Hello from Oil country

I haven’t written for a couple of days – I’m out in Alberta right now. Interesting experience – this week, the Alberta government announced a budget surplus of 7 billion dollars (10 billion if you really add everything in) on a 27 billion dollar budget. It is greater than the government of Canada’s surplus.

They are planning to sock some away, about a billion. By some measures, sounds like a lot, but once natural gas (the principle source of royalty revenue as I understand it) starts to decline, it may go fast…

But for now at least, things are booming!

Prices and demand

Oil prices jumped $1.44 per barrel in early trading today after militants in Nigeria attacked oil facilities, causing Royal Dutch Shell to reduce output by 455,000 barrels per day.  This is despite a glut of oil as consuming nations have been stockpiling, leading to lower prices in past weeks.

Analysts say this is a reminder that much of world oil supply comes from high-risk countries.  I think it is interesting to look at the numbers involved.  With current global consumption at 84 million barrels of oil per day, 455,000 barrels represents 0.5% of daily consumption.  Yet the price rise was 2.4%.

This situation reflects traders’ awareness that demand for oil to tends to be inelastic – that is, demand drops a small amount when prices increase, at least in the short term. Consequently, a small drop in supply results in a large increase in price.

Of course there is much debate about the price elasticity of oil, gasoline, and natural gas.  The real problem is that if we are truly reaching the maximum daily extraction rate of oil, price elasticity theory may not work very well.  The theory is based on the principle that if prices rise demand will drop, or if prices fall supply will rise.  But what happens if we hit a hard, physical limit to the amount of oil that can be produced?  What if production starts to decrease?  What effect will that have on the theory and practice of the economics of elasticity?  And what will be the effect on the economy?

Energy Issues in the Globe and Mail – 2

Second item in the Globe and Mail is the headline article of the Report on Business section: EnCana axes spending on gas wells. EnCana is cutting drilling activity because it is so expensive, and in the short term natural gas prices have fallen. They are cutting their spending on natural gas wells by 5%, with the majority of that coming in Colorado. From a business point of view this makes sense; but if you’ve seen my presentation you know that in the past five years the number of wells has been increasing just to keep production of natural gas flat. This years mild winter meant we had adequate supplies, but if companies start cutting back on drilling…?

Energy Issues in the Globe and Mail – 1

The first item of note in todays Globe and Mail newspaper is Eric Reguly’s column discussing Peter Tertzakian’s new book One Thousand Barrels a Second. I read this book on the weekend, and was going to review it, but Eric and I have exactly the same take on the book – so if you’re interested, read his review titled Fairy tale ending belies oil book’s facts. (In brief, my summary is: Not too much new information for someone familiar with the situation, though I think it is generally balanced, well presented, and realistic (i.e. “there is no magic bullet”), up until Chapter 7. I was dissapointed with his “trip into the future” – 11 years from now! – and the extremely rosy picture he paints. I suppose it might be possible to get there from here, but only if there is a mammoth effort starting right now, and I see no sign of that. Instead, I think his picture will cause many people to think there is nothing to worry about, it will all work out.)

Macleans magazine article

“When the oil runs out” is the title of an article in this week’s Maclean’s magazine.  It is nice to see Canada’s national newsmagazine covering the topic of peak oil. Jonathon Gatehouse has written a reasonably well balanced article on the situation.  But as I often find in this and other topics, the balance is barbell shaped – that is, most of the coverage outlines one extreme view or the other.

I think the result will be that many people will dismiss the issue because of the extreme views.  This is a constant challenge for those of us wanting to raise awareness of energy issues. My approach in speeches and presentations is to build people up but by bit.  The primary objective is to keep the communications open, since once people shut down, it doesn’t matter how compelling your argument is, they won’t hear it.  The risk is the the audience won’t recognize the gravity of the situation.

Of course it would be much easier if we could present a magic solution.  But this situation is a predicament: “an unpleasantly difficult or complicated situation.”
Jonathon recognizes that people are looking for that solution.  In his closing paragraph, he states “If scientists, thinkers, and politicians really want the public to pay attention to a pressing problem, they’d best to find a way to offer some hope along with the fear.”

For me, the hope is that we as citizens can clearly define our priorities for how we are going to live in a lower energy world. We can do it, and it doesn’t have to be unpleasant – but we do have to start talking about it.  So spread the news.

Welcome to the EP blog

A colleague of mine convinced me that since I am spending time every day following issues in the Energy predicament, I would have something interesting and useful to say. We shall see!

in the meantime, visit the web site at www.EnergyPredicament.com.