AuthorTopic: Hills Group Oil Depletion Economic and Thermodynamic Report  (Read 75029 times)

Offline Futilitist

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #15 on: July 29, 2016, 09:51:59 PM »
It's a pity for us that the full report costs $39, but I suppose he's got to make a living. I look forward to the podcast.

My first question, based on lack of the full report, is whether the theory stands up in the real world, when central banks can create the money needed to buy the refined products that are essential to keep society running, even when the energy cost says there is nothing "economically useful" that can be done with it. Liquid fuels needed to keep the trains, coal mining, natural gas extraction and electricity/internet network maintenance running are more than just "economically useful". 

I note that: "Graph# 5 shows that this hypothesis is well supported by the data set provided by the EIA. The years 1980 - 1985 are considered anomalous and are excluded. Justification for this exclusion is discussed in the report."  These were years of decreasing/flat world oil production due to high price following the second Oil Shock (1979).  It wasn't until 1993 that 1979 production was surpassed. The world economy won't recover from another shock like that.

As with any model, it's value is in how accurate it is as a predictor for future Oil Production and Pricing.  It's working well so far, but it's most important predictions look outward to 2020 or so, with the general conclusion that energy from Oil will be a vanishingly small part of the economy after that.  I'm not sure that Short takes into account what might be done with credit distortions by the Central Banks though.

RE

It doesn't matter what the central banks do.  They canna' defy the laws of physics, RE.  The price of oil will follow the Etp model forecast all the way into the ground. 

When I first saw BWHill's model I was amazed.  But I was a little frustrated with the 60 year span and yearly average oil prices shown in the Etp model graphs.  I wanted to see how the Etp model curves would look if superimposed over the more familiar weekly oil price chart I had been staring at for so many years.  So I made some graphs:



A picture is worth a thousand words.

And here is a close up view of the most recent oil price movements:



I included a 50 day moving average.  As can clearly be seen, the oil price has been locked into a very stable descending channel averaging about $25 or so below, and parallel to, the Etp Maximum Oil Price Curve for well over a year and a half.  It can't manage to break above about $15 below the curve.  It even has a annual rhythm, falling sharply every July since it first began it's plunge in 2014.  We are currently experiencing the third major annual oil price drop, right on schedule.  This pattern is becoming very obvious.

Which brings me to my next question.  Why has this thread been dormant for over a year?  This should be the most exciting news for doomers ever!  We now have the best apocalypse timer ever made, but no one here seems to care.  What gives?



---Futilitist 8) 

Offline RE

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #16 on: July 30, 2016, 12:43:31 PM »
FT!  You're BACK!


Nice work on the graphs!

RE
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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #17 on: July 30, 2016, 02:08:17 PM »
It doesn't matter what the central banks do.  They canna' defy the laws of physics, RE.  The price of oil will follow the Etp model forecast all the way into the ground. 
That's not entirely true.  The price of oil is generally quoted in dollars per barrel.  The central banks have extremely little control over the denominator, but they still have influence over the numerator, i.e. the value of the dollar.  There still is the possibility of naked printing of helicopter money which could lead to hyperinflation.  But, in real terms, taking inflation into account, you're absolutely correct.  This is apparent when you look at the Gold to Oil Ratio, which is about at its highest, which means oil is at its cheapest in relation to gold.
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Offline Futilitist

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #18 on: July 30, 2016, 05:18:57 PM »
It doesn't matter what the central banks do.  They canna' defy the laws of physics, RE.  The price of oil will follow the Etp model forecast all the way into the ground. 
That's not entirely true.  The price of oil is generally quoted in dollars per barrel.  The central banks have extremely little control over the denominator, but they still have influence over the numerator, i.e. the value of the dollar.  There still is the possibility of naked printing of helicopter money which could lead to hyperinflation.  But, in real terms, taking inflation into account, you're absolutely correct.  This is apparent when you look at the Gold to Oil Ratio, which is about at its highest, which means oil is at its cheapest in relation to gold.

I agree that the central banks still have some small amount of "control", but not much.  I think the whole system is already in collapse, so I don't think that helicopter money will have much effect at all.  In energetic terms, oil ultimately determines the value of the dollar, not the other way around.  They aren't called petrodollars for nothing.

Just for fun, though, here are couple of graphs I made highlighting the way that the Fed used to be able to manipulate oil prices:



The top graph is the oil price.  The bottom graph displays the oil price relative to interest rates.  This takes into account the influence of easy credit on the oil price.  The highest oil price at the lowest interest rate marks the highest real price ever paid for a barrel of oil.  Surprise, the highest real price ever paid for oil happened in 2012, exactly where the Etp curves cross, i.e. the thermodynamic limit specified by the Etp model!  And that is also exactly when the Fed unleashed Operation Twist which quickly morphed into QE3.  This enabled the oil price to stay artificially high until June/July of 2014, when the central banks finally lost control.  The oil price began to fall, and after about 2 months or so the Fed pulled the plug on QE3 because it simply wasn't working anymore. 

The price of oil is determined by the laws of physics.  Many people have a hard time accepting this.



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Offline Futilitist

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #19 on: July 30, 2016, 05:36:41 PM »
FT!  You're BACK!


Nice work on the graphs!

RE

Hey thanks, RE.  It's good to be back. 

Can you please lift the draconian mod approval thing for my posts.  You're crimping my style.  I promise to use some CFS.  Thanks.



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Offline RE

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #20 on: July 30, 2016, 10:14:58 PM »
Hey thanks, RE.  It's good to be back. 

Can you please lift the draconian mod approval thing for my posts.  You're crimping my style.  I promise to use some CFS.  Thanks.

I will lift the moderation.  Stick to the numbers.  No Nazi shit.  You go back in the Tiger Cage as soon as I get a WHIFF of the old F-Bomb posting.  Capische?

RE
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Offline roamer

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #21 on: July 31, 2016, 11:46:38 AM »
It's a pity for us that the full report costs $39, but I suppose he's got to make a living. I look forward to the podcast.

My first question, based on lack of the full report, is whether the theory stands up in the real world, when central banks can create the money needed to buy the refined products that are essential to keep society running, even when the energy cost says there is nothing "economically useful" that can be done with it. Liquid fuels needed to keep the trains, coal mining, natural gas extraction and electricity/internet network maintenance running are more than just "economically useful". 

I note that: "Graph# 5 shows that this hypothesis is well supported by the data set provided by the EIA. The years 1980 - 1985 are considered anomalous and are excluded. Justification for this exclusion is discussed in the report."  These were years of decreasing/flat world oil production due to high price following the second Oil Shock (1979).  It wasn't until 1993 that 1979 production was surpassed. The world economy won't recover from another shock like that.

As with any model, it's value is in how accurate it is as a predictor for future Oil Production and Pricing.  It's working well so far, but it's most important predictions look outward to 2020 or so, with the general conclusion that energy from Oil will be a vanishingly small part of the economy after that.  I'm not sure that Short takes into account what might be done with credit distortions by the Central Banks though.

RE

It doesn't matter what the central banks do.  They canna' defy the laws of physics, RE.  The price of oil will follow the Etp model forecast all the way into the ground. 

When I first saw BWHill's model I was amazed.  But I was a little frustrated with the 60 year span and yearly average oil prices shown in the Etp model graphs.  I wanted to see how the Etp model curves would look if superimposed over the more familiar weekly oil price chart I had been staring at for so many years.  So I made some graphs:



A picture is worth a thousand words.

And here is a close up view of the most recent oil price movements:



I included a 50 day moving average.  As can clearly be seen, the oil price has been locked into a very stable descending channel averaging about $25 or so below, and parallel to, the Etp Maximum Oil Price Curve for well over a year and a half.  It can't manage to break above about $15 below the curve.  It even has a annual rhythm, falling sharply every July since it first began it's plunge in 2014.  We are currently experiencing the third major annual oil price drop, right on schedule.  This pattern is becoming very obvious.

Which brings me to my next question.  Why has this thread been dormant for over a year?  This should be the most exciting news for doomers ever!  We now have the best apocalypse timer ever made, but no one here seems to care.  What gives?



---Futilitist 8)

This looks like Steve Ludlows triangle of doom and is completely meaningless without reference to how the ETP Maximum oil price curve and the ETP model curve were generated.  Please enlighten us Futilist.
« Last Edit: July 31, 2016, 11:48:44 AM by roamer »

Offline RE

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #22 on: July 31, 2016, 12:25:33 PM »

This looks like Steve Ludlows triangle of doom and is completely meaningless without reference to how the ETP Maximum oil price curve and the ETP model curve were generated.  Please enlighten us Futilist.

I can answer that question.  ShortonOil (BWH) took historical data and then extrapolated the curves based on past history of pricing versus supply.  He fudged the curves somewhat but the fudges are reasonable assumptions.

The model after the fudges does mirror the real-life behavior of the system.  Currently, it is doing a good job as a gross predictor of the pricing changes, although there is much short term fluctuation due to speculation the model cannot account for.

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Offline roamer

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #23 on: July 31, 2016, 12:33:32 PM »
Solid as hell, should take that model to the market and cash in guys ::) ::)

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #24 on: July 31, 2016, 12:40:46 PM »
Solid as hell, should take that model to the market and cash in guys ::) ::)

You can't "cash in" on a gross model like this because the market is glutted with speculators.  It bounces around wildly and you cannot pick out the dates to short it or long it.  The market can do strange things longer than you can stay solvent.  It is just a gross predictor of a long term trend.

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Offline roamer

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #25 on: July 31, 2016, 02:40:42 PM »
I was being sarcastic RE.  The model is a predictor of nothing as far as i can tell.  Curve fitting doomer porn cloaked in technical jibber jabber. 

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #26 on: July 31, 2016, 03:08:07 PM »
Doesn't the smoothness of the curves imply a steadily decreasing ERoEI, whereas in reality the ERoEI decline is very lumpy?  One breakthrough in technology (for example horizontal drilling and fracking) can make a whole swag of resources available.  Likewise a "stranded field" can suddenly become available once a pipeline to it is built.  This doesn't make much difference in the long run, but when focusing in on fine detail, it does.

Iran says it will get its production up to 4 Mbpd.  That may be bravado, but it's not impossible.  The effect would overwhelm the fine detail.

The moving average, which is useful in removing market jitter, can be calculated in a number of ways - this one looks like averaging the PREVIOUS 50 weeks, which is not jitter but jitter plus trend.  I think it would be more useful to use the average of 3 monthly values CENTRED on the date, since that is more likely all jitter.  Experiment a bit, so see what's best.  It is the amount of time the moving average is outside the curves' envelope that matters.
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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #27 on: July 31, 2016, 05:06:34 PM »
I was being sarcastic RE.  The model is a predictor of nothing as far as i can tell.  Curve fitting doomer porn cloaked in technical jibber jabber.

Your sarcasm was noted.  I ignored it.  It was stock in trade for Moriarty.  The model is an average price predictor over time.  Your opinion of it as jibber jabber needs to be backed up by something besides your opinion if you expect me to take it seriously.  Right now you are just name calling.

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Offline Futilitist

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #28 on: July 31, 2016, 07:20:53 PM »
Quote from: RE
Quote from: roamer
This looks like Steve Ludlows triangle of doom and is completely meaningless without reference to how the ETP Maximum oil price curve and the ETP model curve were generated.  Please enlighten us Futilist.
I can answer that question.  ShortonOil (BWH) took historical data and then extrapolated the curves based on past history of pricing versus supply.  He fudged the curves somewhat but the fudges are reasonable assumptions.

The model after the fudges does mirror the real-life behavior of the system.  Currently, it is doing a good job as a gross predictor of the pricing changes, although there is much short term fluctuation due to speculation the model cannot account for.

Not to be overly critical, and I certainly don't want to get off on the wrong foot here, but that is a terrible answer, RE.  You obviously do not understand the Etp model at all.  You make it sound like a fudge filled economic model that happens to be making good predictions for now.  Not exactly a ringing endorsement.  The Etp model is not an economic model at all.  It is a thermodynamic model.  And there is no fudging.  It's lucky I showed up.

The name is Futilitist, roamer. 

You say this is all completely meaningless without reference to how the two Etp curves were generated, but a good explanation was already posted by RE on the last page.  Did you miss it?  Here it is again with some more detail added: 

Quote
The Energy Factor, Part IV

The Price of Oil
 
The price of petroleum is controlled by two factors:

1) The cost of production.
2) The $ amount that the end consumer (the NEGs) can afford to pay for it.

What the end consumer pays must be sufficient to cover the cost of production. All production cost must be borne by the end consumer, who includes the end buyer, and the societal cost required to produce petroleum, and its products.

The Petroleum Price Curve, shown below, reflects the two factors that have, and will continue to control petroleum prices. The ETP derived Cost Curve is constructed from the ETP model, and has mapped the price of petroleum since 1960 with a correlation coefficient of 0.965. It is the most accurate pricing model that has ever been developed, (see report)*.

Here is some more detail.  The Etp model is a open system thermodynamic model of oil depletion based on the first and second laws of thermodynamics.  It is an exergy analysis that measures the rising entropy production in the oil production process.  It uses 3 nested control volumes:

Quote
"Crude oil is used primarily as an energy source; its other uses have only minor commercial value. To be an energy source it must therefore be capable of delivering sufficient energy to support its own production process (extraction, processing and distribution); otherwise it would become an energy sink, as opposed to a source. The Total Production Energy (ETP) must therefore be equal to, or less than EG, its specific exergy. To determine values for ETP the total crude oil production system is analyzed by defining it as three nested Control Volumes within the environment. The three Control Volumes (where a control volume differs from a closed system because it allows energy and mass to pass through it's boundaries) are the reservoir, the well head, and the Petroleum Production System (PPS). The PPS is where the energy that comes from the well head is converted into the work required to extract the oil. The PPS is an area which is distributed within, and throughout the environment. It is where the goods and services needed for the production process originate. This boundary make-up allows other energy, and mass transfers to be considered as exchanges, such as natural gas used in refining, electricity used in well pumping, or water used for reservoir injection."
~BW Hill


The Etp model curve is derived from the Entropy Rate Balance Equation for Control Volumes, which is a second law statement.  The derivation results in Etp Equation #7 (from the Etp book):

Quote
(Equation#7)

[ETP/lb]/Gb=[[(mc∗cc+mw∗cw)(TR−TO)]/mc]/Gb

giving: BTU/lb/Gb

mc = mass of crude, lbs.
cc = specific heat of crude, BTU/lb R
mw = mass of water, lbs.
cw = specific heat of water, BTU/lb R
TR = reserve temperature, R
TO = standard reference temperature of the environment, 537 R
si = specific entropy into the control volume
se = specific entropy exiting the control volume

BTU/gal/Gb for 35.7 API crude = BTU/lb/Gb * 7.0479 lb/gal

Evaluation of ETP from Equation# 7 requires the determination of three variables: mass of the crude (mc) mass of the water (mw), and the temperature of the reservoir (TR). These must be determined at time (t).

1) The mass of crude at time (t) is derived from the cumulative production function,
2) the mass of water is derived from the average % surface water cut (fw) of the reservoir,
3) temperature of the reserve is derived from the well depth. This assumes an earth temperature gradient of 1F increase per 70 feet of depth.

Using only 3 dependable yearly production data inputs, the Etp model's equation #7 generates the yearly rate of increase of entropy production in the world oil production process.  The yearly rate of entropy increase is directly proportional to the yearly oil price increase (correlation .965) because the oil industry is very mature and they can control all other cost factors except the rising lifting costs due to entropy production. 

So that basically explains the ETP derived Cost Curve.  Here is how the Maximum Consumer Price curve was generated:

http://www.thehillsgroup.org/depletion2_022.htm

Quote
The Maximum Consumer Price curve was also developed from the ETP model. It represents the maximum price that the end consumer can pay for petroleum. It is based on the observation that the price of a unit of petroleum can not exceed the value of the economic activity that the energy it supplies to the end consumer can generate.



A more complete explanation of how the Maximum Consumer Price curve was formulated is show in chart# 160 below:



The two Maximum affordable price curves labeled 71% (black), and 62% (light blue) are skewed logistic curves. There is no explicit mathematical equation to describe them. They are derived numerically, and the dots represent values for specific years. The 71% curve is the maximum theoretical energy that can be extracted from a unit of 37.5 API crude. Its value is derived from the combustion equations of hydrocarbons. The 62% curve is the average energy extracted from the same hydrocarbon by the end user. It passes through the  ETP derived price curve at the inflection point of the ETP curve in year 2012. 2012 was the energy half way point for petroleum production. It was the year when it required one half of the energy content of petroleum to produce the petroleum, and its products.
The individual points are generated from the equation:

  $/barrel = (Energy delivered - ETP value/ BTU/$) * 42.

Energy delivered = 140,000 BTU/gal *0.62 (140,000 BTU/gal - the energy content of 37.5 API crude)
ETP value is derived from the ETP function
BTU/$ is taken from the BTU/$ graph - Graph# 12

 


The Maximum Consumer Price curve is curtailed at 2020 at $11.76/ barrel. At this point petroleum will no longer be acting as a significant energy source for the economy. Its only function will be as an energy carrier for other sources. Production will continue as long as producers can realize the lifting costs at existing fields. E&D expenditures, and field maintenance costs will have been curtailed. All production from that point forward will be from legacy fields only. The economic impact that will result from the energy lost to the general economy is beyond the scope of this report.

As far as being able to make short term price predictions using the Etp model, I think it can actually be done to a certain limited extent.  On peakoil.com, I made the following successful price prediction using the model plus my own observations about the stability of the channel in which oil has been declining for well over the last year and a half:

http://peakoil.com/forums/post1321389.html#p1321389

Quote
On the last page, I posted this explicit prediction:

Quote from: Futilitist
I think the oil price might be topping out.



The oil price has been running below and parallel to the Etp Maximum Price Curve for quite a while now.  It has averaged about $25 or so below the Etp Maximum Price Curve for a more than year and a half.  The last major top was at about $61.36.  That was about $15 below the Etp Maximum Oil Price Curve.  I believe that there is very strong resistance when the oil price comes within $15 of the maximum price.  We will see.
It has been about 26 trading days since my prediction based on the Etp model.  Here is an updated graph:



I included a 50 day moving average to show just how locked into a descending channel the oil price has been for well over a year and a half.  This channel continues to run significantly below, and exactly parallel to, the Etp curve.  I made my prediction when oil was $49.78/bbl and climbing.  It is now $41.86/bbl.  Of course, I expect the long term average oil price will continue to decline, as forecast by the Etp model.   

Considering how well the Etp model continues to perform, the fierce resistance to it displayed on this site seems highly unjustified and frankly a bit weird.

Come on guys!  The Etp model is amazing once you actually understand it.  It is like the Holy Grail of oil depletion models.  Yet even here in doomer land, it is hard to find any real support for, let alone excitement about, the Etp model.  What gives?     



---Futilitist 8)
« Last Edit: July 31, 2016, 08:14:32 PM by Futilitist »

Offline Futilitist

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Re: Hills Group Oil Depletion Economic and Thermodynamic Report
« Reply #29 on: July 31, 2016, 07:44:25 PM »
I was being sarcastic RE.  The model is a predictor of nothing as far as i can tell.  Curve fitting doomer porn cloaked in technical jibber jabber.
This is totally false. 

It is obvious that you don't understand the model you are attempting to criticize.  The "jibber jabber", as you call it, is the language of an engineering report, which is what the Etp model is.  Fortunately, I have been studying and debating the validity of the Etp model for more than a year and a half now.  I have read the Etp book about 12 times.  I have discussed the model and it's implications with BWHill in great detail.  I understand the physics and the methodology used to create the model, and I can help translate "jibber jabber" into English if you sincerely want to try to understand it.  But if you are just trolling...



---Futilitist 8)   

 

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