[Peakoil] Expense of Finding Oil, Nat. Gas Soared in 2008

[Alex Pollard]

Having the oil price above $60 or so would have been a large factor in the
destruction of the credit bubble in Western economies. Loans had been
taken out to finance marginal investments that relied on continued cheap
energy. High oil prices did not so much reduce demand in a kind of linear
or proportional way but rather broke the back of the debt-fueled economy.
So if in terms of elasticity, you could say the elastic snapped and broke.

So we have had demand destruction that is out of proportion with the
actual price increases people experienced at the pump, because everyone
was leveraged to the gills. As a result the oil price was able to fall
dramatically (or was pushed in time for the US election) to below US$30
for a brief time.

The Soviet Union collapsed a couple of years after its peak in 1987. World
oil production has been peaking since about 2005.

The world financial system is being held together with happy talk and
fudged statistics and accounting standards. Some US banks have an 8 month
backlog of delinquent loans so these foreclosures are simply not reported.
There are still literally tens of trillions of dollars worth of
derivatives owned by large US banks, betting on all manner of financial
outcomes. Many are Credit Default Swaps which "insure" against the failure
of companies, such as GM. Many are Interest Rate Swaps which rely on
"business as usual" in the bond markets. This coming disaster is never
mentioned in mainstream reporting.

With the US Fed now printing money (as China cannot/won't finance the
massive new US govt debt) there is massive inflation in the pipeline hence
rapidly rising oil price despite the world being in recession. That and
long-term interest rates are now rising. The "Green Shoots" of recovery
are a delusion.

Alex

> Thanks, Paul. Makes sense and is very helpful.
>
> So when oil reached $US 147 a barrel last year, demand barely changed.
> Then came the recession and the amount of cash now available to fill up
> the nation's fuel tanks is much less - at the same time that petrol
> prices are creeping up again. But, as you say, over the short term, we
> can expect consumers to sacrifice elsewhere in order to keep motoring.
> It's what they choose to sacrifice that will cause the pain in
> households and through them rippling through the economy.
>
> This is where to social effects of peak oil ripple outwards, feeding
> back from each other. Things could get worse very quickly as "the pips
> squeak". I wouldn't like to have a business dependent on highly elastic
> consumer demand: up-market coffee shops, clothing shops, new cars.
> --------------------------------------------
> Keith Thomas
> www.evfit.com
> --------------------------------------------
> On 22/06/2009, at 3:30 PM, Paul Pollard wrote:
>
> Keith
>
> I don't have any figures on price elasticity of petroleum, although I
> have
> seen somewhere figures in the recent past for the effect over several
> months
> or a year of much higher prices, which suggest that demand is pretty
> price
> inelastic..
>
> However, the key point is that price elasticity varies greatly
> depending on
> whether it is short-term (say, immediate up to a year or two),
> medium-term
> (say two to five years), long-term (say up to ten years), or very
> long-term
> (say over decades).
>
> I would confidently guess that the demand for petrol is very inelastic
> in the
> short-term (because its built into transport fleets that are very
> expensive
> to rapidly change, and into patterns of transport that are also very
> costly
> to alter), but is far more elastic in the long and very long-term
> because
> these aspects can be changed at reasonable cost, as long as we have the
> foresight to make the necessary changes.
>
> However, the apparent lack of long-term thinking and planning so far,
> for less
> oil, in most countries including Australia, does not bode well for much
> greater price elasticity in the long-term.
>
> Paul Pollard
>
>
> On Monday 22 June 2009 06:27, Keith Thomas wrote:
>> Note well.
>>
>> What I'd really like to know is what effect the recession has had on
>> petroleum consumption. Is demand elastic (pointing to society's ability
>> to adapt), or inelastic (pointing to the danger of a sudden social
>> change)?
>>
>> I'd also like to compare elasticities between, say, Australia, UK and
>> the US. Does anyone have these data?
>> --------------------------------------------
>> Keith Thomas
>> www.evfit.com
>> --------------------------------------------
>>   Study Shows Expense of Finding Oil, Nat. Gas Soared in 2008
>>   by Kristen Hays
>>   Houston Chronicle, 19 June 2009
>>   URL: http://www.rigzone.com/news/article.asp?a_id=77447
>>
>>   The U.S. oil and gas industry's costs of finding resources rose 35
>> percent last year amid the wild rise and fall in commodity prices, an
>> Ernst & Young study released Thursday showed.
>>
>>   The three-year average cost per barrel of oil equivalent, excluding
>> acquisitions of proved reserves, was $27.22. But in 2008 that spiked to
>> $51.96.
>>
>>   "This validates that finding oil and gas reserves is very, very
>> expensive," said Marcela Donadio, oil and gas sector leader for the
>> Americas. She noted that cost also demonstrates why some companies have
>> delayed final investment decisions on costly expansions or new
>> projects, such as those in Canada's oil sands or deep-water
>> exploration.
>>
>>   The study examined U.S. exploration and production results for 40
>> companies from 2004 through last year. The companies, which include oil
>> majors as well as large and small to midsize independents, collectively
>> hold 70 percent of U.S. oil reserves and 61 percent of U.S. natural gas
>> reserves.
>>
>>   Overall costs, including acquisitions, rose 35 percent last year to
>> $132.1 billion, the study said.
>>
>>   But oil reserves fell 7 percent to 15 billion barrels, largely
>> because
>> regulatory reporting rules required companies to book reserves that can
>> be produced economically at the closing price on the last trading day
>> of the year.
>>
>>   Last year that price was $44.60 a barrel -- far below the year-end
>> 2007 price of $95.
>>
>>   The same rule forced reductions of 6.7 trillion cubic feet of booked
>> natural gas reserves as well. Even with those write-downs, gas reserves
>> rose 4 percent overall amid the boom in shale production last year.
>>
>>   However, starting at the end of 2009, companies can book reserves
>> based on average annual price rather than a one-day snapshot. In 2008,
>> that average was about $99 a barrel.
>>
>>   So as prices recover alongside the economy, reserves that were
>> written
>> off can be restored to companies' books as they become economical to
>> produce again, said Charles Swanson, managing partner of Ernst &
>> Young's Houston office.
>>
>>   "It certainly was a year to remember," he said.
>>
>>   Copyright (c) 2009, Houston Chronicle. Distributed by
>> McClatchy-Tribune Information Services.
>
>
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