Re: Mea Culping

There are a number of serious market analysts who do believe the oil markets are overpricing oil.

I am wondering though on what basis the likes of George Yared claims that it is? I recall him saying he thought the equilibrium point on oil supply & demand was closer to $80/barrel than what it is now. The number that is in my head is $60 to $70 per barrel.

I tracked down the following article:

Beutel didn't know when that collapse would come, but he predicted it will be within weeks or months, not years.

But he didn't know just what might bring it about - perhaps the Federal Reserve increasing interest rates or a big drop in consumption as people worldwide can no longer afford to fuel their cars or heat their homes.

"If these prices stick, you may see whole neighborhoods where people abandon their homes," he said predicting that in the Northeast U.S. it will cost $5000 to heat a home unless prices fall.

Many analysts said supply and demand justifies expensive oil - maybe $90 or $100 a barrel - but $130 is just too much.

Now, long term I don't see us getting back to sub-$1.00/gallon gasoline:

"To see something run this far and this fast, you see it leveraged by financial players," said Neal Dingmann, senior energy analyst at Dahlman Rose & Co., a New York-based energy investment boutique. "The direction is corerct [sic], the speed isn't."

Ibid.

It very much appears that the thought is that oil will eventually be at a solid $135/barrel but that time is not now. That it is speculation driven and does not contain a basis in reality. Please note, the same article contains opinions of oil analysts who believe there to be a solid and current basis for $135/barrel oil.

I have paid particular attention to all of this, I have been at times documented my mileage and such details as gas cost and the like. One thing I have noted is gas prices tend to hit their annual peak right now and will subside to more sane levels as the summer advances. In fact, the highest gasoline price I observed from last year occurred on May 30, 2007. However, remember history repeats itself until it doesn't, that is past trends may not continue to hold.

The Bakken Play - Follow Up

John Derbyshire at the Corner blegged for some information on the Bakken Oil Reserves. I responded by pointing him at our discussions but it does not appear he published any references.

However, he did note this discussion at the Oil Drum. Essentially, the discussion at the Oil Drum states the actual amount of oil in the Bakken Reserves is about what the hype had it made out to be, the problem is actually recovering the oil. The writer at the Oil Drum feels the USGS estimate is optimistic and believes the Bakken Oil Reserve will underproduce. Very interesting read and gives a good feel for the geology we are working with.

Re: Re: Bakken Oil Analysis

Lance says:

Looking back on those stories, I see a lot of “estimates,” but no real sourcing for those estimates. So it looks like I got sucked into speculation that was too good to be true.

The fellow I refer to in my post LC Price set it all off:

Then the stuff of legends came, along with one geochemist by the name of L. C. Price. Mr. Price, working for the US Geological Survey [USGS] performed extensive chemical analysis of abandoned oil wells, primarily in North Dakota and came away with an astonishing conclusion—The Bakken trend contains up to 200 billion to 500 billion, yes that is with a “B”, of original oil in place.

Source: The Bakken Trend: Lost Dutchmen Mine of the Oil Patch? – Seeking Alpha How did LC come up with his estimate? I have not seen his paper nor would I probably be able to really understand it (not having studied much geology).

Geologists and oil companies have known of this reserve for a long time, it is just costs more to coax the oil out of the ground there and only now with $110 per barrel oil is it feasible to extract that oil.

Bakken Oil Analysis Out

The USGS released its Bakken Oil analysis today.

Back in 2000 a guy by the name of LC Price put together a paper on the Bakken oil reserve and estimated the the reserve to hold between 200 and 500 Billion bbl.s of oil. I have seen some estimates go as high as 900 Billion barrels of oil. For comparison Saudi Arabia is thought to be sitting on 260 billion barrels of oil. However, the USGS did not release Price's report (Price has since died) and did further analysis of the reserves. The USGS released the much anticipated report today and the result is...

Nowhere near the numbers tossed around above. The USGS estimates the Bakken Reserve to hold about 3.65 billion barrels of recoverable oil. This increases our nation's known reserves from 14% to 19%. Not quite the spectacular as the hype (how typical). However a few things.

As our technology and expertise increase we will most likely bring more of the oil in the reserve into production. Secondly I recall reading (sorry can't get the source) that oil production in Alaska is outperforming early reserve estimates.

However, remember what I was saying yesterday, this is not cheap oil. Even if the amount was according to the hype the oil is hard to recover and most likely is more problematic to refine.

In addition the the petroleum there is natural gas to be found there.

The Bakken Oil Reserves

Here is a poorly written, but informative, paper on the Bakken Oil Reserve. This deposit has been known since the mid-70s (Wiki says it was described in 1951, but I don't know if that was the geological formation or the fact it may contain a lot of petroleum) and it appears the oil (according to the Wiki entry on the Bakken Oil Rserver) is more difficult to extract than what oil producers like.

The impression I get is this oil reserve is only going to put an end to the rise in the real price of oil and is only going to be able to drive the price of oil down as we learn how to more productively extract it. That is, even if this oil source lives up to the hype and we get good production online in a fast manner it probably will not do much to lower the price of oil. It will do much to weaken OPEC's hand, which is not a bad thing (however remember OPEC's hand also consists of the fact a lot more people want oil now than before).

The paper I cite above notes numerous times the ability to extract oil depends to a large extent on the price of oil. If all of a sudden oil goes back to under $50/barrel then the Bakken oil is probably not going to be worth going after. However, I am skeptical we will see current oil production become dirt cheap again (or at least not without a very serious shock to the world economy) at prices like they were at the end of the '90s and early '00s (even with the recovery of the dollar).

There is a lot of variability in the estimates of the total amount of oil as well as how much of the oil is recoverable.

I was talking with a guy at the pump in Kaukauna a weekend or two ago and warned about how this area is probably home to the ultra-endangered hairy-nosed prairie dog (a tongue in cheek invention) and he laughed and said if the estimates are confirmed to be as good as the early papers indicate then no hairy-nosed prairie dog is going to stop the extraction of that oil.