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Oil prices and the EROEI

Conventional oil is oil that has undergone a complete training and is stored in a tank "accessible" rock ( If this reservoir is 4000 meters deep under the Arctic or on the moon it is no longer conventional oil ) . In recent years, the rise in world oil production ( liquid to be precise) hides the decline in conventional oil production . Where is the problem : conventional or unconventional oil if it advances my car!
Not so simple, unconventional oil costs a lot more expensive to produce than conventional oil , in dollars ( or any other currency) and especially energy ( much more serious ) .

When a bank lends money for a project she seeks , of course, to know its profitability. In short, it lends money and measures the profitability of the project with what it can generate logic (IRR : Rate of Return) .
Do the same with oil : oil production measure and compare oil invested. The tool exists is the EROEI (Energy Returned On Energy Invested ) . This is the ratio of the amount of energy used with respect to the amount of energy produced . If the number is less than 1 is that you have consumed more energy than did produce the project. Clearly, if you consume two barrels for produce that is not profitable!

There is 150 years old , you could dig a hole with a shovel in Pennsylvania , blot the oil with some old rags and produce only oil . In 1930, you could not produce one because you needed to drill several hundred meters to reach the oil. Cutler Cleveland of Boston University , in 1930 he had to use a barrel of oil (energy, steel , transportation , work ...) to produce one hundred barrels of conventional oil ( EROEI 100 ) . In 1970 , we must start in the Persian Gulf and a barrel of oil you produce twenty to thirty ( 20-30 EROEI ) . Today you have to leave off Brazil , and even in Antarctica and a barrel of oil you produce eight to ten barrels ( EROEI 8-10). For unconventional oil ratio is even lower. For example, oil sands ratio falls between eight and five , see two for some authors. This ultimately not a lot of importance to consume more dollars or euros to produce oil , it is in the order of things with the exponential growth of the money supply. What really counts , the heart of the problem is the ratio between energy consumed and energy produced. The day he will take two barrels to produce even 1000 000 per barrel , this only works more . The real question is not how many dollars a barrel ("no limit" for the speed with which increases the money supply ) but how barrel for barrel !

The EROEI is a theoretical calculation debatable , just watching the trend: we consume more and more energy to produce a barrel oil (if you do need to remember one thing these lines is it) . This confirms what is observed empirically everywhere . In 1960, offshore production accounted for 10% of world production , today more than 30% . In the 70s , the depth of drilling were a few hundred meters, today we are in the ultra deep offshore with 2 or 3 km of water column... The development costs are so high that even "supermajor" are forced to work together to cope.

That is why the price of oil is structurally definitely in a super bull cycle , little by little , year after year should always consume more energy to produce the same amount of oil. It is a " clear trend " , it is generally best not opposer.le if oil prices and the EROEI

The real question for almost 10 years (+ / - 2005) , is no longer " should we invest in the oil sector ? " But how: Junior or supermajor , conventional oil and shale oil ? Natural gas or oil , uranium or coal, hydro dam or wind, solar or geothermal plant coal or natural gas, onshore or offshore drilling , what asset allocation, how long reserves, political risks ?
Remember, once the trend identified, unfortunately no recipe , to paraphrase Peter Lynch , which is the investment that Rockefeller 's oil "Investing is an art, not a science ."

Every investor or manager must seek its solution in terms of: the investment time (short, medium , long or very long-term ) risks, leverage , diversification , capital, psychology ...
There are " methods" that can be divided into two main streams :
1 Fundamental Analysis ( accounting approach ( investor) Warren Buffet, Peter Lynch, Ralph Wanger ... )
2 technical analysis ( psychological approach ( trader ) ) .
( You also have the efficiency of markets is to say that there is no possible method, academic approach ... ) .
The effectiveness of these methods is more experience and ability of the user of the method itself .

But whatever the medium , method and experience, if you follow the right trend you greatly increase your chances of success ...

Dr Thomas Chaize

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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