What were the real origins of the great oil crisis of the 1970s? Politics or depletion?

If you happen to be caught in a boat in a major storm, such as in this image by Hokusai, you'll surely think you experiencing a major shock. However, it is also true that no storm changes the average water level of the oceans. So, the oil storms of the 1970s were perceived as major shocks, but did they change the average patterns of the world's oil production? In this post, I argue that they didn't. Just like a sea wave has to crash on a shore, sooner or later, so oil production had grown so fast in the 1950s and 1960s that it had to crash, sooner or later. And it did. 

The oil crisis that started in the early 1970s is still widely remembered today and much of the interest in the vagaries of the present oil market is derived from a comparison with the events of that time. Yet, it may also be that the crisis was widely misunderstood while it was taking place and that it remains misunderstood even today; often reduced to the work of a small group of evil Arab sheikhs, perhaps the ancestors of today's Daesh. But, as it often happens, every question may have an explanation that is simple, obvious, and totally wrong.

Last week, there was a meeting at the University of Venice, Italy, dedicated to this issue: what were the origins of the oil shock and of the countershock of nearly half a century ago? The conference collected for two days experts in subjects such as political science, economics, communication science, history, and more and I won't even try to summarize for you all what was said. Suffice to say that even after you study a subject for 15 years (as I did with peak oil) there are always chances to learn something new that you didn't suspect before. I emerged out of the meeting with the understanding that there was an important political and human side to the great oil crisis. Yet, I remain convinced that there are deeper factors; those factors that people call "fundamentals." And, when dealing with a mineral resource, crude oil, depletion is the fundamental factor.

Not that I pretend to have "the" answer to the origins of the great oil crisis of the 1970s, but I can't avoid to note that the magic word "depletion" was almost never mentioned at the meeting. It is the usual problem: depletion remains a widely misunderstood concept. For the oil industry; as long as their books list "reserves" existing somewhere; then the problem is not considered to be of any importance. And, for historians, if oil production restarted after the crisis, then it means that there never was any lack of oil and, as a result, the crisis must have had political or financial reasons. But depletion doesn't mean "running out" of anything; it is a gradual phenomenon that was already strongly affecting the oil markets at the time of the crisis.

Here, I'll discuss a little only the case of Iran; examined at the Venice meeting by Abbas Maleki, former Iran's deputy foreign minister, and by Claudia Castiglioni, researcher at the University of Florence, Italy. Both of them appeared to see the history of Iran's oil as mainly the result of political and financial factors. Surely, these factors played a role in the crisis, but I thought they couldn't be the whole story. So, after hearing Maleki's talk, I looked for the data for the Iranian oil production; and here they are (image by Plazak, Wikipedia):

Looking at this graph, I was struck by a curious thought. There came to my mind Hokusai's famous "great wave" image, you see it reproduced here, on the right. Note the shape of the oil production curve for the period from about 1950 to 1980; doesn't it look like an ocean wave that grows and then crashes down? From 1955, for some 20 years, Iran's oil production doubled approximately every 5 years; something that corresponds to a yearly growth rate of about 15%. And now ask yourself: how long can anything double every five years?

If you think about that, it makes little sense to ask why Iran's production collapsed; it had to. Just like an ocean wave, it had to crash down sooner or later. Keeping oil production rising for a longer time would have needed not only to match investments to the rapid doubling rate, but also to increase them further in order to overcome the progressive depletion of the "easy" oil resources. Iran was not running out of oil; it was running out of the capital resources needed to extract it.

So, I think that the conventional explanation for the collapse of Iran's oil production is wrong: it is not correct to say that it collapsed because of the revolution. But it would be just as wrong to say that the Iranian revolution was caused by the production collapse. The two phenomena went together and reinforced each other; one more example of another misunderstood concept: that of "enhancing feedback". The same phenomenon affected the Soviet Union, but Iran turned out to be more resilient: the country survived the revolution, the oil shock, economic sanctions, and a major war. Slowly, Iran reached a new stability, the oil industry was rebuilt; and Iran became again an oil exporting country, even though it never reached the peak level of 1979 (and probably never will).

The interest in the great oil crisis of the 1970s-1980s is not just a game for academic historians; it is something that has deeply affected the world's history and it is still affecting our perception of the factors affecting the supply of crude oil that, today, we need as much, and even more than, we needed it at that time. So, there is a crucial question to ask: could we see another great oil crisis in the near future?

As always, the future is obscure, but at least not beyond all conjecture. Today, we don't see in any country (with a single exception) oil production growing so rapidly as it was the case for Iran and others before the great crisis. Hence, it seems unlikely that we'll see again an abrupt crash (apart from the above exception, which seems to be already crashing). Nevertheless, the problem of depletion remains, and it can only grow bigger as more oil is extracted and burned. So, we are heading toward a difficult future; we may not see another "oil shock", but an "oil decline", even a rapid one, very likely, yes.



H/T to the organizers of this excellent meeting, Duccio Basosi, Giuliano Garavini and Massimiliano Trentin.

Oil prices keep going down, but this is not good news

Originally published in Italian in "Greenreport" [14 October 2014]

Ugo Bardi

 
There is plenty of movement in the oil world: after five years of relatively stable prices, the legendary "barrel" is coming down from over $ 100 to under 90, and it looks like it will keep falling. What's happening? Has anyone found new resources? Or is it Saudi Arabia using the "oil weapon" to bring down Russia, the heir of the old "evil empire"?

In reality, it is nothing like that. There are no major new discoveries of oil in the world and the Saudi oil weapon is much less fearsome than it is normally described in the media. But, then, why are prices going down? There are good reasons, but we need to understand them and, more importantly, to explain why the likely future drop in oil prices would NOT be a good thing; indeed it could be a planetary disaster.

First of all, we should take into account that oil is a finite resource, but also that it is subject to the laws of supply and demand; it cannot escape the control of the entity we call "the market". So, we are seeing two contrasting trends in the oil market. One is the gradual depletion of the so-called "conventional" oil; that is liquid oil extracted at relatively low cost from wells. As a consequence, the production of conventional oil is static or declining almost everywhere. The other trend is the increase in the production of "unconventional" oil, that is combustible liquids which are obtained, for example, by treating oil sands, or biofuels, or "oil shale," the kind you obtain by means of the "fracking" process. 

Up to now, the rapid development of the production of unconventional oil - especially shale oil in the United States - has compensated ​​the worldwide decline in the production of conventional oil; it has, in fact, allowed production to keep growing. At the same time, many of the major economies are in recession and are reducing their energy demand. Italy, for example, has lost 25% of its oil consumption over the last five years, and the descent continues. Other economies, such as in Germany, are in trouble, even if not yet in recession. This causes a decrease in the world demand. 

So, the two factors - increase in supply and decrease in demand - go in the same direction: the market wants the price of oil lowered, and it goes down. We should also take into account that these phenomena are often heavily influenced by the perceptions of financial operators: if everyone thinks that the price of oil should fall, then it will fall. In practice, we risk to see not just a drop in oil prices, but also a true meltdown of the oil market, like that witnessed in 2008-2009.  

Many people would be tempted to believe that lower oil prices are a good thing, but it is not so. If we will see a repetition of the scenario of 2008-2009, the result can only be a disaster (as it was at that time). The problem is that oil resources are not all the same: to produce certain types of oil is very expensive. Extracting from tar sands or from oil shales, for example, is more expensive than extracting from traditional wells. So what happens if prices go down? It happens that extracting and marketing certain types of oil does not generate a revenue anymore. Then, those types of oil are not produced any more. Who would ever want to produce at a loss?  

In practice, if prices decrease, the world's oil production decreases: have you ever eard of "peak oil"? It is just this phenomenon: "peaking" does not mean running out of oil; absolutely not. It means that producing more oil is not as convenient as it was before, hence less is produced. Therefore, we see a peak in the production curve. That's peak oil.

And that's exactly what may happen in the near future. Oil at over $ 100 a barrel allowed the industry to maintain a fairly constant production - actually even to increase it slightly over the past few years. Oil at significantly lower prices does not allow it anymore, and it forces the industry to reduce production. This leads, among other things, to the closing of many refineries, as is happening in Italy.

In the end, it is perfectly possible that oil will cost less in the future, but also that we won't have the money to pay for it. There is nothing to do about that: it is the market, baby! But above all, the troubles come from our attitude that continues to make us believe that oil will last forever. It is not possible. Let's start thinking about that!

"Extracted": a press review from Luis de Souza

A review of the recent publication of "Extracted" by one of the co-authors of the book, Luis de Souza, from his blog "At the edge of time". In this post, Luis examines mainly the recent developments of the Ukrainian crisis and other features of the world energy situation.

Press review 03-05-2014 - Extracted

by Luis de Souza

Two years ago Ugo Bardi invited me to take part in the redaction of a book on raw materials. I spent much of the 2012 summer researching and writing to produce a chapter on two particular metals: silver and gold. After a first edition in German language last year, the English version has finally arrived, to what appears to be a warm reception.

"Extracted" provides an overview on the relationship between our society and economy and the stocks of raw materials found in the Earth's crust. These stocks are sources of negentropy - negative entropy, meaning organised or concentrated matter, as opposed to chaos and dispersion - that feed our industries with low cost inputs. The economic difficulties we live today are closely linked to a decline in the quality of the resources needed to feed our economies - meaning an increase in entropy - that may at some point even translate into a decline of extraction rates.

Resource Crisis
"EXTRACTED" published
Ugo Bardi, 29-04-2014

My new book, "Extracted" is now on sale. It is an updated version in English of the German version which was published last year. You can get it directly from the editor, Chelsea Green or from the usual sources.

This book was a lot of work, but I must say that I am very happy about the final result and I would like to thank my co-authors, who provided the specialized expertise for the "glimpses" about specific mineral commodities, the staff of Chelsea Green for their highly professional help in editing, and the staff of the Club of Rome for having made the task possible.

The first reactions to the book seem to be highly favorable, which is, I think, a bit worrisome. Fortunately, there has been at least one negative review on Amazon.com by someone who says he feels "insulted" by the book, but nevertheless he gives it three stars out of five!

But on the short terms concerns are more on the geo-politics of raw materials. Moscow has issued an ultimatum to Ukraine on its gas debts, threatening to cut supplies beyond the 7th of May. Days later the IMF approved an aid package to the troubled country, proving that control comes with a bill attached.

The Telegraph
Ukraine: Russia's Gazprom issues May 7 ultimatum over gas supplies
Emily Gosden, 25-04-2014

Russian state-controlled energy giant Gazprom has ratcheted up the pressure on Ukraine, issuing a May 7 ultimatum to settle $3.5bn unpaid debts or start paying in advance for its gas.

Alexander Medvedev, deputy chief executive, warned that Europe must help Ukraine pay the bill – and a further $5bn needed to refill storage facilities this summer - or face “severe problems” with gas supplies this winter.

By May 7, Ukraine would owe about $3.5bn for gas it has used in recent months, Mr Medvedev said. If it failed to pay, Gazprom would stop supplying Ukraine with gas for domestic usage from June, unless it paid for it in advance.

Here is one of the reasons why Russia can't simply let Ukraine pass onto the sphere of influence of the US. And why extending NATO that far is such a terrible idea.

David Stockman's Contra Corner
Why The War Party Is Playing With Fire: Much Of Putin’s Military-Industrial Complex Is In Eastern Ukraine!
Pater Tenebrarum, 30-04-2014

However, it turns out that there is something else that makes the Ukraine’s East especially important – for Russia. Back when the Ukraine split from the Soviet Union, it took some 30% of the country’s industry with it – inter alia a big chunk of its defense industry. As pointed out in an article in the FT by Jan Cienski , Russia’s military-industrial complex remains highly dependent on spare parts produced by Ukrainian factories – and their deliveries have not surprisingly recently been halted. This sheds new light on the backdrop to the previous gas discounts and the sudden decision to threaten a delivery stop unless the Ukrainian government pays its debts to Gazprom. Tit for tat. However, there are additional implications. [...]

The article points out further that ‘invading the Ukraine in order to get hold of these plants would be a 19th century way of looking at a 21st century relationship’, an assessment one must agree with. Absent the current tensions, the Ukrainian factories would still sell these parts after all – it is their business and they cannot eat them. Since many of the parts are probably highly specific, it won’t be easy to retool the factories, especially for an essentially bankrupt country like the Ukraine.

Would Russia’s president Putin invade the Ukraine for that? We rather doubt it actually. However, Russia is not a monolithic country ruled by an almighty dictator. Putin has a great advantage at present because he enjoys truly stunning approval ratings in Russia (as of mid-March, they were at a new high of 76%). Twelve times more people said they ‘like and even admire him’ compared to those expressing dislike. Some recent results of detailed polling questions can be found here.

In Iraq a farcical election took place where 270 parties ran for a 320 seat parliament. The winner(s) will in fact be taking power over Baghdad and little else of the country. The war front keeps neighing on the capital, both from the east and the north.

New York Times
Militants Pose Threat on Eve of National Elections in Iraq
Tim Arango and Duraid Adnan, 28-04-2014

That reality, which the government appears powerless to remedy, offers a sobering postscript to the American war and a volatile backdrop to elections scheduled for Wednesday. The vote will be Iraq’s first nationwide election since the withdrawal of United States forces at the end of 2011, and it is clear it will be held amid rapidly growing violence and sectarian bloodletting. On Monday, six suicide bombers struck polling sites around the country as security force members voted in advance, killing at least 27 people, officials said.

The greater fear, though, is that there is no way back this time, that the sectarian division of the nation will become entrenched as the government concentrates its forces on protecting its seat of power in Baghdad. With fighting in Abu Ghraib, on the western edge of Baghdad and less than 20 miles from the city center, the government recently shut down the local prison. Insurgents have gained strength in Salahuddin Province, to the north of Baghdad, and in Diyala Province, northeast of the capital.

“All arrows are pointing toward Baghdad now,” said Jessica D. Lewis, research director at the Institute for the Study of War, who has closely followed the fighting in Anbar.

At websites like PeakOilBarrel.com the accuracy of figures published by the EIA on gas production in the US have been questioned one way or another for some time. This week I came across the article below, that exposes what seems to be deliberate data manipulation.

Post Carbon Institute
The EIA is Seriously Exaggerating Shale Gas Production in its Drilling Productivity Report
David Hughes, 21-04-2014

“Natural gas output from US' Marcellus edges closer to 15 Bcf/d: EIA” declared the headline in Platts that attracted my attention, since the latest data on the Marcellus shale gas play of PA and WV indicated production was less than 12 bcf/d. This headline was based on the latest issue of the EIA’s new monthly Drilling Productivity Report published April 14. Reading further, the article claimed that the Haynesville shale play “peaked at about 10 Bcf/d in 2012”, when in fact it had peaked at closer to 7 bcf/d in 2011. These errors are serious exaggerations of reality and bear further investigation, as the EIA Drilling Productivity Report is widely read and quoted in the media.

Fortunately the EIA also publishes independent production data by shale play in its Natural Gas Weekly Update. A check of production data for the Marcellus revealed that it was at 11.8 bcf/d in February and that the Haynesville had indeed peaked at 7.2 bcf/d in November 2011. These figures are also corroborated by Drillinginfo, a commercial database which is used by the EIA.

The erroneous view the EIA (and more widely the Obama administration) has been trying to convey regarding gas reserves and production in their country is a clear attempt to lure investors towards a doubtful industry. So far it is working, cheap money has been readily available to companies that spend far more than what they earn. Until one day; call it "shale subprime".

Bloomberg
Shale Drillers Feast on Junk Debt to Stay on Treadmill
Asjylyn Loder, 30-04-2014

Rice Energy Inc. (RICE), a natural gas producer with risky credit, raised $900 million in three days this month, $150 million more than it originally sought.

Not bad for the Canonsburg, Pennsylvania-based company’s first bond issue after going public in January. Especially since it has lost money three years in a row, has drilled fewer than 50 wells -- most named after superheroes and monster trucks -- and said it will spend $4.09 for every $1 it earns in 2014.

The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it.

“There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”

More bad news to the petroleum and gas sector in the US is the growing possibility of environmental regulation coming into place. First it was drinking water supply protection, more recently earthquakes, but now flaring seems the main threat.

OilPrice.com
Is This Issue About to Explode for Big Oil?
Dave Forest, 28-04-2014

It's no secret that oil production has surged in many new parts of North America recently. Often in areas that have limited infrastructure in terms of pipelines--especially for natural gas.

That means oil producers need to flare any gas produced alongside oil output. Burning off the stuff because there simply isn't a way to get it to market.

But this month two regional governments have said that gas flaring needs to stop.

The most critical is North Dakota. Where the state Department of Mineral Resources is reportedly looking at new rules to limit flaring.

The hypothesis of China taking the opportunity of relatively low gold prices to build a relevant strategic reserve of this monetary metal has been around for almost an year. Now even the mainstream media is contemplating this hypothesis. This story is part of a bigger plot that brings us back to "Extracted", the difficulty in finding and accessing high quality resources is shifting power away from old power structures.

Reuters
China allows gold imports via Beijing, sources say, amid reserves buying talk
20-04-2014

China does not release any trade data on gold. The only way bullion markets can get a sense of Chinese purchases is from the monthly release of export data by Hong Kong, which last year supplied $53 billion worth of gold to the mainland.

"We have already started shipping material in directly to Beijing," said an industry source, who did not want to be named because he was not authorised to speak to the media. The quantities brought in so far are small, as imports via Beijing have only been allowed since the first quarter of this year, sources said.

The People's Bank of China (PBOC) is believed to be adding to its gold reserves, according to the World Gold Council (WGC), as it looks to diversify from U.S. Treasuries. The central bank rarely reveals the numbers.

Gold's 28 percent plunge last year and China's record bullion imports in 2013 sparked speculation that the PBOC has added significant amounts of gold to its reserves, and could likely make an announcement this year.

An editor of the Financial Times proposing the nationalisation of banking? Yes, this crisis is forcing the re-thinking of traditional structures and systems. While positive outcomes could be expected from such move, ours is not exactly a problem of money, no matter how disappointed monetarists may be.

Financial Times
Strip private banks of their power to create money
Martin Wolf, 24-04-2014

Banking is therefore not a normal market activity, because it provides two linked public goods: money and the payments network. On one side of banks’ balance sheets lie risky assets; on the other lie liabilities the public thinks safe. This is why central banks act as lenders of last resort and governments provide deposit insurance and equity injections. It is also why banking is heavily regulated. Yet credit cycles are still hugely destabilising.

What is to be done? A minimum response would leave this industry largely as it is but both tighten regulation and insist that a bigger proportion of the balance sheet be financed with equity or credibly loss-absorbing debt. I discussed this approach last week. Higher capital is the recommendation made by Anat Admati of Stanford and Martin Hellwig of the Max Planck Institute in The Bankers’ New Clothes.

A maximum response would be to give the state a monopoly on money creation.

Some space now for renewable energies. I followed particularly close the development and deployment of the Pelamis wave energy systems in Portugal some years ago; they were in the water just for a couple of months, to simply fade into oblivion afterwards. Wave energy is indeed a promising resource but the technology is far from anything mature, as the article below details.

Environment360
Why Wave Power Has Lagged Far Behind as Energy Source
Dave Levitan, 28-04-2014

It’s not difficult to imagine what wind energy looks like — by this point we have all seen the towering turbines dotting the landscape. The same goes for solar power and the panels that are spreading across rooftops worldwide. But there is another form of renewable energy, available in huge quantities, that doesn’t really call to mind anything at all: What does wave power technology look like?

Wind and solar power have taken off in the past decade or two, as costs have come down rapidly and threats from climate change have made clear the need to transition away from fossil fuels. Meanwhile, numerous studies have concluded that wave power — and to a lesser extent, tidal power — could contribute massive amounts to the overall energy picture. But while the industry has made halting progress, experts agree that it remains decades behind other forms of renewables, with large amounts of money and research required for it to even begin to catch up.

Maturity is something PV does not lack. Below a remarkable example of its market penetration, providing energy to poor communities that can not possibly afford to tap electricity from the grid.

Deutsche Wella
Solar energy lights up lives in Kenya
Victoria Averill, 29-04-2014

Fifty-two-year-old Daniel Tempes Olonapa stands outside his greenhouse perched on a hilltop overlooking the towering buildings of Kenya's capital, Nairobi. He points to two paper-sized black panels on top of his roof.

"Can you see them?" Daniel asks, pointing towards the panels excitedly. "They are small, but they are very powerful. I rigged them up there myself and put in the batteries. Then the sun comes and we get light, we can charge our phones. My six children can do their homework at night. "

The solar panels supplying Daniel with precious electricity come from the solar energy startup M-Kopa, which means "borrow" in Swahili.

The company is on a mission to supply cheap, clean and affordable solar power to the thousands of rural, off-grid Kenyans like Daniel, who up until now have only dreamt of having electricity on tap. M-Kopa has brought together the latest solar technologies with high quality solar panels, batteries and lights, and is selling them at kiosks and shops around Kenya.

European followers may wish to read mid-week commentary on the first ever presidential debate. Have a pleasant weekend.