November 6th, 2005

Oil prices...

Apparently, our recent flirtation with $3/gallon gasoline is hurting the oil companies so much that Exxon's profits almost doubled to a record $10 billion. Oh, and their production is down, due to this and that and oh incidentally "maturing oilfields". Hang on, gasoline is selling for such a high price their profit per gallon doubled and yet their production went DOWN? Why on earth would that happen? Simple. They'd produce more if they could, but they can't. We've hit peak production.

Hint for understanding that last link (on "maturing oilfields", go read it), the concept of "peak production" is very simple. We're not about to run out of oil, about 50% of all the oil we started the century with is still in the ground, and there's oil shale and other stuff like that. But the problem is the _rate_ of oil production. The number of barrels/day we can suck out of the ground declines as the levels drop lower. When Saudi Arabia started pumping (using steam extraction), it was getting 80% oil and 20% water out of the pipe. Last I heard it was getting 20% oil and 80% water, and the ratio continues to worsen. Sinking more wells makes this problem _worse_. So even though it'll still be getting oil out of the ground for decades to come, the _rate_ of production has peaked, and will only decline in future. And the problem will only get worse, because we found all the big oilfields a decade or two ago, once sattelites and seismic technology got decent. Yes we find new oilfields all the time, but they're smaller and smaller. All the big ones were easy to find, even with older technology. And a small oilfield not only has less oil in it total, but it also produces fewer barrels/day. That's the peak production problem in a nutshell.

(Look on the bright side: we could be using natural gas which floats to the top of the well rather than sinks to the bottom. That means that natural gas well are more or less producing at full capacity one day and then suddenly run out. Some people have suggested a greater reliance on natural gas. This is stupid, setting us up for future sudden if not catastrophic energy shocks. Oil at least tails off gracefully and gives us plenty of _warning_ it's running out. Not that oil companies want to admit they haven't got virtually unlimited quantities of the stuff.)

So it's nice to know that the ex-oilman president is doing so much to keep the country's energy infrastructure in good shape. Remember, this is the idiot who, two weeks into taking office in 2001 (with gas prices already at $1.50 a gallon and climbing), he set up a task force to come up with an energy policy, that said we should continue to rely on oil for the forseeable future, and focus on laying new oil and gas pipelines to keep up with demand? (Read page x of the overview.) Apparently, he also refused to sign the Kyoto treaty because Exxon told him not to. Interesting how the Saudis used to be screaming that they were pumping at capacity and they just couldn't get oil out of the ground any faster (remember, when their oil fields were new what came up out of the pipes was 80% oil and 20% water, and last I heard they were down to 20% oil and 80% water. That means five times as many wells to get the same number of barrels/day out of the ground...) And _now_ what everybody's suddenly shifted to is "oh, refineries. That's the bottleneck, refining capacity. We just have to build more refineries." How reassuring. How does increased demand for crude oil from china affect _our_ refining capacity? If refineries are the problem, why are they rushing into the arctic national wildlife refuge to drill under there? If refining is the problem, how was the release of unrefined oil from the strategic pretroleum reserve after hurricane katrina supposed to help matters?

No, refining _isn't_ the real problem. Peak production actually occurred a couple years ago, and the elephant in the room is the increasing demand for oil from china. For a while we thought Russia's production capacity coming back online would buy us a few more years, but China sucked it all up, and more. We can't pump more to meet that increase in demand, and sinking more wells will just slow down the ones we already have, and even without demand increasing to match GDP it'll be a struggle to pump the same amount of oil next year as we did this year, with the fields "maturing". But blaming refining is reassuring because it's something we can do something about. Peak production at the oil well level isn't. We've sucked oil wells dry before: they generally last somewhere around 30 years. The rate at which we found new oil wells peaked a couple decades ago, and the rate at which we started cracked the suckers open and started the sucking peaked more than a decade ago. That part's public knowledge. And now we're paying $2.50/gallon for gas because of "refining capacity". Right...

The oil money flooding the middle east is obviously pouring sugar on an anthill that's been continuously at war for the past millenia, and our response to it finally winding up on our doorstep isn't to try to cut back on the oil money but to declare war on the only secular regime in the area. (What, you think the Saudi regime isn't evil? A theocratic monarchy where women aren't even allowed to drive cars, home country of most of the September 11 hijackers, and also home of the Bin Laden construction company Osama inherited his money from in the first place? Yeah they're currently our friends, so what? Remember how we're the ones who armed and trained the Iraqi Baath party back in the 80's back when THEY were our friends? So now we're there out of what, a sense of moral indignation? Can _anybody_ say that with a straight face? After intentionally leaving them in power after the first Gulf war?)

Our response only makes sense if you think about somebody _not_ trying to stabilize the geopolitics of the region (a war creating a puppet government ain't gonna do that; we stayed out in 1990 so as not to _destabilize_ the region, and to avoid an obvious repeat of vietnam where 10 years after we expected to be gone we're still having trouble fighting some unknown percentage of the civilian population; it's not easy fighting people with day jobs who _moonlight_ as enemy combatants. Armies are good shooting large groups of people who are all wearing the same uniform. As a tool of forensic investigation trying to figure out whodunnit when a bomb goes off in a crowded restaurant frequented by GIs, they suck. That's a police job. Vietnam also a "police action" conducted by the military. Didn't work any better than, and didn't get wrapped up any faster. Imagine some idiot had decided to respond to the mafia presence in New Jersey by sending in the army. We didn't even do that against Al Capone in chicago during prohibition because it DOESN'T WORK.)

No, the thing in Iraq only makes sense if you realise we're trying to secure access to a steady oil supply, especially in the face of China's jump from importing almost no oil to importing over 12 billion barrels a year in what, a ten year period? (Don't forget the extreme leverage China now has over the US government as the largest holder of the treasury bonds financing W's deficit. Remember the government shutdowns a few years ago when they couldn't pass a budget in time? China doesn't have to call in its debts; guess what happens if they simply threaten to stop loaning us _new_ money? Now in this context, can we afford to get into a bidding war with china trying buy a finite monthly supply of oil from other countries, or do we have to go out and grab it? On the negotiation front, there is NOTHING we can do to stop china from buying all the oil they want, preferentially, ahead of us. Because Bush mortgaged our government to them, because with all the federal embezzlement going on (no-bid contracts for Haliburton are just the obvious tip of the iceberg: every dime of federal money spent gets spent ON something, and gets spent TO somebody. Guess who?). No he can't balance his darn budget any better than his father could, and he's happy to sell the country to china to have money to spend. Because, despite tianamen square, they're our friends right now. See "moral outrange"...)

Meanwhile, those of us who think we should have been working to reduce consuption and come up with alternatives years ago were ignored. There are alternatives. Wind power generating electricity is the most economically viable current alternative, it scales well and we don't need new discoveries to make it work; guess what Holland's been specializing in for centuries? The netherlands exports the majority of the world's electricity generating windmills, as prebuilt kits, and they've got them in the gigawatt range. I've seen estimates that say five western states could produce enough wind power to meet at least the electrical demands of the continentual united states. We just need to build the darn things. And as for fuel for vehicles, if we electrolyze water we can store and transport the hydrogen; we know for a fact fuel cells work. (Storing and transporting hydrogen is tricky, a liquid would be much nicer but liquid hydrogen is _dangerous_. And yeah, the turbines chop up birds. As opposed to oil slicks and exhaust pipes. And yes, the best places for wind power are deserts like west texas where we'd have to pipe _in_ water to electrolyze it. This is all just a question of how much we're willing to invest in building infrastructure. Spending more money on oil infrastructure is throwing good money after bad at this point, we hit diminishing returns five years ago, now it's getting _silly_.)

And it's not like gas going from 90 cents/gallon to $1.50/gallon wasn't a big red warning sign. But no, reducing oil consumption would be bad for Exxon. It wasn't what Bush wanted to do. It's what he actively did NOT want to do, because it didn't funnel money to the people who paid the record amounts of money for his election campaign.

Oddly enough, Exxon's position is right out of The Innovator's Dilemma.

Rob
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