Why Brazil’s Find Doesn’t Matter

The find: “On Nov. 8, Brazil’s state-controlled oil firm Petrobras confirmed the finding of huge oil reserves that could hold up to 8 billion barrels of light crude in the Tupi fields, off Brazil’s southeastern coast.” “Tupi is the world’s biggest oil find since a 12 billion-barrel Kazakh field was discovered in 2000, and the largest ever in deep waters.” “Perhaps more important, Petrobras believes Tupi may be Brazil’s first of several new ‘elephants,’ an industry term for outsize fields of more than 1 billion barrels.”

Ok, it does matter. It’s a huge find for Brazil that will make the nation a major oil exporter for years to come, especially given their booming ethanol industry. It is significant in a world where every year another nation peaks in production or switches from net exporter to net importer. Every drop counts.

However, many point to this find as proof that energy supply is nothing to worry about. Oil, for our purposes, is practically limitless. OPEC refuses to produce more. Speculators are driving up futures markets. The giant multinationals that control oil are colluding to bottleneck worldwide refining capacity. They’re making a huge pie from our blood and sweat and they’re all taking a slice. Hell, a new major find is announced every 6 months. Where is all that oil? Why isn’t it driving prices down?

It’s all vaguely true. Oil is limitless, in that we will never run out, because we’ll never be able to recover it all. Had every OPEC nation mounted a massive round of investment in oil production 5 years ago, coming online about now, they would be producing more. Some claim the “peak oil myth” is being spread by the majors to fuel speculation and keep prices artificially inflated. The interaction between futures and price is not my area of expertise, but these links state that futures are following increases in the spot price, not leading them. There are a number of local bottlenecks, such as in the U.S, but there is still some room to spare worldwide. These bottlenecks don’t appear to impact the price of crude, but do impact the price differential between light/sweet and heavy/sour.

Maybe Western oil companies are colluding to artificially inflate prices. The U.S. went to war with Iraq not to secure access to their oil, instead knowing that a long-term insurgency would cripple their contribution to worldwide production. Spend two trillion dollars on the war! Enough of it ends up back in our (their) pockets, anyway. The end result is hyperinflation in oil-exporting nations, eventually lowering the real value of our national debt. The Saudi royals don’t care because they’re all rich enough to hole up in perpetuity in any temperate country of their choosing where sand is limited to the flawless beaches. The switch from the petrodollar to a basket of currencies is quickened, but it’s simply a matter of maximizing utility while the potential exists.

What if reality ends up mirroring conspiracy? There are enough competing theories out there that reality will necessarily approximate to one of them. It doesn’t mean the underlying assumptions cause the result. Did you know the Rothschilds are responsible for the assassinations of Lincoln and Kennedy? Both presidents supported policy that stood in the way of the Rothschild family achieving global domination, and both were assassinated. I don’t understand how you can’t see this …

—

“If confirmed, the deposit . . . would propel Brazil to the No. 12 position in oil reserves, after the United States and ahead of Canada and Mexico.” Taking into account natural gas, “The discovery is likely to raise Brazil’s oil reserves by 50 percent, and turn it into the country with the eighth-largest oil and gas reserves in the world. Petrobras President Sergio Gabrielli said that the reserves ‘will lie somewhere between those of Nigeria and Venezuela.’” “Initially, Tupi will produce about 100,000 barrels a day but may ramp up to as much as 1 million before 2020 – more than the biggest U.S. field in Alaska’s Prudhoe Bay, says Hugo Repsold, Petrobras’ exploration and production strategy manager.”

8 billion barrels. Eventually a million a day in production from this one field. Those are big numbers, with more elephants to come. How could I say it doesn’t matter? Tracy McGrady looks short standing next to Yao Ming. As per the CIA World Factbook (June, 2007), the U.S. consumes 20,730,000 barrels of oil a day to the tune of 7.56 billion barrels a year. The U.S. accounts for about a quarter of the world’s 82+ million barrel consumption a day. China comes in number 2 with 6.53 milion a day in consumption, and India a distant sixth at 2.45 million a day.

Per capita consumption: 68.838 barrels/day per 1,000 people (U.S.), 4.943 barrels/day per 1,000 people (China), and 2.168 barrels/day per 1,000 people (India). China and India will never catch up with the U.S. in terms of per capita use. It simply isn’t possible: there isn’t enough oil. Emerging markets are, well, emerging. Growth means increased energy use, and some of that will be oil. It isn’t the only carrier of energy, but it’s currently the best for a number of applications. That’s why we use it.

—

I conducted a brief Amazon search for books on the history of oil. Found one book written by an industry expert claiming blue skies ahead and nothing to worry about. The market is cyclical. Oil prices were depressed for a couple decades due to excess production capacity, and oil companies weren’t heavily investing in exploration or technology. Now we’re on the opposite side of the cycle. High prices spur companies to find new sources and develop the technology to reach more difficult deposits. Oil may not be a truly free market, but there’s enough money in it to drive interests in a semi-efficient manner.

More exploration would have led to more finds, true, but it’s not like there isn’t a constant effort to find more sources. 8 billion, just over a year of supply for the U.S. alone, the biggest find in 7 years. The previous find enough to cover a year and a half. Not every barrel is even recoverable. People skeptical of environmentalists believe that drilling ANWR would solve high gas prices, and the damn treehuggers are putting polar bears over the common man. Too lazy to source this, but my understanding is that even a massive exploitation of Alaskan resources would net us somewhere in the million barrel a day range. The U.S. currently produces 7.6 million barrels a day, and dropping – covering over a third of our own use. A production increase of 13% is nothing to sneeze at, but it doesn’t “solve” our energy needs.

A million a day from Brazil, another million from ANWR. Increase drilling in the Gulf Coast. Maximize output from the Caspian Sea. Major exploitation of Canadian oil shales. A stable Iraq could produce another 2 million a day. That shouldn’t present a problem. 5 years from now we’ve got another 10%-15% in global production, enough to cover growth over that period… all things being equal.

When conventional extraction from the massive Cantarell Field in Mexico peaked, they embarked upon a nitrogen injection product to increase output. Production soared from ~1 million barrels a day before the initiation of the plan in 2000 to 2.1 barrels a day in 2003, making it the second highest producing field in the world at that time. It’s expected to produce a million a day in 2008. Unconventional extraction techniques boost productivity at the expense of longevity. This difference in output (from 2003 to 2008) approximates our total imports from Mexico, our third biggest source. There is more oil to be recovered in Mexico, but the state oil company has been hamstrung by the government. I have to assume this is changing, given high prices. Of course, they’re starting to use more oil too.

The Ghawar Field in Saudi Arabia is the top-producing in the world. Saudi Arabia keeps a tight lid on information, but the field is expected to produce over 5 million barrels a day. It is believed that Saudi Arabia has been using water injection techniques on its giants to keep up production. If this is true, then when Ghawar peaks it will face a steep decline like Cantarell.

—

20-24 billion barrels in reserves, aka 3 years of U.S. consumption, puts Brazil in 12th-14th place in total reserves. It should be apparent how reliant we are on the top 10, top 5, and especially number 1 (Saudi Arabia). It’s not like Hungary has been sitting on 100 billion barrels and just not bothered to look for it. Eh, let’s save it for a rainy day.

Nuclear plants are going up all over the world. There is a coal renaissance under way. Good ole clean-burning coal. Every year the global output of wind, solar, and other alternative/sustainable energies increases. Cars can run on ethanol, but ethanol is mostly a joke. We use oil because it’s convenient and it packs a punch. Our infrastructure relies on it. This cannot change overnight, and things like consumer car fuel efficiency are a non-registering blip on total usage… which isn’t to say we should all drive Suburbans or oppose policy that encourages vehicles with higher fuel efficiency There’s a lot of room for conservation in the U.S., but it will be matched by growth around the world.

I tend to make oil a tangential issue when I write because, despite my self-education on the issue, I have no idea what is really going on. I didn’t bother to bring out the hundreds of links from my bookmarks because this is supposed to be about Brazil. I don’t mind rosy predictions, preferring them over doom and gloom. But to portray a single, massive, highly unusual find – representing a single nation’s yearly consumption – as a major, world-changing event is outrageous.

On the other hand, it will have a major impact in South America. It’s another puzzle piece of Brazil becoming a major economic power. A find that is insignificant relative to worldwide consumption skyrockets a nation into the elite of producing nations and has major geopolitical consequences. If that doesn’t reflect how fragile oil supply is, I’m not sure what does.