Cresting the Blip

In a column on May 5 of this year, I stated, “We will not see gas under $1.00 a liter again.”

It appears I was wrong. Error. In this strange crisis of the world economy we find ourselves this November, gas just fell below the one dollar mark for most stations in Nova Scotia a week ago.

Some “experts” (which maybe I thought I was until this point) are saying that when people get comfortable with the lower price, oil companies will be loath to anger us by raising it too quickly. They predict at least several more months at lowered prices. I make no prediction on that, having learned something at least.

The oil companies are capable of doing that, it seems. Despite pie charts being flashed around at gas stations showing us where the dollars go in the business, and how we apparently shouldn’t be blaming any of those people for high prices, I noticed that Exxon posted an almost record profit for the first quarter of this year, some 10.9 BILLION dollars. That’s not sales or anything like that, that’s profit. It was only outdone by the previous quarter, last of 2007, when their profit was $11.7 BILLION. The $10.9 is apparently $1,385 each second for the quarter, for those who are fascinated by such numbers, or $10,900,000,000, if you are impressed with that approach. Profit. And you thought the oil business was in trouble.

I don’t think many people at the service station pumps are pocketing that kind of profit. Such numbers seem obscene when people are struggling to even fill their car tanks, particularly so when people struggle to fill their home heating tanks.

If I was to make a prediction (I never learn) on the longer term oil market, I would have to say that the high price of gas and heating fuel over the last while was not the aberration in the marketplace, but rather the present drop to more acceptable levels is the aberration (which is why I missed it, I humbly claim).

I just finished reading a book called Stupid to the Last Drop, about the Alberta oil & gas industry, and the way our world lust for oil is endangering landscape and lives there for the sake of profit. It’s an interesting read, hopefully only one side of the argument as many things are, but I was struck in the initial chapters by his description of oil in the history of the world. He didn’t say anything particularly new, I think I’ve said about the same thing myself, but his way of presenting it really brought the situation into focus.

Many of us, at least when being lazy in our thinking, feel that somehow the use of oil has been around for a very long time, and when we are dazzled by numbers describing amounts in the ground, we start to get notions that it will be around for a long time yet.

That isn’t the case, very unfortunately (or perhaps fortunately for our planet), as I have said before. Borrowing the framework of this author, if you think of the history of the world, and draw yourself a timeline of at least thousands of years, the oil phenomenon is merely a brief black blip along the line of our history. The Drake well, drilled in Pennsylvania in 1859 is heralded on US sites as the first “modern” oil well in the Americas, but a Canadian well in 1858 in Ontario was apparently a commercial venture ahead of that. A few weeks ago, my wife and I passed the site of Leduc #1, the first oil well in Alberta, which struck oil in early 1947.

The trouble with the blip on the timeline is that the blip came, and the blip will go. Oil is a fixed resource, and we have been using it at an ever increasing rate, particularly in the last fifty years or so. Use has been even more spectacular in the world market in the last decade or two as countries like China come into mainstream manufacturing and modernization.

Most oil fields in the world have crested the top of the blip in the last few years, or will do so shortly. In other words, they reached the limit of their easy production, and now need more wells to produce the same amount of oil, while demand grows and grows. They are on the downside of the blip, where they see their supply being outstripped by demand, and they can see like a man hauling money out of his pocket that eventually they will reach nothing but lint. With the current need for oil, the end will come far, far more quickly than the 150 years of growing the blip to its crest.

We have built our civilization, if you want to call it that, on oil. Factories run on it, our products are made from it, electricity is generated by it. Land, sea, and air transportation runs on it, and countries go to war for it. Pulling it out of the market will not be something that the world can handle easily.

While we may gradually switch our cars over to electricity, we are unlikely to be doing that with aircraft. Much of our production of plastics depends on the oil industry, and that will not be easily replaced. Some areas of Canada have access to hydro power, and that is a great boon, but in much of the country, it cannot approach the demand for electricity now, and certainly not if we attempt to add everything that ran on oil or gas to the electrical grid.

I don’t know if someday they will refer to our golden times as “The Oil Age”, which they probably should, however short it might be. Certainly it’s been the foundation for much that we take for granted.

The timeline of history flows along, a blip appears and grows—it’s the “Oil Age”, the use of oil as a cheap method of running almost everything that makes us think we are civilized and modern. Then the blip peaks…

Then the blip dies away.

6 thoughts on “Cresting the Blip

  1. Francis and I know of each other but never met, and we served in the High Arctic in earlier lives as weather observers. And I can claim to be an ex-Maritimer (1960) — now living in Calgary and retired from the oil industry. My expertise was in Information Technology — a support role to the geo-scientists who make that industry tick.

    It sounds like I made my prognostication on the price of oil at a more opportune moment than did Francis. The Manager at a Shell station in Calgary was moaning about his unhappy customers when oil last passed through $20. per barrel going north! I told him to “Get used to it! You’re never going to see $20 again.” And he hasn’t!

    Francis talks about pie charts and Exxon’s profit. Wrong emphasis! I won’t comment on Exxon’s profit (it IS whopping!) but surely you do expect a huge profit (NOT a dirty word!) from a huge company — the largest in the world. The converstaion should be about the economics of the industry.

    Many people know and understand that food retailing is a relatively low margin business — sell lots of food and the profit margin is 4% – 8%. Much more profit in selling jewellry. Gasoline retailing is something like food retailing. There are times when the profit derived from refining and gasoline retailing is almost non-existent. If it wasn’t for the chips and chocolate bars, they might even lose money. Many people have observed that if the oil companies didn’t own the gas stations (most of them), consumers wouldn’t be happy with the greatly reduced number of gas stations.

    My wife is an exploration geologist with one of Canada’s biggest oil and gas (O&G) exploration and production (E&P)companies. When I first met her, she drilled wells that cost about $500,000 – $750,000. That now seems impossibly cheap! Those wells — exploration, sometimes dry holes — were drilled on the flat prairie and quite shallow — many less than a thousand feet deep. That’s yesterday’s news!! In the last 2 years, she has drilled holes that were 16,000 – 17,000 feet deep and at a cost of about $40 million!! And exploration holes (wildcats) are successful about 5% of the time!!! Think money!

    Drilling rigs to drill that deep are much bigger, newer, and more expensive than in “the good ol’ days”. And you don’t drill as many of these as you used to drill the shallow, cheap holes. And, you don’t drill such ‘monsters’ without doing a lot more (think ‘EXPENSIVE’) preliminary work to make sure you feel good about the target you are hoping to find. At one time, geologists were all that it took. Now geophysicists are also in the game and expensive/modern seismic studies are done.

    The O&G industry has been through so many boom and bust cycles that they have lost technical people to more secure fields (think government and universities) and the lack of security is a serious concern to young people thinking of geoscience careers. In many places, geology classes are not near capacity — and the jobs go begging. My wife has lost her job about half a dozen times — highly trained in Canada and the UK and has attained MSc degree and higher education.

    Over the last 30 years or so, the industry has changed a great deal. Francis is right when he talks about “Cresting a Blip”. A well-known phrase in the O&G industry is that all the ‘easy’ or ‘cheap’ oil has been found. What remains is MUCH more expensive — deep water (VERY deep!), much deeper on dry land, and into underground formations that previously were not viable/economic. The big, new O&G ‘plays’ are places where they look for rock/sands that are very ‘tight’ — much less porous. These formations were known in the past but ignored because you just didn’t get any natural gas to flow. But, ‘frac’ing techniques have advanced to the point where they CAN get gas out of these formations. ‘frac’ing (as in ‘fracturing’) was done several decades ago to help break open the spaces in reservoirs and get more out of the rock. Now they are using much greater pressures and materials and are able to do what they only dreamed of in earlier times. Again, think expensive! VERY expensive.

    Almost all of the major oil and gas fields around the world have crested/peaked and are in decline (a very serious word in the O&G industry). The decline rates vary from 5 – 20% a year — sometimes depending on how much money you throw at them! You can reduce declines by water-flooding, fracing, etc. Again, think money! Gulf of Mexico, Saudi Arabia, Russia, …. all over. If you see charts of how much O&G is produced each year, it now declines slightly. The decline would be much greater if successful exploration and production wasn’t happening.

    So, Exxon (as an example) takes those billions and devotes much of it to capital spending programs to find new sources of oil and gas, to ‘stimulate’ existing wells, to pay for very expensive deep-sea drilling ships and platforms (some ‘monsters’ built in the Far East and towed around the world!), and pay high salaries for workers in a dangerous industry or to keep people at work in Calgary’s office towers. Yes, they’re hiring!

    I was at a wedding recently where the groom’s parents came from home in Sydney, NS. I didn’t know this but some contractor at Fort McMurray works hard (think money!) to attract and keep qualified workers — in this case, from Cape Breton. A plane arrives in Fort Mac and takes them directly to Cape Breton, they have 3 or 4 weeks off and the plane then returns them to Fort Mac. Not an airline but a charter!

    Why is it that North Americans squawk about high gasoline prices that are much lower than in Europe and many other areas? By design, those high prices (through a big assist in taxes) were meant to curb usage — leading to smaller, more efficient cars. Do North Americans have some God-given right to burn gasoline at will? And, don’t you just love to hear Buzz Hargrove rant about the fact that foreign cars are allowed to be sold in Canada and the US but Detroit can’t sell in Japan or Korea? (I DO love the story of Chrysler being allowed to export Jeeps to Japan some years ago so they sent a shipload over — with the steering wheels on the left side — the WRONG side for Japan!!!!) Stupidity has its reward!

    I commend for your reading a book titled “A Thousand Barrels a Second” by Peter Tertzakian. It speaks about the history of energy consumption — from different sources and how an older source is displaced by newer sources. The world is waiting for something to displace the inherent problems with fossil fuels.

    The Industrial Age began with energy from burning coal, not oil, and coal was vital until near the mid-point of the 20th century. Early dates for oil discoveries are notable from an historical point of view but we didn’t know what to make of it right away.

  2. Don has a lot of knowledge in the area of oil, living out in the thick of it, and certainly took a lot of time to share it… I think he wrote more than I did!

    I’m not sure when a report comes out of “profit” by a company like Exxon Mobil if it’s excluding money that is poured back into it from the profit… it’s apparently enough that quite a number of American politicians are calling for limits on these profits. Don does make a good point that we are impressed with the amount of profit, but need to keep in mind that Exxon Mobil is the largest company in the world, so total profit is proportional. I read in one report that Exxon gave chairman and CEO Rex Tillerson an 18 per cent raise to $21.7 million, so certainly some company staff are enjoying the ride.

    Thanks for your time and certainly information, Don!

    Francis

  3. You will find I agree with your suggestion that many US companies pay their very top executives too much money. In the US, the ratio of pay at the top vs. pay at the bottom is often 500 or 1000 to 1.

    But the $21 million you quote for Exxon CEO is quite a bit lower than many in other industries — especially the financial industry where these bright lads got it all wrong recently.

    Quite a few Calgary O&G company CEOs might be paid about $175K — albeit with stock options that would make them happy IF they find oil! Otherwise, they work only for the salary for a year or two and then get sent packing when a new CEO arrives to take his/her shot at success.

    You are right that profit is profit but it (some of it) will be spent eventually to further their business. You, too, can be a shareholder of Exxon but the dividends you receive are modest at best.

    I caught your mention of paying for heating oil. Is that still common in NS? I know there is a gas pipeline planned (finished?) from Sable Island to Nova Scotia and then to the New England states. I thought there was a plan to use some of that natural gas in the Maritimes. I haven’t seen a house with a fuel oil tank since I left Ottawa in 1973.

  4. About 60% of Nova Scotians still use oil heat. The Natural Gas pipeline extends to Halifax (just in recent years) and will not likely get down to where we are. I suspect that for new construction it’s an option, but when someone takes in conversion or new furnace costs, it takes a while to make it pay. The LNG company has been whining about costs and asking for large increases; some using LNG say the savings after install are not great. Certainly not the situation you’ve enjoyed out west, and already they are saying the Sable area gas could be peaking vs production costs (and of course much of their plan is to sell to the US– they only provide Maritimers because the gov’t ordered that they had to).

    I burn about 5 chords of wood as well as oil… labor intensive. A lot of that in rural areas.

  5. Here in New York State, when we saw the price of gas dropping like a rock (it has!), I thought of all those people from Nova Scotia who had moved to Alberta for jobs. What will become of those jobs now? I’m guessing that there will be some cut backs as the immediate future price of oil seems a bit uncertain. Hopefully our friends who have headed West won’t be badly hurt.

  6. Yes, gas down to 91 cents+ in Nova Scotia today… making me more of a liar than ever. I suppose it’s at the cost of the possible total failure of the world economy as we know it (but I never said that), but gee, at least it’s cheap gas. Don’t feel as guilty if we decide to “go for a drive” in the evening, a prime social event in this area.

    I suspect the oil field barons are just holding their breath and waiting to see what will happen. Certainly the Tar Sands and many other Canadian ventures are profitable when crude prices are high, and not at times like this.

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