[Graeme]

The Petroleum Industry: Past the Tipping Point?

As Jon Stewart so beautifully satired a couple of weeks ago, American political leaders have long said "enough is enough" about the lack of a coherent national strategy regarding oil.

In the wake of the BP oil spill in the Gulf, is this time different? Will the U.S. finally be able to change its stance on petroleum? Will the petroleum industry itself be irrevocably altered?

Though I don't always agree with its perspectives, one of the better (i.e., more well-informed and reasoned) weekly energy newsletters I receive is "Musings from the Oil Patch", written by Allen Brooks, Managing Director of the boutique investment banking firm of Parks Paton Hoepfl & Brown.

In the June 8 issue, Brooks provides an excellent analysis of the future of the petroleum sector, entitled "BP Oil Spill Pushes Industry Beyond Tipping Point". The main conclusion of the essay is that the oil industry will never be the same - and all of the ways in which it will change should drive up the price of oil. His summary:

"Onshore oil and gas resources will become more valuable than offshore ones. Shallow-water petroleum resources may be worth more than deepwater ones. International markets will be more active and attractive for energy and oilfield service companies than the U.S. market. The domestic oil and gas industry will be less profitable in the future. New U.S. offshore drilling and operating procedures will become more onerous and expensive and likely require different, more capable equipment."

That's where the peak oil theory comes in. There are innumerable postings on the Internet about peak oil (see, for instance, the Association for the Study of Peak Oil), so I won't go into detail here. But, suffice it to say: in a world of increasing demand for petroleum (especially from places like China, where oil demand is growing at "astonishing" rates) and a finite planet with ancient organic matter (e.g., dinosaurs) converting to hydrocarbons not anywhere near as rapidly as hydrocarbons are being extracted, the long-term price trend can pretty much only be upward.

In the June 21 issue of ASPO's weekly newsletter "Peak Oil Review", editor Tom Whipple interviewed Jeff Rubin -- formerly the chief economist of CIBC World Markets and author of Why Your World Is About To Get A Whole Lot Smaller: Oil And The End of Globalization. Below is a somewhat lengthy but nonetheless fascinating passage from that interview:

"Depletion does not have to be apocalyptic. It will only be apocalyptic if we continue to consume oil as we have in the past when it was cheap and abundant. Because I'm an economist and believe in the power of prices, I believe that we're going to change.

huffingtonpost

[rockdoc123]

excuse me while I add some reality to this....horsepucky. We have explored to death all the onshore resources...there is bugger all left of any size to make most companies jump up and down about. We are in the deep and ulta-deep water for a reason, that is where all the remaining "big" resources remain. What will happen is more like this: oil companies will be forced to stop deep water exploration, small independants will keep trying to find resources onshore (mostly unsuccessful), we will exceedingly count on the spare capacity from OPEC which will end up being not as reliable as we might hope and finally we will beg the oil companies to go back into the deep water to explore. What is silly about all of this is no one is thinking about the time it takes from discovery to production. If you stop deep water exploration now, say for 5 years, we have basically lost any chance of giving ourselves the energy cushion we need to convert to other sources. And you can say, well good, this will make us convert sooner. My comment on that is that it will take much longer that you think to convert the economy over to any single or combination of energy sources.
Yes the disaster should change the industry. But the change should not be to stop exploring in ultra-deep water, it should be to explore more safely. There need to be more stringent regulations and they need to be enforced. There needs to be jail sentences for BP execs if it is found they were willfully circumventing rules or standards and it all needs to be looked at in light of the laws that were put in place after Exxon Valdez.

[Graeme]

Appreciate your comment - sounds reasonable from someone who has worked in this sector.

I also suspect that there will be even more incentive now to develop alternative fuels from various sources and conversion kits for the existing fleet of vehicles, and to introduce new models of cars/trucks that don't run on gasoline.

And this from new thread I've started:

The Deepwater Horizon disaster will inflate the costs and risks of offshore drilling, decimating oil exploration (just as the Three Mile Island accident put back the nuclear industry by 30 years).

In addition, there will be increasing pressure to move away from carbon-based fuels as climate-change legislation (ETS schemes and the like) puts further costs on using them.

[Tami]

I don't see how draining the planet of the last few drops of petroleum and spewing the results into the Gulf waters and atmosphere makes sense without a concomitant mitigation program, a long term, 20-year plan that would include conservation, improved oil recovery, fuel switching to electricity, hydrogen, etc. None of this is national policy.

Good. National policy, slavery, prohibition, abortion, hasn't really worked out so well for some.

Considering how well small incentives have worked out recently for things like wind driven electrical generation, why not some incentives in the arena of interest following by a lessening in the other? Lightly start to subsidize nukes, wind, tide, solar, non crude powered transport, start taking away depreciation and amortization favors in the oil business, changes to what is and is not a capital expenditure, certainly the Windfall Profits tax did a good job of driving the majors out of the country, maybe we can drive all oil based production overseas in 20 years, leaving us with nukes, solar and wind?

Stopping the insanity or fixing the problem? It sounds like you are waiting for Jesus to lead you out of the dirty water. Me, I am fixing the problem.

Got solar panels Rock?

Why would he need them? If I understand the gist of what is often talked about here and over at TOD, the world appears to be headed toward obviously plentiful and much cleaner natural gas? Certainly solar panels are nice though, and the American desert SW can become a major generator of power for some portion of the US, but the massive infrastructure built for NG east of the Mississippi would seem to make it a preferable fuel for the foreseeable future.