Monday, March 31, 2008

We Just Can't Predict

"The Scandal Of Prediction"
from The Black Swan
by Nicholas Taleb
pages 160-162

I once gave a talk to policy wonks at the Woodrow Wilson Center in Washington, D.C., challenging them to be aware of our weaknesses in seeing ahead.

The attendees were tame and silent. What I was telling them was against everything they believed and stood for; I had gotten carried away with my aggressive message, but they looked thoughtful, compared to the testosterone-charged characters one encounters in business. I felt guilty for my aggressive stance. Few asked questions. The person who organized the talk and invited me must have been pulling a joke on his colleagues. I was like an aggressive atheist making his case in front of a synod of cardinals, while dispensing with the usual formulaic euphemisms.

Yet some members of the audience were sympathetic to the message. One anonymous person (he is employed by a governmental agency) explained to me privately after the talk that in January 2004 his department was forecasting the price of oil for twenty-five years later at $27 a barrel, slightly higher than what it was at the time. Six months later, around June 2004, after oil doubled in price, they had to revise their estimate to $54 (the price of oil is currently, as I am writing these lines, close to $79 a barrel). It did not dawn on them that it was ludicrous to forecast a second time given that their forecast was off so early and so markedly, that this business of forecasting had to be somehow questioned. And they were looking twenty-five years ahead! Nor did it hit them that there was something called an error rate to take into account. *

Forecasting without incorporating an error rate uncovers three fallacies, all arising from the same misconception about the nature of uncertainty.

The first fallacy: variability matters. The first error lies in taking a projection too seriously, without heeding its accuracy. Yet, for planning purposes, the accuracy in your forecast matters far more the forecast itself. I will explain it as follows.

Don’t cross a river if it is four feet deep on average. You would take a different set of clothes on your trip to some remote destination if I told you that the temperature was expected to be seventy degrees Fahrenheit, with an expected error rate of forty degrees than if I told you that my margin of error was only five degrees. The policies we need to make decisions on should depend far more on the range of possible outcomes than on the expected final number. I have seen, while working for a bank, how people project cash flows for companies without wrapping them in the thinnest layer of uncertainty. Go to the stockbroker and check on what method they use to forecast sales ten years ahead to “calibrate” their valuation models. Go find out how analysts forecast government deficits. Go to a bank or security-analysis training program and see how they teach trainees to make assumptions; they do not teach you to build an error rate around those assumptions—but their error rate is so large that it is far more significant than the projection itself!...

* While forecast errors have always been entertaining, commodity prices have been a great trap for suckers. Consider this 1970 forecast by U.S. officials (signed by the U.S. Secretaries of the Treasury, State, Interior, and Defense): “the standard price of foreign crude oil by 1980 may well decline and will in any event not experience a substantial increase.” Oil prices went up tenfold by 1980. I just wonder if current forecasters lack in intellectual curiosity or if they are intentionally ignoring forecast errors.

Also note this additional aberration: since high oil prices are marking up their inventories, oil companies are making record bucks and oil executives are getting huge bonuses because “they did a good job”—as if they brought profits by causing the rise of oil prices.



Sunday, March 30, 2008

India Turns to Angola for Oil

India Turns to Angola for Oil After Losing in Energy Auctions
By Manash Goswami
March 31 (Bloomberg)

India, Asia's third-largest consumer of oil, will focus on obtaining energy assets in Angola after failing to secure supplies closer to home.

``Angola is the next country where we are going to concentrate,'' Indian Oil Minister Murli Deora said in an interview in New Delhi. ``We lost because our bid wasn't good enough'' in previous auctions, he said. ``We have learned from this,'' the minister said.

State-run refiners from India and China are among 43 companies that have submitted bids for 11 oil blocks in Angola, OPEC's fastest-growing member. India's oil shortage has spurred Deora to turn to Angola, with reserves equivalent to 11 years of India's crude imports, after losing out to China in $10 billion of auctions in three years.

India's energy independence has been threatened because it hasn't been able to increase production at home, where output from three-decade-old fields is declining while economic growth boosts demand for gasoline and diesel. India will also compete for oil in Nigeria, Africa's biggest producer, and Sudan.

``India has to acquire assets overseas. There is no other way,'' said Prashant Periwal, an analyst at B&K Securities in London. ``China has slowly and steadily spread across most of Africa and is sitting on huge resources. For fuel security, you have to take control of supplies.''

India plans to resume talks with Pakistan over a $7.4 billion pipeline to transport natural gas from Iran after more than a decade of delays, Deora said.

Blackouts, Growth

Asia's third-largest economy can produce only half the gas it needs to generate electricity, causing blackouts and curbing economic growth. Demand may more than double to 400 million cubic meters a day by 2025 if the economy grows at the projected rate of 7 to 8 percent a year, according to the Oil Ministry.

India has been beaten by China to auctions for energy assets in Kazakhstan and Myanmar in the past three years. India has offered to build ports and railways in Nigeria and Sudan, copying tactics used by China.

India organized a two-day India-Africa conference in November to discuss oil cooperation, where Deora offered to build refineries and pipelines.

India, Venezuela

India, the fastest-growing economy after China, estimates its requirement for oil will rise 62 percent over the next five years to 241 million tons a year, or 4.8 million barrels a day.

Deora will travel to Venezuela next month to complete an agreement to acquire a stake in fields in the biggest crude- exporting nation in the Americas.

ONGC Videsh Ltd., the overseas exploration unit of Oil & Natural Gas Corp., India's biggest producer, will invest up to $356 million in a venture with state-owned Petroleos de Venezuela SA, to operate the San Cristobal area.

ONGC Videsh and China Petroleum & Chemical Corp., Asia's largest oil refiner, have been selected to bid for assets in Angola, according to state-run Sonangol SA. The African nation is offering 11 licenses for fields with a potential of 9.6 billion barrels of oil reserves, Sonangol said on its Web site.

Bidding Delayed

The bidding has been delayed after Angola extended the deadline indefinitely. The offers originally had to be submitted by March 13, according to Sonangol.

The auction will take place after elections in September, Diario Economico reported on March 19, without saying where it got the information.

Tuesday, March 25, 2008

Net Oil Exports - March 2008 Update

Net Oil Exports - March Update. Top 20 Exporters (93% of total exports).

Click on following link to download updated Excel spreadsheet(404 kb):
scroll down to bottom of linked page and hit orange button on right and
then hit second prompt if download doesn't start immediately

Saturday, March 22, 2008

Michael Lynch on Peak Oil

Original ASPO-USA article

Energy Bulletin link to article

Peak oil, uncommon ground
by Michael C. Lynch
March 17th, 2008

(Although I have certainly not predicted oil price behavior correctly in the past few years --to put it mildly--I would argue that this is not relevant to the issue of supply forecasting, and hope my views on that subject will be considered in that light.) The prospect of an oil production peak at 100 mb/d, as some in industry now believe, appears unlikely in my opinion, as most of the above-ground constraints should be overcome. Unless there are serious demand side pressures (which I don’t expect), oil production will probably pass 100 mb/d within 12-15 years. Certainly, given that we’ve produced only 10-15% of conventional oil resources and unconventional resources are larger than that, there seems no reason to consider petroleum to be a scarce resource.

And while non-OPEC supply has underperformed, it seems likely to recover soon, as it has done the past two times it plateaued. Indeed, having spent two decades writing about the Malthusian bias to oil supply forecasts, I cannot find any differences with the current set of arguments, whether from resource pessimists, those concerned about flow rates, or senior industry officials, and the predictions of a quarter-century ago.

Instead, we appear to be experiencing a financially-driven oil price bubble, which will eventually burst and leave oil prices much lower than the current $110/barrel. (Prices might not go below $80 this year, but longer term, $45 is more likely the norm.) The industry will once again lament that they “screwed up the boom,” companies with deep pockets will buy up those who are cash short, resource nationalism will recede as will upstream costs, while investors in alternative energies flock to Washington in search of ever more government support.

I found this article fascinating for several reasons. Michael Lynch is one of the best known resource optimists, the article appears by request at a rather strange location (a peak-oil website), I haven’t seen any discussion of the article (including at ASPO-USA), and the only mention of Michael Lynch I’ve seen recently was a rather nasty comment in a silly post by Kenneth Deffeyes.

All that aside, I think that whether or not one agrees with many of these points, the article raises some very important topics concerning forecasting the oil situation and hopefully I’ll have a chance to slowly start picking this apart.

I try to stay away from forecasting and prediction because I strongely believe it is next to impossible to do successfully for reasons I’ll get into. I frequently post articles, reports, and videos by oil-world luminaries making such predictions, not because I agree with any of them but as a way of documenting the things they’ve said, so that later (in many cases years from know) we’ll see if in fact anybody produced a decent record of forecasting.

Tuesday, March 11, 2008

Pickens's BP Capital Energy Fund Fell 14% This Year

Pickens's BP Capital Energy Fund Fell 14% This Year
By Margot Habiby
March 11 (Bloomberg)

Billionaire investor Boone Pickens's BP Capital Energy Equity Fund fell 14 percent in the first two months of this year, amid soaring prices for natural gas and crude oil.

BP Capital spokesman Jay Rosser, who said in an e-mail that the fund fell, declined to comment on the hedge fund's specific market positions and holdings.

About 90 percent of the Energy Equity Fund's assets are in energy-company stocks, according to Bloomberg data. Natural gas futures jumped 25 percent on the New York Mercantile Exchange through February, as crude oil climbed 6.1 percent.

BP Capital's biggest equity holdings as of the end of last year were in Suncor Energy Inc., Exxon Mobil Corp. and Occidental Petroleum Corp., according to a regulatory filing. Suncor's shares lost 16 percent through February, and Exxon Mobil dropped 7.1 percent. Occidental rose 0.5 percent.

Pickens, the founder and chairman of Dallas-based BP Capital LLC, told CNBC on Feb. 21 that he was short on both crude oil and natural gas. He didn't provide additional information on his positions. A short is a bet that prices will decline.

``Oil is going to back off here in the second quarter,'' Pickens said in the CNBC interview last month. ``It'll be back above $100 in the second half.''

Wednesday, March 5, 2008


This chart was done by Xeroid.

If you put trend lines through EIA 'World C+C' and your 'net exports' data and overlay them you can see the 'World C+C' ~2.2% annual growth suddenly slow in 2005 and also net exports fall away and peak around the beginning of 2007 as the net exporters hang on to crude for their own use.

Interestingly, the trendlines predict peak world C+C around 2009. I guess the trendlines are as good as anything for predicting slightly into the future!


Monday, March 3, 2008

Warren Buffett Discusses Peak Oil

Warren Buffett interview on CNBC, March 3rd, 2008.

He mentions Pickens who they had on last week.