Daily Speculations
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Daily Speculations |
01/01/2006
Lessons from Buster, by Stefan Jovanovich
My father-in-law, Jonathan Douglas Turner, more commonly known as "Buster", spent his entire adult life in the oil business. When he was a boy living in Santa Ana, Texas, he helped his father and older brothers load oak barrels of oil onto horse-drawn wagons and drove them from the well head to the railroad depot. He studied geology both as an undergraduate at the University of Texas and as a graduate student at the University of Oklahoma and worked as a roughneck each summer to earn his tuition.
He was a lifelong speculator and trader - in oil leases and stocks - but I never once heard him predict the price of crude. He said that was something to be left to the people who had tenure - they could afford to be unhedged. He also said that the people who were most confident about predicting the world's future petroleum reserves were usually the ones who had the least direct experience with actually looking for and finding the stuff. That may have been the pride of someone who spend half a century buying drill pipe in December and selling it in January to roll over his tax liabilities, but it was also the wisdom of someone who could know the industry's latest rig count before the numbers were published.
He thought we would get an accurate survey of the world's petroleum resources only when the rest of the planet had been surveyed, explored and drilled as thoroughly as the lower 48 states had been by 1980. Until that time, there was simply no way to know how much oil and gas remained to be found, and there was no way to use past experience in one part of the world to predict future discoveries in another. You could use the exploration and production science learned from past experience, but that E&P science would not tell you what you were going to find.
It may be that the world has been so thoroughly explored over the past 25 years that everyone in the oil business now has all the charts they are ever going to need. Somehow, I doubt it.
Bruno Ombreux comments:
I agree with your father-in-law that oil prices are impossible to predict. Oil prices are formed at the intersection of supply and demand. Most apocalyptic predictions are based on a study of supply, without considering what impact high prices could have on demand.
However, when it comes to forecasting oil reserves and production, not prices, I think there is enough geological evidence to state that "peak oil" has already happened, or will happen very soon. See for instance the paper Estimates of Oil Reserves, written in 2001 by Jean Laherrere, a geologist who spent his life in the field drilling for oil, rather than in an academic or Wall Street ivory tower. His English is even worse than mine, but his work is excellent:
The icing on the cake is Figure 79, a nice chart showing the precision of price forecasters. In 2000, nine major organizations were giving forecasts for 2005 ranging from a low of $15bbl to a high of $26bbl. Needless to say, no one got it right!
Stefan Jovanovich responds:
If my father-in-law were here to comment, I think he would point to the 3rd paragraph on page 91: "Good estimates of oil reserves need good data, which are almost impossible to obtain even where records are in the public domain...". No estimates of future production are possible without geologic survey data, and for most of the world the data does not exist for the simple reason that it has not been worth paying for the surveys.
For the integrated producers of energy the logistical costs of storage, transportation, refining and distribution far outweigh those of exploration and production. My father-in-law had capped wells throughout his exploration area because it was not worth the expense of laying pipe from the wellhead to a distribution connection point. Finding oil and gas in the smaller volumes that he explored for was a secondary problem. Finding it in locations where it was profitable to take it out of the ground and sell it to Ashland or Conoco or Kerr McGee was the real challenge.
It is for this same reason that oil and gas exploration tends to cluster in the same geographic areas where "known" reserves already exist - the infrastructure for moving the hydrocarbons to market is already there. It takes a lasting increase in prices for both the e&p companies and the integrated producers to be willing to shift their attention to truly unexplored territories. The e&p folks don't want to commit until they are certain there will be a way for them to sell what they find; the integrated producers don't want to build infrastructure until they are assured that the oil & gas reserves are there.
$50 oil is enough of price increase for both the e&p and integrated companies to take risks on finding and selling oil and gas from new places, if the price lasts for at least another two to three years and "everyone" then agrees that the new, higher price will be here for several more decades. If enough people believe that a peak in production has been reached, that will help make this scenario come true -- and thereby prove the forecasts of peak production false.
