Peak oil felt like a very real and immediate possibility around the time of the oil price peak in mid-2008, but the “oil-is-here-to-stay” crowd has enjoyed something of a resurgence since then.

Oil prices are down (though back to more than twice the low seen after the financial meltdown). Furthermore, 2009 was a banner year for new oil field discoveries — more than 10 billion barrels in potential reserves of black gold, which was the most found since 2000. Then there’s the fossil fuel riches of the Arctic that will likely be opening up in years to come, thanks to climate change.

Don’t get too excited, though. While there might be plenty of oil left below the surface of our planet, it won’t be enough to prevent an oil shock in the short-term future. Here’s why:

• What’s left is deep, hard to drill for and expensive to get at: BP’s Tiber find in the Gulf of Mexico, for example, lies below more than 3/4 of a mile of water … and then below an additional 6.6 miles of ocean crust. There are no more easy-to-reach, gushing Spindletops awaiting us just one-fifth of a mile below dry land.
• With rising technological challenges comes rising risk: The Deepwater Horizon rig that exploded in flames and then sank in the Gulf of Mexico last week was drilling a well nearly 3 1/2 miles deep below the ocean at the time. The disaster, which has caused a massive leak of oil into the environmentally sensitive and economically important Gulf, is being blamed on a blowout preventer failure. Blowout preventers are needed to cope with the steep pressures and temperatures encountered while drilling such deep wells … and the risks of them failing grow ever higher the deeper we drill. (Ironically, it was the Deepwater Horizon responsible for last year’s Tiber find, courtesy of the deepest well ever drilled.)
• One word: rust: Oil industry expert Matthew Simmons (pdf) has an expression for the oil industry’s looming infrastructure problem: “Rust never sleeps.” The combination of ageing, rusting oil and gas pipes — coupled with a high-skill workforce that’s also ageing — create “almost insurmountable obstacles” for the industry, he argues.
• Price volatility: OPEC ministers now say an $80 barrel of oil is about the right price to keep the fuel flowing. (It’s trading at around $85 today.) That might be fine for OPEC, but it puts a bit of a pinch on a global economy that just over seven years ago was used to a price just a third as high. Bring the price much higher, and the economy can’t cope — people stop spending on other purchases to free up cash for the oil-related essentials, which include not just fuel but food. Bring the price much lower, and the energy companies lose their incentive to invest in new exploration, much less infrastructure upkeep and development of non-traditional fuel sources like oil sands, which require a high oil price to justify.

Government officials and business leaders, take heed: you’d be a lot better off tuning out the soothing reassurances from OPEC and the oil giants, and tuning in the warnings being given by everyone from Virgin’s Sir Richard Branson and the UK Industry Task Force on Peak Oil & Security.

As the Task Force noted upon releasing it latest report earlier this year, “Our message to government and businesses is clear. Act now. If we don’t, we run the risk of a return to the oil price shocks of the 1970s and 2008 with all the inherent uncertainty and trauma that brought.”

Anybody listening?

The article, “Why it doesn’t matter that there’s plenty of oil left” , was reproduced with permission from Greenbang.

By Todd M. Schoenberger, Managing Editor, Taipan Publishing’s Tipping Point Alert

As expected, the 12-member cartel known as the Organization of Petroleum Exporting Countries (OPEC) opted to keep its current production quotas in place following yesterday’s short six-hour meeting in Vienna. Crude oil prices rallied on the news and rose another 1.5% to close at a two-month high of $82.93 a barrel.

Traders at the New York Mercantile Exchange have been bidding up prices of crude oil with the expectation that global demand could increase as the economic recovery takes shape. With no changes in crude oil supply expected any time soon, prices per barrel should continue its ascent and chase the psychological $100 mark.

For now, however, OPEC seems to be quite pleased with oil prices north of $80 with no immediate plans to adjust output levels.

Current prices are “beautiful,” said Saudi Arabian Oil Minister Ali al-Naimi, when speaking to reporters prior to the OPEC meeting. “The producer is looking at this price, the consumer is looking at the price, the investor is looking at the price, and everybody is saying this is great.”

According to Jason Simpkins of MoneyMorning.com, OPEC, which supplies about 40% of the world’s crude oil, set its official cap at 24.845 million barrels per day in December 2008 and has kept it there for five straight meetings. In that time crude oil prices have more than doubled.

The wild card to deal with when it comes to higher crude oil prices is higher gasoline prices at the pump. And, since this is the season that consumers tend to see higher gasoline prices, the figures are expected to have an impact on discretionary incomes, which could hamper the economic recovery.

Across the country, retail prices at the pump have increased 3 cents in the past week, to settle at $2.787 for a gallon of unleaded fuel. The price one year ago was $2.092 a gallon.

According to The Post-Journal in New York, historical price data going back 10 years to the year 2000 shows gasoline prices have increased on average roughly 13% between March 1 and April 30.

“In these difficult times, gasoline prices pinch more than usual, and rising gasoline prices could be a drag on economic recovery,” the Natural Resources Defense Council said in a report released Wednesday. “This reality reminds us that America’s addiction to [crude] oil continues to threaten not only our national security and global environmental health, but also our economic strength.”

Americans need to prepare themselves for prices to touch $3 a gallon and spike higher as the country approaches the July 4th holiday. As crude oil prices rise, with no changes in supply by OPEC on the horizon, consumers will feel a hit to their wallets. For now, though, the one group happy to see higher prices at the pump are oil investors.

As Michael Fitzpatrick, Vice President of Energy at MF Global in New York, said to TopNews.com: OPEC “is not trying to stem the rise of prices by clamping down” on production, and this is supportive for the markets on the whole.

This article was republished with permission from Taipan Publishing Group.

By Adam Lass, Editor, WaveStrength Options Weekly

This is probably your last chance to buy into oil before it starts to plunder the economy again.

Five of the many reports cluttering up my desk this morning claim to be pertinent to the price of gas this summer.

As regular readers may recall, I track these things closely for two reasons. First, there is the effect gas prices have on the economy. Inflation may be the disease, but gasoline is one of that disease’s chief vectors, the agent that carries it deep into our economic body – and our wallet.

The second reason I track oil and gas is to make as much profit off the damn stuff as I possibly can. Just think of it as getting a little of our own back.

Red Sky in the Morning?

The first report comes to us from AccuWeather’s Joe Bastardi, who apprises us that his outfit’s slide-rule types are looking for the Atlantic and Gulf of Mexico to enjoy an unusually active hurricane season this year, both in terms of quantity and ferocity of storms.

In 2009, we saw the weakest season in a decade, nine named storms that never actually came on shore here in the U.S. In 2010 we are told to expect an above-average season, some 16 to 18 storms with at least two or three gob-smacking the homeland.

They credit this to “a weakening El Niño in the Pacific.” Apparently, this cyclic Pacific warming cycle protected us last year, and may fail to do so this year.

Or Not

Meteorology may very well be the oldest true science (I’ve always had a hunch that some of those scratch marks on the Lascaux cave walls were simply counting how many damn days in a row it had rained). But it still has a hard time with stuff like whether or not we will get three inches or three feet of snow here at Seven Oaks Farm.

Still, Colorado State University’s Tropical Meteorology Project has also called for 16 named storms, WSI is calling for 13 storms, with eight slated to hit Category 3 or higher on the Safir-Simpson Scale, Commodity Weather Group is calling 11 storms all told with five hitting hurricane strength, and most in the trade suspect that the May report out of the Fed’s Climate Prediction Center will fall in line as well.

This whole guessing game is germane to energy prices in that some 27% of our crude oil and 15% of our natural gas come out of the very shallow Gulf of Mexico. Should any of these storms rip through the Gulf, we could expect to see said supplies cut off with an attendant price increase. Heck, just the treat of same is enough to start a speculative frenzy in downtown New York.

China Wants Your Gasoline

Next up, we have a slightly more concrete issue brewing in China. It seems that the world’s fastest-growing economy has passed a critical threshold in February, when its demand exceeded internal supply, and it became a net importer of oil and associated product.

If these numbers are to be trusted (and that is always an issue when dealing with Beijing – and Washington too for that matter!), it appears that Chinese demand is up 58% year over year, with China purchasing some 1.8 million more barrels a day.

Now even here we see some rather odd caveats: JPMorgan Chase’s Brynjar Eirik Bustnes claims that some of this may be linked to low refinery utilization during the month of the Lunar New Year.

Still, one can easily imagine how this too is whetting speculators’ appetites.

OPEC Upgrades Demand – Again

Again we go to the pile on my desk, and find that OPEC is expecting to pump 880,000 more barrels per day (roughly 1.04%) this year than it did in 2009, if it has any hope at all in keeping up with burgeoning demand from both China and recovering Western economies.

The caveat here? This current call has been upgraded by some 80,000 barrels over last month’s prediction, and may yet be upgraded again in a similar manner. OPEC’s most recent statement warns that “questions remain as to how long governments will be able to support their economies.”

Which brings to the furor brewing in Washington over the Fed’s commitment to an “extended period of low rates.” It seems that a vocal minority of voting board governors feel that this pledge is boxing them in a bit.

Talk, Talk, Talk

They don’t actually want to change rates, mind you. When pressed, they concede that “the U.S. jobs market remains weak, with unemployment rate near 10% and job openings scarce.” But they would like that “extended period” phrase that was used in the last four FOMC reports changed to “some time” in the next statement. This way, investors will understand that the Fed will “not refrain from raising rates well beyond what is prudent.”

And we believe them, because the Fed has such a strong track record of fiscal prudence, right?

Your Nightmare Is a Speculator’s Dream Come True

Let’s string the dots together one more time: flood of cheap dollars (and yes, they will start getting cheaper again, now that that whole euro funk is passing) chases limited supply of oil… oil goes up… everything that travels by truck train or plane gets more expensive… inflation!

Oh, and here’s one last item of the heap: It seems that the supply of oil stateside is declining substantially faster than “the experts” were expecting. The call was for pretty much no change this week, with an even balance between imports into the plenums and use by refiners. Instead we see a 2.96 million barrel drop in the plenums.

This shortfall delighted the aforementioned speculators, who responded by jacking July crude futures to $84/bbl.

There is only one minor difference between my prediction for the economy and some of my dour compadrés’: they are calling for a double-dip recession to take down oil. I figure that oil will take the economy down into the next recession.

Both ideas stink. But mine offers a shot at some cool gains along the way.

This article was republished with permission from Taipan Publishing Group.

A weakened dollar and renewed tensions over pending sanctions against Iran caused a huge surge in the price of crude oil futures during Tuesday trading in New York.

The U.S. dollar slipped against the euro as the feel in the market was that the European currency had dropped too far in recent weeks in the wake of Greece’s economic problems. When the dollar falters, traders usually pour more of their money into commodity investments.

U.S. Secretary of State Hillary Clinton’s meeting with Saudi Arabia’s King Abdullah in an effort to lobby support from Gulf states and China for sanctions against Iran also heightened tensions in the oil-rich region. Iran is OPEC’s second-largest producer of crude oil.

Crude oil for March delivery rose $2.88 to settle at $77.01 a barrel at the close of floor trading on the New York Mercantile Exchange. Trading was rather light on Tuesday with Asia celebrating the Lunar New Year.

The 4 percent spike was the largest percentage gain since late September.

A top Saudi oil ministry adviser declared his concern that a peak in oil demand had already occurred, or would take place in the next decade, and said that his country, which relies heavily on income from its crude oil exports, is alarmed enough about it to diversify its economy by striving to become a leading alternative energy exporter.

“Talk of oil demand peaking is an alarm to speed up the economic diversification process,” Mohammed al-Sabban said on Monday at the World Economic Forum in the Saudi city of Jeddah. “The challenges facing Saudi Arabia are huge: we need to develop Saudis in order to be innovative, creative, to catch up with the rest of the world.”

More than a quarter of the youth in the country are unemployed, and the kingdom is trying to upgrade their scientific and educational institutions to further their knowledge which will help them expand their economy into other areas.

Al-Sabban also announced that his country will be launching its first carbon capture project by injecting carbon dioxide into the Ghawar oil field, the world’s largest oil field, beginning in 2012.

“The world cannot wait for us before we are forced to adapt to the reality of lower and lower oil revenues,” al-Sabban added.

The theory of “peak oil” is the point where oil extraction has reached its maximum levels and is entering a state of permanent decline. Experts differ on whether most oil producing nations have already reached their peaks in oil extraction, or, as al-Sabaan contends, if crude oil consumption will begin to slow as leading economic nations begin to rely more heavily on alternative and renewable energy sources.

“The world cannot wait," for the Saudis before they are "forced to adapt to the reality of lower and lower oil revenues,” Mohammed al-Sabban warned.

Saudi Arabia is currently extracting 8 million barrels of crude oil per day, with a reserve capacity of 4 million barrels per day more.

Gulf states, which rely on crude oil exports to cover as much as 90 percent of their budgets, need to begin looking into nuclear energy as an alternative, Adnan Shihab-Eldin, a former secretary general of the Organization of the Petroleum Exporting Countries (OPEC) told the audience in Jeddah. He noted that nuclear power would be economically viable even with crude oil prices just above the $40 per barrel range.

The Saudis, as the biggest oil producer in the 12-member organization, are widely considered to be the leader of OPEC and their comments are usually looked at as a sign of what the cartel as a whole is thinking.

Saudi King Abdullah recently launched a solar-power water desalination plant in its efforts to begin looking toward alternative energy. The country provides more than 18% of the world’s production of desalinated water.

OPEC: give us certainty to invest

You only get a small preview of the following story, but I found the bit that is accessible to be pretty humorous:

OPEC’S producers need greater certainty over long-term oil demand if they are to justify upstream investments to bring new production capacity on stream, says the group’s secretary-general. In an interview with Petroleum Economist, Abdalla El-Badri reiterated Opec’s message that greater clarity about demand is necessary if the world expects Opec’s exporters to continue investing in new output capacity.

Uncertainty over demand yields a startling gap in the group’s 10-year outlook. Opec says demand for its crude in 2020 could reach 37m barrels a day (b/d) – up from 28.8m b/d now – or remain almost flat, reaching just 29m b/d.

It’s a dilemma, because the additional investment needed to meet the higher figure amounts to $250bn, says El-Badri. “We could use that money somewhere else; in our infrastructure or for the welfare of our people.

Sorry, but that’s just not the way the world works. All businesses would like some certainty about demand. If GM had some certainty about demand, they would never have had to declare bankruptcy. They could have just built the cars that would be demanded. But the best you can do is try to estimate where demand will end up, and make your decisions accordingly.

However, I will give some free advice. I don’t believe the world will be able to build out enough crude oil capacity to keep up with demand. (Even if demand remains flat, new capacity has to come online to compensate for depleting fields). I don’t believe biofuels can scale up enough to displace more than a small fraction of our oil consumption. I believe demand from China and India will continue to grow. I believe that oil production will soon peak (if it hasn’t already). And I believe that a lot of projects have already been delayed or canceled, increasing the likelihood of a return of supply/demand imbalances within a few years. If my musings are correct, upward pressure will continue to be the trend in oil prices, and countries that have export capacity will make a lot of money.

So nobody is going to give you certainty on demand (in fact, most people are likely to be appalled at the idea), but if it were me I would make the investments in capacity. Even though many countries will continue to attempt to migrate away from oil, demand for oil will remain strong for many years to come.

OPEC continues pumping at their high levels despite slight drop in price of oil.

There were other people who believed that oil prices would fluctuate due to Tropical Storm Erika, but this didn’t even happen. For some traders, it was as if nothing mattered and they weren’t interested in volatility.

OPEC is likely to keep their pumps going. Despite the fact analysts suggest that OPEC is pumping too much, they can’t be swayed because they are ecstatic that despite the amount they are pumping, the prices have stayed around the $60-$70 range. Most people aren’t concerned about oil prices. They are more worried about the stock market and where the dollar is going to be which has allowed oil its consistent level.

It is believed that oil will slide below $65 for the October supply which could make for a more inexpensive winter season if it stays at those levels. With winter coming and the United States known for consuming huge amounts of oil during those times, there is some concern about where the price may go. With OPEC continuing to pump the amount of oil they are, it may not go up, but it has much room to go down. Whether it happens or not, though, will rely entirely on people and when they decide to buy.

Miss $4 gas? It’s not coming back any time soon

“For retail prices, I expect we’ll see the national average for regular grade gasoline near $2.25 gallon by the May-June period, and about $2.25 to $2.35 a gallon for the July-August period,” said Brian Milne, refined fuels editor at DTN, an Omaha, Neb.-based commodity tracker.

Brace Yourself (and Your Portfolio) for an Oil Price Shock by 2012 Or Sooner

In his press conference last week, Obama said the country can’t afford to wait to tackle its oil addiction “until the next time that gas gets to $4 a gallon.” But noted consulting firm McKinsey & Co., Saudi oil minister Ali Al-Naimi, and “dean” of oil analysts Charles Maxwell of Weeden & Co. all say that an oil price shock that hits between 2010 and 2013 now appears all-but-inevitable.

So how high does Maxwell see prices going? By the “mid-teen years,” as he put it, the price of a barrel of oil could hit $200 to $300.

Oil May Fall to $28 a Barrel, SocGen Says: Technical Analysis

March 31 (Bloomberg) — Crude oil is set to drop to $28 a barrel in New York in the second quarter, according to technical analysis by Societe Generale SA.

Prices may rally until meeting resistance at $71 a barrel and then plunge to their lowest since 2003, Societe Generale analyst Stephanie Aymes said, using charts that make use of Elliott Wave theory.

Financier sees oil shock from credit crunch

“We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away — it will be much sooner,” Simmons told Reuters in London.

“These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike,” he said.

Venezuela’s Chavez says $80/bbl fair oil price

Energy Minister Rafael Ramirez in recent weeks said he expected oil prices to stabilize at $70 a barrel, describing that price as the minimum necessary to maintain investments in oil production.

Bernstein Says Oil Will Be $50 in 2009, $80 in 2010

March 31 (Bloomberg) — Crude oil is likely to be $50 in 2009 before falling supply causes prices to increase to $80 next year, Sanford C. Bernstein & Co. analysts said.

“The combination of reduced OPEC volumes and non-OPEC production shut-ins and declines will result in a larger than anticipated reduction in global supply,” Bernstein analysts including Ben Dell said in a report today. That “should help to tighten the oil market in late 2009 and early 2010.”

Oil price is too low to ‘support investment’

Qatar’s Deputy Premier and Energy Minister HE Abdullah bin Hamad Al-Attiyah said the global economic downturn, its impact on a drop in demand and a slide in the price of oil and gas “represent the main challenges facing the oil and gas industry.”

“The slide in oil price for a prolonged period while the cost of projects is not dropping fast enough, will (negatively) affect the volume of investments and threaten stability of the markets in the long-term,” al-Attiyah said.

“The absence of investments in the oil sector and not being optimistic about the future will create a gap between demand and supply,” he added. Al-Attiyah has said that a price above $70 was necessary to encourage investment, a view shared by several other OPEC members.

OPEC president eyes $75 oil this year

LUANDA (Reuters) – Oil prices could reach $75 per barrel in 2009 despite a the economic crisis, OPEC president Angola said on Monday, adding that compliance by the 12-member group with the agreed cuts remained at around 80 percent.

Personally, I think the Elliot Wave guy is way off the mark with his $28 prediction (and I don’t rate technical analyses very highly anyway relative to fundamental analyses). OPEC is showing a fairly high level of compliance with respect to the announced cuts. When members have visions of $100+ oil prices dancing in their heads, it is probably a bit easier to get them to comply while oil is bouncing around $50. Combine that with lots of project cancellations, and higher prices are in the cards.

I think the Bernstein analyst hit closest to the mark. OPEC is likely to overshoot with their cuts (just as they did last time) and not react until prices are much higher. By the time they do start to react, project cancellations will start to become a factor, and supply will once again be pinched. I would personally put the odds of higher prices in 3 years at 90%, with a better than 50% chance that they will be back over $100.

Oil Rises After OPEC President Calls for End to Overproduction

Sept. 10 (Bloomberg) — Crude oil jumped in New York as OPEC President Chakib Khelil called on members to stop producing more than the group’s set quota, a move that would reduce supplies by 520,000 barrels a day.

The Organization of Petroleum Exporting Countries agreed to cut daily output to their 28.8 million-barrel limit, Khelil said in Vienna today. The group kept its output quota unchanged after adjusting for the departure of Indonesia and including new members Angola and Ecuador.

“It’s definitely a defensive measure to keep prices above $100,” said Jonathan Kornafel, a director for Asia at Hudson Capital Energy. “They don’t want to see us go back to $140 or $150 but they want us over $100. It’s a bit of a shock to the market and that’s why we’re up.”

Just another ‘above ground’ factor that is going to keep oil from falling much below $100. OPEC has the pricing power to achieve this. In fact, a big part of the reason the price got there in the first place was that OPEC cut too much for too long a couple of years ago. Not only did this tighten up supplies, but it also led to a lot of speculation that OPEC oil production had peaked.

As far as not wanting us to go back to $140, I wouldn’t go that far. I think they want to maximize their long-term revenues. If they can get $140 without causing a recession and destroying demand, then I think they would be quite happy with $100 oil. In fact, I recall when some in OPEC were saying that $100 was too high.

For the first time, it seems that the public overwhelmingly thinks so as well:

Drivers blame D.C. for high gas prices

According to a Consumer Reports Auto Pulse Survey released Thursday, 77% of consumers said the root of high gas prices lies with the government’s failure to implement an effective energy policy. That compares with 75% of drivers who blamed oil companies, 70% who said foreign oil producers were at fault and 68% who thought the Middle East conflict was a leading cause for record fuel costs.

So, 152% of those polled thought it was either the government or Big Oil behind the problem. (Must have been a case of “Vote early and often.”)

One thing that was surprising to me was the number of people who favored off-shore drilling:

As a result, 90% of those surveyed support an increase in alternative energy development, and 81% want the U.S. government to allow more drilling on and off our nation’s shores. Americans also favored conservation measures, with 83% saying they supported tax incentives for alternate transportation.

Of course I know one person who voted for Big Oil as the culprit behind oil prices. He works for the government. Chuck Schumer, notorious demagogue when the topic is oil, had this to say following the recent congressional hearings into the impact of speculation on oil prices:

Schumer downplayed the role of speculators in driving up oil prices, and he placed blame on the oil industry and the Organization of Petroleum Exporting Countries.

“I think it is interesting that the big oil companies and OPEC are blaming speculators for out-of-control prices, when they may be much more of the cause,” said Schumer.

Attaboy, Chuck. Keep looking for that boogie man. But don’t be surprised if you spot him during your morning shave.