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Estimating the impact of Harvey (and Irma and others)

By PeakProsperity. Originally published at ValueWalk.

Hurricane Harvey took offline over 50% of Texas’ refining capacity and shut down large percentage of the wells in the major Eagle Ford shale play.

This week, Hurricane Irma threatens to deliver a similar massive punch to the oil patch in the Gulf.

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To discuss the ramifications from these storms on the oil markets, geoscientist and oil explorer Jeffrey Brown returns to the podcast. He calculates that Harvey alone will have long-lasting effects such as lingering supply shortages, but his greater focus is attuned to the growing validation of his Export Land Model, which calculates the rate at which oil-producing nations cease to become net exporters as their domestic consumption increases. Since it’s formulation in 2005, more and more countries have switched from being net-exporters to net-importers, and the data in aggregates is strongly suggestive of a flat-lining in world oil production — the consequences of which are immense:

But if you look at the available data — basically we have to rely on some US data and some OPEC data — it strongly suggests is that actual global crude oil production virtually stopped increasing in 2005.

I think it was 69 million barrels a day is what I estimated in 2005, we might have had 70, 71 million barrels a day in 2016 — which is a very slight increase over 2005. So, in other words, if you look at the trillions of dollars spent on global upstream capex post-2005, all we’ve been able to do is basically keep crude oi production from collapsing. What has increased is global natural gas production and associated liquids, condensate and natural gas.

So my thesis is the increase in condensate natural gas liquids is obscuring flat-lining actual global crude oil production. Add to this tremendous shortfalls in discoveries and the fall-off in capex, and to me that’s just a very strong probability of actual ongoing material decline in real global crude oil production.

Click the play button below to listen to Chris’ interview with Jeffrey J. Brown (49m:09s).


Chris: Welcome, everyone, to this Peak Prosperity podcast. It is August 31, 2017. I am your host, Chris Martenson. Hurricane Harvey had flooded an immense stretch of the Texas and western Louisiana coasts. The situation is still developing, and we do not yet have anything close to a complete accounting of the damage, let alone when repairs might begin, how long they’ll take or what the costs will be. Of vital importance, however, to everyone in the US, as well as global energy markets, is the impact Harvey has had on the petroleum extraction and refining industries that are absolutely crammed into the bullseye of Harvey’s wrath. Will there be shortages? Will transport fuels like gasoline, diesel and jet fuel spike in price? How can we begin to understand these complex and very important issues?

On that front to help us understand and appreciate the importance of export quantities, we have Jeffrey J. Brown back with us today. Jeffry is a licensed professional geoscientist responsible for the discovery of several oil and gas fields in west central Texas, and currently managing an exploration joint venture. He’s authored numerous articles with a special emphasis on global oil exports. In 2006, Jeff first proposed a simple, mathematical model for oil exporting countries called the Export Land Model, or ELM, which I featured in the crash course video series and book, because it’s essential to understanding the future of oil. I think the model has some insights for us here today as we try and unravel the complexities of the US refining and distribution system in our search for clues as to what may unfold in the near future. Welcome, Jeffrey.

Jeffrey Oh, thank you very much. I’m happy to be on your podcast today.

Chris: Well, thank you. First, you’re in Dallas. How did you fare there, and have you noticed any impacts all the way up there from Harvey so far?

Jeffrey: We began to see the first impacts yesterday, and it’s really beginning to hit full force today. Several gas stations out of gasoline and long lines at several others. One of the principle companies, Quick Trip, in the area was basically doing a triage operation. They announced they’re gonna cut off gas to half of their gas stations on Labor Day weekend, and direct the remaining fuel they have to select ones on a scattered area across the metroplex. Basically, they found that in a gas shortage situation, if they tried to keep every station supplied everybody might of ran dry, so they’re basically doing a triage operation. But it’s certainly hitting with full force right now.

Chris: Well, I’m sorry to hear that, but not unanticipated, not surprising, as you and I exchanged in an email string a few days ago. You were expecting regional shortages to develop as a consequence of what happened down there.

Jeffrey: Yes. I had a little email correspondence with a Wall Street Journal reporter, and I kind of took issue with a statement they made that we had roughly 23, 24 days of supply of gasoline in inventory. And I pointed out the critical mistake they’re making is not accounting for the minimum level of inventory we need to keep the whole system running. Pipelines, tanker trucks, terminals, etcetera. There’s a good deal of gasoline that always in transit that’s counted in the inventory, but it’s not usable. And the various numbers I’ve heard is between 170 and 185 million barrels as a minimum operating level. And I think a few years ago the Congressional Research Service put the number at 185. But as of last week we had 230 million barrels in inventory – gasoline – and in round numbers they were basically producing about 10 million barrels more or less. So, we actually have roughly 45 million barrels of gasoline above minimum operating level. So, for the sake of argument, let’s say the inventory drops by 10 percent, drops about 23 million barrels; well, it’s only a ten percent reduction in inventory, but that would wipe out roughly half of the available inventory.

Chris: So this is an important point, Jeffrey, which you directed me to a Tom Whipple article from 2007 that he wrote about this. And what he wrote in there was, he said that the next important point about gasoline stockpiles is not that all of it is usable. As gasoline is largely delivered by pipeline, barge, and coastal tankers these days, a lot of the gasoline hey, it’s tied up in transit; thus the amount of gasoline trapped in transport is substantial. This trapped gasoline is known as the minimum operation level.

So, let’s take a pipeline. This seems easy to understand. The pipeline is a tube. It’s got a volume. There’s gasoline in there. I guess they count that – the amount of gasoline in the tube – as part of our inventory.

The post Estimating the impact of Harvey (and Irma and others) appeared first on ValueWalk.

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