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Causes and Consequences of the Oil Shock of 2007-08
James D. Hamilton, Department of Economics, UC San Diego
This paper explores similarities and differences between the run-up of oil prices in 2007- 08 and earlier oil price shocks, looking at what caused the price increase and what effects it had on the economy. Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007-08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. In the absence of those declines, it is unlikely that we would have characterized the period 2007:Q4 to 2008:Q3 as one of economic recession for the U.S. The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.
(17 April 2009)
70-page PDF from one of the country’s leading specialists on the economics of energy. _BA

The Net Hubbert Curve: What Does It Mean?

David Murphy, The Oil Drum: Net Energy
Cutler Cleveland of Boston University has reported that the EROI of oil and gas extraction in the U.S. has decreased from 100:1 in the 1930’s to 30:1 in the 1970’s to roughly 11:1 as of 2000 (Figure 1). But beyond the fact that society receives currently around 11 barrels of oil for every 1 barrel that it spends getting that oil, What does this mean?

Well, first, it means that, if the trend of declining EROI continues, society will be spending an increasingly larger chunk of their remaining energy to get more energy. This cycle is positively reinforcing:
(22 June 2009)

Global oil and gas E&P spending seen down 15 pct

Matt Daily, Reuters
Oil and gas producers will cut spending more sharply than expected this year because of the slump in North American natural gas prices, analysts at Barclays Capital said on Monday.

Spending globally on exploration and production is expected to shrink by 15 percent in 2009 from the previous year, compared to the 12 percent drop the companies had expected in December, Barclays’ analysts James Crandell and James West said in a report on their semi-annual survey of 402 energy companies.

Energy companies have delayed or canceled many projects as oil prices tumbled from their record highs reached in July 2008. That has erased about half the price in shares of oilfield service providers such as Schlumberger Ltd (SLB.N) and Halliburton Co (HAL.N).

U.S. spending is expected to drop 38 percent to $67.5 billion, far steeper than the 26 percent decline the industry had expected in December, and the biggest drop since the 40 percent cut in 1986, the analysts said.
(22 June 2009)

Former Puerto Rico energy advisor: Peak oil – coming soon but when?

Lewis L. Smith, Economics Web Institute
… So when we say that world crude-oil production is going to peak, we do not mean that one day there will be no oil left in the ground, or that all the wells are going to be capped on the same day. We mean that at some point, the oil which is economic to extract (by whatever means) will reach its all-time high, and that sooner rather than later, there will be less and less of it produced each year thereafter.

So the more important question is not how much oil is down below, but how fast one can get it out. If you try to accelerate the extraction process too much, because near money is worth more than far money, you run the risk of reducing the amount of oil and/or gas which can be extracted over the remaining life of the well or reservoir. The foregoing is not a theory. It is economics, engineering and geology all entwined together.

… One of the most famous models was M. King Hubbert’s version of the logistic curve, by which he correctly predicted the peak and decline of US crude production. In fact, most of the debates over “peak oil” in the 20th Century revolved around what are, for lay people, arcane issues of modeling. So in that sense, and that sense only, the 20th Century debates may be characterized as “theoretical” in part.

However, the debate which has begun in the 21st Century is different. It is not theoretical. It is not even about forecasting techniques. It got started because people began to question the veracity of Saudi Arabian oil statistics and the accuracy of that country’s projections of its future production. This is the story.

For some five decades, Saudi Arabia managed to make the world believe that it was a cornucopia of oil. It also managed to convince people that it had some “aces up its sleeve”, in the form of geologically promising rock formations which had not been drilled. The writer remembers this very clearly, beginning in his refinery days, in the late 1960’s.

Indeed up to a few years ago, Saudi oil executives were still claiming that the country would produce 10, 15 or even 25 million barrels per day of crude oil for the next 50 years! This was despite the fact that it had never produced much more than 10 million and is currently producing less than eight million. All of these allegations were of course very convenient because (a) they got the world “hooked” on cheap oil and (b) they assured the country of US military protection against hostile neighbors, who were stronger militarily and, in some cases, more populous (Iraq, Iran and Israel).

However, all of these assertions have turned out to be somewhat optimistic. Most of the reservoirs which are still active today “show their age”, especially those which have been producing for 50 years or more, and some even began to do so decades ago. Last but not least, the unexplored or underdeveloped reservoirs appear to be only “jacks” or “tens”, instead of “aces”. Only the outside world didn’t know any of this until recently.

… Unfortunately these projections [for peak oil] vary “all over the map”. For example, “the optimists” like ExxonMobil, who want to keep us hooked on oil until the last possible moment, say 2030 or 2032.

“The pessimists” claim that the peak has already occurred, say in 2004. More important however, the International Energy Agency, once a leading optimist, has just “thrown in the towel” and gone for 2020. Elsewhere, a consensus seems to be building around 2010-2013.

… But the biggest problem is that industry statistics are full of errors, omissions and bald-faced lies. This is especially true for estimates of “reserves”, that is for estimates of the oil which remains to be extracted from active reservoirs and promising prospects. For example, the official reserves of one major producer are reliably believed to be overstated by 111%, according to a respected industry publication.

The author has been an advisor on energy to various governors of the Commonwealth of Puerto Rico [USA].
Former director of what is now Puerto Ricos’s Energy Affairs Administration. With extensive experience with energy-policy formulation and the economics of energy-project evaluation, he is a “Middle East watcher” since 1961.


Demand: The other side of the oil coin

Peter Tertzakian, Calgary Herald
… The way we shop, communicate, get our news, play games, collaborate, find ourselves on a map, listen to music, watch shows and even work are radically different than even five years ago. Technology is dramatically reshaping the way we live work and play, creating templates of living that many of us marvel at, but also have difficulty imagining going forward. Our feelings about the changes are probably similar to how people felt when the horseless carriage and the light bulb were first introduced. Maybe we can’t pin a specific year like 1879 on all the life-altering inventions coming at us—from iPhones to Facebook to Skype—but I believe that we’ll look back on the middle part of this decade as a major turning point in our societal template. And because energy use and the way we live are inextricably interwoven that means a major turning point in our energy appetite too, including oil consumption.

The big energy debate over the last few years has been around the concept of “peak oil.” There is little doubt that offsetting production declines and bringing more oil to hungry markets like China will challenge the upstream industry, but it’s time for the debate to also include discussion about “peak demand,” and even declining demand. In wealthy mature economies, the data is clearly starting to show it.

Peter Tertzakian is an author and Chief Energy Economist of ARC Financial. His second book, “ The End of Energy Obesity: Breaking Today’s Energy Addiction for a Prosperous and Secure Tomorrow” will be published in July by John Wiley & Sons.
(22 June 2009)