Tuesday, November 20, 2007

Constraints in oil production

Fascinating article today in the WSJ, regarding a plateau in oil production, which would represent a significant change from traditional viewpoints.

“The new adherents -- who range from senior Western oil-company executives to current and former officials of the major world exporting countries -- don't believe the global oil tank is at the half-empty point. But they share the belief that a global production ceiling is coming for other reasons: restricted access to oil fields, spiraling costs and increasingly complex oil-field geology. This will create a global production plateau, not a peak, they contend, with oil output remaining relatively constant rather than rising or falling.
The story is covered elsewhere. Both of these recaps question if this article is just another Peak Oil argument (one saying yes, the other no).

A few things stand out to me in this article:

1) The conspiratorial side of me finds it interesting that such a controversial article would be placed on the front page of the WSJ on the same day that a very important OPEC summit is occurring. Of course it could be coincidence, but generally front page, above-the-fold stories addressing the potential plateauing of oil production come from somewhere. The reporters seem intimately familiar with a variety of extraction and refining minutiae, yet quote almost exclusively from previously public sources. Reading through this a third time, it sure feels like a number of deep background interviews informed this piece. If so, the timing and placement of the message certainly arouse my curiosity.

2) If you view $95 oil as the result of speculation, a deflating dollar and a war/risk premium (as opposed to simple supplydemand issues), you can now, according to this article, also add:
  • "resource nationalism"
  • "limits on oil field access"
  • "billions of dollars in infrastructure underinvestment"
  • "oil field damage due to over-depletion"
  • "revenue surplus which limits extraction investment"
  • "labor, construction and equipment bottlenecks"
  • "booming commodity markets"
  • "declining production levels in existing fields"
  • "overestimation of near-term potential in alternative supplies"
...as reasons why oil prices might be so high. Certainly a few of the above points are common knowledge, but in sum, I counted 9 different factors in this one article which could negatively impact the near-term production of oil. If I'm a trader with a longer-term perspective, maybe I'm becoming more comfortable with oil stabilizing above $80 for the next few years. Maybe.

3) The idea of oil production reaching a "constant" level of output that it can't push through sounds suspiciously like a natural limit to me. The article references 100 million bpd as that limit several times. I'm not implying there's a natural law from which we can't deviate, but given the plethora of challenges currently found in oil discovery, drilling and funding, I wonder what happens north of 100 million bpd. Does each marginal barrel have an increasing incremental cost of extraction? Does it cost $150 per barrel to go from 100 million to 105 million bpd say?

I've got a lot more on this, including an interesting conversation I had with a leading energy economist a while back, as well as some other thoughts, but that can be saved for another post.

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