Friday, January 27, 2006

Kuwait's oil reserves

Kuwait has let it be known, through the mouthpiece of an oil industry newsletter, the Petroleum Intelligence Weekly, that its oil reserves are less than half of what had been previously stated. Last week Kuwait possessed 99 billion barrels of oil. This week it has only 48 billion barrels. As Byron King points out in his newsletter Whiskey and Gunpowder, this amounts to a 5% reduction in global oil reserves.

Of course it has been suspected for many years that OPEC countries' oil reserves have been over stated by 50%. This is the first official confirmation. If Saudi Arabia follows suit, it will confirm (Saudi oil magnates' nemesis) Matthew Simmons' thesis that the Saudi kingdom is near peak also.

Why is it in OPEC nations' interest to restate their reserves now? Maybe because times have changed. When these countries overstated their reserves, it was a buyers market in oil. Oil producers were suffering from falling energy prices. A larger reserve base meant a larger production quota, and greater revenue.

Now things are different. All OPEC countries are finding it hard to meet their production quotas for light oil. This stuff has become extremely valuable all of a sudden. Countries that possess large reserves of it have to think about defending their territory against the possibility of invasion. It would be safer to emphasize how little oil a small nation has, rather than how much.

It has also become clear that faster production means that a smaller percentage of the entire oilfeild will be recoverable in the end. Slower production preserves the geological integrity of the oilfeild. Few countries now are trying to maximize their production. Nations are now trying to steward their natural resources carefully, not sell them off as quickly as possible.

Import dependant countries, like the USA, Japan, China, Europe are making increasingly desperate pleas for more oil production, which are mostly going unheard. China is backing up its pleading with very large cash and military protection offers. The USA is mainly backing up its pleading with threat of invasion. When asked, the Saudis typically announce that they will increase production, but they never do. Instead they offer heavy sour oil, of which there is a glut on the maket, and few refineries can process.

I bet more coutries will follow Kuwait's lead in restating official reserves this year.

Thursday, January 26, 2006

strife at the plateau of oil production

Peak oil is not just about how much oil is produced, but also:
1. who gets it
2. who finances it, and in what currency

Strategic power is forcefully shifting east, to Russia, Iran and China. Jim Willie just wrote a killer essay on the geopolitics of oil. I quote Willie on why the USA cannot attack Iran to control its oil fields, like it did to Iraq:
The Iranian Oil Exchange challenges the Petro-Dollar. This time it is different. Iran aint Iraq. Iran has two big friends who have a good memory of recent heavy-handed dealings. When the United States invaded Iraq, established the reconstruction, and began to install a new government, it did so with little resistance. In the process two big events took place, not mentioned much by the lapdog US press & media. Russia got screwed out of multiple billion$ in Iraqi debt. China got screwed out of multiple billion$ in large energy contracts for Iranian oil & gas....

By enlisting Russian and Chinese assistance militarily, Iran has won some effective defense. Clearly, Russia is the key participant, but not without China supplying key Silkworm missiles themselves. Recall Putin is a master chess player. Russia recently announced the sale of world class missile systems to Iran. Be sure that overtaking Iraq was akin to taking the lunch pail from a 7-yr old boy sitting for a school bus. Overtaking Iran bears no resemblance to Iraq. Iran has over 70 million people, as opposed to Iraq's 23 million. Iran has no easy borders and no friendly neighbor for the US to base an attack. The "shock & awe" was mere target practice and an exercise of advanced weaponry on largely undefended sites...

If oil does not actually peak in the next five years, but production follows a bumpy plateau, the key question will be "who gets it"? If the USA gets less and China gets more, then there will be a major change in the relative prosperity of those nations. Also, Putin's Russia is becoming very strong, controlling most of Europe's access to energy.

If the worldwide banking and trading markets shift to Euros, which is something Putin wants, this could bring severe changes also. Our bankers would probably lend us enough cash to stay solvent, but require reductions in our defense budget..

Wednesday, January 25, 2006

innovation is overrated..

In the business pages I read companies bragging about innovation, ad nauseum. Their own innovation of course. Most ludicrous of all is Microsoft. Microsoft says innovation is their one true "core competancy". Bill Gates even says his position in the company is "chief innovator". Naturally companies can be expected to brag and bluster, but Microsoft innovative?

The problem is larger than an annoying business buzword. It is a philosophical assumption that innovation is always good, that there is no downside, that there is no cost nor drawback to innovation. A free lunch. Society, and particularly progress, depends on innovation. It is a freight train that can not slow down. If it did, then the unthinkable would have to be thought. The freight train of progress must, by definition, make the world a better place. Technology is widely admired. The myth is that it will make our lives easier and give us more free time. Like an ad for a handheld computer, showing a person in office attire using a gadget at the beach - technology has set the person free! The reality is exactly the opposite. Nobody goes to the beach more often because innovative technology has given them more free time. Innovation means working more hours, not less. We also assume that innovation is that proverbial rising tide that floats all boats. That everyone will benefit. But inconveniently, disparity of wealth is growing, not shrinking. The technocrats' answer is of course: more innovation.

We should be aware of what is lost with innovation. That is tradition. In America we are accustomed to despise tradition, we are so eager to replace it with something better, a more profitable, faster, bigger thing or way of doing. Accounting standards are a good example. Enron was among the companies that was applauded for innovative accounting in the 1990s. When Enron fell apart the innovation was relabled: fraud. The same thing might be said for fiat currency itself some day. It was a wonderful thing. Until it crashed. Then we might think there was a good reason that money was, traditionally, made from silver and gold.

Friday, January 20, 2006

I love it!!

"The market rout came as energy prices surged and as key technology stocks disappointed"
- MarketWatch

Wednesday, January 11, 2006

Not Shale Oil Again!!

I bet we'll be hearing more about shale oil, or Kerogen, this year. Canadian Tar Sand had a very profitable year in '05, thanks to a massive marketing campaign to promote Canada as the Saudi Arabia of the future. This year Colorado's shale will want some of that action. Really, all kerogen has going for it is that it is American. So, we can at least dream of energy independence. And some people will want to invest in that. I've thought for a while that it won't work, for a shortage of water, for one, and a very low return on energy.

Now Shell Oil has a particularly preposterous, and seductively innovative, plan to produce oil from shale. They intend to heat Colorado earth to 650 degrees F, from the surface to 1000 feet down, and let it cook for three or four years. This will turn the kerogen into light free-flowing oil! Lots of natural gas is also produced, which can be recovered, and many bi-products, which are mostly toxic. So that the oil doesn't escape (and pollute groundwater) they plan to construct a "freeze wall". This is a huge box of frozen earth that contains the boiling earth. They plan to do this for up to 1000 square miles!

Its hard to even imagine the environmental consequences of such madness. I read about this scheme in Dan Denning's Strategic Investment newsletter (I would link, but it is subscription only). My first reaction was that this would never work out, so why worry? But then I thought of all the people who are desperate to find the "next energy source", and the people who are desperate to achieve "energy independence", and the people who are simply desperate to get rich on any scheme no matter how stupid. And then I thought of how easily Shell and other oil companies will be able to raise billions of dollars just by making classy presentations (they will make presentations to everyone except the hapless residents of the shale country, who will have their land and health taken from them). And then the oil companies will have to do something with the dollars that they raise. They will have to go make a gigantic mess in Colorado. They will destroy what little, and very precious, groundwater there is in those high arid plains. Then naturally the whole thing will go bankrupt amid financial scandals.

So I just hope, as it becomes more obvious that we are facing peak energy, and we look to the future, and as our dollar starts its long final slide to irrelevance, that we do sensible things with the last of our capital and energy, not blow it on a dangerously idiotic shale oil boondoggle. Lets think about re-building America's rail system. There is a lot that we could fix in this country. No need to boil up Colorado.

Monday, January 09, 2006

Inflation in 2006

In the current Newsweek issue (January 9), Robert J. Samuelson says that 2006 will be a boring but moderately prosperous year IF nothing very bad happens to the US economy. Then he goes on to list 5 things that could derail the economy and send presumably it into recession. The five things are:
  • Housing goes bust
  • The dollar crashes
  • General Motors files for bankruptcy
  • Oil jumps to $85 a barrel
  • The yield curve inverts
    He did not see the need to ponder what would happen if all five things happen in the coming year. The all seem likely to me anyway. Except maybe the last item - I have no idea if yield curve will invert (I have tried to figure this one out. All it says to me is that the Fed is not in control. They want to raise interest rates, but they can only raise the short term rate, and the long term rate, set by the market, remains stubbornly low). But a housing market bust? virtually certain. The re-finance industry will come to a complete halt. Oil going to $85? Also near certain. And if a dollar buys that much less oil, and the liquidity in housing dissapears, then yes, the dollar will fall.

    There are some other dark clouds on the horizon that Samuelson didn't mention. War with Iran. This is looking more and more likely. Can there be anything more threatening? This would be the very worst thing at the worst time.

    A dark horse that no one seems to be thinking about is that commodity price inflation will spread from oil to such basic goods as corn, cotton, and soybeans. For now people seem to take it for granted that grains and other soft commodities will always be available at very cheap prices. I mean $2.20 for 50 pounds of corn??? I think corn will double this year and then double again next year. And corn is used to make many thousands of products. Same for soybeans. For years now the prices of these commodities have been held down by globalization: cheap production could always be found somewhere, like Brazil, Eastern Europe, if not America or Canada. But now the key factor in agricultural production is fuel and fertilizer (which is linked to natural gas) prices. These costs are going up worldwide, giving a very stong inflationary push to the dollar.