Jeff Rubin On Peak Oil: Supply or Demand?

Davy on Wed, 9th Jul 2014 7:39 am

I have tried to relate this point here on this board in a slightly different view. Instead of a positive sounding Peak “supply/demand” I am relating production destruction/demand destruction. I think this is an important point because it will relate the scenario of the coming decent. Will this scenario be a stagnation and decline of production leading to higher prices causing a similar 2008 style oil price spike induced recession destroying demand and oil prices? IMA without the CB’s having any tools to reflate the economy. “OR” will we see the BTFAH and or BTFD financial bubble finally turn to tears as all Ponzi schemes eventually do. IOW a financial system bifurcation that will most definitely lead to demand destruction any way you cut the cake. Whether slow, fast, or deep demand will falter and confidence will evaporate causing higher cost of money. Eventually investor instincts will return and real price discovery will return with a financial crash and high cost of money causing a death rattle to future growth. Confidence evaporation is the same thing as liquidity evaporation. Do you think Big Oil will be pumped up with large grandiose projects if Rome is burning around them? If this happens then demand destruction will destroy production. The important point is how prices will react in each case. I would think naturally production destruction we would see higher prices slowly strangle the real economy like a rising tax on discretionary spending. Demand destruction on the other hand will cut economic activity leaving excess supply on the markets cutting prices temporarily giving the illusion of adequate supply. Was it not the low oil prices post 2008 crisis along with free money that was a defibrillator for the heart attack the global economy experienced? IMA, this time around there will be no “gold rush” with any “unconventionals pseudo oil sources” to fill the gap with the necessary production for a growing economy when depletion is the obvious underlying trend. Further, IMA, unconventionals supported by perfect market conditions of repression of interest rates yielding cheap money and relatively stable high oil prices making the whole fracking bonanza a reality. Further will say a BTFD and BTFAH financial Wild West Wall Street chasing yields pumping capex into the veins of the shale revolution. We know the whole shale revolution was one of a market Ponzi scheme within the grater Ponzi scheme we call the new normal global financial system that is nothing more than a huge debt bubble that should have popped in 2008. I have seen it written that without the US shale production a pure peak point would have been identified by now.

forbin on Wed, 9th Jul 2014 8:42 am

This is really a question for Rockman

1, if the USA can support ( and it is mainly the USA context here ) an average price of oil of $150 , how much more Shale Oil / unconventional oil can the USA produce or even the world at that price

The point being is that the ROW has muggled along so far with $108 boe prices and , yes theres been some more oil produced at these prices ( but only because of theses prices – a drop to $50 would be interesting …..)

another point current stripper wells are fine with the current price but each produces little oil for “mom & pop” business.

Can we say the same for the Shale plays? There’s a big drop off for sure , but how good is that “long tail ”

Thanks,

Forbin

dolanbaker on Wed, 9th Jul 2014 9:24 am

Unavailable outside the US – any youtube links?

Pops on Wed, 9th Jul 2014 11:40 am

Presented by Nissan, LOL

I dig Rubin, he has a great delivery, I’m always waiting for the punchline. Here was one:

To economists it’s “moral hazard”
To bankers it’s “shit happens”

Davy,
I think the world will go the way of Japan these last years, or as Rubin puts it “a new speed limit” on the economy is in effect.

Returns on investment are in the toilet, Corps are sitting on profits in overseas accounts to avoid taxes and because there is no prospects of growth so why invest? Small time business is closing right and left everywhere I look, more people are out of work – U6 unemployment is 15%

rockman on Wed, 9th Jul 2014 12:25 pm

Forbin – I hate you f*cking question. LOL. Not that it isn’t a great question and an important question. Here’s my best guess: the increase in shale production will range from significant to not so much. Here’s why I can only give you a sh*tty answer. In a conventional plays higher oil prices allow you to drill for 1) smaller reserve targets or 2) larger but riskier targets. The economic justification should be obvious. But now fractured shale wells: since there’s no reservoir size factor per se the above dynamic doesn’t work. With the shales it’s more of a function of how many natural fractures the hz well cuts and how much drainage the manmade fractures create. It’s very difficult to estimate those factors so it’s much less clear how many “poorer locations” are out there to drill that might be justified by higher prices.

On top of that there’s the “lemming dynamic”. Just because oil prices increase and a lot more wells are drilled it doesn’t mean a proportional increase in production. Consider the late 70’s when oil prices rose about 300%. In no time at all we had over 4500 rigs drilling. Compare that to the response of the latest 300% increase in oil prices: about 1800+ rigs drilling. And while the current drilling activity has bumped oil production up nicely the 4500+ rig count didn’t come close to a proportional increase. Why? Because very foolish lemmings with capex drilled every crappy prospect that came along.

I had just started my career and was looking after an exploration JV my pipeline company had formed with a small oil company. This was one of 4 JV’s they joined. So this company essentially got paid to generate and drill the prospects we participated in. And we drilled 18 exploration prospects with them. And everyone was a dry hole: we didn’t produce $1 of oil/NG. And the senior partners of this other company? They retired millionaires. They couldn’t find oil in their drive ways but they sure knew how to cut a deal. LOL.

After that I worked for a CA company that had zero background in the oil biz but did have a lot of money. So they spent $550 million and found $80 million in oil/NG. And the public/Wall Street was behind them from the start and loaned them $100 million in bond money. A $100 million debt they couldn’t pay $1 on when it matured. And then they filed bankruptcy and disappeared forever. So more lemmings over the cliff.

I mentioned it a while ago: I have not seen a single circumstance in my 40 year career that did more collective damage to the oil patch then the INCREASE in oil prices in the 70’s. This is why there’s an ExxonMobil and not an Exxon and Mobil Oil. And why there is no Texaco, Gulf Oil, etc. Hundreds of companies, small and Big Oil, disappeared.

And now you see one story after another about the slim margins companies are making today as they take on more and more debt. Folks question whether the global economy could survey with $150/bbl oil. An equally fair question IMHO: can the oil patch survive a 50% increase in oil price? Without my long winded story above you might question my sanity asking that. But now knowing what happened 35 years ago you might not.

yellowcanoe on Wed, 9th Jul 2014 12:26 pm

Well, duh! A video of a Canadian economist isn’t available to Canadians!

Pops on Wed, 9th Jul 2014 12:37 pm

There may be only 1,800 rigs drilling in the US but that is 1/2 of the worlds supply.

Again, if the world is going to be fraced from stem to stern, why aren’t there more rigs by now?

rockman on Wed, 9th Jul 2014 1:50 pm

That’s an easy question Pops: would you invest your life savings in building a drill rig that will have to work every day for the next 3 to 5 years just to recover your initial investment with zero return unless you were sure you wouldn’t be paying a storage fee to let it sit collect dust in a couple of years?

As you point out we have half the demand for drill rigs in the world in the US right now and there’s no big push to build many new rigs here. So would you want to invest in building a new rig here, wait for a company in Turkey to agree to contract that rig for two years? And then spend beaucoup money to ship the rig to Turkey and hire/train a bunch of hands to run it? BTW some years go Shell Oil shippedForbin – I hate you f*cking question. LOL. Not that it isn’t a great question and important question. Here’s my best guess: the increase in shale production will range from significant to not so much. Here’s why I can only give you a sh*tty answer. In a conventional play higher oil prices allow you to drill for 1) smaller reserve targets or 2) larger but riskier targets. The economic justification should be obvious. But now fractured shale wells: since there’s no reservoir size factor the above dynamic doesn’t work. With the shales it’s more of a function of how many natural fractures the hz well cuts and how much drainage the manmade fractures create. It’s very difficult to estimate those factors so it’s much less clear how many “poorer locations” are out there to drill.

On top of that there’s the “lemming dynamic”. Just because oil prices increase and a lot more wells are drilled it doesn’t mean a proportional increase in production. Consider the late 70’s when rose about 300%. In no time at all we had over 4500 rigs drilling. Compare that to the response of the latest 300% increase in oil prices: about 1800+ rigs drilling. And while the current drilling activity has bumped oil production up nicely the 4500+ rig count did come close to a proportional increase. Why? Because very foolish lemming with capex drilled every crappy prospect that came along. I had just started my career and was looking at a JV my pipeline company had formed with a small oil company. This was one of 4 JV’s they joined. So this company essentially got paid to generate and drill the prospects we participated in. And the we drilled 18 exploration prospects with them. And everyone was a dry hole: we didn’t produce $1 of oil/NG. And the senior partners of the other company? They retired millionaires. They couldn’t find oil in their drive ways but they sure knew how to cut a deal? LOL.

After that I worked for a CA company that had zero background in the oil biz but did have a lot of money. So thy spent $550 million and found $80 million in oil/NG. And the public/Wall Street was behind them from the start and loaned the $100 million in bond money. A $100 million debt they couldn’t pay $1 on when it matured. And then they filed bankruptcy and disappeared forever. So more lemmings over the cliff.

I mentioned it a while ago: I have not seen a single circumstance that did more collective damage to the oil patch then the spike in oil prices in the 70’s. This is hey there’s an ExxonMobil and not an Exxon and Mobil Oil. And why there is no Texaco, Gulf Oil, etc. hundreds of companies, small and Big Oil, disappeared.

And now you see one story after another about the slim margins companies are making today as they take on more and more debt. Folks question whether the global economy could survey with $150/bbl oil. An equally fair question IMHO: can the oil patch survive 50% increase in oil price? Without my long winded story above you might question my sanity by making this statement. But now knowing what happened 35 years ago you might not. number of drill rigs into Turkey and Halliburton did the same with $millions of their equipment. So when the project was done Shell and Halliburton had to pay to ship it elsewhere, right? But good news: they didn’t have to pay nothing to ship it: the Turkish gov’t refused to give either company an export license. So $millions in equipment were sold. You can imagine the “discount”. And believe it or not this story was told to me by a guy trying to talk

So how many here are ready to invest in an foreign rig to drill in a shale play that hasn’t been proven yet?

Thought so. LOL.

BTW my billionaire owner has started many dozens of companies. The only one he ever lost money on was a drilling rig company. But it wasn’t a total loss: that’s where he met his future wife.

Nony on Wed, 9th Jul 2014 2:05 pm

I’m kind of with Pops, though. What does it mean that the number of rigs is so much lower now. I don’t know. And some of the speculation could even be in a direction that I don’t like (i.e. support the peakers). But I believe in looking at data. That’s why despite me being a cornie and Pops a peaker, I give him major respect for running that future price guessing thread…stuff like that makes people think about the opposite of their “side” and not just argue like Internet nitanoids.

Irrational then? Too conservative now? Rigs becoming more efficient now? [PRice expectations? Doubt it, but we could compare futures curves, I guess.] Lack of drillable prospects? Gas versus oil? Differences in the rig capabilities (depth, etc.)?

rockman on Wed, 9th Jul 2014 2:30 pm

Pops – Messed up my full response to the shale rig question. Let’s try again.

That’s an easy question Pops: would you invest your life savings in building a drill rig that will have to work every day for the next 3 to 5 years just to recover your initial investment with zero return unless you were sure you wouldn’t be paying a storage fee to a yard to let it sit and collect dust for a couple of years waiting for a contract?

As you point out we have half the demand for drill rigs in the world in the US right now and there’s no big push to build many new rigs here. So would you want to invest in building a new rig here, wait for a company in Turkey to agree to contract that rig for two years? And then spend beaucoup money to ship the rig to Turkey and hire/train a bunch of hands to run it? BTW some years go Shell Oil and Halliburton shipped tens of $millions of equipment into Turkey and when they were done they couldn’t ship any of it out because the Turkish gov’t would grant them an export license. Had to sell it very cheap to local company.

So who here is ready to invest in a drill rig on the expectation of renting it for 3 to 5 years of continuous works to just recover you initial investment? And do hoping some foreign shale play that hasn’t been proven yet begins to boom?

Thought so. LOL.

BTW my billionaire owner has started many dozens of companies. The only one he ever lost money on was a drilling rig company. But it wasn’t a total loss: that’s where he met his future wife.

Pops on Wed, 9th Jul 2014 2:31 pm

I’m pretty sure the bottleneck, in the bakken anyway, is the frac rigs not the drillers. The last directors cut says 600 wells waiting on completion. I think it’s been pretty high for a year or two now.

https://www.dmr.nd.gov/oilgas/directorscut/directorscut-2014-06-17.pdf

Nony on Wed, 9th Jul 2014 2:35 pm

I love the Bakken. Looking forward to the 15th. It will be another nice jump I think. The bad weather really was the limiter in the past winter…not running out of oil as some peakers opined.

Pops on Wed, 9th Jul 2014 2:45 pm

Thanks ROCK, I did get lost, LOL

I’ve wondered for a while why there isn’t more demand for drilling and fracing rigs when there is no doubt the world would really like more oil at some lower price.

I can see the hold up in the Bakken is probably the takeaway capacity as well as frac rigs.

Pops on Wed, 9th Jul 2014 3:39 pm

I looked up the rig count and turns out there are 233 more rigs this year than last after all
US + 117
CA +95
Everybody else +11

http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-rigcountsoverview

Nony on Wed, 9th Jul 2014 3:43 pm

Maybe also some evolution of the rig type so not apples to apples? I mean 1000 eighteen wheelers is not the same capacity as 1000 pickup trucks. (Making a Texas analogy, for ‘rock. ;))

Pops on Wed, 9th Jul 2014 3:50 pm

Right, back then it was straight down and probably not all that far, now it’s 20k feet down and halfway to Paducah horizontally

Nony on Wed, 9th Jul 2014 4:07 pm

“Although newly manufactured units
experienced a downturn in 2013, there
are still a copius number of new rigs being
produced, and the average age of rigs
in the U.S. fleet continues to decline. Cumulatively,
over the past eight years, 1,685
brand-new units have been added to the
U.S. fleet, indicating that at least 55% of
the fleet has the advantage of newer technology
and, presumably, lower maintenance
costs.”

http://www.nov.com/uploadedFiles/Rig_Census/RigCensus2013.pdf

yellowcanoe on Wed, 9th Jul 2014 4:09 pm

Looks like it is just Hula that has its knickers in a knot. The IdeaCity site quite happily lets Canadians view the video.

Plantagenet on Wed, 9th Jul 2014 6:28 pm

Oil supply is adequate to world oil demand right now, but just wait. There will be more oil rigs out there drilling every miserable bit of shale soon enough.

forbin on Thu, 10th Jul 2014 3:19 am

Hello Rockman,

Thanks for the answer – sorry it was a bit of a bu@@er but I think its a $64000 question we seem to have no answer for !

Plant’s post is both correct but not the full story

supply always meets demand at the set price

the set price is the issue

Its the dynamic that will put in place when peak production occurs.

thanks again Rockman , I always look forward to your posts

Forbin

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