very high priced, compared to the rest of the world, that doesn’t use much energy.

Living in the US, Europe or Japan, it is hard to get an idea of the cost structure of the rest of the world. We are so far above the cost structure of the rest of the world that substituting natural gas for oil would do little to fix the situation.

Figure 9. Photo of an auto-rickshaw I took while visiting India in October 2012. A total of 10 of us (including driver) traveled for several miles in a three-seated version of one of these. Those of us on the edges held on tightly to the frame, because there was not room for all of us.

We can also debate how much substitution of natural gas will actually do, and in what timeframe. In the US, natural gas is temporarily very cheap. But it costs more to extract shale gas than the market currently pays, in many areas. Also, a recently University of Texas study showed that Barnett Shale was past peak production, if prices do not rise.

There are really separate markets in many parts of the globe. Our market is collapsing because of high price. Perhaps increased efficiency and natural gas substitution will help low-cost producers, until they reach a different limit of some sort.

When a country is not competitive, it is not just oil consumption that drops, but consumption of other energy products as well. If we look at the per capita energy

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consumption of the US, EU-27, and Japan combined, we see that non-oil energy consumption per capita reached its peak in 2004, and is now declining (Figure 10, below). If consumers are too poor to buy oil products, they are also too poor to buy products made with other types of energy.

Figure 10. Per capita consumption for the sum of the EU-27, US, and Japan, based on BP’s 2012 Statistical Review of World Energy.

The Rest of the World followed a very different pattern of energy consumption. Nonoil consumption soared, on a per capita basis. Oil consumption also increased on a per capita basis.

Figure 11. Per capita energy consumption for the Rest of the World, based on BP’s 2012 Statistical Review of World Energy.

More detailed data shows that the big increase in non-oil consumption was a huge rise in coal consumption, after China was admitted to the World Trade Organization in December 2001.

How does peak oil demand work out in the end?

I would argue that lack of competitiveness in world markets is a limit that the US, EU27 and Japan are hitting right now, but at slightly different rates. EU-27 now seems to be ahead in the race to the bottom, partly because its combined currency. I wrote a post in March 2012 called Why High Oil Prices Are Now Affecting Europe More Than the US, explaining the situation.

It seems to me, though, that a big piece of the problem with lack of competitiveness gets transferred to the governments of the affected countries. This happens because collection of tax revenue lags, because not enough people are working, and those who are working are earning lower wages. At the same time increased payouts are needed to stimulate the economy, and to provide benefits to the many without jobs.

Governments increase their debt to meet the revenue shortfall. They reduce interest rates to record-low levels, to stimulate the economy. They also use Quantitative

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Easing, or “printing money” to try to lower long-term interest rates, and to try to make their exports more competitive. Unfortunately, these actions do not solve the basic structural problem of high and rising world oil prices, and the fact that these rising prices make their economies increasingly less competitive in the world marketplace.

One possible way I see of the current situation working out is that the total energy consumption (including all types of energy products, not just oil) of the EU, US and Japan will continue to fall, as high-priced oil continues to erode our competitive position in the world marketplace.

Figure 12. One view of future energy consumption for the EU-27, US, and Japan.

Historical is based on BP’s 2012 Statistical Review of World Energy.

The slope of the decline is based on the type of decline experienced by the Former Soviet Union, in the years immediately following its collapse. This pattern might reflect a combination of different patterns for different countries. Greece and Spain, for example might continue to fall quite quickly. The US might lag the EU in the speed at which problems take place. The likely path seems downward, because any action taken to fix the government gap between income and expense can be expected to have a recessionary impact, and thus have an adverse impact on energy consumption.

The Rest of the World is now growing rapidly, but at some point they will start reaching limits. One of these limits will be lack of an export market. Another will be lack of spare parts, because businesses in the US, Europe and Japan are failing for financial reasons. Some of these limits will relate to pollution and lack of fresh water.

The effect of these limits will also be to raise costs. For example, a shortage of water can be worked around through desalination, but this raises costs. Lack of spare parts can be worked around by building a new plant to make the spare part. Pollution problems can be mitigated by pollution controls, but these add costs. These higher costs, when passed on to consumers will also lead to a cutback in demand for discretionary goods, and the same kinds of problems experienced in oil exporting nations. Thus, these countries will also have “Peak Demand” problems, because of rising prices, related to limits they are reaching.

I don’t know exactly how soon the Rest of the World will hit limits, but given the interconnectedness of the world system, it would seem to be within the next few years. Figure 13 shows one estimate of how this may occur.

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Figure 13. One view of energy consumption for the Rest of the World. Historical data are based on BP’s 2012 Statistical Review of World Energy.

Here again, individual countries may do better than others. Countries with little connectedness to the world system (for example, countries in central Africa) may have fewer problems than others. Of course, their energy consumption (of the type measured by the EIA or BP) is very low now. They may use cow dung and fallen branches for fuel, but these are not counted in international data.

Figure 14, below, shows the sum of the amounts from Figures 12 and 13. Thus, it gives one estimate of future world energy consumption based on Peak Demand considerations.

Figure 14. One view of future energy consumption for the world as a whole. History is based on BP’s 2012 Statistical Review of World Energy.

If there is a silver lining to all of this, it is that world CO2 emissions are likely to start falling quite rapidly, because of Peak Oil Demand. World CO2 emissions could quite possibly drop below 20% of current levels before 2050. In the scenario I show, energy consumption drops faster than forecasts such as those put out by the Energy Watch Group. Such forecasts do not take into account financial considerations, so are likely overstated. The downside of Peak Oil Demand is that the world we live in will be very much changed. Population levels will likely drop, indirectly because of serious recession, job loss, and cutbacks in government benefits. The financial system will need to be completely revised, because debt financing will make sense much less often than today. In fact, in a shrinking world economy, money can no longer act as a store of value. There no doubt will be some people who survive and prosper, but their lives will likely be very different from what they are today.

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After gold, oil comes next Written by Andrew McKillop from AMK CONSULT LONG TERM METRICS The gold-oil ratio or how many barrels 1 Troy ounce of gold will buy has been tracked for decades, and has long term median values, about 15.4 barrels per Troy ounce. Whenever we move out of that range, as in the Cheap Oil Era of around 1986-2000 the ratio sends us a signal.

This above chart stops in 2010, but as it shows we were already in a context where gold price growth had outstripped oil's price growth. While the question "Is oil overpriced?" could be eluded, for a long while, it became very clear gold was overpriced. The simplest proof came these past few days - gold was slain on bullion markets through Apr 12 - Apr 15 and the fantastic price drop tells us all we need to know. Cheaper gold is the only logical readout, with potentially a long way further to fall to get anywhere near the all-in mining costs of producing gold as reported by majors like Barrick Gold and its African Barrick subsidiary (around $1045 per ounce).

In turn this logically means only one thing for oil: further price erosion.

To be sure, covering all options and possibilities, we can have simultaneous rises, or falls, in the price of both commodities holding their ratio unchanged or almost. But this ignores the other main variables, which start with the US dollar's world value,

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and range out to average CPI or PPI inflation rates, and the price of other energy sources and supplies. The period of around 1950-1970 for example, featured oil at rarely above $2 per barrel and gold mainly at $34 per Troy ounce. The gold-oil ratio tells us nothing about the absolute value of a resource, and specifically when it is overpriced and must fall.

GAUGING HOW MUCH OIL MUST FALL Even early last week, Herd analysts from respected large firms and funds could be heard saying that while gold may be set to "correct downwards", perhaps a lot, possibly to $1400, it will be "back around $2k per ounce" by the end of the year. To date, few or no Herd analysts are trying the same talk with oil - for example a quick two-day 10% fall in prices, bringing Brent to $90 and WTI to $80 a barrel. This correction is overdue but seemly trading, supposedly, demands moderate daily cuts in the price. However, exactly like the gold rout, the downward spiral for oil will accelerate out from those initial good mannered 1%-a-day fat trimming exercizes, to muscular daily cuts.

The first target will be around $75 for Brent, and close to $70 per barrel for WTI, preserving a Brent premium, if only for nostalgia reasons.

Below $75 for Brent, serious oil industry problems will generate - exactly like the usually neglected role of gold mining industry financial meltdown, which has played for around 12 months already, among the factors that made the gold crunch of midApril 2013 not only possible, but overdue. Gold mining is a no-no industry, it fooled itself into thinking gold prices could grow forever and embarked on ill-fated, high cost expansion programs. The results were bad, as the quickest check on equity prices for gold miners from as far back as 2011, will show. The energy industry has sobering evidence in the US, of what happened to company debt, EBITDA and equity values for gas-oriented majors when natural gas prices fell 75% from their 2005-2006 highs. When (rather than if) that happens to oil, even the initial "fat trimming" to $75/b oil, there will be major financial fallout.

Big Oil is walking a tightrope to a very uncertain future, from a controversial past. It is condemned to produce more - despite painfully sluggish market growth and in many markets like Europe, zero growth or contraction of oil demand, year-in, year-out.

Unfortunately for oil, at least as many killer facts can be lined up to show that oil, exactly like gold, is overvalued and overpriced. How it corrects, the process and its stages, will be part-and-parcel of oil analysts and traders' daily concern. For the oil trading industry, the gold price crash of April 2013 sends an advance warning of big things coming and due to happen in the oil market.

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Global impact of North American shale gas boom forces Qatar to shift focus Written by Mark Young from Evaluate Energy The global impact of the US shale gas boom was in further evidence this week as Qatar Petroleum, along with its MOU partner, Centrica, made its first move into the North American E&P market in a $1 billion acquisition of Canadian assets from Suncor Energy. North America had been earmarked by Qatar as a guaranteed market to sell its copious Liquefied Natural Gas (LNG) export capacity in, but the US Shale boom has turned this idea on its head, as the middle-eastern NOC becomes the latest foreign power to move into the North American E&P arena. The assets being acquired (to be 40% owned by Qatar Petroleum) are well spread over the country in 3 provinces, and the British Columbia set of the assets will no doubt form a potential export opportunity as Kitimat becomes Canada's LNG exporting centre in the coming years.

A look at Qatar Petroleum's world-standing will shed light on just how significant a move this is, and just how big an impact the shale boom is having on world energy markets. Qatar is the world's largest LNG exporter by a significant distance with around 78 million tonnes per year (mtpa) of export capacity, and Qatar Petroleum is the operator of all of it. Its nearest rivals, including Indonesia (34 mtpa), Malaysia (24 mtpa) and Australia (23 mtpa), are dwarfed in comparison. Efforts to catch up with Qatar have been led by the Australians, with plans in place to expand the industry in that country significantly by 2020. But these plans are beginning to fall into ruin, as many projects are being cancelled or delayed for various reasons, chiefly a lack of skilled labour and extreme rises in projected costs - Chevron's Gorgon LNG project is now projected to cost US$50 billion, for example. Plans in new regions of potential LNG exports, such as Mozambique/East Africa, are likely to be a long way off into the future, so Qatar, on the face of it, looks to be in an extremely strong position as the global leader of gas exports. Yet it still moved into this new market.

Recent years have seen Indian, Chinese and other far-eastern NOC's moving into the North American market following the US shale gas boom, countries without strong domestic markets, but this is arguably the first time a reasonably stable world gas power has felt the need, or has been forced, to join the party. Even as recently as the company's 2011 Annual Report, Qatar Petroleum lists North America as the target market for its LNG Production 'mega-trains' 6 & 7 at its Ras Laffan complex.

Whilst the company also listed more ensured markets of Asia and the Middle East as destinations, these 'mega-trains' have a total capacity of 15.2 mtpa, and the potential

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income from exporting this amount of gas to the US had to be replaced, as the LNG import terminals on the American east coast became obsolete and began to sit idle after shale gas began to quickly flood the domestic market.

In the company's first move to combat the potential harm caused by the shale gas boom, Qatar Petroleum, along with partner ExxonMobil, submitted plans to the relevant authorities to convert its 15.6 mtpa import facility at Sabine Pass, Texas, into an export terminal of the same capacity, in a clear effort to recoup some of the shortfall back by profiting on US exports in the future. However, this follow-up move into Canadian E&P provides a more immediate solution to Qatar's problem, with net 2P reserves of around 390 bcfe (90% gas) and net production of 100,000 mcfe/d. In fact, this move is not really any different to what Woodside Petroleum are planning, the company is reportedly in talks over acquiring Canadian gas assets, and Woodside is a company who recently shelved an LNG project in Australia to look for a cheaper option, standing it in stark comparison to the world leader in LNG exports.

Widescale exports of US/North American shale gas may be as far as 3 to 5, even 10 years into the future, so for the time being, shale gas will remain trapped within those borders. But now the world leading gas exporter has got involved, the global impact of the US shale boom is extremely hard to deny, no matter how trapped the physical quantities of gas may well be.

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Aging giant oil fields, not new discoveries are the key to future oil supply Written by Kurt Cobb from Resource Insights With all the talk about new oil discoveries around the world and new techniques for extracting oil in such places as North Dakota and Texas, it would be easy to miss the main action in the oil supply story: Aging giant fields produce more than half of global oil supply and are already declining as group.

Research suggests that their annual production decline rates are likely to accelerate.

The most recent research on giant oil fields has been available since 2009 so it doesn’t attract media attention the way new discoveries hyped by oil company public relations departments do. And yet, that research is far more important to understanding our oil future.

Here’s what the authors of “Giant oil field decline rates and their influence on world oil production” concluded: 1. The world’s 507 giant oil fields comprise a little over one percent of all oil fields, but produce 60 percent of current world supply (2005). (A giant field is defined as having more than 500 million barrels of ultimately recoverable resources of conventional crude. Heavy oil deposits are not included in the study.)

2. “[A] majority of the largest giant fields are over 50 years old, and fewer and fewer new giants have been discovered since the decade of the 1960s.” The top 10 fields with their location and the year production began are: Ghawar (Saudi Arabia) 1951, Burgan (Kuwait) 1945, Safaniya (Saudi Arabia) 1957, Rumaila (Iraq) 1955, Bolivar Coastal (Venezuela) 1917, Samotlor (Russia) 1964, Kirkuk (Iraq) 1934, Berri (Saudi Arabia) 1964, Manifa (Saudi Arabia) 1964, and Shaybah (Saudi Arabia) 1998 (discovered 1968). (This list was taken from Fredrik Robelius’s “Giant Oil Fields -The Highway to Oil.”) 3. The 2009 study focused on 331 giant oil fields from a database previously created for the groundbreaking work of Robelius mentioned above. Of those, 261 or 79 percent are considered past their peak and in decline.

4. The average annual production decline for those 261 fields has been 6.5 percent. That means, of course, that the number of barrels coming from these fields on average is 6.5 percent less EACH YEAR.

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5. Now, here’s the key insight from the study. An evaluation of giant fields by date of peak shows that new technologies applied to those fields has kept their production higher for longer only to lead to more rapid declines later. As the world’s giant fields continue to age and more start to decline, we can therefore expect the annual decline in their rate of production to worsen.

Land-based and offshore giants that went into decline in the last decade showed annual production declines on average above 10 percent.

6. What this means is that it will become progressively more difficult for new discoveries to replace declining production from existing giants. And, though I may sound like a broken record, it is important to remind readers that the world remains on a bumpy production plateau for crude oil including lease condensate (which is the definition of oil), a plateau which began in 2005.

One the clearest cases of the study’s key finding is Mexico’s Cantarell oil field, the second most productive in the world, until a steep decline began in 2004. Production from Cantarell stalled in the early 1990s leading Petroleos Mexicanos (PEMEX), the Mexican national oil company, to begin an aggressive drilling campaign and to build what at the time was the largest nitrogen extraction plant in the world. Once completed, the plant captured nitrogen from the air and injected it into the Cantarell field in order to counter falling pressure.

The result was a dramatic rise in production from about 1 million barrels per day (mbpd) in 1995 to above 2 mbpd in 2003, just two years after the nitrogen injection began. But, by the end of 2005 it was evident that Cantarell was in decline.

What followed was a breathtaking slide from 2.136 mbpd in 2004 to just 396,000 barrels per day as of the last week of March this year. That’s a total decline of 81 percent in just over eight years. (Please note that the day after I accessed the March number from the PEMEX website, the table in which it appeared vanished from the site. I’ve been unable to find the number elsewhere. This piece, however, noted production a year ago at about the same level.)

PEMEX has stabilized total Mexican oil output from all fields at about 2.5 mbpd—it was 3.4 mbpd at Cantarell’s peak—by successfully increasing production from its Ku-Maloob-Zap offshore field. But once again the company is using nitrogen injection to achieve the increase just as it did at Cantarell. And so, PEMEX may be on course to repeat at Ku-Maloob-Zap the rapid decline previously experienced at Cantarell.

Four years on from the 2009 study it is possible that the percentage of world oil production from the giants has slipped as just enough production from new smaller fields has been added to keep global production flat. But if, as the study suggests, the decline rate for giant fields accelerates, the record-breaking expenditures and herculean technical efforts now being undertaken by the oil industry just to keep production flat may be overwhelmed.

Perched on a production plateau, either we are approaching ever closer to a decline in worldwide production of crude oil proper or new developments—that is, ones not yet in evidence—will boost the global rate of production definitively above the current

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plateau. The weight of the evidence, however, suggests an unfavorable outcome in the decade ahead.

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Tide turning for crude Written by Andrew McKillop from AMK CONSULT GOLD, OIL AND THE DOLLAR To this heavyweight trio for deciding investor sentiment in the commodities space, we can add sovereign debt, interest rates and currency valuations, in a cocktail mix that reads badly for oil above $85 - $90 per barrel - for Brent. Short term bounces and dips in commodity prices driven by the Eurozone merry-go-round might grind onward, perhaps, but the sundown on commodities of all kinds is shaping up on the horizon. Taking only the dollar, if the USD strengthens, "traditional" confidence in natural resource commodity assets looks set to drain and bleed away on an almost daily basis.

As of early April 2013 we still have no problem finding still-typical Herd statements (this one from Capital Economics) such as: "Admittedly, the price of gold has not yet benefited as much as we had expected from the Eurozone crisis, so we are lowering our projections". Like others, Capital Economics has simply pushed forward its gold forecast of a "fresh surge to new highs around $2 000", to the year-end. This is becoming unlikely, as the markets are showing more and more openly. Gold price weakening also means shrinking crude prices in the current context.

While the main source of what we can call "conventional macroeconomic uncertainty" is the Eurozone and other EU economies, this downplays the remaining high level of uncertainty concerning the US economy, increasing concern on Japan's "monetary experiment" for restoring inflation, and rising uncertainty concerning China's economy. Taking simply the complex and long-running US "fiscal cliff issue", Societe Generale's commodity experts advise this could potentially shave as much as 3% from US economic growth in 2013-14. This would create a Eurozone

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economic future for the US. WILDLY BEARISH The day after a wildly bearish report from the US Energy Information Administration showing that crude supplies are at their highest level for 82 years and refinery runs at a 6-year high for this time of year, the oil market response was set in stone. Add in the worldwide pressure, not only from central banks but also North Korea that bolster the dollar, and talking about Brent at $120 becomes fond memories of a receding past. Whatever Mario Draghi of the ECB may be saying about the Eurozone economy the readout is continuing or deeper recession in Europe, which in 2013 entered its 7th straight year of declining oil demand.

Back-flow from a strengthening dollar in the shape of more expensive US exports may also play its own baleful role in further depressing any potential for expanded oil demand in the US, whose crude oil imports can only decline due to powerful growth of domestic oil production. Add in China's potentially serious new bird flu outbreak, and things look even worse for non-US oil demand.

Once upon a time, also down Memory Lane, cold weather could give a fillip to US heating oil demand and lever growth of crude prices in its wake, but natural gas usurped that role long ago. The highly exceptional long-life winter conditions ruling the northern hemisphere, especially strong in Europe, have helped gas prices in several market, but cold winter conditions have also depressed gasoline demand, while global gas prospects, including stranded resource and shale resource potentials make it clear that gas shortage, anywhere, can only be temporary.

In Europe, despite its high-cost renewable energy action plans (REAPs) mandating a switch away from carbon fuels for power generating, real world change this winter has featured rising use of coal, "clean" or otherwise, and declines in natural gas demand in most EU27 countries reaching double-digit levels. Coal stays cheap, with prices still as low as $8 per barrel equivalent before shipping costs. For US power producers, like European generators, this is a no-brainer shown by US coal-fired generation up 21 percent YOY. How long this will last is however in question, as the Obama administration turns its political heat on coal steam power into something of a crusade.

GEOPOLITICS TO THE RESCUE? This is always a wildcard, and even the North Korean nuclear issue (replacing the Iran nuclear issue for a while) could or might prove worthy of a short upbeat interval in the general decline of crude prices, but first and most it can bolster the dollar.

Israel-Palestine tensions, with the return of Spring are back on the boil and the Syrian civil war can at all times break out of its borders - but almost only westward into Lebanon. The decline in Turkey-Israel tension due to recent "peace feelers" from Israel runs counter to the usual program of rising Mid East tensions, which traditionally bolster oil.

More important and a real fundamental change, global oil production is poised to move out and away from the Mid East on a steadily accelerating basis. To the

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increasing number of onshore and offshore oil E&P projects moving forward to commercial supply status in west and central Africa, east African projects are adding their weight. In many cases including gas resources, often large, the Dark Continent is now revealing its potential promise of a global shift of oil-and-gas emphasis that can chip away at Mid East domination, with a major downward impact on the alwaysvariable "risk premium on oil".

Global oil, today, provides around 32 percent of world energy compared with 53 percent at the time of the first oil shock in 1973 and this longterm fundamental is unlikely to change its direction. In turn, this changes the metrics for gauging geopolitical risk in oil, making current probable premiums of round $15 per barrel and up, another hangover from the receding past

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Scientific viewpoint or 'religious' belief: My cat explains energy optimism Written by Kurt Cobb from Resource Insights Each morning when I release my cat from the basement where he sleeps, he rushes to the upstairs bathroom to drink water from a bowl placed there for him. He appears to have a 'religious' belief that the water in this bowl is far superior to that in the bowl sitting alongside his food in the basement. So far as I can tell, there is no discernible evidence available to him to make this distinction. I take his preference then as a matter of faith rather than evidence. The water upstairs is holy. The water in the basement窶馬ot so much.

How do I know that the upstairs water is really holy? When I forget to fill the upstairs bowl, the cat complains even if his basement bowl is full. It is hard enough to reason with a cat, but even harder to argue one out of what is essentially a religious belief.

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And so it is with humans. Some ideas find their basis in fact, while others fall under the category of faith. As it turns out, those that are faith-based are the most difficult to overturn. I rarely try. But, then there is a vast sea of ideas parading as facts, when really, these 'facts' are nothing but ideology based on ideas that are empirically false or at least suspect.

Such is the ideology of the fossil fuel optimists who tell us that the marketplace will bring forth whatever fossil fuel supplies we need when we need them at prices we like. Some, but not all, tell us that fossil fuel supplies have no practical limits because it is our imagination that brings them out of the ground. Statements like that are part and parcel of the kind of magical thinking that infects the public discussion about the future of energy.

I style myself as an energy realist with an emphasis on risk management. No one can know the future. That's why it is important to use our imagination to picture outcomes that might hurt us badly and to suggest measures to prevent or mitigate those outcomes.

The fossil fuel optimists in the world tend to be economists, not geologists (who generally take an empirical rather than religious approach to matters). Those economists simply know that they know that the marketplace is a superior force— even a god-like one—to which we should exclusively entrust our energy future. Yet, that same marketplace has failed to yield enough crude oil in the last decade to provide the cheap energy that keeps the global system stable. In fact, the record price of oil has and continues to be a destabilizing force in global affairs.

My colleague Jeffrey Brown—who back in 2006 conceived the Export Land Model and through it correctly foretold the subsequent decline in global oil exports and the accompanying price rise—recently remarked that many of the optimists believe something which defies logic. They believe that the sum of production from discrete oil wells, oil fields and oil producing countries around the world—which provide innumerable examples of peak production followed by persistent declines—will never add up to a global peak and decline in oil production—ever! Oil production will grow at some percentage each year forever, indefinitely.

In fairness, I must point out that quite a few of the other optimists say that a peak in oil production is decades away. So, at least their case does not rest on a logical impossibility imposed on a finite Earth. But, they refuse to admit that no one knows the day when oil production will peak. And, the inescapable logic of their position is this: If world oil production will someday peak and decline, the risk of a decline grows with each day. Failed peak oil predictions of the past don't mean that peak oil is wrong, only that peak oil draws ever closer. The bumpy plateau in oil production proper (crude oil plus lease condensate) since 2005 ought to be cause for alarm.

Now, I should classify those economist/optimists so that their motives become more transparent. There are those who work directly for or as consultants to the oil industry. Enough said. There are those who work for Wall Street firms that do substantial business with the oil industry. Enough said. There are those who work in government all around the world. Here it can only be said that most of the world's

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governments have no plausible plan for addressing the consequences of a persistent decline in world oil production. So, given that, it hardly seems advisable to them to inform the public about a danger for which there is no response.

The optimists associated with the oil and financial industries will tolerate no dissent.

Those of us who want a rational discussion about logical outcomes, prudent risk management and sound public policy are to be ridiculed and shouted down as heretics. In fact, those optimists are currently engaging in a public relations blitz designed to drown out dissenting voices and make people think the following: "I'm hearing that we have a lot more oil from a wide variety of credible sources: energy analysts and consultants, oil industry executives, think tank scholars, university academics, even government energy agencies. How can they all be wrong?"

But the simple truth is that—except for the government personnel—they are paid directly by the industry or have financial ties to it through donations to think tanks and grants for academic research. The government personnel get most of their information from the industry, so it is not surprising that they share the industry's view.

Keep in mind that the work that the optimists do on Wall Street and in the oil industry is focused specifically on making rich people richer—that is, the rich who own and run the oil industry and the rich who own, run and/or prosper along with Wall Street and all financial establishments worldwide. These optimists are not paid to think about the public good, but only to search out speculative profits and stoke speculative fevers for the advantage of their benefactors. Their pronouncements about energy or practically any other subject are not made for the sake of good policy, but for the sake of high profits.

If there is room for optimism about energy, logic tells us that it simply cannot lie with finite, depletable resources. We do know that the resource of sunlight is vast. The solar radiation which strikes the Earth over just 20 days is equivalent to all the energy in known reserves of coal, oil and natural gas. But, so far, we have only been able to harvest just a tiny amount of it for human purposes. While there are environmental impacts to large solar and wind installations (and, let's not forget that wind is just another form of solar energy), the energy source, the Sun, is on any human time scale inexhaustible.

As a practical matter, we would have to reduce our energy consumption drastically over time to make it possible for renewable energy to supply the lion's share of our needs. Even a very rapid and large build-out of renewable energy infrastructure would not allow us to consume the colossal amounts of energy that we do today, at least not any time soon.

But, we know how to reduce our energy consumption considerably. I always get a rise out of American audiences when I tell them that the average European lives on one-half the amount of energy of the average American. And, it's worth noting that oil consumption for Japan, Germany, and Italy has been in persistent decline since 2000. But, even in these countries, there is much more to be done.

It matters little whether my cat ever comes to the realization that he's getting the

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same water upstairs as he is in the basement. His 'religious' belief in upstairs water does no harm to him and inconveniences me only on rare occasions. But the religious devotion of the energy optimists to the oil abundance story and their campaign to prevent a reasoned discussion based on the facts and logic has the potential to harm us all very badly and soon.

The future of energy is not a parlor game or a poker match. It's dead serious business. The oil industry and its spokespersons in their various garbs are taking it seriously. Are you?

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