Monday, March 20, 2006

NZ Ministry of Economic Development - US$40 Oil Soon.
Level 3 NCEA "Oil Forecasting"

"Both theory and empirical evidence suggests that oil futures markets are probably the best source of future oil price projections."
Oil Price Assumptions and Scenarios (Samuelson, 2005)

This report goes on to argue that after 2010 oil will drop back to around US$40 per barrel. I doubt Mr Samuelson would ever dare walk under a ladder or cross a black cat.

"Why are you whistling?", "Why to keep the elephants away of course." "But there aren't any elephants." "Ah you see it must be working".

For anyone aquainted with the topic of peak oil the above article makes interesting, if not comical reading. So, I recently asked Ralph Samuelson Senior Energy Analyst at the MED if he had any further information about their oil price projection modelling. What I wanted to know was how they go about coming up with the so far out of whack figures that are supposed to represent where the oil price should be.

This stuff always makes me laugh because economic arguments essentially display the classic characteristics of the Post-Hoc fallacy. "oil price plummets on increased stocks", followed closely by, "oil up after Bahgdad violence", and then today hilariously, "Oil trades near one-week low on speculation US supplies rose". Laugh if you like, yet this is how the MED's pseudo-scientifically titled "energy analysts" do their projections.

I can imagine headlines, "Oil price plummets after Federer wins Open", "Oil price reaches 6 week high after Mahmoud Abbas farts", "Oil price plummets after Sharon Stone wins Oscar". Ok, so I'm having some fun. However, such causal factors are quite possibly just as reliable as arguing because the NYMEX futures price for oil delivery 2011 is US$44.50, it shall be so. Or, as MED argues, this is the best way to figure out what oil will costs in 2011.

And there instantaneously is your justification for spending billions on Transmission Gully, by the end of the decade oil will be 40 bucks a barrel, how do you know? The futures market says so - excuse me but these fuckers are clueless.

The response to my email to the MED regarding where the get their figures from follows.

Hi Steve,
The assumptions shown in that document are still the ones we plan to use in Energy Outlook. Although the oil market is changing constantly, we believe the assumptions are still consistent
with the latest developments.

For a recent comparison of what other modellers
are saying, see, Table 20 (their p. 108).
For the latest futures market prices, see and click on the “crude oil” link.
I hope to see you at this afternoon’s workshop:
Cheers, Ralph

Forget any scientific basis for the models or the assumptions, forget any actual analysis. The only qualifications you'd need to be an energy analyst for this Government is the ability to use Microsoft Explorer.

My reply to Ralph Samuelson,

Ok, so I would be correct in assuming that the modelling is purely economically (ie. post-hoc) based.

I can't make the workshop although I did see it advertised, have classes to teach unfortunately. I think there is the "oil market" and then their are studies, figures and concerns of a more scientific nature which could validly inform modelling processes, perhaps that's outside your brief? At a minimum such scientific opinion could provide mitigating factors in your projections. I think the ASPO data and models are a good place to look first. It surprises me that (given we are supposed to living the "knowledge economy") that the MED use the futures markets to project the oil price, but fail to consider an international scientific bodys modelling and data.

That is, whatever the "market" says unless significant oil is discovered to offset current depletion rates the market might be in for a surprise. Ralph my argument is that the "market" assumes that oil is an infinite resource and it's just a case of getting it out of the ground. The EIA figures suggest this, when every single respected body on the planet are suggesting that by 2030 there will be significant structural supply issues in the oil market, yet the EIA (in AEO2006) have oil at (hopefully) US$33 bl. This is laughable. Are you able to do some modelling based on current depletion rates on all the majors against discoveries?

North Sea decline percentages are much higher than anticipated (7-8%) putting the UK on an increasing net import trajectory. News last month that Mexicos Canterell, third largest field I think is in decline, news in January that Kuwait's Burgen feild (second largest to Ghawar) is in decline. Rumour that the same thing is in store of Saudi's Ghawar very soon, I guess time will tell.

Both parties (the economists and the scientists) can't be correct in the long run (but I know who I'd rely on for reliable information). That is the economic arguments have oil returning to "normal" prices after 2010. How could that possibly be the case unless more oil the size of Saudi or Mexico is discovered based on current demand growth and offset against ever increasing depletion revelations (last year was the worse year for discovery since the second world war, in fact the price paid for exploration exceeded the value of the discoveries).

I would argue that to simply run with the economic arguments ignoring the scientific could be doing the country, the Government a big dis-service. Not sure what you think about this. As I say it's probably outside your brief to look beyond market indicators.

But Ralph, you have a very responsible job. You argue that oil will return to some reasonable figure by the end of the decade and the Government will pump billions into roads based on the data you guys provide. You present data however that oil won't return to 30 bucks a barrel, that it is on an upward trajectory, well over $100 a barrel by the end of the decade and investment in a more sustainable infrastructure might ensue.

Just on the EIA data again, the current AEO2006 high price scenario, that is the worst possble scenario $ value for oil projects the cost of oil at less than the current price. In fact the average of all the current figures is $31.91 (I quickly worked it out) - that's a discrepancy of 100%. They are all out by 30 odd dollars. They have been wrong for about 3 years now, how long do they all have to be wrong before you all start looking at the modelling? If you look to the last published (on the MED website) NZ Energy Outlook by your projections we all should be enjoying US$23 (from memory) a barrel oil right now.

How can all you guys be so consistently wrong? Have you considered that you're not taking into account what the scientific community is saying that we are on a irreversible upward trajectory ?

Steve McKinlay

Thursday, March 09, 2006

Roy Hemmingway Performs Korbut Flip
With a double salto ending in the lunge position.

Perhaps I'll leave it to you to judge.

Last Thursday
"Roy Hemmingway says it is a myth there is a high risk of Auckland blackouts from 2010 and another myth that there will not be enough power this winter"

and today,
"Electricity Commission chairman Roy Hemmingway said the situation had become a matter of concern. "

How can a myth be a matter of concern?

The NFI award of the week goes to Roy Hemmingway.

Tuesday, March 07, 2006

Oil, Simmons, Iraq and the forthcoming Electricity Crisis.

Matt Simmons and Peak Oil
There have been some very interesting articles written in recent days. Take Matt Simmons's very good article Outlook 2006 What a Difference 20 Years Makes in Crude Oil Prices. The key point to be taken from this article is how fundamentally wrong most economists got it over the last 20 years. Simmons illustrates how demand has exploded and new supply has shrunk. Typically Middle East oil made up any supply shortfalls however increasingly it seems we have already past the peak supply of sweet light crude, the easiest oil to produce, the simplest to refine into a final product.

Until 2005, OPEC had risen to the occasion and supplied constant surges in unexpected demand. Now it is clear - for anyone closely studying OPEC production announcements and other data on the true status of OPEC oil output - that the countries comprising OPEC membership are all producing at maximum levels.

By the middle of 2005 every rig capable of drilling in the world was in use, every key oil pipeline and processing facility is operating at 100%. Oil supply according to Simmons is tighter than it ever has been but more concerning;

2005 will go down in history books as perhaps the poorest year for exploration success for both oil and gas since World War II. This dismal success was not for lack of effort. Record amounts of funds are being plowed into E&P capital spending, which is why all the world's rigs are now in use.

Peak oil advocates are always going head to head the Panglossian optimists, those that place their blind faith in the market, or argue that technology and science will come to the rescue, "the world won't run out of oil for another 70 years or so.." Most of this crowd don't actually understand what peak oil means, nor do they understand the fundamental problem increasingly complex societies are faced with.

Economic growth necessarily requires an energy subsidy, and as existing energy sources become scarce and marginal returns diminish due to increasing societal complexity a civilisation must find a cheaper more abundant energy source to replace the scarce one. Otherwise, economic growth flounders, empires shrink, political and civil disarray emerges. Even technological investment itself is subject to diminishing returns, 4-5% increases in investment in technology are needed to produce around 2% boosts in productivity, at this rate we'd all end up scientists.

2006, Simmons suggests will be the year the Peak Oil debate intensifies into a debate on the scale of climate change.

Another good article dicussing peak oil appears in Scientific American, with a link to the infamous Hirsch Report (which strangely appears back on a US DOE website after going AWOL for sometime during 2005) is titled Facing the Facts on Oil. Worth a read!

Someone way too frightened to face the facts on Peak Oil is Nathan Paulsen, Minnesota Daily. Nathan wrote an article entitled Complacent and Addicated. Showing some weak concern, hey I guess we can say Nathans heart is in the right place but he just couldn't face telling the truth. I know this because I emailed Nathan and he came back to me saying in a meek rodent kind of tone, writing the column caused him a lot of "anxiety", and "I imagined that not one in a hundred of my peers has ever heard of peak oil". A lame excuse for bullshit I say. Nathan argued with reference to the Hirsch report that according to "broad scientific consensus" peak oil will occur within the next 25 years. Fucking Bullshit!

Wake up Nathan! If you had actually read the Hirsch Report and done even a minimal level of research, you would have recognised (AND REPORTED) that the most optimistic suggestions by the discredited IEA themselves (International Energy Agency) is in fact 25 years, nothing like erring on the side of "don't scare the horses" or maybe Nathan is afraid that in Minnesota he'd be lynched by a mob of Ford Explorer Lumberjacks. The other crock of shite from the IEA is that only after several trillion dollars (13 from memory, yes trillion is what I said) has been invested, several mega-oil-fields are found, ones the size of the mighty Ghawar field in Saudi, and all this assumes Canada's oil tar sands can be bought on board meanwhile to make up the shortfall.

Get it right Nathan, peak oil according to broad scientific consensus will occur by the end of the decade, if not already, or else very shortly after. I hate to think what life might be like in 25 years. I had a go at predicting what it might be like in 15 years (two years ago) In 25 years time Nathan there'll be fuck all of anything left, but love, hope, kids, shelter and life, a life red in tooth and claw, nasty brutish and short. Chur Hobbes.

There is an awakening backlash in the United States. People are sick of Iraq, not to mention the Iraqis are no doubt sick of the United States. This marriage made in hell is on the rocks and an ugly divorce is well overdue. After all ask yourself again why did they go there? Weapons of Mass Distruction? Terrorism. None of the 9/11 terrorists were from Iraq. There was no terrorism in Iraq before the US marched in. No, the US are there in an attempt to secure some large oil reserves. They've realised the project is a fucking failure and so just a week or two ago Bush announces we need to reduce our addiction to oil. A very good article predicting the downfall of the Bush regime was published on Scoop. Article by Bernard Weiner titled Conservatives Jumping Ship: Bush is Going Down. Essential reading!

Electricity Crisis Time! (already?!)
Roy Hemmingway Electricity Commissioner earlier last week inferred (my inference) that Meridian's Dr Keith Turner was an idiot. Well, lets face it if you have a theory or opinion and someone calls it a myth then they are calling you an idiot in a roundabout way.

Dr Keith Turner is warning of an electricity crisis due to low hydro lake levels, lake levels are similar to 1992 however electricity demand is much much greater today than 92. I like Keith Turner, he's committed Meridian to renewable energy development, he tells it as it is. He's not afraid of bad news.

But what I wanted to say was this.

If Keith Turner is right, he's warned everyone very clearly, that unless action is taken now there is a high probability of a very serious situation this winter, and Hemmingway is wrong

"Mr Hemmingway told the annual National Power Conference in Auckland yesterday that it was not the case that electricity supply would be short this winter."

"Roy Hemmingway says it is a myth there is a high risk of Auckland blackouts from 2010 and another myth that there will not be enough power this winter." (From Stuff)

If Hemmingway is wrong - he should resign.

Steve McKinlay
PowerLess NZ

Thursday, March 02, 2006

Where's My Free Lunch?

The popular truism, merely a restatement of the laws of thermodynamics, that is (simply) that you can't get anything for nothing is at strangely at odds with the economists "market will always provide", dogma. It used to be God that would always provide, but we mustn't forget, as we are told, we live in a secular society. And so, religious fundamentalism has been replaced by a corporate version of the same thing. Of course the market won't provide for free. No, and we ought to remind ourselves there is a double cost. The price we pay, and the price the environment pays.

Nevertheless, don't worry about supply, or the economy we are told - science and technology, like superman or the cavalry will come to the rescue. And so as New Zealand ponders the implications of the worst trade deficit in the history of our nation, more household debt that could be squeezed into a black hole it's "business as usual" folks. We all need to be MORE optimistic Dr Cullen tells us - otherwise we'll talk ourselves into a shithole. Forget the fact that we are hocking ourselves into a shithole in the name of "progress". No one for a second considers the possibility that we are a nation (a planet) living well beyond our means. Not just financially but in terms of our ability to continue to consume finite resources that we a constantly reminded are not finite, they are only limited by our minds or our ingenuity.

Don't worry about supply the American Roy Hemmingway tells us, will we run out of electricity, it's a "myth" Hemmingway tells us. Don't listen to the doom and gloom merchants - there's plenty of everything to go round. So, keep the spa-pool plugged in and head out to the Warehouse this Saturday armed with your credit cards for some retail therapy, it will help keep the economy ticking along too.

I say "the American" because, culturally Roy Hemmingway has a lot to answer for. His nation wastes more of every concievable resource the planet has to offer, all in the name of the "American Fucking Way of Life". We ought to be wary of the opinions of "optimistic" consumption champions like Hemmingway.

So, while Westport and the southern lakes run out of water, and while the economy looks like a jumbo jet running on one dodgy engine, there is a bizzare rush to bizzarely, build more motorways, because what we all really need in these uncertain times is less commute time. Surely somehow a faster trip to work in the morning will equate to billions of dollars in increased gross domestic product.

Oil production is expected to peak soon, next year maybe, or by the end of the decade. So, the billions that are spent today discounting the future, building Aucklands highways, will still be being paid back as we are on the downside of the production curve. After peak oil global production will be some 3 or so percent less each year, while demand growth continues to run at more than 3% per annum. Once this time arrives there will be no more economic growth because growth requires increased consumption of energy, as we are forced by circumstance to use lesser and lesser amounts of energy so too will economic activity and inevitably population claw back.

So what of the future? Ah, don't worry economists will tell you. For a 150 years scientists have been making discoveries, "they'll come up with something", like the proverbial magician pulling the the rabbit out of the hat. If we don't build the roads now, we'll all be sitting in our solar powered cars bumper to bumper circa 2015.