[radon]

$this->bbcode_second_pass_quote('Cloud9', 'A')merican citizens now buy enough guns and ammunition to outfit a World War II army every nine days. Home Land Security has grown to a standing army of almost four hundred thousand if you list the private contractors in the overall count. HLS has ordered enough ammunition to fight a twenty year war and has taken delivery of 2700 armored vehicles designed to fight urban wars.

[Keith_McClary]

$this->bbcode_second_pass_quote('ROCKMAN', 'K')eith - That's the deceptive part of energy pricing. One factor for an increase in pricing is the lack of new production coming on line. A lack of production increase due to a lack of drilling opportunities. A lack of drilling opportunities equates to a lower manpower requirement for both the prospect generation and drilling aspects. There used to be 5 of us with my company. Now there are three. The two no longer here were experts in deep NG exploration. But we couldn't find enough of those prospects at today's prices to justify keeping them on.

[Pops]

I got to thinking about the idea that $2.50/gal is the economic ceiling for unleaded in the US. So I noodled how much extra we've spent since the average price exceeded $2.50 a gallon.

According to my rudimentary ciphering skills and really rough numbers (I didn't figure for exports, etc), I come up with $700B spent in excess of $2.50/gallon since 2005, the first year the avg. price of unleaded exceeded $2.50/gal

We use about half as much diesel but about the same price, so lets say $1.5T total has been diverted from whatever that money might have been doing in the economy otherwise has been shifted to paying the scarcity premium on transportation fuels.

Just as a reference, that $1.5T additional cost is about the same as the cost of the wars to date,close to a fifth of the $8T in additional US public debt since '05, about the same as the cost of the Bush tax cuts to date and it's about half the amount of QE so far.



http://www.eia.gov/forecasts/steo/realprices
http://www.eia.gov/dnav/pet/pet_cons_ps ... mbbl_a.htm
http://useconomy.about.com/od/usdebtand ... y-Year.htm

[ROCKMAN]

Keith – Yep…global is different. But also is the manpower requirement. I don’t know the numbers or where I could find them. But the NOC’s are just like ExxonMobil and the other Big Oils: they have a very low ratio of employees to production. This is why Big Oil can’t compete with the independents in the US when it comes to producing low flow rate wells: there aren’t enough engineers or geologist in the world for them to hire. On a per bbl basis it takes fewer hands to develop a 300 million bbls field off the coast of Africa then a 10 million bbl field in Texas. Consider the huge manpower and equipment demand in the Eagle Ford and Bakken plays have created yet how relatively small the gains are from those plays compared to offshore Brazil, Africa and the DW GOM. A good unconventional shale well here comes on at 1,200 bopd and then goes into a high decline almost immediately. But a DW well may come on at 25,000 bopd and not show much decline for a few years. IOW it might take 20X the manpower to add an equivalent amount of oil production from the Eagle Ford. And the EFS wells won’t last nearly as long.

I haven’t worked much international but I think most would be surprised about how little manpower is used in the exploration process. The big factors in that arena are capex and time…not boots on the ground.

[SeaGypsy]

I have 2 friends working in sonar exploration, one in central Australia, the other on a ship rig in the Pacific and South China Sea. Both were very busy from about 10 years ago until the last couple of years, when work has started to dry up; both are now only part time on exploration and have had to source other work. For inland exploration, the primary stage was from the air, then heavy sonar, now most potential new fields are either being test drilled or passed around for bids for test drilling. A few new gas wells are producing from this decade of exploration, but as yet no new oil is being produced, despite some promising test results. Shale oil exists in Australia, lots of it, but it is very unpopular due to the environmental concerns. The oceanographic explorers have pegged a lot of potential sites, but very few have become producers, as politics get involved. Many countries in the Pacific and SE Asia are disputing undersea resource rights. In most cases the politics are not about to magically resolve. In some, there is a growing warlike position being taken over potential resources, before even test drilling has been allowed to happen.

[Pops]

Gail has another post along these lines (falling oil price)

$this->bbcode_second_pass_quote('', 'O')ver time, in order to maintain constant oil production, the price consumers can afford tends to fall, because governments need to “take back” the huge deficit spending they are using now to prop up the system. At the same time, prices required by producers tend to rise, as the mix of oil production moves to more difficult locations.

While in theory oil prices could spike again because of rising demand of the less developed countries, it is hard to see how this price spike could be sustained. We would likely run into the same problems we had before, with more layoffs and plus credit contraction leading to a cutback in demand in the US, the European Union, and Japan. These users represent a big enough share of the total that their drop in demand would tend to bring world prices back down.

The problem this time, though, is that governments seem to be getting close to being “out of ammunition,” in trying to fight what is really diminishing returns of one of the major drivers of our economy. I don’t how exactly how things might play out, but experience with prior civilizations suggests that “collapse” might be a reasonable description of the outcome.

[ROCKMAN]

“…it is hard to see how this price spike could be sustained. We would likely run into the same problems we had before, with more layoffs and plus credit contraction leading to a cutback in demand in the US, the European Union, and Japan. These users represent a big enough share of the total that their drop in demand would tend to bring world prices back down.”

I don’t think we’re there yet or even just 5 years away. But I wonder if we’re heading towards a period when pricing alone won’t determine who gets the oil. China and others are tying up more long term oil through direct ownership in the ground, production via contracts/refineries JV’s as well as other growing trade positions. There will always be a limit on how much any of the economies can handle from a price standpoint. But what happens when the day comes that X million bopd is tied up by China et al at a price they can afford but the marginal bbls available are at a price too high for the rest of the economies to handle? So global oil production declines a bit but revenue to the exporters doesn’t drop too much due to price stability. And the exporters have the added bonus of not depleting their reserves as fast. That's rather similar to where we are today IMHO.

Could even turn out worse: So the economies not getting the oil they need began to falter as their consumption drops. But then add in the possibility that the strong developing economies, like China, can actually afford those more expensive marginal bbls. So now some economies (maybe even the US?) lose the ability to acquire even the more expensive oil to some degree. Not that unlikely given that many global economies are in that position right now. OPEC is selling all the oil they want to today at $95+/bbl. But Greece et al aren’t the buyers that they once were.

Price rationing is working very well today and should continue to do so in the future. But what happens when there is a much more limited amount of oil on the market to be acquired at any price. Price will ration that distribution but the distribution of a much smaller pie. In a tight oil market I doubt China will sell any of the Angolan oil they currently own in the ground to the US/EU regardless of the price they could get. And I doubt the KSA would stop supplying their 600,000 bopd refinery they jointly own with China and sell that oil on the open market regardless of the price available: the value of those refined products should be worth that much more in a tight oil market. And if China does build that largest refinery ever in Egypt and captures some of that 2 to 4 million bbls/day of Persian Gulf oil that transits the country on the way to EU refineries I suspect higher oil prices won’t push those exporters to sell oil instead of even high priced products. And when Brazil finally get a significant amount of DW oil flowing how much will be exported and how much run through the refineries China will be helping them to build? And how much of those refinery products will be exported from a country with a booming population that's already demanding (sometime violently) an improving economy?

IMHO it’s good to remember that the US economy doesn’t run on oil: it runs on gasoline, diesel, fuel oil and other refinery products. As do all of the other economies. And while the economies of many oil exporters depend heavily on oil sales today in the future their revenue stream may increase more from product sales. As always the Golden Rule applies: he that owns the gold makes the rules. Today the “gold” is oil. In 10+ years refinery products may represent a much bigger chunk of that pile of “gold”. And if China controls a large number of those refineries then they hold the key to the vault.