We’re Not Alone…

Thank GOD! I thought to myself. They’re here!

My mind raced. We’re not alone in the galaxy. The aliens have arrived. They’re going to save us. Kind of like at the end of Star Trek: First Contact.

My mental gears kept turning. Unless they’re here to destroy us with death rays, like in The War of the Worlds. And then eat us, like in The Thing. All while they take our oil, gold, rare earths, tungsten, cobalt, vanadium and other good stuff. Like in Independence Day.

I wondered if an alien would leap out from the floating disk and say, “Take me to your leader?” Hmmm… But would some trigger-happy National Guardsman pull a Kent State and shoot him, like in The Day the Earth Stood Still?

Oh, man. We don’t want to get pushed around by the aliens, of course. But if somebody shoots the alien, it’ll make for trouble. We’ll have an interplanetary crisis on which hinges the fate of humanity.

Hmmm… If somebody shoots the alien, my advice is to sell your stocks. Go to cash, pronto. Meanwhile, you’d definitely be glad you bought gold — and TOOK DELIVERY! See? I told you so. When you buy gold, take delivery.

It’s All About Ratings

I pondered the cosmic implications for, oh… all of about half a second. Then I listened to the television announcer in the background. He described how an errant balloon was drifting over Colorado with a little boy onboard. Damn, I thought. No aliens. Just a bad imitation of The Wizard of Oz.

Then the milk of human kindness began its slow IV drip into my veins. For as much as I’d have preferred real aliens landing to take over (c’mon, could they be worse than the current crop of commissars?), I worried about the little boy.

I figured that yes, maybe it was happening like the TV drones were saying — although TV drones often lie like rugs. A wayward balloon? A little boy? OK, it might be real. If so, then it’s high drama, literally. Stranger things have happened. Remember the OJ slow-speed chase in the white Ford Bronco, through Los Angeles, down Interstate 405, back in 1994? Historic, no?

Yep, maybe some little tyke climbed into a gondola. I’d hate to have the kid fall to his death from a balloon. In living color. On the 42-inch flat-screen TV with awesome resolution. Of course, the TV news vultures would be all over the story. Live at Five. I can only imagine the headline in Variety: “Kid Falls, Ratings Soar.” That’s showbiz, right?

Except, as you surely know by now — unless you’ve been living on Mars or something — there was no little boy on the flying saucer. It was just some guy trying to do a publicity stunt. It was all a hoax.

Not a Hoax — We’re in Trouble

I’ll tell you about something that was drifting over Colorado last week, and it’s NOT a hoax. It’s Peak Oil. I attended the 2009 international conference of the Association for the Study of Peak Oil and Gas (ASPO), out in Denver. Here’s the long and short of it. We’re in trouble. With a capital “T,” and that rhymes with “P,” and that stands for Peak Oil.

Last week, I told you about how Marcio Mello, one of the explorationists that discovered the offshore Tupi oil field of Brazil, gave ASPO a spellbinding stemwinder of a keynote talk about the newly discovered oil resources of the Brazilian pre-salt play. It was a great talk. I believe Marcio. Not only do I believe him, but I’m choosing investment ideas based on his research. Marcio has changed the thinking within the world oil exploration community. Marcio is a player. He’s a game changer.

But let’s get real about this. Sure, there’s a LOT more oil out there. As in, “out there,” 150 miles and more offshore, in 8,000 feet of water and deeper, beneath 20,000 feet of rock and salt. You see the problem, right?

Yes, that offshore resource is out there, and it’s super hard to extract. This is not the “easy oil” of the good old days. (Just kidding. It’s never been easy.)

But we’re looking ahead. And that’s why we’re invested in the future of deep-water oil, plus subsea equipment builders and service companies. These are long-term plays, for a long-term process of deep-water development.

Meanwhile, Brazil is still building the shipyards in which it will build the drill ships and platforms, which will develop the offshore arenas, over many, many years. Again, you see where I’m going with this, right?

Sure, there’s a lot of offshore development going on now. But there’s much, much more that’s going to happen in the coming decades. It HAS to happen. And that’s the problem. It’ll take time. And capital. And many people with critical skills. And some of those critical skills have not yet been developed. And it’s just super complex. By comparison, maybe building a flying saucer is easy.

Peak Oil: We’re There

By every measure, the world’s output of crude oil peaked between 2005 and 2007. Peak Oil? Hey, we’re there.

What do I mean? That’s output of crude oil, as in conventional petroleum that flows or gets pumped out of wells. Yes, the worldwide total output of what we generically call “oil” has risen — slightly — in recent years. But that’s because there are increasing volumes of natural gas liquids (NGLs) in the mix, plus unconventional oil like what the global marketplace obtains from Canada’s oil sands.

Let me focus on NGLs for a moment. In other words, the global energy industry is blowing down the gas caps on older fields. That’s how you get NGLs. That, and spinning the NGLs out of tight gas, like what we see with another recent addition to the OI portfolio.

In a macro sense, it means that the global energy industry is pulling what’s left of the conventional oil out of the early-discovered fields and taking the gas too. When it comes to Peak Oil, we’re there, and in fact, we’re past it.

The future of conventional petroleum output is downhill, even with the future output from the deep-water offshore discoveries. That deep-water oil will sure help, but it won’t power the world of the future the way it powered the world of the past. We live in a different world now.

Thus, the energy future is all about transition to something else. It gives a whole new meaning to that phrase, “Take me to your leader.” Huh? What leader? Most of the world’s policymakers are clueless about this.

More on NGLs, and “Oil Pharmacies”

Let me clarify things some more. NGLs are hydrocarbon fractions that are not methane and ethane. NGLs are present in the high-pressure, high-temperature gas that flows from the ground. But NGLs are not gaseous at surface conditions. After a short time at the surface, NGLs condense out of the gas flow and become liquid. It goes back to Boyle’s Law and the “ideal gas law” in chemistry.

NGLs condense out of natural gas flows, from oil field gas caps and from some tight-gas output like we see in the Marcellus Shale of Pennsylvania. NGLs include things like propane, butane, pentane and other items up the hydrocarbon chain, up to and including high-grade gasoline.

NGLs are nice. But they’re not crude oil. According to Matt Simmons last week in Denver, “There’s no such thing as West Texas Intermediate [WTI] oil anymore.” Mr. Simmons states that places like the pipeline crossroads at Cushing, Okla., are little more than “crude oil pharmacies” anymore.

That is, there are lower and lower flows of conventional oil from the wells of the traditional U.S. oil patch. Thus, operators at Cushing take whatever oil they can obtain from one place, plus whatever oil they can obtain from another place. They mix and match, and blend it all with synthetic crude from Canada. Maybe they add some imported oil juice and then send it down the line as WTI.

Along those lines, Venezuelan economist Carlos Rossi stated to ASPO his analysis of oil trends in the U.S. “You are worried about your foreign oil imports now,” he said. “You in the U.S. import about 65% of your oil today. You don’t like it. But if you follow the clear trends, by 2025, you’ll be importing about 92% of your oil. You’ll like that even less.” No doubt.

On that cheery note, let me quote James Kunstler, who recently summed up the problem, describing “the tragic evolution of an industrial economy into a financial-finagling economy.”

Jim Kunstler’s view is that sooner or later, the citizens will awaken and wonder how the energy situation could get so out of hand, or “stealing of their future,” as he phrases it. “Whatever else one might say about American culture,” adds Kunstler, “it is keenly attuned to a sense of heroes and villains. We take great pride in our ability to blow away the bad guys.”

Maybe those aliens realize this. And that’s why they haven’t shown up yet.

Until we meet again,
Byron King

October 27, 2009

Deep-Water Oil Won’t Cure Peak Oil was originally featured on Whiskey and Gunpowder

That’s the most that can be produced. So when recession causes a temporary decrease in world consumption, it can seem like those 85 million barrels are enough. But consumption is bound to resume its upward climb, while those 85 million barrels a day are all we get. The day of reckoning has just been delayed for a little bit.

“Can’t we get more than 85 million barrels?” some folks are bound to wonder. Let’s look into that.

Those Stubborn “Peak” Curves

This week I was in Denver, attending the 2009 conference of the Association for the Study of Peak Oil & Gas (ASPO). Despite all the happy talk in the Big Media about how the oil situation is under control, I assure you that the oil situation is NOT under control.

The market meltdown and world recession of the past year has bought some time, or stolen some time may be a better way of saying it. All the “peak” curves are still out there, but are merely adjusted a bit to the right on the timelines.

As Marine Corps Gunnery Sergeant R. Lee Ermey likes to say on the television show Mail Call, “Wipe that smile off your face.” We’re staring at an energy problem that’s coming down the tracks like a runaway freight train. It’s just astonishing that more people don’t appreciate the looming impact of Peak Oil.

Meanwhile, the politicians are fooling around with the health care issue. Hmmm… I have some news for them. If you screw up energy, health care isn’t going to matter very much.

Oil Output Not Increasing

It might be a comforting thought to believe that world oil output can increase. Indeed, many policymakers in the U.S. and Europe apparently dream themselves to sleep at night pondering how the current oil volume of about 85 million barrels per day could move upward to, say, 95 million barrels per day — “if only the world oil industry were more efficient.”

Yeah, right. Except the global oil industry is not that model of dreamland efficiency. Sure, there are some bright spots. The big internationals like Exxon Mobil, Chevron, BP, Shell, etc. are good. There are some really good state oil firms like Brazil’s Petrobras and Norway’s StatoilHydro. Saudi Aramco is outstanding. These guys are all doing great work to keep the world’s pipelines and tankers filled.

But much of the rest of the world’s oil industry lacks the knack for capital discipline and crisp project execution. Venezuela’s oil industry is a basket case, what with the Chavez-led nationalizations and mass firings of recent years. Output is falling in Venezuela, and this from a nation with among the largest hydrocarbon reserves anywhere in the world.

Mexico’s national firm, Pemex, is nothing but a piggy bank for the politicians, who suck most of the investment capital away from the oil patch and into their own boondoggles. Thus is Pemex walking off a cliff of underinvestment, depletion and decline. According to Matt Simmons, Pemex may not be exporting any oil at all to the U.S. within 18-24 months.

Iran’s oil industry is in a slow death spiral, despite the occasional report of Chinese assistance with field development. Apparently, there’s a “Twitter Revolution” going on in Iran that includes people at the grass roots impeding the oil industry. Well, it worked to depose the Shah back in 1979. Perhaps the Iranians can rid themselves of their mullahs in a similar way.

Next door in Iraq, chaos reigns. According to Matt Simmons, the Iraqis “are in the dark about how to run their oil industry.” The Iraqi oil legislation is so burdensome that almost all players within the international energy industry are spurning Iraq, including the Chinese. Wow. When the Chinese won’t invest in your oil fields, there MUST be something wrong.

And so it goes. The bottom line is that we should expect a global oil shock by 2012, or earlier if global economic activity kicks into high gear. It should go without saying that despite any calamities that may come from such a thing, you would be very happy if you’d taken advantage of lower oil prices to stock up.

Until we meet again,
Byron King

October 23, 2009

Peak at 85 Million Barrels of Oil a Day was originally featured on Whiskey and Gunpowder

In a riveting talk that lasted well over an hour, Marcio detailed the immense petroleum potential of offshore Brazil, as well as the Amazon Basin.  If Marcio’s estimates are correct, Brazil may be the location of near 200 billion barrels of additional petroleum resources.  That’s well within the range of current resource estimates for Saudi Arabia.

For good measure, Marcio described the petroleum potential of offshore West Africa — another 130 billion barrels — as well as the Congo region, with 50 billion barrels or more.

Finally, Marcio described the “unknown potential of the US back yard, the Gulf of Mexico (GOM).”  Marcio offered remarkable insight into the deep regions of the GOM, 100 miles and more offshore Texas and Louisiana.  He showed early work he performed on a number of GOM areas, including the site of BP’s (BP: NYSE) recent billion-plus barrel find at the Tiber site.

It was clear from the reaction of many in the ASPO audience that Marcio hit nerves.  If his analyses of the South American, African and GOM petroleum systems are right, then in the future the world has access to much more conventional oil than people previously believed.  But it’s not the same as saying the nothing has to change in modern habits of energy use.  Getting this oil will require a trillion-dollar level of offshore, deepwater investment.  It’s a 50 to 100 year project.

The new thinking about deep petroleum systems may allow the world’s energy thinkers to back off from raw geologic concerns about the wheres and how-muches of resources.  But like a game of “whack-a-mole,” the reduced worry about geology now translates into a new emphasis on exploration and development technology, as well as capital, skilled personnel, political issues, environmental safety and climate alteration.

In the past 20 years, Marcio has pioneered the idea of detailed geochemical analysis of “petroleum systems” in the Southern Hemisphere.  The goal of the work is to identify and locate deply buried oil-bearing zones.  Marcio’s work led directly to dozens of oil finds by Petrobras, both onshore and offshore.  His work has also led to significant oil finds in the Caribbean region, Colombia and Peru.

Some Bad News

After Marcio Mello offered his ebullient view of future oil supplies in the world’s deep waters, the next day was a return to earth for the assembled throng at the Denver meeting of the Association for the Study of Peak Oil & Gas. The day was filled with well-informed viewpoints on the looming issues of energy scarcity in a capital-constrained world. Among other things…

Geologist Art Berman offered a decidedly negative view of the latest “big thing,” which is obtaining large volumes of natural gas from tight shales. In a comprehensive review of production and flow rates from several thousand wells drilled in the past decade in the Barnett Shale of Texas, Mr. Berman has a gloomy forecast.

Looking at a large sampling of Barnett wells, the overall data reveal that initial gas flows decline rapidly. With some wells, the drop-off is as much as 70% in the first year, with further declines of 20% in the second year.

This hardly dovetails with the happy talk about how “shale gas” will supply U.S. energy requirements for the next several decades, if not a couple of centuries. It appears that most Barnett wells are short-term money losers, with a few prolific wells carrying the bulk of capital expenditure. Across the industry, according to Mr. Berman, the whole process stays afloat due to liberal application of borrowed money, as well as dilution of existing shareholders by production companies issuing new stock.

According to Mr. Berman, the picture is not much better in other shale plays, such as the Fayetteville and Haynesville shales. And similar gloomy data are just now starting to come in on the embryonic gas play in the giant Marcellus formation of Pennsylvania.

And Peak Oil Still Looming

Matt Simmons gave another of his famous talks about the specter of Peak Oil. The only things that are changing, according to Mr. Simmons, are that things are getting worse for future energy supplies. It’s difficult to say with specificity how bad things are, because the data are so poor on a worldwide basis.

“Look at what happened with the bad information we had, or didn’t have, with the financial institutions over the past couple of years,” said Mr. Simmons. “With our energy data, it’s worse. We’re in for some shocks that will change our lives in ways that’ll rival Pearl Harbor.”

Expect to see oil at $200 per barrel by the end of 2010, according to Mr. Simmons. Also expect to see net oil exports from Mexico simply vanish within 24 months or less. This will play havoc with U.S. refiners on the Gulf Coast. Mexico has simply delayed for too long its effort to explore, drill and rebuild its fast-depleting oil resources. Mexico is going to have to scramble to salvage something from its looming energy disaster. These die are cast.

Things could go wrong with energy supplies in any of a dozen places, according to Mr. Simmons. For example, there’s a stealth “Twitter revolution” in Iran that’s slowly shutting down that country’s oil production. Shutting down the oil industry was the straw that broke the camel’s back and brought down the Shah in 1979. There’s some thinking that it may work to rid Iran of its mullahs.

In Venezuela, the output of the state oil company PdVSA is declining at alarming rates due to political interference and underinvestment.

In Nigeria, the low-grade civil war could quickly morph into a large-scale civil war.

In Iraq, according to Mr. Simmons, “They’re in the dark about how to rebuild their oil industry.”

And of course, a lucky terrorist shot could take down any of hundreds of major oil installations worldwide, wreaking havoc through the following ripple effect.

Mr. Simmons admires Brazil’s Petrobras, calling it “the finest large oil company in the world today.” But the offshore success of Petrobras will simply not be able to make up for the multitude of other problems with the global energy industry. There won’t be enough oil, and it won’t arrive in time. Longer term, Mr. Simmons expects to see oil at $500-700 per barrel. “People need to understand how expensive it is to obtain oil,” said Mr. Simmons.

Much of the world’s energy infrastructure is old and rusting and will require several trillions of dollars to replace — if it can be replaced. (Is there enough steel, for example? Where will the money come from?) Add the aging work force, within which many new hires were laid off in the past year. There’s a serious lack of skilled talent across the board, and no amount of clever management and automated “expert systems” will make up the difference.

Finally, new technology is coming on line slower than most people anticipated. The deeper, more challenging environments are sucking down technology and money, and yielding less than expected in many cases. According to one study, only eight out of 100 major energy projects came in on time, were within budget and yielded the expected volumes of oil and natural gas. Thus are high costs, delays and reduced cash flows hurting the ability of the energy industry to maintain adequate levels of capitalization.

The stark fact is that oil is going to get a lot more expensive and the bull market in oil will be firmly in place for a long time. Smart investors would take advantage of any corrections or dips to get themselves set for the ride.

Until we meet again,
Byron King

October 20, 2009

An Update on Peak Oil from ASPO was originally featured on Whiskey and Gunpowder

The published inflation data are surprisingly unsophisticated in so far as they compare current prices with a snapshot a year earlier.

Just over a year ago, oil was every hedge fund manager’s favorite speculation. In summer 2008 a barrel got to well over $140, before falling sharply back.

That summer’s high oil price had the effect of canceling out the deflation which was occurring elsewhere in the economy, as the first phase of the credit crunch started to bite. It helped keep inflation up.

But by summer 2009, after hitting a trough of $30, the price was back down around $65 representing an annual fall in the oil price of over 50%. Now it was keeping the inflation figures down. Oil would continue to be below the price of 12 month previous throughout the period from January ‘09 to September ‘09.

Now – in the fall of 2009 – prices are more or less where they were a year ago, but 12 months ago they were falling fast, while now they are rising. So for the first time in over a year the effect of oil prices in the inflation figures, in October/November 2009, will be up again. And by January, even if prices don’t continue to rise from here, the low prices of winter 2008/9 will form the base. Oil will again be at twice the price it was a year earlier. This will have a marked impact on inflation data.

It’s not only the energy markets that threaten the “low inflation” data currently encouraging bondholders to continue buying government debt paying little more than 3.0% per year. There are well over two billion Chinese and Indians who used to make the unwelcome but necessary market adjustments on the demand side when world grain prices rose:

Some 30% of the world’s population went hungry.

Until the current decade, that was an important part of how world demand came into line with dips in world food production, before big price rises would cause Westerners to feel the sharp pain of a world food shortage. But this has now changed, and permanently.

The wealth and dollar reserves of the Asian countries are now large, and their people are not going to go hungry in future (and quite right, too). Instead they will be competing on world markets, and the price of grains will start to show the very sharp spikes associated with unreliable supply and a newly inelastic demand in critical commodities.

You may remember the food riots of early 2008, and how they seem to have disappeared. Well, that occurred after a small dip in world grain production in 2007. Fortunately, by its end, 2008 had turned into a bumper year for the global food harvest and a serious crisis was averted. That bumper harvest brought global food prices down again – but for how long?

Rice gives us a hint of the nature of price movements we should learn to expect. From a stable base it spiked viciously upwards (by 300% and more) as it sucked in speculative money during the 2008 panic. But when it fell back as panic subsided, it still remained twice the original base level. It is from here that the next upwards spike seems to be starting.

In a similar pattern sugar has already started to cool off a bit, but pepper is in the earlier stages. At the end of August ‘09 it rose 17% in a week on news of a poor crop arising from adverse weather in South East Asia.

Unlike camcorders, food is not a discretionary purchase and under the harsh law of marginal utility – together with the new inelasticity of Asian demand – even modest food shortages will cause sharp price spikes, and maybe more riots, which indeed started to appear in Asia in September 2009, with tragic consequences.

When necessities are in short supply people behave in the opposite way to normal. Instead of reducing demand they tend to panic and stockpile food for safety, perversely increasing demand on those higher prices…

Regards,
Paul Tustain
BullionVault

October 13, 2009

The Price of Oil and the Inflation Time Bomb of Autumn was originally featured on Whiskey and Gunpowder

No one reads it. The mainstream media ignore it.

It’s the product of the best prognosticators in the Department of Energy. Okay, that may be what puts most people off. But if you’re patient enough to dig into it, it will cough up some fascinating nuggets of information.

The present edition is no exception. The report refrains from spelling out the conclusion that seems most obvious from its data. However, confirming a trend begun just last year, the 2009 edition clearly reveals that the government has been forced to admit that Peak Oil is coming. Moreover, it’s expected to arrive much faster than was believed as recently as two years ago.

This represents a remarkable turnaround in the agency’s opinion. Up until 2008, they were predicting unbroken growth in world oil supplies for the next two decades. But in ’08 and ’09, the rosy picture turned decidedly unrosier.

Before we look at the numbers, a couple of notes on terminology. The EIA makes its projections based on what its analysts call the “reference case,” i.e., average economic growth. It also provides estimates for better- and worse-case scenarios, but the reference case represents the best guesses they have.

Oil (as we generally think of it), upon which most of the world economy depends, is termed “conventional liquids,” i.e., the stuff that comes gushing up from under Saudi sands. “Unconventional liquids” – extra-heavy oil, bitumen, coal-to-liquids, gas-to-liquids, and biofuels – are also covered in the report, as we’ll see, but conventional is far and away the most important one at this moment in history.

With that in mind, by 2007 the IEO was in its final year of irrational exuberance, confidently predicting that world production of conventional liquids would be 107.5 million barrels/day (up from 81.9 in 2005). That dovetailed nicely with a forecast for world demand of 118 million b/d, with 10.5 million barrels of unconventional liquids taking up the slack.

By ’08, they had put the info into table form, and look what happened:

Same table, ’09:

Projected production, as you can see, is suddenly shriveling up. From 107.5 million b/d of oil projected for 2030 in 2007, to 102.9 million b/d in 2008, to this year’s meager expectation for 93.1 million. That’s a drop of 13.4% in only two years, and posits production growth of only 11.6 million b/d (14.2%) from 2006 levels.

If that isn’t an admission that the era of Peak Oil is upon us, what is?

The report assumes that some of this stunning shortfall will be made up by development of unconventional liquids to the tune of 13.5 million b/d, including a jump of 5.9 million b/d in biofuels. At the same time, while conventional liquid production from non-OPEC nations is projected to grow only 7%, OPEC is expected to substantially increase its contribution, ramping up output by almost 25%. (All figures are for the period of 2006-2030.)

Does this seem optimistic? Well, it presupposes some heavy lifting on the part of OPEC, a dicey proposition in the best of times.

And it means creation of the infrastructure necessary to exploit extra-heavy oils, tar sands, shale, ultradeep deposits and other unconventionals, all of which require sophisticated technological know-how and face significant environmental challenges.

Biofuel production could more easily be elevated. But to reach the lofty level of nearly 6 million b/d would necessitate a huge diversion of cropland from food to energy, certain to be attended by a rise in food prices, not to mention potentially serious food shortages. The need for food being rather more primal than the need for gasoline, politicians are going to be reluctant to risk loosing angry mobs into the streets.

Even if all of these developments proceed flawlessly, though, we’ll still have to face a widening gap between production and consumption. Or will we?

As it turns out, we’re in luck! Or so the EIA would have us believe. Because, accompanying that falling supply is – you guessed it – declining demand. In 2007, the IEO anticipated world demand for all liquids of 118 million b/d in 2030. This year, that estimate shrank to 107 million b/d, right in line with production.

The important point to take away from the IEO’s analysis is that the world is facing a decline in liquid fuel production and the government, after years of straight-faced denial, is now admitting it.

Does this mean we’re going to run out of oil? No. But supply constrictions mean that the good old days of limitless, cheap oil are gone. And, though viable alternatives eventually will be developed, there’s no way of putting a timetable on that. In the interim, we’re going to have to pay up if we want to keep the family jalopy on the road.

How much? The IEO report’s reference case calls for $130/barrel oil in 2030, but that’s based on relatively modest demand increases from India, China, and other developing nations, and we find it very optimistic. It easily could be twice that.

Regards,
Doug Hornig

August 31, 2009

Washington Capitulates: Peak Oil Is Real was originally featured on Whiskey and Gunpowder

Drivers in the U.S. no longer determine the global price of oil. So oil prices can remain high despite a weak labor market — as we saw in the 1970s. If this winds up being the case, it’s bad news for owners of financial and consumer stocks and good news for owners of energy stocks.

Andy Xie, formerly of Morgan Stanley, is a great strategist who, while most other economists sought to justify the housing bubble, warned of the unsustainable U.S./China vendor finance trade model that grew so rapidly between 2001-2008. He recently wrote an article for Caijing magazine on the factors that might drive oil prices in the future. He writes:

Conventional wisdom says inflation will not occur in a weak economy: The capacity utilization rate is low in a weak economy and, hence, businesses cannot raise prices. This one-dimensional thinking does not apply when there are structural imbalances. Bottlenecks could first appear in a few areas. Excess liquidity tends to flow toward shortages, and prices in those target areas could surge, raising inflation expectations and triggering general inflation. Another possibility is that expectations alone would be sufficient to bring about general inflation.

Oil is the most likely commodity to lead an inflationary trend. Its price has doubled from a March low, despite declining demand. The driving force behind higher oil prices is liquidity. Financial markets are so developed now that retail investors can respond to inflation fears by buying exchange-traded funds individually or in baskets of commodities.

Oil is uniquely suited as an inflation-hedging device. Its supply response is very low. More than 80% of global oil reserves are held by sovereign governments that don’t respond to rising prices by producing more. Indeed, once their budgetary needs are met, high prices may decrease their desire to increase production. Neither does demand fall quickly against rising prices. Oil is essential for routine economic activities, and its reduced consumption has a large multiplier effect. As its price sensitivities are low on demand and supply sides, it is uniquely suited to absorb excess liquidity and reflect inflation expectations ahead of other commodities.

Xie’s entire article is worth a read. You can find it at this link.

The Chinese government is sending strong signals to its banking system that it wants lending to slow down from its blistering pace. It remains to be seen whether this will actually result in a contraction in Chinese bank lending or whether lending may just shift from one sector to another. If I had to guess, I think oil prices will have a sharp correction this fall as Chinese stockpiling slows down and as oil and refined product inventories remain more than adequate to meet sluggish U.S. demand.

But this correction will offer trading and investing opportunities on the long side. As you see in the two charts below, the linkage between oil prices and U.S. inventories during the entire post-2002 bull market was not as close as you’d expect:

Here’s why I think a correction in oil prices will offer a buying opportunity: Inflation fears and stabilizing in global demand are not the only reasons the price of oil has doubled from its lows. Oil prices are up because the marginal cost of new supply — including from Canadian tar sands and from under thousands of feet below the ocean surface — is so high.

To Andy Xie’s important point about oil as an inflation hedge, I’d add that OPEC planners understand that they are trading a scarce, extremely energy-dense, nonrenewable, depleting asset for paper money. They also are beginning to grasp that indebted oil importers plan to ease their debt burdens by employing the heavy guns in the inflation arsenal: “quantitative easing.” So their portfolio preferences will shift away from government paper and toward retaining scarce oil in the ground for future revenues. In other words, “Why should we trade oil for dollars now if we receive higher prices five years down the road?”

This is just one of the many intricacies governing how the global oil market operates, and it helps explain why those who are perpetually bearish on oil prices waited for years and years for a rational, free-market supply response to higher prices that never arrived in force. That is, until last fall’s panic brought demand far enough below supply that prices crashed. Now, the conventional wisdom says that several million barrels per day of spare OPEC capacity will keep a lid on prices for years. We may discover by next year just how quickly this alleged spare capacity will come back online, and at what price.

The question then becomes why should national oil companies rush into the risks of making the enormous capital investments necessary to maintain production — let alone grow production. Nancy Pelosi and Ben Bernanke are not promoting policies to make energy cheaper; in fact, their playbooks virtually ensure the opposite. Privately owned exploration and production (E&P) companies that take smart risks will be the ones that deliver more supply at lower prices to help ease supply constraints.

Now, when you consider how the U.S. economy currently functions, you come to understand that rising energy prices induce enormous headaches for practically every consumer and business. Call rising energy prices a “deflationary force in the real economy” if you like. The point here is the irony of the situation: The Fed and Treasury are trying to reinflate a deleveraging private economy, and much policy could wind up accelerating the deleveraging process by adding pressure to the prices of nondiscretionary items like food and energy. After all, these are both global commodities, and capacity in these sectors is tighter than most market participants realize.

Bottom line: There is no easy, painless way out of a credit-financed asset bubble that artificially pumped up consumption. This artificial growth in consumption prompted entrepreneurs to misallocate resources into unproductive sectors that were temporarily pumped up by what looked like sustainable demand. Meanwhile, there are many sectors, including oil and gas, that have been underinvesting relative to the long-term global demand for mobile, modern lifestyles.

Sure, oil prices could correct sharply this fall as traders panic about a temporary glut in aboveground supply at storage terminals. But to use manufacturing terms, it’s the “raw material” and “work in process” inventory that really matters. That type of inventory, sitting higher up in the supply chain, is much tighter than the “finished goods” inventory sitting in storage terminals like Cushing, Okla. I expect we’ll see this tightness reflected in prices by 2010, even if demand remains stagnant.

Production capacity in oil and gas looks plentiful right now, but capacity naturally falls every year, and requires hundreds of billions in global capital expenditures just to keep supply steady. According to an exhaustive analysis published by Neil McMahon of Bernstein Research on Aug. 10, non-OPEC oil supply will keep declining in the coming years, despite healthy levels of investment. Outside of OPEC (where information regarding capacity and investment plans is murky at best) explorers are targeting smaller formations, as production from giant, decades-old fields declines. McMahon writes:

In the long term, we believe that oil prices will increase in line with the marginal cost of supply, which continues to rise as the complexity of new wells increases and production rates from established fields decline. Basically, not enough significant discoveries have been made in non-OPEC countries in recent years to help the supply situation before 2015. Additionally, flow rates from the few discoveries that have been made do not give rise to much optimism and, as in the past, the drop in absolute oil demand will be offset by rapidly declining mature field production with the recent fall in industry spending. So the continued decline in non-OPEC supply will provide an additional support for prices, as it feeds through to OPEC spare capacity. We believe that 2010 will see the next inflexion point in prices, as OPEC spare capacity begins to decline and demand shows positive growth for the first time in a number of years and we expect to see oil average $80 in 2010, $103 in 2011, $111 in 2012, and increasing to $140 in 2015.

You can imagine what this type of price trajectory will do to U.S. businesses that rely on cheap fuel, and have no ability to push through price increases. Considering how many more trillions of U.S. dollars will be floating around the global economy in 2015, and savers’ willingness hoard them declines, $140 per barrel might be conservative.

Global oil production capacity, rather than demand, will eventually drive prices. Bernstein projects 2020 oil production capacity will be about the same as it is now: 85 million barrels per day. We must consider net exports too; the global trade flows of this oil will certainly change. Over time, more tanker shipments will be diverted away from the U.S. and Europe and head to Asia. Also, in recent years, OPEC countries have been consuming more of their own product at home. Plus, the Chinese government has shown that it will beat any and all comers in the competition to secure supply under long-term contracts.

Regards,
Dan Amoss

August 28, 2009

Inflation and Oil Prices: Our Next Move was originally featured on Whiskey and Gunpowder

The trip was sponsored by the American Petroleum Institute (API), which paid for the airfare and accommodations. Managers at both Syncrude and ConocoPhillips granted me access to any parts of their operations I wanted to see (within allowances for safety). And everyone answered any and all questions I asked.

Post-trip, I have complete editorial freedom to write about what I saw and learned. And I learned a lot. So this is Part I of a two-part series. Watch for Part II.

The Past and Future of Oil and Oil Sands

The first thing that struck me about visiting the oil sands of Alberta was how much geological and social similarity there is to the oil patch of Pennsylvania.

Geologic similarity? Yes, because the reason that the hydrocarbons are so near the surface in both areas — Pennsylvania and Alberta — is that the Pleistocene glaciers scraped off much of the overlying rock. When the glaciers retreated about 10,000 years ago, they left hydrocarbon-bearing rock formations exposed near the surface, or buried not too deep. This led to oil seeps, which led to people being curious about the black, gooey stuff.

To be sure, the hydrocarbon resource is quite different between the two places. That is, in Pennsylvania, you have light, sweet crude oil that flows easily and is soft and smooth to the touch. Indeed, Pennsylvania crude feels like hand lotion. (It’s the origin of Vaseline, for example. And some people use it as the basis for a shampoo.)

While in Alberta, the “bitumen” from the oil sands is as thick as cold molasses, and very sticky. It’s got some sulfur in it as well.

On a warm day in August, oil sands have the consistency of really stiff, dry oatmeal. Bitumen is a far cry from hand lotion.

And as for social similarities? Well, the Indians of old used to skim the oil from streams near Titusville, Pa. So did people of the “First Nations” of Alberta, who used to recover the tarry bitumen from the rocks along the Athabaska River of northern Alberta. Thus both oil and oil sands have been around for a long, long time.

Early white explorers in both Pennsylvania and Alberta noted the oil seeps. They wrote in journals and logs that eventually somebody could do something with the substance.

Eventually, both Pennsylvania and Alberta had their oil booms. In fact, we’re soon coming up on the 150th anniversary of Col. Drake’s oil discovery at Titusville, Pa, on Aug. 27, 1859. Pennsylvania’s oil boom is colorful history at this point (although Marcellus Shale development will soon change that).

Whereas Alberta is still in the midst of its oil sands boom. It’s a boom that’s going to last for quite some time, I believe.

“Easy” Oil Versus Heavy Oil and Bitumen

There’s a reason Col. Drake started an oil boom in Pennsylvania more than a century before Alberta enjoyed the same thing. Col. Drake found some of that so-called “easy” oil. No, it’s not easy to find. It’s that Col. Drake’s oil flows easily from a well.

That is, for all the oil that mankind has pumped out of the ground in the past 15 decades, almost all of it has been the light, sweet stuff that flows easily. Generally, when people looked for oil they bypassed the heavy oil and bitumen. Until lately, of course.

When we think about the concept of “Peak Oil” today, we need to keep in mind what we’re talking about. The curves show oil output peaking in so many parts of the world. This phenomenon is quite real, as long as you understand that it’s the “old fashioned” kind of oil deposit that Col. Drake was drilling. The light, sweet, easy-flowing oil is getting harder and harder to find, certainly in significant quantity.

But there are a lot of other hydrocarbon molecules out there. Most of those molecules are not light, sweet crude oil. Indeed, most of the hydrocarbon molecules that the world will use in the future will be “heavy,” with lots of carbon atoms and not so many hydrogen atoms.

Here’s a graph from oil services giant Schlumberger that estimates the world’s heavy oil and bitumen resources. Canada’s 400 billion cubic meters of bitumen translates into something like 1.4 trillion barrels of oil equivalent. How much is that? Well, it’s about SEVEN times the total oil reserves of Saudi Arabia.

It just so happens that most of that Canadian bitumen is located in Alberta (with some is in Saskatchewan). And Fort McMurray, about 250 miles north of Edmonton, is the heart of the development process.

Oil Sands — Surface Mining

Large-scale oil sands development began in the 1970s. It took gigantic levels of capital investment, like tens of billions of dollars. That’s not pocket change. So a group of lease-owners got together and pooled their capital to form privately held Syncrude Canada, a joint venture. First mining started in 1978.

The way Syncrude operates, it’s not really “mining.” It’s landscape architecture. Under Alberta law, Syncrude could not turn over its first shovel of rock without a master plan for remediation and restoration at the end of the cycle. It’s quite a farsighted model for long-range resource development.

Thus for much of the 1970s, Syncrude performed baseline environmental studies and data gathering. It started digging in 1978. At first, the pit looked like a moonscape of open-pit mining. See the photo below. It looks like a mess, right? Well, there’s more to the story.

The mining process is fairly straightforward. Big shovels (really big) scoop large volumes (really large) of oil-laden sand (API number 8, the “bitumen”) into gigantic loaders (and I mean gigantic.

The loaders haul the rock to a crusher. The crushed rock goes to a washing bin, kind of like your washing machine at home except it’s the size of a high-rise office building. The Syncrude operation washes the bitumen off the sand using naphtha. Then it separates the bitumen, recovers the naphtha for reuse and takes the clean sand (and it’s clean) and replaces it in a previously mined pit.

The process uses a lot of water, but not as much as the horror stories you might hear about “draining the rivers” of northern Canada. Each barrel of water is recycled about 18 times.

The process uses a large amount of natural gas, but not as much as you may have heard (like “all the natural gas of northern Canada”). Pretty much everything about the operation is built with cogeneration in mind, so the company continuously recovers the heat at each stage. That natural gas goes a long way, from what I saw.

If it takes, say, five years to dig a pit, and then it may take five or more years to fill it back up with sand during the restoration process. Syncrude’s goal is to handle the rock as little as possible.

Eventually, Syncrude returns the land to original grade, although the company has some artistic license with the contours. It covers the land with the original topsoil, which has been in cold storage (northern Alberta… it’s cold up here for 10 months of the year). Then it replants trees, and that’s saying something, because the growing season is under two months. It takes 80 years for your basic spruce tree to reach maturity.

There’s even a new water table, despite the disturbance of the land.

Where Things Now Stand

So at this stage, after 30 years or so of mining (with about 80 years to go, at current rates of extraction), Syncrude has come to a point of delivering 350,000 barrels of synthetic crude oil per day. It takes the 8-API bitumen and upgrades it to oil that’s competitive with West Texas Light. Then it delivers it to the JV members, for whatever use the owners want to make of it.

Along the way, the Syncrude process removes the sulfur, so it’s sulfur free (refiners like that). In fact, there’s a mass of sulfur up at Syncrude that’s about the size of the step pyramid at Saqqara, Egypt. And along the way, Syncrude sells the sulfur to the chemical industry.

The former Syncrude mine that I visited is about 3.5 miles square, and formerly about 200 feet deep. Now it’s restored to grade, with trees growing and a herd of 300 wood bison grazing.

For the cynics out there, I’d say that it’s not some environmental Potemkin village, because you can’t fake a replanted forest of 25-year-old trees. You can’t fake a 300-bison herd. Not on a former mine site 3.5 miles square.

Sure, there are still issues about land disturbance, settling ponds, water usage, gas usage and myriad of other things that come up when you’re spending billions of dollars on a major mining effort. But Syncrude has built its business model around dealing with the “other” issues, and not just moving oil sands and recovering oil products. Don’t underestimate the ability of the Alberta government to regulate its energy producers. This is a long way from Appalachia.

Meanwhile, we’re talking about literally billions of barrels of bitumen (or oil equivalent) that the process makes available to the North American marketplace. And if the U.S. wants to get onto its environmental high horse about the source of the hydrocarbons from the oil sands — and tax or ban their importation — there are other buyers in the world. Like the Chinese, who have racked up many frequent flyer miles on their treks to Fort McMurray.

That’s all for now. In Part II, I’ll discuss the in situ process that I saw at the ConocoPhillips Surmont site.

Until we meet again,
Byron King

August 24, 2009

Update on Canada Oil Sands, Part I was originally featured on Whiskey and Gunpowder

What Are These Oil Sands?

Back in Pleistocene time, the glaciers covered much of northern Alberta.  In places, there was a mile of ice.  During some of the warmer periods, there was a lot of melting.  On occasion, and in some places, there were giant, glacial-dammed lakes.

Every now and again, these glacial dams would break, sending massive volumes of water downstream, wiping away pretty much everything along the way.  Well, it turns out that in this scoured-out area that included much of the rock covering some lower Cretaceous deposits of oil.  Or rather, it was “oil” that had long ago lost the volatile components.  The stuff is properly called bitumen.

Thus we have an area in northern Alberta that’s about the size of New York State.  That area holds near 1.4 trillion barrels of bitumen resource.  To be sure, not all of it is recoverable.  In terms of recoverable “reserves,” there are only (ahem…) about 175 billion barrels, or over eight times the total of U.S. oil reserves.

Of those 175 billion barrels, about 20% are near enough to the surface to strip mine.  That’s within about 250 feet or so.  Any deeper, and the cost-benefit calculation dictates that you have to recover it via a well-and-pumping process.  Still, that makes for about 35 billion barrels of bitumen that could be extracted by mining.  (About 1.5 times total U.S. oil reserves.)  The actual, mineable area is about the size of Rhode Island.

The Heart of Oil Sands Country

All of which gets me back to why I was in Fort McMurray.  This is the heart of oil sands country.

Near 200 years ago, early explorers noticed gooey oil seeping out of the banks along the Athabaska River.  On warm days, with direct sunshine, the stuff actually flows.  Mostly, it has the consistency of peanut butter.  Unless it’s cold up here – which happens a lot – and it’s hard as a rock.

Needless to say, people talked about these “oil sands” for a lot of years.  Then in the 1960s, some people within Canadian industry and the Alberta government began to do something about it.  They decided to develop them.  It’s a long, long story.

Here’s the Short Version

The short version of the story is that large-scale oil sands development began in the 1970s.  It took gigantic levels of capital investment, like tens of billions of dollars.  That’s not pocket change.  So a group of lease-owners got together and pooled their capital to form Syncrude Canada, a joint venture.  First mining started in 1978.

Thing is, the way Syncrude operates it’s not really “mining.”  It’s landscape architecture.  Under Alberta law, Syncrude could not turn over its first shovel of rock without a master plan for remediation and restoration at the end of the cycle.

So for much of the 1970s, Syncrude performed baseline environmental studies and data-gathering.  Then they started digging in 1978.  At first, the pit looked like a moonscape of open pit mining.

The process is fairly straightforward.  Big shovels (really big) scoop large volumes (really large) of oil-laden sand (API number 8, the “bitumen”) into gigantic loaders (and I mean gigantic.)  The loaders haul the rock to a crusher.  The crushed rock goes to a washing bin, kind of like your washing machine at home except it’s the size of a high-rise office building.

The Syncrude operation washes the bitumen off the sand using naphtha.  Then they separate the bitumen, recover the naphtha for reuse, take the clean sand (and it’s clean), and replace it in a previously-mined pit.

The process uses a lot of water, but not as much as the horror-stories you might hear about “draining the rivers” of northern Canada.  Each barrel of water is recycled about 18 times.

The process uses a large amount of natural gas, but not as much as you may have heard (like, “all the natural gas of northern Canada.”)  Pretty much everything about the operation is built with co-generation in mind, so they continuously recover the heat at each stage.  That natural gas goes a long way, from what I saw.

If it takes, say, five years to dig a pit, then it may take five or more years to fill it back up with sand during the restoration process.  Syncrude’s goal is to handle the rock as little as possible.

Eventually, Syncrude returns the land to original grade, although they have some artistic license with the contours.  They cover the land with the original topsoil, that’s been in cold storage (northern Alberta… it’s cold up here for 10 months of the year).  Then they replant trees, and that’s saying something because the growing season is under two months.  It takes 80 years for your basic spruce tree to reach maturity.

There’s even a new water table, despite the disturbance of the land.

Where Things Now Stand

So at this stage, after 30 years or so of mining (with about 80 years to go, at current rates of extraction), Syncrude has come to a point of delivering 350,000 barrels of synthetic crude oil per day.  They take the 8-API bitumen and upgrade it to oil that’s competitive with West Texas Light.  Then they deliver it to the JV members, for whatever use the owners want to make of it.

Along the way, the Syncrude process removes the sulfur, so it’s sulfur-free (refiners like that).  In fact, there’s a mass of sulfur up at Syncrude that’s about the size of the Step-Pyramid at Suqqhara, Egypt.  And along the way, Syncrude sells the sulfur to the chemical industry.

I visited a former Syncrude mine, about 3.5 miles square and formerly about 200 feet deep.  Now it’s restored to grade, with trees growing and a herd of 300 wood bison grazing.  For the cynics out there, I’d say that it’s not some environmental Potemkin Village because you can’t fake a replanted forest of 25-year old trees.  You can’t fake a 300-bison herd.  Not on a former mine site 3.5 miles square.

Bottom line is that this is an immense operation.  Syncrude employs 5,000 people, plus 2,000 contractors.  Paychecks are north of $100,000 per year.  Every oil sands job supports 3 local jobs, 6 provincial and 9 others across North America (especially at Caterpillar, where they build those giant, 400-ton loaders).

In the coming weeks I’m going to delve deep into North American oil sands operations and any companies that may be set to profit. Oil sands are nothing new, but now may be the perfect time to scoop up shares of a small player or two…

Regards,
Byron W. King

August 19, 2009

The Oil Sands in Alberta, Canada was originally featured on Whiskey and Gunpowder

The ADC uses its position as an Ecuadorian Non-Governmental Organization (NGO) to raise funds as a not-for-profit in the United States. With these funds, it pays for a widespread publicity network (including a Washington, D.C. public relations firm) that would never exist in the absence of well-meaning donors. This network publicizes over and over that Chevron is liable for damages of $27.3 billion.  But the claims have no basis in fact.

How could this situation arise?

It seems to me that the Ecuador suit may have begun with good legal intentions, but has gone badly off course. One possible scenario:

Texaco operated in Ecuador until the early 1990s.  By 1992, Texaco turned over all its operations to Petroecuador.  Then Texaco paid for and oversaw a cleanup of many of the oil pits, pursuant to its agreement with Petroecuador and the national government.

In 1993 Texaco got sued in US court over the Ecuador matter.  The ADC was formed at about the same time, probably not by coincidence.  To be accurate, in 1993 there were a lot of unremediated pits related to oil production in Ecuador.  There were many local concerns about what the long-term health issues would be.

Case Dismissed?  Not So Fast…

But in 1995-1998, Texaco cleaned up its share of the pits, pursuant to an agreement with Petroecuador and the Ecuadorean government.  The cleanup was good enough that new vegetation started to grow on these sites. Eventually, after a lot of legal haggling, the US court case was dismissed on grounds of forum non conveniens.  So what happened?  Plaintiffs filed a new case in Ecuador in 2003.

Then with the new case in Ecuador, the plaintiffs started learning some unpleasant truths—Texaco had done a pretty decent job of cleaning up the pits. There wasn’t any evidence linking Texaco-remediated sites to higher cancer rates, and tests for soil and water pollution kept coming up negative.

So what were the plaintiffs’ lawyers to do? Drop the case?  No way. They had the big troop of ADC folks, whom they had convinced of a huge problem. These ADC folks volunteered their time and contributed money to the cause.

Also by that time, the suit was in Ecuador where the court system was much looser (and has become more so over time).  Almost any allegation can be made in a lawsuit, no matter how scandalous.

When current President of Ecuador, Rafael Correa was elected in 2006, he made it clear that he was on the side of ADC.  Correa made it even easier for the plaintiffs to paint the story however they wanted, and to get the court to support them so that results came out as they wanted.  In his weekly radio program, Correa has talked about his support for the ADC and his solidarity with the Ecuadorian lawyers in this case.

The US trial lawyers in the case, and their Ecuadorean co-counsel, started embroidering on the truth, and found they could get away with it.

Instead of just trying to get back to where they would have been if the pits hadn’t been remediated, the lawyers decided to make a huge suit out of it — $27.3 billion instead of the original $1 billion. To get to such a large suit, a lot of embroidering on the truth was needed—including accusations that had little to do with the underlying facts.

Complicated Case

The nature of the case was so complicated that only a very few at the top of ADC understood how misstatements were being made. The rank and file of ADC, let alone the local citizens near the Ecuadorean oil operations, never knew the difference.

Most of the well-intentioned people who had volunteered their time and money to the ADC never figured out where the paths diverged. It seemed like such a “good cause,” and as the allegations increased, ADC donors became more and more convinced they were doing the right thing.

US Press Takes Sides – Against the Oil Company (Surprise!)

Almost all of the US press assumed that if an NGO was making the allegations, there must be some substance behind them. Certainly, an oil company can’t be believed in this day and age.

Once the story got started – including the catchy (but totally false) notion that Chevron caused an “Amazon Chernobyl” — it was easy to propagate.  More and more media were unwittingly drawn into what was pretty close to a multi-billion dollar scam.

The fact that the suit was in a foreign country and much of the evidence was in Spanish made it even easier to issue accusations as if there were substance behind them, and to pass off problems caused by the state-run oil company, Petroecuador, as problems caused by Chevron.

Examples of Baseless Allegations and Questionable Claims

1. Pits recently in use by Petroecuador are being passed off as showing damage caused by Texaco Petroleum prior to 1992.

Newspapers and magazines are peppered with photos such as this one from the Economist:

Looks terrible, huh?  Except that it’s not a Texaco pit.  It’s a pit from Petroecuador operations.  Whoops.  Wrong oil company.

When the ADC shows reporters pits at issue in the suit, it shows pits such as the one above with liquid oil in them. Any pit that still has liquid petroleum in it clearly has been in recent use (by Petroecuador), because the more volatile elements quickly evaporate in the heat of the Amazon, leaving a substance similar to asphalt.

Texaco has been completely out of the country since 1992.  So that means the pit shown in the photo is one that Petroecuador has been using. Trying to pass it off as Texaco’s responsibility is just plain fraudulent.

Texaco remediated 161 pits back in the 1990s.  These were Texaco’s responsibility under its agreement with Petroecuador and the government of Ecuador.  These old, remediated pits are undetectable to someone now looking at the sites, based on the ones I saw during a recent visit.

2. Water pollution that is either non-existent, or that is caused by current Petroecuador operations, is being passed off as the responsibility of Chevron.

The example of Texaco-caused water pollution that is now being offered to the press is that of “Mr. Salinas’ well.”  In the movie Crude and in a recent segment on the CBS News show, 60 Minutes,  Mr. Salinas indicates his well is polluted with petrochemicals, and that this has caused health problems.

One problem with this allegation is that if it is true, it could not possibly be the fault of Texaco. Mr. Salinas’ well was tested in 2005, as part of the official, court-sanctioned “Judicial Inspection” phase of the Ecuadorian trial. When it was tested in 2005, there was no petrochemical contamination as determined in tests performed by the plaintiffs and the defendants. So if there is petrochemical contamination of the well, it must have occurred after 2005 – and long after Texaco left Ecuador.

A May 11, 2009 article  in Terra Magazine talks about pollution of the well near Mr. Salinas’ house caused by a recent Petroecuador accident. If there was a problem with pollution at the time of the filming in early 2009, this recent Petroecuador accident would seem to be the likely cause.

La Nueva Casa de Senor Salinas

One thing that is strange about the whole story is that Mr. Salinas recently received a new house, as part of a program sponsored by ADC and the Ecuadorian government. As a condition of the grant, the house near the polluted well was to be torn down, because of the pollution.

Yet I had a chance to visit Mr. Salinas’ old house when I visited Ecuador in early June. Mr. Salinas has moved (presumably to his new house), but his old house has not been torn down. Instead, his daughter and her children were living in the house near the well. We could detect no sign of hydrocarbons in the well. In fact, Mr. Salinas’ daughter seemed to be washing clothes with the water, as shown in this photo I took. One wonders whether the extra house was some sort of bribe or payment, in return for testimony.

3. The truth is being stretched when it comes to health issues of people affected by petroleum pollution.

If there were huge numbers of individuals suffering from cancer as the result of petroleum pollution, it’s likely we would find them, and they’d be plaintiffs in this or other law suits. Yet when attorney Cristóbal Bonifaz (the lawyer who filed the initial suit in 1993) filed a suit in San Francisco in 2006 on behalf of nine Ecuadorian plaintiffs supposedly having cancer, three of the plaintiffs didn’t have cancer.  A US federal district court dismissed the case and sanctioned and fined Bonifaz.

The suit in Ecuador against Chevron also does not include the names of any individuals with cancer. Since the Ecuador suit doesn’t claim the particular individuals named in the suit have cancer, it isn’t necessary that any of the 48 named individuals have cancer.  But the lack of individuals with cancer is somewhat strange. When one looks at government statistics regarding cancer in Ecuador, cancer rates are lower in the area with oil extraction than they are in the nation’s capital of Quito.

A second approach to stretching the truth is a peer-reviewed paper whose data appears to have been doctored. The 2008 paper “Monitoring of DNA Damage in Individuals Exposed to Petroleum Hydrocarbons in Ecuador” by Cesar Paz-y-Mino et al. purports to show injuries from hydrocarbons. Yet, another paper with the same lead author from 2004 called “Chromosome and DNA damage analysis in individuals occupationally exposed to pesticides with relation to genetic polymorphism for CYP 1A1gene in Ecuador” has identical summary exhibits.

The likelihood of identical results in two supposedly “different” cohort  studies is virtually nil, especially since there were different numbers of subjects in the two studies. One can only conclude that results of the second study (the one regarding hydrocarbons) are incorrect—the second study really reflects the results of the earlier study on pesticides, but it was tossed into the pileup onto Chevron.

A third approach to stretching the truth is determining the incidence of illness by asking residents their recollections of illnesses of types that may or may not have anything to hydrocarbon pollution. Sewage water in the area is not treated prior to discharge into rivers, so there are a large number of illnesses related to bacterial contamination. Yet no attempt is made to distinguish between illnesses cause by bacterial contamination and illnesses caused by hydrocarbon exposure.

A fourth approach to overstating health issues is repeated mention of the possibility of benzene contamination (for example, here).  Benzene is known to cause cancer.  But in the lawsuit against Chevron, none of the test results submitted to the court show evidence of benzene contamination.

I could go on and on with many other baseless allegations and questionable claims. Some of these are given in a post I wrote earlier for The Oil Drum.

Why Am I Writing This Post?

The primary reason I am writing this post is that I am appalled at the level of journalistic investigation in the US. It is ridiculous that a case such as this one against Chevron can have so many baseless allegations repeated endlessly, without any attempt to discern the truth.

The fact is that I’m an energy-oriented blogger.  I work for nothing (or often, less than nothing).  Yet I’m the one investigating these issues, involving multi-billion dollar international claims that appear to be riddled with fraud.  It’s bizarre.

A second reason I am writing this is that I believe that current press treatment is manifestly unfair to Chevron.   There seems to be a belief today that oil companies are somehow “bad,” so it’s OK to treat them differently.

As far as I am concerned, with world oil shortages ahead, US oil companies will be ever more important to the US mix of energy needs. We are still far from the point where we can expect renewable energy systems suddenly to appear on the horizon and save the day, even if many people would like immediate salvation from them.

I’ll come right out and say that Chevron paid most (only most) of the cost of my trip to Ecuador to see the oil extraction sites.  But Chevron buying me an airline ticket, hotel lodging and a few meals has not influenced my independence of thinking. I’m just following the facts as I see them.

Actually, I came out financially behind on the trip to Ecuador, and risked physical harm, both from yellow fever (for which no vaccine was available) and from the people of the area—we were accompanied by armed guards on the trip.

Meanwhile, I do not own any shares of any oil company or any renewable energy company.  I have no opinion about the future financial prospects of Chevron, although I happen to believe that a company like Chevron is vital to the world’s future energy prospects.

I did not get any answers when I twice attempted to get information from the ADC. I do not see this as a huge disadvantage. The “ADC story” – supported by a slick, Washington, D.C. public relations firm — is told endlessly on the Internet and in much of the mainstream media.

But based on what I saw when I visited the site of the so-called “Amazon Chernobyl,” the ADC story is baseless.  The lawsuit is nothing but a world-class shakedown of Chevron.

Regards,
Gail Tverberg

July 15, 2009

A Baseless Lawsuit Against Chevron in Ecuador was originally featured on Whiskey and Gunpowder

You see, on my recent trip to Kentucky’s Bourbon Trail, one thing stuck in my mind: TAXES. I was utterly shocked when I heard what the distillery tour guide was saying about a $13.50 per gallon tax on any distilled bourbon. That’s over $700 of taxes per barrel. And that’s before the bourbon even gets to the bottle. For me and you, fellow Whiskey Shooter, there’s another tax when we get to the counter—somewhere around 6%.

So what’s the total bourbon tax?

According to the Kentucky Distillers’ Association, around 53% of the cost of the average-priced bottle goes to local, state, and government taxes.

I guess that’s why the tour guide took the time to tell us about the taxes. That way we wouldn’t be bitter when we paid $30 for a bottle of “corn juice.”

So the tour went on and our group wandered through the rest of the distillery — tasting the freshly distilled 160 proof grain alcohol, feeling the corn mash and playing in the gift shop…

But wait. Isn’t this taxation that same kind that created rebellions?

My tour group, and Americans in general, have been lulled to sleep, as if Uncle Sam slipped us a Mickey. Last I checked, the U.S. isn’t an alcohol supplier. Nor is it a real estate agent. Nor is it a car lot. But it seems like the current administration wants to get its hands on everything.

And the way things are going, who knows what’s next…

The Latest Nickel-and-Dime “Tax”

You gotta give it to ’em: At least Washington came up with an appropriate nickname for its latest cash grenade. It’s called “cash for clunkers,” and last week the House approved the bill — with your money!

It simply amazes me that something this poorly thought up could pass so quickly through the largest legislative body in the U.S. Just think about it: 435 well-paid pairs of eyes took a look at this bill. And a majority OK’d it!

In case you haven’t heard of the latest clunker of a bill, let me give you the rundown…

It’s a $4 billion plan to subsidize sales of new cars with better mpg. Essentially, if you have a car that gets less than 18 miles per gallon and you “upgrade” to a new car that gets at least four more miles per gallon, you’re eligible for at least a $3,500 tax credit.

I love the well-accepted term “tax credit.” Does everyone on the Hill think we’re that easily swayed by bills that contain such positive-sounding phrasing?

Here at the Whiskey Bar, we aren’t that easily fooled. This “tax credit” is a simple euphemism for free money — money that you and I as U.S. taxpayers are providing. Simply put, it’s taking money from our pockets and giving it to new car buyers in an effort to jump-start new car sales.

I don’t know about you, but paying for my neighbor’s car wasn’t on my agenda today.

But let’s dig a little deeper, since we could be footing the bill…

The bill, as it stands, is less likely to be affecting normal car owners — so this is for our SUV/truck-driving neighbor. Because even if you bought a 1990 Chevy Cavalier or Ford Taurus, you’re still probably getting well above 18 mpg.

So obviously, this bill is almost strictly for those non-Peak Oil-thinking, overzealous SUV or truck buyers. These folks have roughly the same restraint and foresight as those who purchased houses that they couldn’t afford.

This bill is almost comical. But frankly, where does the spending stop on Capitol Hill? Combine this with the latest auto bailouts and it’s really starting to look like our nation has turned into a new and used car lot.

Things are getting scary ’round these parts.

Government Spends, You Save…

Those dollars in your pocket aren’t looking as great as they once did. And as I see it, with an overburdened and overspending government, the dollar could be in for a crude awakening.

That’s because one thing is for sure: Over the next few years, the world is going to spin, the U.S. government is going to spend, and all of this will be running on the same fuel: oil.

As I wrote a few months back, the price of gasoline is going to rise. And that mainly stems from the rising price of crude oil.

As you know, the world’s commodities (most notably oil) are priced in U.S. dollars. As the dollar weakens, and as the Earth still spins and demands more energy, the price of oil is going to rise.

In my opinion, over the next three months to five years, oil is going to rocket — even more so than the price of gold. We got a taste of what can happen when oil spiked last year to $147 per barrel. And from my standpoint, it’s inevitably going to be back to those levels, or higher.

My best advice for protecting your hard-earned dollars over the next five years is simply to invest in all facets of the oil industry: oil service companies, oil holding companies, oil technology companies, and the commodity itself (through ETFs or commodity options).

Sure, the Obama administration wants to improve mpg, but one thing is for sure: We’re still going to be burning oil for decades to come — more and more every year. And although we may hit some rough patches for demand, the overall trend line is going to be UP.

By investing in oil, you’ll protect your wealth and profit at the same time.

After all, we all want to be able to afford our next bottle of bourbon.

Stay ahead of the curve,
Matt Insley

June 17, 2009

Taxing to Better Mileage? was originally featured on Whiskey and Gunpowder