2011 September 23

The Master Resource Report  2011-09-23

Will There Be Oil? (page 1 )

UK homes versus oil? (page 2 )

Airbus forecasts for airplanes. (page 3 )

Is this the ultimate fuel cell. (page 3 )

EIA forecasts to 2035. (page 4 )

Response to Daniel Yergin’s WSJ essay.

This week I received this very thoughtful rebuttal to Daniel Yergin’s essay in last weekend’s Wall Street Journal that attacked the Peak Oil theory. The author Derik Andreoli has graciously allowed me to reprint it.

Derik views the issues surrounding Peak Oil as one of price which is the way consumers and business view it, even if they do not put it in the precise framework of the Peak Oil Theory. Buyers of petroleum products don’t concern themselves with daily crude production or the distinction between reserves and resources. They focus on the price they are paying now and its impact on either their life or their business. So with that let’s take a look at what Derik had to say.

“Before I share my thoughts on the article, I want to emphasize that my primary concern regarding liquid fuels is that of price. High and/or rapidly rising fuel prices strain the economy and the balance sheets of individuals and businesses alike. And price is set by the fundamentals of supply and demand, the costs of marginal production, transportation and refining, geopolitics, and regulations. I am interested in all of these price influences, and therefore I have spent a good deal of time examining peak oil models, which speak to supply.

Peak oil models should not be confused with peak oil theory, which is quite straightforward. Peak oil theory states that because oil is a finite and non-growing resource, production will at some point in time decline. And that’s it. That is the theory in its entirety, and it is indisputable (and Yergin admits as much).

The problem with Yergin’s article, however, is that he mistakes the Hubbert model for the theory. Even worse, he doesn’t critique the model, but rather attacks the forecast which was produced, then uses the poor forecast not to discount the model but, rather, to ‘disprove’ the theory. This is a classic straw man argument. It’s a bit like taking any one of the hundreds of 30-year economic forecasts made back in the 1960s – all of which are off by a wide margin – and claiming that economic base theory has been disproved and anyone who believes in it is a crackpot!

Unfortunately, Yergin’s attack doesn’t stop at the forecast. He goes on to attack Hubbert himself. No style points there.

But here is where I agree with Yergin: Hubbert’s model is deeply flawed, and the forecasted date of the U.S. peak was, in a word, lucky. It should be noted, however, that Hubbert’s model is just one of a number of long-term oil forecast models, and the majority of these models (which in some cases are quite mathematically complex) agree that there is a statistically significant chance that crude+condensate+unconventionals will peak sometime before 2020.

While I may share Yergin’s sentiment regarding Hubbert’s model, I don’t share Yergin’s client base. Yergin’s outfit works closely for and with the oil and gas industry, and it is in their best interest that prices go up and the public remains dependent on their products. I, on the other hand, have a client base that *consumes* liquid fuels and sees rising prices as something that pulls profits down rather than pushing them up.

I see high/rising prices as a problem. Yergin sees high/rising prices as the solution.

Think about it for a second. Our eyes should be on price, but Yergin executes a magical slight of hand by first pulling our attention away from prices by drawing attention to peak oil. Then he ‘disproves’ peak oil by attacking a 50+ year old long range forecast *and* the man that made the forecast. Then he goes on to say that peak oil is nothing to worry about because rising prices will make it economical to produce a bunch of oil (and stuff that can be converted to oil, like bitumen). Therefore, we will have a long plateau rather than a steep decline.

While high prices may coax more liquid gold from deeper and more geologically complex reservoirs, I can hardly see how high prices can solve the real problem… which is high prices!

And speaking of prices, I don’t trust a word that Yergin says regarding prices. Take a look at the attached graphic.”

As far as price goes 2011 is on course to be the most expensive year in history for the price paid by U.S. refineries. It is also on track to have the highest average price for both gasoline and diesel in history. Price matters. The trouble comes when one violates the “Prime Directive” and tries to predict it. That applies to predicting the date of Peak Oil, you will only be wrong and allow fellows like Daniel Yergin to find fault in the totally valid Peak Oil theory. Of course this raises the question of why so many listen to Daniel Yergin???

Speaking of price Brent was trading at $106/barrel early this morning.

Thanks again Derik for allowing me to share your thoughts.

Another bump in the road for shale gas.

According to Bloomberg a “…Pennsylvania appeals court ruling has raised questions about who can claim ownership of natural gas embedded in the Marcellus shale formation, potentially putting in doubt the legitimacy of thousands of drilling leases.”