[Graeme]

Peak Oil is a Cost Issue

$this->bbcode_second_pass_quote('', 'B')ut the reality is more complex. Peak oil is not just a point in time or even a plateau when oil supply becomes unable to expand to meet demand. We need a more nuanced model for oil prices that includes several other factors.

First, there is the role of speculators.

Second, is the mindset of the oil exporting countries, including OPEC, which are increasing supply at a slower rate than they could.

Third, and most complex are cost pressures. The paradigm example of costs reducing potential supply is the “oil shale” deposits in the American West and elsewhere.

In sum, higher costs of energy production are the mirror image of lower capacity to expand production. The two parts of the same whole problem mean that less oil is produced as it costs more. Less oil being produced is what leads “peak oil.” So are the higher costs of producing oil a result of “peak oil”…or are they an integral part of it?

[BrazilianPO]

Peak Oil is a cost issue, indeed. I remember when oil was at U$ 20, people would say "Oil will never pass U$ 40 because that is the price of production for tar sands."

Well, oil reached U$ 40 and nothing happened. Now, tar sands would be profitable at 60. Oil reached 60 and again, no new oil. Now oil is at 100, oil from tar sands is supposed to cost around 60 or so, but no new production. There are a few possibilities:

1. Tar sands break even cost is dependent on overall oil prices, and taking into account ROI, nobody wants to invest in it; and is waiting oil to reach U$ 500, because then the profit will compensate the risks.

2. Tar sands are too energy-dependent, labor intensive, hard to scale up and thus it has an inherently low ROI no matter what price is oil.

3. Or worse, there is no way to explore tar sands because there is no specialized labor, equipment or infra-structure for such a demanding process. How many people, equipment is necessary to keep an oil platform that produces 200,000 bpd? Now, how many large trucks, giant excavators, people, energy, processing plants, water and natural gas are necessary to produce 200,000 bpd from tar sands. It may be just impossible. EROEI in action.

[MD]

Leanan once again has delivered a must-read gem to the front page.

A terrific analogy:

$this->bbcode_second_pass_quote('', 'T')he way I think of it is like a plow preparing a field. It used to be that the field was flat and contained good soil. The plow would cruise right along. Now the field is on a hill and contains rocks. The only way to go in future years is higher and steeper with the rocks turning into boulders. Eventually, progress becomes extremely slow. That is what is happening to the production of oil.

[nocar]

BrazilisnPO,

the tar sands are already being developed and producing quite a lot of oil. I read 'Stupid to the last drop' a few weeks ago. Of course I forgot the specifics, like the name of the author and the exact amount of oil produced.

But I remember this: the general message of the book is that the environmental costs of this kind of oilproduction is outrageous, but clearly some people make money from this business. And good oil is coming out.

nocar

[Concerned]

$this->bbcode_second_pass_quote('MD', 'L')eanan once again has delivered a must-read gem to the front page.

A terrific analogy:

$this->bbcode_second_pass_quote('', 'T')he way I think of it is like a plow preparing a field. It used to be that the field was flat and contained good soil. The plow would cruise right along. Now the field is on a hill and contains rocks. The only way to go in future years is higher and steeper with the rocks turning into boulders. Eventually, progress becomes extremely slow. That is what is happening to the production of oil.

[Starvid]

Tar sands are producing something like 1-3 mbpd.

[BrazilianPO]

$this->bbcode_second_pass_quote('nocar', 'B')razilisnPO,

the tar sands are already being developed and producing quite a lot of oil. I read 'Stupid to the last drop' a few weeks ago. Of course I forgot the specifics, like the name of the author and the exact amount of oil produced.

But I remember this: the general message of the book is that the environmental costs of this kind of oilproduction is outrageous, but clearly some people make money from this business. And good oil is coming out.

nocar

[Plantagenet]

$this->bbcode_second_pass_quote('BrazilianPO', 't')here is a strong skills shortage in the mining industry, and tar sands would have to compete for professionals with all other mining projects around the world. Not good.

[lawnchair]

$this->bbcode_second_pass_quote('BrazilianPO', '
')2. Tar sands are too energy-dependent, labor intensive, hard to scale up and thus it has an inherently low ROI no matter what price is oil.

[aflurry]

yes, very good point. One thing that seems to be missing from alot of analysis is the destruction of stability that the peak brings. It is a alluded to in the term "bumpy plateau," though perhaps unintentionally. It's isn't so much a question of absolute cost, because all major economic undertakings are financed, an additional premium must be added to account for cost risk.

So, in the analogy, you you bid out a job to plow a field in an area knows for good soil. You get numerous low bids because everyone knows their only going to need their light-duty plow, one mule, etc. But when you get up on the rocky hill, those bids dry up. The plow-boys start to worry about what will happen to their only good plow if it hits a boulder, or what if their mule falls off a cliff, etc. Anyone dumb enough to low bid these jobs has probably already been shut down by a broken plow or dead mule. The rest bid high, higher even than just tacking on what it costs to move the rocks, etc.

The point is, the "bumps" in the bumpy plateau represent a huge, undetermined risk that must be accounted for when trying to finance long term projects. This is fundamental to the way things get done. No financing, nothing gets done, no work, recession.

Except, this is where the business cycle is supposed to rescue us. Recession should lower prices, promote financing, growth, etc. But this assumes not so much cheaper prices, but predictable cheaper prices.

[thor]

$this->bbcode_second_pass_quote('Plantagenet', 'R')aise the pay of mining engineers and mining geologists and other professionals to high enough levels and there will be a flood of qualified people pumped out by the universities.