Ian Fraser: Myopic Metrics and Blind Alleys for High Finance – and Big Oil, too

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance.

Hitching your wagon to flawed or “dozy” metrics is never a particularly good idea. We saw this in the build up to the global financial crisis. RBS’s obsession with earnings growth, whilst paying no attention to return on capital, is just one idiosyncratic example; spurious “credit ratings” of structured products are another, and pervasive. It was financial institutions’ blind faith in flawed metrics, and their penchant for burying risk, through the use of deceptive risk models such as Value At Risk, that, as much as anything else, encouraged a generation of bank CEOs to lead their institutions over a cliff.

Equally flawed metrics are now driving risky, and indeed sometimes even desperate, behavior in the oil and gas sector. Campaigners suggest that investors’ and analysts’ obsession with certain flawed indicators is driving international oil companies such as Shell BP, Total and ENI to take environmental, political and financial risks that are likely to blow up in investors’ faces – indeed in all of our faces (they already have in the case of BP’s disastrous Deepwater Horizon spill).

According to a report by Massachusetts-based Oil Change International, Platform, and Greenpeace, “Reserves Replacement Ratio (RRR)” – the rate at which production was replaced by new oil discoveries – is the most pernicious indicator of all.

RRR measures the volume of proven reserves that company adds to its reserve base in a given year, relative to the amount of oil and gas it produces over the same period. The yardstick is widely used by analysts and investors, to the extent that an oil company is deemed to be “successful” if it consistently keeps its RRR above 100% (i.e. it is replacing more oil and gas than it is producing), but a failure if its RRR is below 100% (i.e. it is failing to replace depleted reserves and will eventually run out of oil).

But RRR is a flawed metric because it is blind to risk. According to the Oil Platform International study, RRR’s failure to differentiate between cheap and expensive to produce resources distorts corporate behavior, driving IOCs to replenish their reserves from far more costly and risky sources, such as in the Canadian tar sands or ultra-deepwater oil fields. The OPI report suggests that if they had not accessed such sources, many of the leading IOCs would have had RRRs of below 100% in the past five years.

RRR is also opaque and fails to place any value on the discovery or acquisition of non-oil energy reserves (such as when an oil firm invests in a wind farm) or investment in pipelines and other infrastructure, further driving risky behaviors.

Here are six questions asked about RRR by Oil Change International in its report:-

  • If reserve additions are made with oil that is costlier and riskier than the oil being replaced, does the RRR indicator adequately value the additions?
  • Is there enough transparency within reserves additions reporting to enable investors to judge risk?
  • Does RRR tell investors enough about the potential or otherwise of the additions made in that year?
  • Are companies taking excessive risks because of perceived pressure from investors to maintain RRR?
  • If such pressure exists, is it in the interests of investors to de-emphasise RRR and allow companies to adopt more flexible business models?
  • Would reducing emphasis on RRR render diversification into low carbon technologies more attractive?

Goaded by short-termist analysts and investors, oil firms generally believe they must keep their RRRs above 100%. They are frightened that any failure to achieve this will cause their shares to be marked down and their companies to fall out of favor with investors and analysts.

The report suggests that, among other things, RRR is driving oil firms to play fast and loose with the environment in ecologically vulnerable frontier regions like Alberta and the Arctic.

And it was investor obsession with RRR, together with the “resource nationalism” that is making cheap-to-drill oil less accessible to international oil companies, that drove BP into its controversial alliance with Russia’s Rosneft via a share swap. Ironically, Rosneft is the Russian state-owned company that was handed the bulk of assets of Yukos after these were expropriated by the Russian government.

However, the only way that oil firms can keep their RRRs above 100%, is by taking “unprecedented risks” as well as by accepting “escalating costs and tighter margins”, according to the 24-page report headlined Reserves Replacement Ratio: Adequate Indicator or Subprime Statistic?”.

Invariably this means cutting corners – which in turn invariably leads to accidents. This much has been identified in the first chapter of the National Commission’s report into the Deepwater catastrophe. The report found that:

Decisionmaking processes at Macondo did not adequately ensure that personnel fully considered the risks created by time- and money-saving decisions. Whether purposeful or not, many of the decisions that BP, Halliburton, and Transocean made that increased the risk of the Macondo blowout clearly saved those companies significant time (and money).

The Oil Change International report states:

The bulk of the oil that remains freely accessible to IOCs is technically difficult and expensive to produce such as the Canadian tar sands, ultra-deepwater and the offshore Arctic…

We label these resources marginal oil as their high-cost and high-risk places them at the top end of the production cost curve and they are vulnerable to emerging trends towards efficiency and climate change regulation that may dampen demand growth and stabilize price…

To maintain Reserves Replacement Ratio (RRR) rates above 100%, IOCs have increasingly turned to tar sands and ultra-deepwater in the face of the continuing decline in their conventional oil fields…

Our research found that at least four of the top six IOCs have significantly relied on tar sands reserves additions to support RRR rates in the past five years. “As a percentage of total liquids additions, tar sands represents between 26% and 71% of reserves additions for these four companies.

In a blog post, Lorne Stockman, the report’s author and research director at Oil Change International, said that in the last five reporting years, four of the top six oil companies would not have achieved RRR levels above 100% had they not been active in Canadian tar sands. Stockman said:

The truth is that oil companies are running out of places to find more oil and the end game is not far off. A recent Deutsche Bank analyst report suggested that high oil prices over the next few years coupled with an accelerating decline in the cost of battery technologies for electric vehicles will precipitate a global peak in demand for oil by 2020.

Stockman cited research from the International Energy Agency suggesting that humanity must aggressively reduce its use of oil if it is to meet climate change goals. Meeting the climate objective means that demand for oil would have to peak by 2018, said Stockman.

So the question is: does replacing production with these risky and expensive forms of oil always make sense? While RRR is just one of many metrics used by analysts, it is one that demands strong performance in something other than simple profit generation or return on investment. It demands the constant reacquisition of a fast-disappearing commodity.

Surely the time has come for analysts and investors to adopt a saner yardstick? As Stockman says, the oil companies are determined to “stay the course”. Their belief that they can continue to keep their RRRs above 100% without harming the environment is not only delusional, it is also impeding the transition away from oil.

A version of this article was published in qfinance on January 18th 2011.

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  1. Deus-DJ

    No doubt the price of oil is also having an impact in the quest to keep RRR above 100%…simply another mark against a nymex with no position limits in place.

  2. readerOfTeaLeaves

    According to a report by Massachusetts-based Oil Change International, Platform, and Greenpeace, “Reserves Replacement Ratio (RRR)” – the rate at which production was replaced by new oil discoveries – is the most pernicious indicator of all.

    When you don’t adequately price ‘externalities’ into your cost models, well…
    As long as these industries maintain their stranglehold on political structures, they’ll be able to continue using bogus accounting that doesn’t cost in the full price of production.

  3. attempter

    Speaking of phony numbers, according to Matthew Simmons Aramco itself called the analytical procedure from which it derived its suspiciously consistent proven reserves figures (262 billion barrels since the mid-80s) “fuzzy logic”.

    Simmons’ book Twilight in the Desert is dedicated to debunking these numbers. Even Saudi Arabia doesn’t have the oil it claims. So it’s not just the increasingly desperate IOCs.

    But in addition to the leveraging of environmental destruction the post describes, the IOCs play all the same old conventional tricks as well. Just like every other kind of corporate racket, these use M&As to trump up phony numbers. In this case, bigger comapny A buys smaller company B whose best asset is the reserves it claims. Compnay A then triumphantly adds these to its own decrepit reserves figure, the Street rewards them, and from there everyone pretends this somehow was a new oil discovery rather than a bookkeeping trick.

    And then there’s the more direct route taken by Shell some years ago, of simply forging reserve numbers outright. Making them up out of thin air. Which is probably also what all those OPEC countries are doing with their “fuzzy logic”.

    So we can see that alleged growth in oil reserves has long been as dubious as alleged economic “growth” in general. The fact is that existing fields are depleting, and there was never any good prospect of replacing them with new fields anywhere near as productive (globally, new discovery itself peaked back in 1964).

    On top of that, the crash and subsequent credit crunch resulted in the mothbaling of some two dozen new oil projects, the very kind which were allegedly going to help make up for declining production at existing fields.

    Add it all up, and we have the prediction that unless the final crash comes first (increasingly likely, with oil reaching $100), we’ll see the classical Peak Oil effect (where demand tries to exceed supply, with dire price effects and increasing supply crunch effects) by 2013.

  4. Paul Tioxon

    Indeed, the risks to take gas out of the domestic Marcellus Gas Fields, straddling NY state and Pennsylvania, shows the degree of desperation to exploit previously untapped, but well known reserves. For decades, the geological surveys revealed a deep and large scale gas reserve capacity that went all but unheralded during the worst of the Arab Oil embargo and the second Oil Company market extortion in 1979, completely enabled by the domestic Oil Industry, the seven of sisters, of that era. While the strategy of all centers of political power is to exploit external sources of raw materials, holding domestic reserves in the ground until the highest market prices can be exploited, it appears that tipping has been reached. Not only are the most difficult and expensive oil and gas fields being ruthlessly developed at the cost to competing natural resources, in this case the water supply for 40 million Americans.

    For the past 5 years, secretly and in violation of state and federal environmental laws and pure drinking water regulations, s toxic brew of industrial chemicals and salt brine used to facilitate the drilling through the thick shale bedrock has been transported by truck and dumped into municipal water treatment facilities in the Philadelphia suburbs. This is claimed to be an improvement over allowing the toxic stew to rest untreated in the ground directly poisoning the watershed which is the drinking water source for the NYC and Philadelphia Metro areas. Part of the enhanced technology which is allowing previously unreachable gas deposits in the shale formation from being economically viable, is the high pressure pumping into the ground, though the shale bedrock level, massive amounts of ground water mixed with the toxic chemicals to force the gas up to the pumping apparatus for recovery.

    This breakthrough has made Pennsylvania an American Gas Emirate with realistic estimates of well over a $1TRILLION in gas to be recovered. At this point in time, over 3 $BB in investment has drilled into the ground all over the state and has attracted the finance for a gas line to be built and managed by UGI running from the upstate gas field of PA to the Port of Philadelphia. As a highly touted solution for energy to free us from foreign energy dependency, why would a $330M investment be made to run the gas out of state? Because this Marcellus gas is of a high industrial value for manufacture, it will bring a better price by the factories of Asia and China in particular, than simply burning it to keep the people of Boston, NY or Baltimore warm in the winter. This investment for export is so valuable that Karl Rove personally headed up field operations for get out the vote operations this past election cycle, which allowed the Republican to totally take over the State government of PA, in a state where the Dems have over 1 million registered voter advantage.

    Outside financing, especially from the new gas industry giants, such as Shell, has muscled out traditional players in the campaign finance game. Furthermore, the job creation has been minimal for locals, due to the skill sets needed for this industry, imported out of work energy sector employees where found, particularly from hard hit Gulf areas, where production had been completely shut down. Small dying towns are now booming, with housing shortages and an uptick in crimes associated with the influx of too many single young men, drinking, drugs and guns making for standard violent crimes of a frontier town that the Marcellus shale field is creating in rural areas across the state.

    1. Glenn Stehle


      • There are two reasons why the Marcellus Shale is being exploited now and not 10 years ago or 40 years ago:

      1) Technological breakthroughs
      2) The high price of natural gas

      • For the most part, the shale plays have been made by independents, not IOCs. Shell recently bought out Eastern and also has acreage holdings in the Eagle Ford Shale play, and Exxon/Mobil bought XTO some time back. But by far and away, development of the shale plays has been done by independents.

      • You say:

      Because this Marcellus gas is of a high industrial value for manufacture, it will bring a better price by the factories of Asia and China in particular, than simply burning it to keep the people of Boston, NY or Baltimore warm in the winter. This investment for export is so valuable that Karl Rove personally headed up field operations for get out the vote operations this past election cycle, which allowed the Republican to totally take over the State government of PA, in a state where the Dems have over 1 million registered voter advantage.

      The export of natural gas to “Asia and China” would require the construction of a gas liquefaction plant. Given cost and safety concerns, I’d put the chances of such a plant being built on the Eastern Seaboard at about zero.
      Wikileaks has an overview of the technology here.

      Here is a list of the LNG plants on-stream, under construction and planned. Note that the only plant on the list in the United States is in Alaska.

      1. Cedric Regula

        I don’t think the economics work for the US to export LNG. Earlier in the 2000s all the talk was for the US to build import terminals because “stranded” NG elsewhere in the world sold for 50 cents and if it was liquefied and transported to US terminals the delivered price would be round $3. That’s well below even our currently “low” costs, which of course don’t include eventual environmental costs which will eventually be borne by shale gas producers.

        Besides, we need more natural gas power plants. Maybe even trucks and cars. No reason to ship the stuff elsewhere in the world.

      2. Paul Tioxon

        With all due respect, the “it is not economically feasible” is the argument that has been used, well, forever. But more relevant to the energy issue, the coming of solar energy has been heralded almost hours after the initial Arab oil embargo. Solar energy in its 2 basic forms, passive solar design and solar voltaic panels, have been around since, well the Arab oil embargo. The Franklin Institute in Philadelphia was the site of the federally funded National Solar Heating and Cooling Information Center.


        In the city of Philadelphia, built during the 1980s, was entire city block of passive solar homes, build without central heating. The biggest obstacle to the project, which was eventually over come, was from the Philadelphia Gas Works, which had virtually wiped out the home oil heat business within the city limits. They did not want to see new construction go gas less, due to superior design considerations. An engineering assessment, 10 years later, showed a well designed project would not degrade in its capacity to go through Philadelphia winters and summers and still produce excellent results. Solar electric was similarly derided as not economically ready for another 10 or 20 years, that would have been 12 years ago. It is clear that this canard can no longer be used in the face of Chinese manufacturing breaking the cost barriers for wider commercial installation of PV panels on a yearly basis. But again, more to the point of objections to LNG terminals.

        You don’t need them at the port, except for importing. There are a number of terminal, already installed in the state, connected to the extensive gas pipelines of the state. See this:


        Companies are partnering to develop a new natural
        gas pipeline to provide Marcellus Shale producers in
        PA improved access to high-value markets. An
        estimated 500,000 Dth/day of transportation capacity
        will be made available for increased production along
        NiSource’s Columbia Gas Transmission pipeline
        system in Clearfield, Centre and Clinton counties to
        interconnections with Transcontinental Gas Pipeline,
        Tennessee Gas Pipeline, Dominion Gas Transmission,
        and Millennium Pipeline in north central PA and
        southern NY, as well as connections to UGI’s
        Tioga/Meeker natural gas storage facilities and
        extensive gas distribution network.

        See also this asset map for Williams Co., which includes a number of LNG storage facilities, again, inland, but connected to pipelines that can be offloaded to container ships. And finally, in a moribund and no growth market of Reading PA, UGI is expanding its current LNG storage facility, for its health? Maybe to hold gas for eventual sale at the port of Philadelphia via the new pipeline from the inland storage facilities.



        The ports of NY/NJ and PA/NJ are the original sites of the oil and gas industry, dating back to the industry’s North American founding in PA during the1880s. The anticipation of direct trade with the Pacific Rim, via the expanded Panama Canal, on East Coast ports, has both NY and Philadelphia engaged in major infrastructure improvements for the larger shipping vessels, by dredging and deepening the water ways to facilitate increased trade. The pre-existing logistic expertise with both gas and oil all along the Delaware river from the States of Delaware, NJ and PA and the long standing expertise of UGI with LNG, has created even more trade opportunities. The LNG will have to pass muster with a number of security hurdles, including the Homeland Security regs as well as other EPA and local government objections. But, with the storage being handled in the inland area away from population centers, pipelines onto storage tankers going outbound will be less of problem than building port storage for LNG.

        The expulsion of a foreign company, BP, and a take over by a local company, Hess, has the project moving forward to build another LNG storage site on the Delaware. See this:


        To conclude, investors are falling all over themselves to increase capacity for LNG in a region without increasing population or manufacturing. If not to use here, it is clear to see that taking it to China, via the Panama canal in the next few years is what everyone is really lining up to do. By statement of fact and by deduction, that is the intent. Of course, the inclusion of Hess, along with Sunoco as the leading and locally HQ energy companies, is most of what you need to know. UGI, HQ at Valley Forge, has been around almost as long as Sunonco, used to manage the Philadelphia Gas Works under contract for eons, and is the gas expert, expanding here and in Europe. The political algorithm is complete, with the necessary and sufficient conditions for accomplishing what they want for LNG exporting to the highest bidder.

        1. Glenn Stehle


          The links you cite do nothing to document the case you’re trying to make. If anything, they do just the opposite.

          • The Northeast gas link speaks of pipeline construction.
          • Ditto the first UGI link.
          • The second UGI link has to do with a small-scale peak-shaving LNG plant.
          • The Hess link is a regasfication terminal. This plant would be used for the import of LNG, not the export of it.

          LNG liquefaction terminals with sufficient capacity to load ocean-going vessels and achieve an economy of scale to be economically competitive are massive projects. You’re talking maybe $10 billion and a seven year construction lag, which doesn’t even include the time to get it permitted. As the link I provided above shows, there is no such plant even in the planning stage in the lower 48.

          1. Paul Tioxon

            You are absolutely correct. The Hess plan is to import gas into the region with the second largest gas field in the world. The other pipelines to be built and the storage facilities, are to flood this region and depress prices with even more gas than that which they plan to import on a small scale. The goal then, is a tidal wave of over supply, in order to drive down prices. This will no doubt bring even more investment in the area, increase profits and serve to drive up CEO compensation to Goldman levels. With the excess capacity, cheap gas will travel in the opposite direction for the first time in history, from the Northeastern US back down south, where gas fired electricity will expand the air conditioned Sun belt for another 50 years, until solar electricity becomes more economically feasible. Because, it just can’t possibly compete in the open market without unjustified government intervention, which the gas and oil industry simply does not suffer from. The higher prices around the world paid by consumers from dependable trading partners like Russia, which are a safe, politically stable and reliable suppliers will not possibly tempt American energy executives to embark on the long term commitment to planning and government and community lobbying. These people could not plan 7 quarters into the future, much less 7 years. Without announced plans, fully laid out for all to see, it will never happen. No, the classic over development of a historic, huge gas field will only serve to depress prices and never find its way out of a mature, densely populated area, with no increase in population or manufacturing to absorb this new supply. Thank god, finally, energy too cheap to meter. It’s about time.

  5. D. Mark Loyd, PE

    It’s the case of the convergence of: 1) the effects of Peak Oil (the low-hanging, high value & volume / deliverability, cheap to acquire and produce Oil is gone) and 2) Mispricing of Risk in the case of costs and risks associated with future oil sources, i.e. Offshore, etc.

    The old economic and resource liability cap for offshore drilling was $75M. We see how grossly inadequate and quickly the BP Macondo spill exceeded that ridiculous sum.

    I am NOT mandating more Fed oversight as in most cases these types of accidents are easily avoided (BP Macondo was apparently a very rudimentary and ill-advised ignoring a failed Blowout Preventer that was mistakenly taken as simply a redundant and acceptable sacrificial corner-cutting measure by certain parties. As apparently the case turned out, both levels of safety and redundancy were breached (unknown at time to parties) resulting in the disaster – again from what i have read). If standard operating procedures had not been subverted regarding the repair / replacement of the BOP at the time failure became obvious, the disaster likely would not have occured.

    Nonetheless, placing an economic and resource liability cap on such a high-risk exploration areas is ridiculous and should be anticipated to be exploited in today’s environment of WS sheisters seeking out these mispriced and misquantified risk opportuniities having been shown by our reps in DC that if the deal is large enough, they are willing to place the US Taxpayer responsible and socialize the losses while allowing their favoured cos to privatize the gains.

    1. Glenn Stehle

      D. Mark Loyd, PE said:

      “… these types of accidents are easily avoided (BP Macondo was apparently a very rudimentary and ill-advised ignoring a failed Blowout Preventer…”

      “If standard operating procedures had not been subverted regarding the repair / replacement of the BOP at the time failure became obvious, the disaster likely would not have occured.”

      That was certainly the BP party line from the very get go. Its spokespersons blamed the blowout on the BOPs in an attempt to shift blame onto the drilling contractor.

      The BOPs, however, were just one of many factors contributing to the blowout. Think of what happened more like driving 90 MPH on a winding, ice-covered road at night in the fog with defective seatbelts. The role played by the defective BOPs is equivalent to the role played by the defective seatbelts.

      1. AR


        As of early-mid-April 2010, would BP have suffered a worse bottom line by abandoning the Macondo well, or by continuing to drill until the catastrophe happened? It strikes me that the worse the signs were that the well was compromised, the faster BP kept going, and the more corners they cut, to ‘save money’ in their rush to find out whether they could get away with their shoddy practices and get their pay-off in oil, or insurance.

        If I were even more cynical I might think they intentionally cut corners after they were pretty sure the well was compromised, in order to collect insurance, assuming that abandoning the well prior to blow-out would result in a total write-off. Proving this would not be easy, since much of the evidence was destroyed in the disaster.

      2. fjf

        That was certainly the BP party line from the very get go. Its spokespersons blamed the blowout on the BOPs in an attempt to shift blame onto the drilling contractor.

        This is a red herring.

        The oil industry divides into two groups: 1) The Operator companies such as BP who hold legal authority to drill the well. They are also burdened with legal responsibility for all aspects of well performance; 2) Contractor companies which are sub-contracted by the Operator to provide a variety of specialized services such as helicopter transport, ship transport, well logging, drilling vessels, catering and hotel functions, etc, etc.

        In such contractual arrangements it is the Operator who holds final legal responsibility for the actions of any sub-contractor employed by it. The Operator plans and directs the work; the sub-contractor is legally obligated to follow the direction provide by the Operator and the contract will typically contain clauses which indemnify the sub-contractor.

        We leased semi-submersible drilling vessels to a variety of Operators (including BP at one point). We empowered our MODU senior officers to take the rig off contract if they were of the opinion that the Operator was making a demand that hazarded the vessel, or crew.

        The Operator would say “Do this.” We would respond “That is unsafe.” They would reply “We are footing the bill and accepting all responsibility. Do it anyway.”

        At that point our Captains would say “We no longer want your money. We are taking the rig off contract. You no longer have any jurisdiction or authority aboard this vessel.”

        When someone is paying a a quarter million USD a day (or more) for your services and you tell them to keep their money they get really, really upset. But this was a good thing as it forced the issue up the chain to our HQ and to the Operator HQ; all the big wallahs would sit down and properly appraise the situation. We always won these battles and we had an exemplary safety record. But we operated in a jurisdiction outside the GOM. Safety can be achieved but it is achieved via organizational structure not through the mechanics of speeds and feeds. Though that helps too.

        The Macondo BOP was a clear point of failure. But that was only a contributory factor. The ultimate cause is to be found in the inadequate organization structure of the offshore industry in the GOM. But the Operator doesn’t want you to know that.

  6. AR

    Tagging along on what Paul Tioxin wrote @ 3:44AM:


    When was the latest new refinery, or expansion of an existing refinery, built in the US? Elsewhere?

    In a post this week Karl Denninger asks if Kinder-Morgan is liquidating. http://market-ticker.org/akcs-www?post=177865

    Are the IOCs in the oil business, or the profits business? Why wouldn’t they merely seek to pad their own pockets a la ‘control fraud’ when they see the end of their business model looming?

    Isn’t this what the banks have done, seeing that the debt is fasting approaching the point where the gears grind to a halt?

    Which will come first: Peak oil? Or peak finance?Gail Tverberg proposes that the finance system will crash first. In any event, it has seemed for a while that big money of all flavors has been cashing out of the US economy for at least 30 years. Why would they do that? And why not fiddle with the numbers to hide their intent?

    The housing/MBS scam was a bust-out. The US is a vast resource to be mined.

    1. Lyle

      On refinery expansions in the US, a quick search shows Motiva in La, Conoco in Il, Marathon in La, Chevron in MS, (trying in Ca but environmental objections there, what else is new its CA the La La land of the world). Yes there have been no grass roots refineries built but a lot of expansions and de-bottlenecking of the plants. Debottlenecking is looking at the plant and seeing where the limiting steps in production are and fixing them. Now of course with Gasoline demand more or less static, small refineries are closing also.

  7. Norman

    Having worked in the Oil business and retiring from same, the official buzz has been “we’re running out of Oil” each year for a few, then “we have increased our reserves doubling what we had before”. I might add that this scenario has been in place since I can’t remember when and I’m 72 years old today. I agree with the idea that the continued increase of reserves by some are questionable, probably bogus in order to keep their stock price up, that the oil is more difficult to get out of the ground, as well as the gas too. But as long as there’s no consensus within the consumers of the world as to being united, then the Oil companies will continue to fleece them, laughing all the way to the bank, as the Bankers fleece the producers in kind. If as they say, that oil is finite, then so is real treasure, so where will it stop?

  8. walt

    “A recent Deutsche Bank analyst report suggested that high oil prices over the next few years coupled with an accelerating decline in the cost of battery technologies for electric vehicles will precipitate a global peak in demand for oil by 2020.”

    Deutsche has an auto analyst group and an energy analyst group. Based on wishful thinking, the auto group predicted the decline in battery prices, and the energy group drank their cool aid.

    1. Cedric Regula

      A decline in battery prices is beginning to look better than just wishful thinking. There are some new promising chemistries emerging that are better performance and price than Li-ion. BYD (China) is ramping up a new battery based on iron which has about double the energy density of Li-ion and also has the other critical performance requirements of automotive use like fast recharge time and adequate deep recharge cycles. Daimler-Benz just entered a technology sharing joint venture with BYD.

      With batteries being the weak link in electric cars (the motor-electronic drive is cheap and 80% efficient) there is a lot of R&D focus by the entire industry on finally delivering on adequate battery technology.

      The next problem with be delivering electricity, however. Many problems there as well.

      1. CingRed

        Can’t wait to fill those new batteries with all that electricity that just happens to be 45% coal produced, 25% natural gas and oil produced, 20% nuclear produced, 7% hydro produced and 3% renewable produced. Until low cost renewable electrical production replaces coal and other fossil fuels all the electric cars we can produce will do nothing to resolve the issues surrounding dumping CO2 into the atmosphere. But then again driving one sure makes one feel like they are being helpful even if in reality they are not. I applaud the advancements in battery technology but one should not forget where and how that electricity is really created.

        1. Cedric Regula

          Norway sequesters CO2 in North Sea oil wells. That would take care of our coal plant emissions if we would pursue something similar here.

          NG emits about half that of coal, so more NG plants is relatively benign. And it could be captured and sequestered as well, since we now have a point source emission rather than a zillion tailpipes.

          The rest is zero emission, and new 3rd gen power plants improved safety a lot and also reduced nuclear waste. But we still need a place to put nuclear waste. That applies to existing plants as well.

          Really cheap batteries would help with the storage problem that intermittant sources like solar and wind have.

          The big problem seems to be doing anything.

        2. jonboinAR

          They are as green as the electricity production, which means they are potentially green, especially compared to fossil fuel, internal-combustion engines. Those have no potential to be green. So it’s definitely a step in the right direction in terms of the CO2 issue. Meanwhile, they will, as they come into production, provide relief to the economic squeeze that the oil producing countries can put on us.

      2. jonboinAR

        Adding: I believe GM just announced that they would double the planned production in ’12 of the Chevy Volt, their version of the electric cars that most of the auto companies are announcing some kind of production of, but GM and Nissan are somewhat ahead of the pack, from 60,000 to 120,000. They’re coming, folks; the batteries are getting to be PRETTY decent, and better all the time. The cars are a wee bit pricy, as yet, but not completely outrageous, and there is a demand.

  9. Hugh

    We have probably been in Peak Oil for 5 years now. It’s more of a plateau than a sharp up-down spike. So we may not see much of a dropoff in production for a few years.

    As attempter noted, everybody lies about their reserves. They will keep lying about them until they can’t hide the truth anymore. It would be wise to anticipate the effects of Peak Oil and move away from oil as soon as possible. This won’t happen for the simple reason that kleptocrats don’t do planning for the future even when the future is now.

  10. Macndub

    I love talking to peak oil theorists about natural gas. Makes them grumpy.

    The technological revolution that unlocked natural gas from shales is hitting the oil business, big time. By example, the United States grew oil production for the first time since 1985, and there was no Prudhoe Bay or Gulf of Mexico to help. Anyone looking for a house in Bismark, ND, can understand what happened to U.S. oil production: just as the TX Barnett Shale revolutionized the gas business, the ND Bakken is revolutionizing the oil business.

    This is a disaster for dealing with climate change: there really is even more oil than we believed, just as there is now centuries supply of natural gas (I do not exaggerate). Can the new oil plays–Bakken, Niobrara, Eagle Ford–do to oil what the shale gas plays–Marcellus and Haynesville–did to gas and collapse prices? Unlikely, since oil is still very hard to produce with the new technology, and most oil in the States still comes from the Saudis. But never say never.

    Investors know that an oil sands reserve is worth quite a bit less than a conventional reserve: the conventional reserve is produced in 10 years, the oil sands reserve in 40. The present value of the latter is considerably less per barrel. Moreover, reserve-replacement is a flawed metric because it excludes timing, capital, and hydrocarbon species (oil or gas are treated equally, which is nonsense). But used in conjunction with netback (Ebitda margin per barrel), recycle ratio (the netback divided by the finding cost per barrel), and reserve-life index, reserve replacement provides some useful information.

    I wish environmental externalities were priced. I wish every motorist, oil company, and industrial energy user paid for the carbon they emitted. But they don’t. And wishful thinking won’t make underground hydrocarbon dry up and disappear: there’s too much of it, and the march of technology proceeds apace.

    Lack of supply won’t get us out of this climate change mess. We’ll need to address it by pinching out demand.

  11. gepay

    during the previous oil crisis in the 70s, Sheik Yamani said, “the stone age didn’t end because of a shortage of stones and the oil age won’t end because of a shortage of oil.” That said, what is true about ‘Peak Oil’ is that the cheap sweet crude has peaked although at the present time it is still true what Yergin said, although the oil will be gone at some point, at any given time there is a glut of oil. Only manipulation keeps the price up. In the year 1990, Leon Hess, (and if you don’t know who he is you are in the wrong blog), stated at a hearing held by the U.S. Senate Committeee on Governmental Affairs:

    “I’m an old man, but I’d bet my life that if the Merc [New York Mercantile Exchange] was not in operation there would be ample oil and reasonable prices all over the world, without this volatility.”

    At the same time, we all saw what $150/barrel oil triggered (uncovered?) in the world economy.
    I am a skeptic of Anthropogenic Global Warming although the other environmental factors of our continued dependence on oil are vastly cost externalized.
    It is obvious that while we still have relatively cheap oil, we should changeover to a different system. Unfortunately humans seem to need a total catastrophe before they will make needed deep seated changes.

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