The Next Trillion Barrels

“If the Peak Oil viewpoint is correct (and with each passing year, the data are matching many of the Peak Oil predictions of the past), conventional oil is going to be scarce and expensive. So even what used to be considered “small” oil finds will, in the future, take on added significance. Future discoveries will likely occur by extending the geography of exploration, especially into the Arctic and deeper waters offshore.

“For the first trillion barrels of oil that have been extracted to date, about another 2 trillion have been left behind. This is because much of the “original” oil extraction relied on natural reservoir pressures to move the oil from its place within the microscopic pores of a buried rock formation into an oil well borehole. When the natural reservoir energy was depleted, the oil stopped flowing and whatever was left behind (which was usually about two-thirds of the original oil in place) remained in the rock formation. Over the years, the geologists and engineers developed methods to maintain reservoir pressures as high as possible for as long as possible, and this helped to increase the ultimate oil recovery. But there are more developments waiting to occur, and there is still a lot of oil “down there” in those older oil fields.

“Thus, even small increases in recovery efficiency can make a significant difference in overall yield from an oil field. For example, a 1% increase in recovery factor from the stated reserves of BP could yield an additional 2 billion barrels of oil equivalent (boe). On a global basis, a relatively conservative increase of just 5% in recovery could yield an additional 300- 600 billion barrels. These increases in recovery efficiencies will have to be achieved through the application of newer technology.”

Byron King
October 18, 2007

Keep reading today’s guest essay here:

The Next Trillion Barrels

Now back to Short Fuse, as she continues her missive from Tinseltown…


Views from the Fuse:

Lately, U.S. stocks have been up and down, up and down…it’s getting hard to keep track. Colleague Steve Sarnoff shares with us what he believes is going on with the see-sawing stock market:

“I view price movement as a daily struggle between buyers and sellers,” he tells us.

“Yesterday’s action is a good example of that battle. Stocks were higher in early trading, as bulls were bolstered by positive earnings news. Into the afternoon, high oil prices and more bad news on housing sent stocks lower. Indexes were moving back up at the close. This type of indecisive action can mark a turning period. Over the near-term, stocks are vulnerable to a natural correction. Energy and gold shares have felt some pressure. A setback would alleviate the general condition of overly bullish sentiment and pave the way for higher prices down the road.”

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Following the news from Bank of America, the greenback fell to a new record low against the euro (EUR), declining 0.6% to $1.4296 per euro.

Bloomberg reports: “The New York Board of Trade’s dollar index touched 77.478, the weakest since the index began in 1973, down from its 2007 high of 85.28 on January 11.”

According to the IMF, the dollar is still “overvalued” and rejects claims that the euro has risen too far.

The Financial Times continues:

“The IMF’s new stance on the dollar will counter the arguments to the contrary made by France and some other eurozone members at this weekend’s meetings of the Group of Seven leading economies and the IMF’s governing body. They have been urging a change in language to temper the fall in the dollar, which dropped by more than 4 per cent against the euro in September alone.”

So, we all know what that means: the dollar is going to continue to fall – and in turn, commodity prices will stay high.

Case in point: Oil hit $89 bucks intraday yesterday.

“Many news reports attribute the recent rising prices for oil and gold to tensions in the Middle East,” our oil man Byron King tells The 5 Min. Forecast. “Specifically, Turkey is threatening to invade northern Iraq and chase down some border-crossing Kurdish guerillas that have been launching attacks on Turkish territory.

“This may, in fact, be the immediate reason why the prices for oil and gold are rising. But this reason is far too facile, if not convenient. The root cause is the declining value of the dollar. That’s a far more profound reason than a border clash between two countries in the Middle East.

“The rising prices for oil and gold are reflective, generally, of the world’s desire to accumulate scarce and precious goods in the here and now, as opposed to holding depreciating dollars for some unknown future.

“Our view at Outstanding Investments is that the Federal Reserve made a monumental strategic and monetary error when it lowered its key interest rate benchmark by 50 basis points last month. The markets of the world have been bailing out of the dollar ever since, and the long downward slide of the buckaroo is far from over. Keep this in mind as you deploy your investment funds.”

If you are looking for the big news of the day, and happen to switch on MSNBC in search of it, you may think that something about Ellen DeGeneres, a seventh grader and a dog named Iggy is today’s big story.

But alas, as nice as it would be to think that Ellen’s “doggy drama” or Britney’s custody battle are the only things going on, unfortunately, we can’t live in that kind of perfect world.

Today, Bank of America (NYSE:BAC) reported a 32% decline in profit in the third quarter. The U.S.’s second-largest bank said that trading losses, defaults and writedowns has cost them close to $4 billion.

“The next couple of quarters will be messy for Bank of America,” said Andrew Seibert, a fund manager at Pittsburgh-based Stewart Capital Advisors, which oversees $950 million and owns Bank of America shares. “You are only seeing the beginning. The banks will be putting up a lot of money for reserves.”

Indeed, Bank of America isn’t alone in their problems – Washing Mutual Inc. (NYSE:WM) reported that their net income for the third quarter fell sharply after being hit by the housing and mortgage crises. Also reporting some pretty major losses are First Horizon National Corp. (NYSE:FHN) and SunTrust Banks Inc. (NYSE:STI).

Shares of financial stocks fell across the board after the release of this data. Obviously, the subprime meltdown and credit market woes have had an effect on banks – but what does it mean for the broader market? Despite all the noise in the markets right now, the major indices have continued to hit record highs – but The Survival Report’s Mike “Mish” Shedlock warns readers not to get too comfortable with this trend. He says that although the subprime mortgage market problems have been largely a financial event, “people have little idea how things have changed.”

“Unless a person has tried to secure a new mortgage or refinance an existing mortgage in the past two months, they probably have no idea how things have changed in the mortgage market. It will take time for consumers to be affected by all these events.

“This is one reason we are seeing weakness in the financials first before the broader market. But we can be confident about two things: 1) the broader market will have a hard time continuing higher if the financials, representing 20% of the market, head lower; and 2) the financials are the ‘canary in the coal mine’ when it comes to the collateral damage of the housing downturn. Where the financials go, the broader market will likely follow.”

While many people are losing their shirt in the subprime fiasco, Mish has positioned his Survival Report readers to profit in the face of the housing market debacle.

Yesterday, we mentioned the Treasury Department report that showed a substantial outflow of foreign capital from the U.S. market, as Japan, China and Taiwan sold U.S. Treasuries at the fastest pace in at least five years. We haven’t seen a sell-off of this magnitude since Russia defaulted in 1998.

“Now here’s the bug-a-boo,” says our currency counselor, Chuck Butler, “this is August data!”

“That’s before the Fed cut rates in September! If Asian Central Banks were looking for improved returns before the Fed cut rates, I wonder how bad those numbers are going to look in September, and then for this month.

“I don’t think this is the ‘rush to the exit door’ that even thinking about scares the bejeebers out of me…otherwise the dollar would be circling the bowl right now!’

The Daily Reckoning