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The First Signs of “Peak Gas”?

Saturday, June 7th, 2008

By Andy Rowell | Consumers the world over are beginning to protest at the huge gasoline prices they are paying at the pump. But whilst the world goes crazy over the oil prices, there are worrying signs about what is happening in the gas market that could also spell disaster.

But it’s the oil price that is currently attracting all the attention. Last month, the Indonesian President Susilo Bambang Yudhoyono postponed an official visit to Europe amid nationwide protests against fuel prices increases. In Europe, French fishermen continued to blockade several strategic ports, whilst their counterparts in Spain and Portugal also threatened protests.

In the UK, truckers converged on London to ask for a reduction in fuel duty, whilst Prime Minster Gordon Brown held urgent talks with the oil industry. Over in America, the oil price was said to have forced many trucking companies to the verge of bankruptcy.

But as oil continues to hover just under record levels, there are daily warnings that the days of cheap oil have gone forever and the price of oil may soon be $150 or even $200 a barrel by next year.

There is also a daily debate as to what is actually causing these unprecedented prices. An increasing number of influential voices are saying it has nothing to do with the actual supply of oil but it is down to speculators exploiting the volatile market.

OPEC, which is under fire from many commentators for not increasing production more, argues that the market is already adequately supplied and that $35 per barrel of the recent increase can be put down to speculation.

Other voices agree, such as Jeroen van der Ver, head of global oil giant, Shell, who argues that the record oil prices are due to “market sentiment” rather than a shortage of supply. “What we say and what we see is there are no physical shortages,” he says. “There are no tankers waiting in the Middle East, there are no cars waiting at gasoline stations because they are out of stock. This has to do with psychology in the markets and you cannot forecast psychology.”

His view is shared by George Soros, the multi-billion dollar financier, known as the man who nearly “broke the Bank of England”, in the early nineties. Soros argues that it is financial speculators that are largely responsible for driving the crude oil price. “Speculation… is increasingly affecting the price,” he said. “The price has this parabolic shape which is characteristic of bubbles,” he said.

Political action on speculators is increasing. Last week a senior German politician proposed a worldwide ban on oil trading by speculators. Uwe Beckmeyer, the head of transport for the Social Democratic party, the junior partner in Chancellor Angela Merkel’s ruling coalition, argued that the recent 25 per cent rise in oil price had nothing to do with underlying supply and demand. “It’s pure speculation,” he said, adding that his party would be calling for joint measures by the G8 to prohibit leveraged trading on energy contracts.

Also last week, in America, Senator Jeff Bingaman, the chairman of the influential Senate Energy Committee, asked the top futures market regulator in the US, the Commodity Futures Trading Commission, for more information about how much impact speculation was having on the oil futures market. Bingamen then complained he had been given “glaringly incomplete” data by the CFTC, which argued that speculative trading was not to blame for recent price rises.

If speculation is not to blame, what is? Some argue that it is the weak dollar. Steve Hanke, professor of applied economics at Johns Hopkins University in the US argues that “Twenty-five percent of the increase in oil prices is strictly due to the fact that the dollar has gone down by 25 percent, because oil all over the world is priced in dollars.”

However, others are now arguing that the high oil price is down to good old simple economics. Demand has outstripped supply over the last couple of years and so the price has increased, on the back of roaring demand, especially from China and the Middle East. “The high-priced energy environment is being driven by the fact that demand has outstripped supply,” President George Bush’s Energy Secretary, Samuel Bodman, said this month: “We have sopped up all the available spare oil production capacity in the system.”

Others concur. One of the authoritative arbiters of how much oil there is the International Energy Agency, that is currently in the middle of its first attempt to comprehensively assess the condition of the world’s top 400 oil fields. Although the findings will not be published until November, according to the Wall Street Journal the IEA is “preparing a sharp downward revision of its oil-supply forecast, a shift that reflects deepening pessimism over whether oil companies can keep abreast of booming demand.”

Fatih Birol, the International Energy Agency’s chief economist, said the oil industry had entered “a new energy world order” where it was harder to keep supply and demand in equilibrium. “What has happened in the last few years has not been in line with economic theory,” he says.

For years the IEA predicted that supplies of crude would gently increase in line with demand increasing to some 117 million barrels per day by 2030. But not anymore. Buried in the IEA website are figures that up the theory that the supply of oil is in real trouble. Since the beginning of 2004, oil’s price has gone from $33 per barrel to over $130 per barrel. In the same period, demand has increased by some 4.3 million barrels per day to 86.5 million barrels per day, whereas supply has increased by only 2.2 million barrels per day to 85.6 million. Supply is already struggling to keep up with demand, let alone reach over 100 million barrels a day.

The bottom line is that demand is now outstripping supply, giving credence to the peak oil pundits that the days of cheap oil over, and the global economy could be heading for a nasty shock.

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7 Responses to “The First Signs of “Peak Gas”?”

pingback:
Posted: Jun 7th, 2008 at 4:44 am

The First Signs of “Peak Gas”? | Mining Exploration Investment News

[...] The bottom line is that demand is now outstripping supply, giving credence to the peak oil pundits that the days of cheap oil over, and the global economy could be heading for a nasty shock. This article taken from rinf.com [...]

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Joe
Posted: Jun 7th, 2008 at 7:05 am

It seems to me that there is a thin line separating what we term “investment” from “speculation.” So far, I see a lot of calls for controlling speculation but no definitions of what “speculation” really is. Without a clear definition, which would also help decide whether it was good, bad, or neutral to the business cycle, there is no point in attacking this activity.

My own understanding is that one of the differences between speculation and investments is the time factor: speculators are merely short-term investors. How short term - there is no absolute rule since all investments differ.

In the wild west there were oil, gold, and even water speculators. They were simply investors with shorter time horizons than today’s pension fund investors. What if someone buys shares of a new company to hold for the long term, feeling certain its growth will be positive in the long run, but soon discovers a lot of competitors entering the industry. What if they heard that one of the company’s patents got rejected? And what if the investor changed his mind and quickly sold his stock holdings in the company? Was he a speculator or an investor?

In my opinion if we conclude that a speculator is no more than a type of investor, then we should quickly forget trying to regulate “speculation.” For without investments, and investor/speculators, the flow of funds, knowledge, and resources could dry up and everyone loses.

Joe

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Anonymous
Posted: Jun 7th, 2008 at 9:21 am

Gee, if your title is “Peak Gas”, discuss peak gas! A sentence is not enough.

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Another Anonymous
Posted: Jun 7th, 2008 at 11:56 am

Agree with anonymous, where is the discussion of peak gas?
This is a much more serious issue for North America then peak oil. We grow much of our food and heat 75% of our homes and businesses with natural gas. Some scores of new gas fueled power plants are being built at the tune of 8 trillion CCF per day. We have little alternative. The liquification of NG gives us LNG and allows it to be transported across oceans, but it uses 35% of the energy content to cool it to -235 degrees F. while changing the BTU content of the end product.
Once it is re-gasified at our ports(only 4 exist and they represent a whole host of other problems) the gas must be carefully mixed in with existing natural gas so as to not throw off the BTU content per cubic foot. (1050 normally)
We are already seeing issues with many furnaces overheating, they all need to be adjusted down to handle the existing incoming pressures and BTU content, any upscaling to more LNG use will push us into wide spread service failure mode of many heating systems.
Look at your NG bill, while your usage compared to last year may not have increased much your cost sure has. In 2008 alone the cost on the mercantile exchange has gone from about 8 dollars to 12 dollars, (per Mcf ..?..)
Are there issues with peak gas? Some say so, The CIA world fact book (search online you’ll find it) says the the world has about 60 years of NG left but if you do the math for North America comparing proven reserves versus consumption, one gets only 9 years for North America. And those numbers have not been updated in several years, but that is what I consider a good source. Given that numbers are often overstated and that it does not factor in Canada’s oil sands project or all the new US NG powerplants I would say the it is a conservative estimate. Folks peak gas is a real serious issue. If you live North of the Mason Dixon line consider an alternative source for heating your house and consider planting a victory garden, rediscover how to can and pickle and brine if you care about your family and your community, don’t panic, we can survive, and maybe even come out of this with stronger more caring communities, don’t panic and buy guns, instead buy shovels and seeds and wood stoves (or electric heating systems). Good Luck to all

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Karen
Posted: Jun 7th, 2008 at 12:07 pm

Peak oil, peak gas - at the end of the day it will be the ordinary consumer trying to make a living and raise a family who will suffer most. I learned about peak oil in school (Australia) in 1971. What have our world governments been doing for the past four decades? Hang your heads in shame all of you for your collective neglect of the world’s peoples. And you have called yourselves leaders? I think not.

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Blorf
Posted: Jun 7th, 2008 at 11:45 pm

Your figures are wrong. From the IEA supply and demand charts you link to:

1Q 2008 demand: 86.6 mb/d
1Q 2008 supply: 87.2 mb/d

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pingback:
Posted: Jun 9th, 2008 at 6:21 am

A to Z Energy ETF » Blog Archive » DrumBeat: June 7, 2008

[...] The First Signs of “Peak Gas”? Consumers the world over are beginning to protest at the huge gasoline prices they are paying at the pump. But whilst the world goes crazy over the oil prices, there are worrying signs about what is happening in the gas market that could also spell disaster. [...]

Reply | Quote selected text | Link to this

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