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Geologist Jeffrey Brown: In Terms of Supply and Demand, the Oil Peak Is Past

Eli Neusner, SeekingAlpha
Jeffrey Brown is an independent petroleum geologist and analyst, who also manages an exploration program in West Texas. He has a major interest in the subject of “Peak Oil” and has used mathematical models to project a very grim future for the world’s oil supply. We caught up with Jeffrey at his office outside Dallas.

Eli Neusner, reporter, (HAI): You’ve published some controversial research in the past. What is the gist of your analysis?

Jeffrey Brown, petroleum geologist (Brown): The basic thrust of my research is that the world has already arrived at Peak Oil – which is a condition in which the worldwide supply of oil cannot keep up with demand. We have used proven mathematical models to show that the top five net oil-exporting countries – which are Saudi Arabia, Russia, Norway, Iran and the United Arab Emirates, and which account for one-half of current world net oil exports – are showing an ongoing decline in net oil exports, continuing a trend that began in 2006. To give you an idea of where we’re headed, Mexico – another former top producer – will see its oil exports hit zero in 2010.

HAI: How can you be so sure?

Brown: Because of the models and because we’ve seen it all before. Our mathematical model shows that once oil production in an oil-exporting country starts declining, the resulting decline in net oil exports can be quite rapid, and the oil exporter tends to show an accelerating net export decline rate. It’s irreversible. The top five oil-exporting countries will approach zero net oil exports around 2030, going from peak exports to zero in about 25 years.
(22 August 2008)
Jeffrey Brown is a longtime Energy Bulletin contributor.

UPDATE (Aug 22). Jeffrey Brown writes:
Sometimes some of the nuances don’t come across too well in an interview. I think that crude oil production has probably peaked, while total liquids will probably show an increase this year, but in any case I think that we are practically speaking presently at a peak plateau.

Regarding net oil exports, I think that we definitely peaked in 2005. Regarding Mexico specifically, the EIA shows net oil exports of 1.5 mbpd in 2007, and I estimate that the average 2008 rate will be about 1.0 mbpd, so the trend is pretty obvious. In any case, I estimate that they will approach zero net oil exports as soon as 2010, probably no later than 2012.

For anyone interested in our net export work, following is a link to a recent video presentation at Sandia Labs, which was videolinked to other national laboratories. There is about a 40 minute presentation, followed by a 20 minute Q&A. You should see two windows, one with the video and the other with the slides. ** LINK **

Russian Oil Exports: Dropping, But Why?

Jim Kingsdale, Seeking Alpha
If evidence is needed that the Export Land Model works, Russia has provided it in spades. The report posted below notes that while production was down in the 1H08 by .8% compared with 1H07, exports suffered a decline of 5.2%. The implication is that Russian domestic demand ate up the difference between production and exports.

Of course, that is not necessarily so, as George (Gershwin) once noted. It could be that Russia simply built its own inventories for whatever (hoarding) reasons. Or it could be that what seems true is true, that they simply used the balance internally.

The Export Land Model highlights the arithmetic fact that if a country’s oil production is falling and its internal oil consumption is growing (which is the case in all oil exporting economies), exports will fall at a far greater rate than production falls.

Of course, the inverse can also be true. If an oil importing country (say the U.S.) begins to use less oil internally and if its oil production is also increasing, its imports will decline at a much faster rate than its production is rising. I don’t expect to see much of a rise in U.S. oil production, but there may be some given higher prices.

Here is the report from the Russian News and Information Agency:
(21 August 2008)

Q: Will we see $3 gasoline before we see $5?

Joseph Romm, Gristmill
Short-term dip in oil prices will not offset long-term increases

A: “Who knows?” and “It doesn’t really matter.” Much higher gasoline prices that are sustained for a long, long time are now inevitable.

The fundamentals in the oil market are that we are in the beginning stages of peak oil. Supply can no longer keep up with demand, which keeps soaring even in the face of record prices. The U.S. Energy Information Administration has the surprising statistics [PDF]:

Preliminary data indicates that global consumption rose by roughly 500,000 barrels per day (bbl/d) during the first half of 2008 compared with year-earlier levels, as a 1.3-million bbl/d rise in consumption outside of the Organization for Economic Cooperation and Development (OECD) was partially countered by an 800,000 bbl/d drop in U.S. consumption compared with year-earlier levels … Total world oil consumption is expected to grow by a little over 1 million bbl/d during the second half of 2008 and by almost 1 million bbl/d in 2009 compared with year-earlier levels.

That’s right, even after “the largest half-year consumption decline in volume terms in the last 26 years” in this country, global demand continues to grow 1 million bbl/d each year. Why?

Over the next year and a half, lower OECD consumption is expected to be more than offset by continued non-OECD consumption growth, led by China, the Middle East, Latin America, and India.

Yes, speculation overextends every move in market price — but why shouldn’t people speculate that oil prices will be much higher in the future? That seems like a very solid bet. And yes, a rising dollar can temporarily help lower prices — but we are headed for a $10 trillion cumulative trade deficit just in oil between now and 2020. So which way do you think the dollar is headed long-term?
(21 August 2008)

Are Oil Prices Rigged?

Ari J. Officer and Garrett J. Hayes, TIMES
We’ve all read that speculators are driving oil prices artificially high – a claim that gets more interesting in light of oil’s recent fall below $115. But maybe we’re looking at it from the wrong perspective. Suppose that major suppliers in the oil industry are these manipulative speculators

Is it possible that oil prices are rigged? You bet. Here’s how:

Just how would you raise prices if you were an oil supplier? Controlling the supply – as in the 1973 OPEC embargo – has become less effective with more sources of oil worldwide. And oil suppliers clearly cannot raise prices by controlling demand in the physical oil market; ultimately, they need to sell their oil, not buy it. However, with the market inefficiencies that we expose here, oil suppliers can regain the upper hand by artificially inflating demand using a different market. To understand this mechanism, we must take a glimpse into the future – the futures market, that is.

… The futures market that serves as a price discovery mechanism for the physical oil market is open only to the elite. We trust these elites to determine the prices, but who are they? Who are the so-called experts? Hedge funds, oil companies, OPEC – the very people who profit from massive, consistent increases in prices. Notice a conflict of interest?

… The futures markets is a closed book that needs to be opened beyond price transparency to participant transparency. After each contract has expired, NYMEX and other exchanges should reveal the participants in each trade. Tear down the wall of anonymity, and long positions will, we believe, connect back to oil suppliers, who should theoretically be sellers of oil, not buyers.

Is this vulnerability a reality? Is economics so wrong in applying its supply-demand theory that we might confuse corrupt manipulation with fair pricing? There’s motive, opportunity, and greed at play. Why would we expect anything else?

Ari J. Officer studies financial mathematics at Stanford University. Garrett J. Hayes studies materials science and engineering at Stanford University
(22 August 2008)
Authors are saying that rigging is technically possible, not that it is actually occuring. -BA

Wikipedia Megaproject Update

Khebab, The Oil Drum
This is an update on the Wikipedia Oil Megaproject Database maintained by the Oil Megaprojects task force (Ace, Stuart Staniford, myself and many others). The database contains now more than 440 separate entries and is growing everyday. The derived net new capacity (i.e. once depletion from existing production is included) is around 1.5 mbpd for 2008 and 2009 after which depletion may dominate.
(21 August 2008)