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Peak Oil

Concerns and worry about Peak Oil are overstated and irrelevant.  Many articles and books have been written on the topic and many lectures given.  Dire predictions have been made and many people have concluded that because of peaking of crude oil production, the future of the human race is bleak.

Peak Oil theory seems so intuitive.  There is a finite amount of oil contained within the crust of the earth.  As the human population increases and the global middle class expands, we have used, and continue to use, more and more crude oil.  The amount of crude oil remaining, therefore, dwindles with each passing day.  Therefore, it is inevitable that crude oil production will peak and then begin to decline.  As production declines, bad things will happen.  The price of crude oil will certainly rise dramatically, and geopolitical conflict will develop over access to the remaining pool of crude oil.  The good life that we live now will come to an end.

As intuitive as this logic is, it has a large problem.  It is flawed.

Why?  Because we live in a market economy and because technology keeps advancing.

Crude oil is but one form of energy available to the human race.  As the price of crude oil rises, exploration companies are incented to find more supply.  Shale oil reserves are developed.  Also, substitutes to crude oil become more viable.  Natural gas displaces fuel oil and also begins to be used more and more as a transportation fuel.  Renewable energy sources become more economical.  Energy markets adjust.  Alternatives are found.

Peak Oil theory focuses on the perceived inevitability of dwindling supplies of crude oil.  What the theory ignores is the possibility of declining demand for crude oil.  There are more and more indications that the demand for crude oil is slowing and will begin to decline.  The energy intensity of our economy is declining as efficiency and productivity improvements permeate our homes and industry. The world population is becoming more urban, lessening the need for gasoline as a transportation fuel.  Cars and trucks are more energy efficient.

With crude oil supplies increasing and the demand for crude oil slowing, and likely to continue to slow more, demand for crude oil will peak long before dwindling supplies of crude oil become a concern.

In the words of Sheikh Zaki Yamani, the former Saudi Arabian oil minister, “The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.”[1]


[1] Fagan, Mary, “Sheikh Yamani predicts price crash as age of oil ends,” The Telegraph, June 25, 2000,http://www.telegraph.co.uk/news/uknews/1344832/Sheikh-Yamani-predicts-price-crash-as-age-of-oil-ends.html.

Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.

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Copyright 2015 by Avalon Energy® Services LLC

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Are Crude Oil and Natural Gas Reconciling?

Crude oil prices have dropped 38% since June for two reasons.  Shale oil production in the US Bakken, Eagle Ford, and Permian basins has increased dramatically – by more than 4 million barrels per day since 2008.  At the same time, worldwide demand for crude oil has declined as a result of slowing economies in China and Europe.

Starting in January 2012, the US crude oil benchmark, West Texas Intermediate (WTI), bounced around $100/Bbl (dollars per barrel), rose above $105/Bbl in June this summer, and is now trading below $65/Bbl.  Natural gas prices fell below $2.00/mmBtu (dollars per million British Thermal Units) during April of 2012, rose above $6/mmBtu during the Polar Vortex during January of this year, and have since fallen below $4.00/mmBtu.

The graph below presents crude oil and natural gas prices on an energy equivalent basis in common units of $/mmBtu.  Starting in January 2012, crude oil bounced around $17/mmBtu, rose above $18/mmBtu in June this summer, and is now trading below $12/mmBtu.

We reported previously on the once wide gap between crude oil and natural gas energy equivalent prices:  Crude Oil and Natural Gas Get a Divorce and Crude Oil and Natural Gas Move To Different Hemispheres.

During April 2014, crude oil reached more than nine times the energy equivalent price of natural gas.  That ratio is now 2.8X.  The graph below shows how this ratio has fallen over the last three years.

While crude oil prices and natural gas prices exhibit little correlation, crude oil prices are highly correlated with fuel oil and diesel prices.  Implications of a declining crude oil to natural gas price ratio include:

  • As natural gas prices spike in pipeline capacity constrained markets this winter, it may be more economical to use fuel oil for power generation than natural gas.
  • The economics associated with converting residential fuel oil furnaces to natural gas become less compelling.
  • The economics associated with converting diesel or gasoline fueled vehicles to compressed natural gas or electricity will worsen, and the payback period associated with existing conversions will be extended further out in time.
  • US liquefied natural gas (LNG) exports will become less competitive in overseas markets where natural gas prices are contractually tied to crude oil prices.
  • Petrochemical facilities that can use both crude oil and natural gas as feedstock may switch more and more to crude oil.

It now appears that crude oil and natural gas may be moving back to the same hemisphere and, possibly, reconciling.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.

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Copyright 2014 by Avalon Energy® Services LLC

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Time to Convert

Like crude oil prices, fuel oil prices have risen dramatically (click here for more information).

The above graph shows the monthly average spot price history of #2 fuel oil delivered to New York Harbor. The prices shown date back to June 1986 and run through November 2011.

Fuel oil is a distillate of crude oil that is heavier than gasoline and similar to diesel. There are various grades of fuel oil (#1 through #6) but the most common is #2, which is used primarily for home heating and, occasionally, for electricity generation. As a home heating fuel, #2 fuel oil competes with natural gas, primarily in the Northeast US.

While crude oil and fuel oil prices have risen dramatically, natural gas prices have dropped precipitously (click here for more information). This has led to a large disparity in the cost of heating homes using fuel oil versus heating with natural gas.

The above graph shows the historical price relationship, on an energy equivalent basis, between fuel oil and natural gas, both delivered to New York City. Since 2006, the premium for fuel oil has increased at an increasing rate. For the month of November 2011, a million BTUs of fuel oil cost five and a half times the cost of a million BTUs of natural gas. This is a stunning difference in price for the same amount of energy. Home owners who heat with fuel oil and have the option to switch to natural gas should consider converting.

Many home owners who use fuel oil and would like to switch but do not have access to natural gas ask if they should convert to propane. Unfortunately, there is not much advantage in doing so. While propane is often produced in association with natural gas, propane prices track crude oil and fuel oil prices. This correlation with crude oil and fuel oil is true also with other natural gas liquids such as butane and ethane.

The above graph shows the historical price relationship, on an energy equivalent basis, of both fuel oil and propane compared to natural gas. Like fuel oil, since 2006, the premium for propane has increased dramatically. For the month of November 2011, a million BTUs of propane cost almost five times the cost of a million BTUs of natural gas.

Note: These prices are in nominal dollars and have not been adjusted for inflation.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us

Copyright 2011 by Avalon Energy® Services LLC