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Why This Is Not A Peak Oil Crisis

by | published March 4th, 2011

In a 1956 paper, Shell research scientist Marion King Hubbert advanced the idea that U.S. oil production would peak in the early 1970s. Turns out, he was correct. Others began applying his approach to global production expectations, and the idea of “peak oil” was born.

Peak oil regards the genuine crisis as emerging when more than 50% of available oil has been extracted. It views the market price as accelerating once the peak hits… and a series of economic contractions issuing from that peak.

Now, if there is a constriction in availability, traders will jack up the price. That’s a simple matter of supply and demand.

In normal trading, oil prices emerge (essentially) from the cost of the next available barrel. However, in a supply-constricted environment, that changes to reflect the cost of the most expensive next available barrel.

Peak oil, therefore, views this as a matter of how much supply exists.

However, while this may become the issue at some point, I do not believe it is the problem now. Considerable oil remains available – both conventional (traditional oil fields) and unconventional (shale oil, oil sands, gas to liquids).

The crisis unfolding before us is not about the amount of oil but of the quality of that oil.

Put simply, the primary flow of crude internationally is of an inferior grade, coming from places beset with political, economic, and infrastructural problems, and requiring additional processing.

The higher prices now unfolding are not a result of insufficient supply, even with the current geopolitical unrest. They are the result of the additional costs needed to extract, transport, and turn that crude into the oil products we need.

As I said, there is plenty of oil out there. But the age of light, sweet crude (low viscosity – or resistance to flow – and low sulfur content) is certainly over. It is heavier, sourer (higher sulfur content) crude that dominates the market. And it is more expensive to process.

That is one of the costs accompanying the unrest in Libya right now. The country is one of the few places left on the globe where significant volume of light sweet is still available. Another is Nigeria – a country also known for its lack of political stability.

If we turn to unconventional sources to maintain the supply side of the equation, we move the costs of processing up even more.

The supply is there. But this supply that will cost more at the pump.

Not surprisingly, readers have sent in a number of E-mails this week related to this issue of supply versus cost…

Back to the Mailbag

Q: There is a report that current and future crude production here in the USA could handle all our energy needs well into the 25th century…. Out here in Kansas, we have fields of untapped crude. The same exists in eastern Colorado, Oklahoma, Texas, Nebraska, the Dakotas, as well as along the Mississippi River, and especially near the field of shale gas in western Mississippi. So why do we need foreign crude? ~ Phaedra

A: Phaedra, the primary reason we depend upon foreign sources for almost 70% of our crude is price. Foreign oil is cheaper than much of the untapped oil available within the U.S.

The U.S. is the most mature oil-producing region in the world. Traditional fields have been declining for some time. When “Hubbert’s Peak” hit in 1971 and 1972, the American market was producing about 9.2 million barrels a day. In 2011, conventional production may not hit even five million barrels daily.

Yes, there are reserves remaining, but the volume extractable at a competitive price is not increasing significantly.

As counterintuitive as it sounds, having supply available locally does not automatically mean it is the preferred option, especially if the cost of extracting it still exceeds the cost of importing equivalent volume from elsewhere.

Now, security of supply is another matter.

One may choose to produce at home to offset the uncertainty of events abroad. Combining North American sources of unconventional with the dwindling supply of conventional crude will address this issue. But it will also significantly increase the price to end users of the oil products.

This next mailbag question expands upon the use of unconventional to offset supply concerns…

Q: You have said that, going forward, more intense efforts will be concentrated on developing oil sands deposits. Do you think that Oilsands Quest Inc. (AMEX:BQI) is a good play in the next six to 12 months? The small (but well-positioned) company owns over 700,000 acres of oil sands property in the Alberta and Saskatchewan regions – more than anyone else in the industry. However, it hasn’t produced enough so far to justify its extensive land purchases. ~ Art

A: You’re right, Art. BQI’s production-to-acquisition ratio does not yet justify the land lease investments made.

However, there is another, more significant, reason why BQI will not be taking off any time soon.

It shares one essential shortcoming with a number of other small (“junior” and less) Canadian heavy oil/oil sands production companies. With a market cap of $190 million, it simply cannot develop the land it controls without a farm-in from a larger company with deeper pockets.

This looks like BQI may end up being an acquisition play in its own right.

I see nothing on the horizon here. Trading at less than 60 cents a share, it may be a speculative move. But don’t count on any buyers coming up to the plate in short order, even with crude oil prices increasing.

Once again, this is a matter of cost. Oil sands remains much more expensive to develop than conventional oil, and the synthetic oil realized requires much greater processing.

Q: Aloha, Kent. When the recent Libyan uprising began, domestic energy producers moved higher. The last two to three days, the price of oil has continued higher, but many domestic producers tanked. Chesapeake, for example, has taken a big hit after initially going up. I would think that outlook on domestic producers would be favorable given higher prices. I haven’t seen any discussion on this issue. Can you tell us what’s going on? ~ Ken

A: Ken, I must admit that your salutation alone entices me to go visit you in Hawaii…

But as to your question, it does point out a trend often seen in the very early stages of oil dislocation. The domestic producers will benefit from protracted increases in oil prices, as will the drillers of natural gas in North America.

Chesapeake Energy Corp. (NYSE:CHK) sits in the center of this unfolding largesse. It is the largest independent gas producer in the U.S. and has been increasing its oil production balance throughout the last year.

Then why aren’t companies like CHK increasing?

The initial trading period after a major change in oil pricing will usually produce broad market declines.

It is also often the oil sector itself that takes the biggest hit, regardless of where individual companies are positioned. That was certainly the case this time around.

Between February 28 and the close of trade on March 2, CHK lost almost 5%. It will probably decline another several percentage points before stabilizing… and resuming its upward climb. But until the dust clears, the market will paint with a very broad brush.

[Editor’s Note: Kent recommended CHK in his Energy Advantage in July 2010, and subscribers are sitting on gains of 63%. To learn more about the Energy Advantage, click here.]

On another note, I have been spending the past week up the coast from Montego Bay, Jamaica. Will have something to say about developments down here in Oil & Energy Investor next week…

Sincerely,

Kent

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. clair orvin
    March 4th, 2011 at 13:59 | #1

    Dr. Moors, I understand that there is a tiny oil company (chaired by a Texas oilman ) in British Columbia that has the oil rights in Turkey.
    The location is so close to Iran that drilling and producing oil in Turkey will be like taking oil from Iran.What is the name of this company and are they worth considering as an investment. Their share price is less than $4.00. Thank you, Clair Orvin

  2. valisacranie
    March 4th, 2011 at 14:34 | #2

    clair orvin :
    Dr. Moors, I understand that there is a tiny oil company (chaired by a Texas oilman ) in British Columbia that has the oil rights in Turkey.
    The location is so close to Iran that drilling and producing oil in Turkey will be like taking oil from Iran.What is the name of this company and are they worth considering as an investment. Their share price is less than $4.00. Thank you, Clair Orvin

  3. Mike Robertson
    March 4th, 2011 at 14:40 | #3

    Good afternoon from Canada, Kent. With oil prices rising, there must come a tipping point where the cost of oil induces another recession resulting in a tanking of the markets which will in turn result in falling share prices for even the oil stocks in our portfolio. Already this week, we have seen the S%P 500 dropping while oil prices rise. At What price of oil do you see as being the tipping point? Time to sell our stocks?

    Mike Robertson

  4. BOB
    March 4th, 2011 at 14:42 | #4

    The decreasing availability of high grade oils and easy-to-extract oils is a part of the Peak Oil equation. The oil in Saudi Arabia already has becoe more difficult and expensive to extract, with sea water being injected to force the oil out of the ground. Since the extracted oil contains around 40% water, that water then has to be separated from the oil before it is shipped. Oil sands in Canada require large amounts of energy for extraction and are heavier oils which require a more complex refining process (as do the oils from Venezuela).

    And 42 oil producing countries have passed their peaks of production and are on downward slopes. When extraction becomes significantly more difficult the production slopes drop precipitously.

    When combined with the increasing demand from developing countries such as China and India and the decreasing output from countries like Libya affected by turmoil and the possible disruptions which would be associated with a war on Iran (being urged by Israel and others), Peak Oil is not necessarily far over the horizon.

    No one has a corner on all the truth about peak oil, but there are some good sites on the internet for following the news from different perspectives.

  5. Patricia Dias
    March 4th, 2011 at 14:45 | #5

    Yes.Have heard about this.The company symbol is TAT.They’ve been aquiring in Bulgaria,Romania,Turkey and Morocco.One part owner has bought 5 million shares on 09/30/2010.T.Boones Pickens and Dell have bought into it as well.
    Maybe Dr.Moors could tell us if this is a good play.Haven’t invested yet,since two major investors have sold out,including Soros.Maybe they know something we don’t.

  6. Brian
    March 4th, 2011 at 14:48 | #6

    Hi Kent, I have some speculative shares in FOGL which have failed so far. Their Toroa drilling was dry but they have other sites and are awaiting acquiring a rig. Is this worth hanging onto? I have not seen any mention of this region recently – what are its prospects please?

  7. Patricia Dias
    March 4th, 2011 at 15:19 | #7

    Back to TAT.Mistake.It’s 5 Million worth of shares.

  8. Jeff
    March 4th, 2011 at 15:22 | #8

    I hate the title, “Why this is not a peak oil event”. By that reasoning, you would conclude that the peak oil event of the US in the seventies was not a peak oil event. It would make more sense to simply come up with a current name for the peak event, like peak shallow oil. You get your point across more cleanly, and you avoid long arguments with people who effectively agree with you, but object to your terminology. And let’s face it. While your point is made more clearly down the article, you are criticizing others for using the exact same terminology that you use to describe the seventies.

  9. Brian
    March 4th, 2011 at 16:10 | #9

    I have some speculative shares in FOGL whichhave gone nowhere. They are awaiting a rig to drill again after the Toroa one failed. I have heard nothing of this area for some time, is it any good hoping that it may be positive?

  10. Bob
    March 4th, 2011 at 16:14 | #10

    Dear Dr. Moors,
    After reading the ‘abiotic’ theory I must say that it is intriguing. Oil continues to be found in abundance even though the easy drilling days seem to be over. Do you subscribe to the idea that there are yet vast pools of oil the world over that are continuing to grow in spite of the idea of ‘peak oil’, or is it just a wild theory? Thanks

  11. Michael Bickley
    March 4th, 2011 at 18:59 | #11

    I have held shares in WSX(Toronto Venture exchange)for the last year.
    The stock has doubled in value since I bought shares as has its production of oil.The company seems to have adequate drilling opportunities.What do you think of the future prospects for this company.I would be very grateful if you could tell me your opinion.

  12. archivesDave
    March 5th, 2011 at 02:19 | #12

    Kent,
    I also question the ‘Peak Oil Theory’ in the light of much research
    and reports coming out from Russia and other locals, about abiotic oil.
    Logically it doesn’t make a lot of sense that biological material has ever been located at depths of 30,000 feet and much deeper. Plus the
    fact of oil deposits being located on Titan, a moon of Saturn.

    According to former execs with Atlantic Richfield (Standard Oil), there are four humongous regions with huge untapped reserves in Alaska, Utah, Montana, Colorado, N & S Dakota, and Canada.

    Me thinks we have been duped once again much like Charlie Brown being conned by Lucy in the football scenario.

  13. Average Consumer
    March 5th, 2011 at 13:44 | #13

    Check out ADM (Archer Daniels Midland), an ethanol producer.
    Last quarter income was impressive. Very stable.
    Avoid the oil roller coaster.

  14. Aloha Mike
    March 5th, 2011 at 21:21 | #14

    Dr. Kent,
    Thank you for all of you insights into this dynamic an changing world of Oil we live in.
    Geopetro Resources GPR is a little company that has recently “spudded” a well or two in Alaska near Cooke inlet.
    Information beyond that I have yet to find. Do you have any further iinfo on them and what their potential is?
    Aloha, Mike

  15. Emilio
    March 7th, 2011 at 00:19 | #15

    Dr Moors,

    Do you think that oil producers (Shell, ExxonMobil, Chevron, BP) actually has enough reasons to increase finished lubricants to distribuitors network?

  16. BARRY
    March 9th, 2011 at 15:59 | #16

    In its infinite wisdom, is the US government restricting the drilling in Anwar and other prime US oil recovery areas, waiting for other countries to deplete their reserves. When Saudi Arabia runs out of oil, what do they have to offer the world? Then the US would be the oil power and control the price, with unlimited profit potential. Just a theory.

  17. dieter kirchheim
    March 12th, 2011 at 12:02 | #17

    high Kent, I am still not understanding why most energy stocks have gone down significntly recently (for instance SLB down from 95 to 84 ) even though OIL has gone up from about 90 to over 105. Thanks to your recommendations my income from these oil stocks increased whenever OIL costs went up. Nobody wants to loose his gains. I understand that you cannot answer all your subscribers questions but maybe you can discuss and advise this in your weekly opinion and advice e.mails. Thank you, Dieter

  18. John
    March 21st, 2011 at 16:37 | #18

    Dr. Moors, there is a report circulating referencing the Bakkan formation in Western ND, Eastern MT and Southern Canada that contains more than 500 Billion barrels of light, sweet crude; and another 2 TRILLION barrels 1000 feet beneath the surface of the Rocky Mountains. We have more oil inside our borders, than all the other proven reserves on earth.. Here are the official
    estimates:

    8-times as much oil as Saudi Arabia
    18-times as much oil as Iraq
    21-times as much oil as Kuwait
    22-times as much oil as Iran
    500-times as much oil as Yemen
    and it’s all right here in the Western United States .

    Now, what is all this “peak oil” about? The game of the soundrels should be blatantly obvious by now.
    >

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