Thursday, February 6, 2014

Sykes on Saturday

Apparently the cost of fuel will increase tremendously.. Now i ask, is someone trying to manipulate the price again? Aivars Lode

I believe the world will never run out of oil. However, the world has run out of cheap oil.
Further confirmation of these beliefs has now been provided by Tim Morgan, global head of research for Tullett Prebon, a United States broker operating mainly between the financial and energy sectors..
Morgan has just published a book entitled Life After Growth, which I do not recommend to fainthearted investors. He's apocalyptic about the future of Western economies, but today let's just concentrate on his thoughts about energy.
Morgan believes economic growth has been achieved only through surplus energy. Back in the Stone Age, the hunters and gatherers expended all their energy just getting enough food to stay alive.
But if the hunters lifted their game so that two of them were able to support a third person, that person was free to develop better weapons and shelter and, importantly, agriculture. So surplus energy created economic gain, because agriculture freed yet more persons to develop valuable assets for their fellows.
The invention of the steam engine by James Watt in 1769 created even greater surplus energy and gave birth to the industrial revolution.
In Morgan's words: "All goods and services upon which money can be spent are the products of energy inputs, either past, present or future."
Morgan uses a ratio known as energy returned on energy invested (EROEI) to show the relationship between the surplus of energy created and the cost of energy consumed in its production. For the hunter-gatherers just breaking even, the ratio was 1:1.
The great oil discoveries of the 1930s took the ratio to 100:1; that is, 100 units of energy were being created for every one unit invested. So the cost in energy terms was only 1 per cent.
Morgan believes the ratio can fall to 20:1 without being disruptive, but once it gets below 15:1 (6.7 per cent) the cost of producing energy starts rising steeply. He estimates the ratio currently stands at about 17:1 globally.
He reckons energy will surely become more expensive in the future because oil that is cheap and easy to access is running out, and future sources will be more difficult and costly to develop.
Currently the world consumes about 85 million barrels of oil a day; the Organisation of the Petroleum Exporting Countries (OPEC) predicts demand will rise to 101 million barrels in 2030. But supply from existing sources is declining by about 6.7 per cent a year. Arithmetically, this means the world will have to find new sources capable of developing 76 million barrels a day in the next 16 years.
Morgan believes OPEC countries are unlikely to be able to supply that shortfall. He cites the giant Ghawar field in Saudi Arabia (the biggest conventional oilfield ever discovered), which is now declining to the point where Saudi Aramco has to inject 13 million barrels of seawater a day to sustain production.
"We have, necessarily, resorted first to those reserves which are most readily and cheaply recovered," he says. "The reserves that remain are certain to be more difficult and costlier to extract."
"The latest fashion in collective delusion concerns shale gas and oil. These may indeed exist in vast quantities, but EROEIs of barely 5:1 should make it abundantly clear that shales most emphatically are not the quick fix that many governments (and their electorates) might suppose."
He's also dismissive of the vast tar sands of Canada and Venezuela, saying their EROEI is probably little better than 3:1 and those which cannot be surface-mined can only be extracted using energy-intensive techniques such as steam-assisted gravity drainage, making EROEIs minimal or even negative.
For all these reasons, Morgan believes the 200 years of growth we have experienced since the early 19th century are over. So hang onto your oil and gas shares. If Morgan's only half right, they'll be worth a lot more one day.