my brother and father were oil traders (had their own company) before there was a new york mercantile exchange (Reagan years) and after.
both tell me , yeah oil could drop if there is a world wide, deep, recession, but absent a significant competing alternative, both say we will look back wistfully on 4$ a gallon gas sometime in the near future
my brother is now a geologist...and is standing by his story...but what do i know...jack
Their optimistic conclusion seems to follow from the following statement in the report:
Both the futures markets and EIA forecasts currently anticipate some softening of oil prices over the next few years, suggesting markets expect supplies to gain ground on demand. International Strategy and Investment, an energy consulting business, has documented a substantial number of projects under way that would boost world oil supplies. The development of these resources could undermine the expectations underlying the higher oil price scenarioseven those of oil nationalism.
In other words, (a) the futures markets, and (b) ISI's claim of "substantial number of projects" are their only justification! I'd say pretty weak!
ac, I hear ya. It's funny to hear these "fundamental" explanations pointing to the huge populations in Asia, for instance. Was there a sudden explosion of their consumer population in the past few years?
Two things can be changed quickly and bring about abrupt changes in economic activity and asset prices.
(a) Cheap and plentiful credit.
(b) Psychology, driven by (a)
We don't seem to give much space to new discoveries, such as those of Brazil. Nor do we even broach the possibility of significant future finds in China and other parts of the world. There are massive areas that remain unexplored because of long-held faulty assumptions about oil's location - assumptions the Russians have quite successfully abandoned.
"Supplies could be bolstered by nonconventional oil sourcestar sands, oil shale, coal-to-liquids."
Uuuh, no. Those supplies are minimal now, and only come on line when prices stay where they are or go higher. Once oil drops, those sources are non-economic - costs too much to take it out of the ground. And furthermore, year after year they make this argument, and the cost of extraction keeps exceeding their expectations.
Instead of a war on Iraq, why don't we ask teh fed to have a war on energy. Funnel money into research alternative now! That billions spent on Iraq could have solved the whole root of mess.
Basically, yes, there are big projects coming on line, but we also have fields like Cantarell falling off a cliff production-wise.
Chip,
Bullshit on all counts. Soviet oil geology (and I know who Alexi Kontorovich and Victor Sokolov are) was all about the source - Bazenhov formation, Kuonomaskaya black shales, and so on. Show me an abiotic oil field, or shut the heck up about "long-held faulty assumptions about oil's location".
Jack, Brazil et al
Civilians under-rate exactly how difficult and expensive these fields are going to be. Basically, you're looking at a 10-15 year development cycle, as we need to invent, get the bugs out of and produce a bunch of new techniques to deal with the combination of subsalt (*), deep water and deep resulting in high temperature and pressure.
Finally, EOG just had a dry hole in the Bakken "resource play". Looks like Parshal field and Elm Coulee might be the exception, rather than the rule.
(*) This is important, because the industry's basic geophysical technique - seismic - doesnt work through salt.
Spot prices get enormous amounts of attention, as do traded futures contracts, and the relationships between them, but a price that I personally find very interesting--though it only changes slowly and is only reported sporadically, is the pricing assumption used in the energy industry to base projected capital expenditure rates of return. That obviously varies from organization to organization, but from what I've read over the past few years it has risen from around $40-45/barrel to around $60/barrel. That capital expenditure decision making process determines how much additional supply comes on line, and the people making those decision are not focused on the peaks and troughs of spot prices. The upward trend in their pricing assumptions is cautious and informed, and implies quite a bit about the likely floor for oil prices, at least.
Chip: no one will see oil from the recent deep sea Brazil discovery under the salt dome until 2014 at the soonest. Quite likely much later. The much lauded Jack resevoir discoveries in the Gulf of Mexico don't have any current timeline for extraction of resources. Sure, the little seven aren't producing as much each year, but they're not desperate enough yet to try and touch the really difficult stuff.
If oil costs $100/bbl to extract who's going to sell it for $20-40 ? Yeah, right not oil in production doesn't cost that much. But the cost of such capital projects keeps going up, and $120 oil/energy hasn't worked it's way out the python yet.
As for the "fundamentals" of oil's recent dips; probably some people taking some profits. I like James Hamilton's writing over at Econbrowser.com . He indicates that the run up in price is a bit of supply/demand and a bit of speculation. Impossible to say which is responsible for more.
So yes, oil will go down and go up. But my jaw will drop if we ever see $89.99/bbl in 2008 USD without worldwide recession. $89.99 was chosen since OPEC claims they'll support a trading range of $60-80/bbl .
The conclusion in this report may suggest that other sources of energy that weren't discussed, i.e. non-hydrocarbon sources, fusion, fission, etc. may supply a greater proportion of our total energy needs in the future and may keep oil prices under pressure.
This article is total malarkey, another example of the wishful thinking that has gotten us to where we are today... in deep trouble.
Even energy Secretary Bodman has had to admit that supply has not exceeded 86mbpd over the last 3 years even with the spike in the price.
The recent drop was caused I think by 3 factors. Profit taking, some countries announcing the termination of subsidies (over half the world's population gets subsidized fuel ) and the movement of Congress to diminish leveraged bets in commodities.
ShortCourage | 05.29.08 - 6:05 pm "Two things can be changed quickly and bring about abrupt changes in economic activity and asset prices.
(a) Cheap and plentiful credit.
(b) Psychology, driven by (a)"
You've smashed the nail smack-dab on the head. "It's the credit, stupid." (My appologies to the James "The Ragin' Cajun" Carville.) And, the credit is contracting daily, as CR and Tanta point to several-per-day reports write-offs, write-downs and restructurings.
As the liabilities disappear, the collateral does, too, in an apparently endless reductive loop. Lather, rinse, and repeat... all the way down to the point where insolvency is washed out of the system and historic norms for the appetite for risk is restored. Say, 2012 or 2014?
Oil at $50 or less per barrel? I can see it... over the deflated credit-supply horizon.
It still remains to be seen if end users will actually pay $130/bbl equivalents for petroleum products.
Rob Dawg
sure they will...everyday.
they purchase on credit often also. And that credit is spun, woven, and tied in the globalarbitrage blanket, and written off 5 years later. voila! Inflation, and ho-humness at us$7/gal.
FWIW, George Soros says that there's good news and bad news. The good news: the oil price run up looks like a bubble. The bad news: It won't burst until the economy in the US and UK goes into recession.
Also, not all oil is equal. $130/barrel is for WTI and Brent. There is a big discount for heavier grades. It is difficult to refine, particularly for low-sulphur diesel. So there are really 2 markets.
And the term, "absent supply disruptions"? Given the political stability in Iraq, Iran, Nigeria and even Saudi Arabia, I'd say supply disruptions are almost a given.
Was there a sudden explosion of their consumer population in the past few years?
Yes.
"In particular, China and India, being the two countries with largest new consumer totals, registered average annual increases of 19% and 14%, respectively."
Can somebody explain how fundamentals explain the drop over the past few days?
Neither supply nor demand react instantly to price changes. A few percent in daily fluctuations is pure mo-mo trading noise.
A better question is how fundamentals can explain a doubling in the past 365 days...
As for production being stagnant, that could either mean Peak Oil is here, or that producers are simply reacting rationally to artificially inflated long-dated futures options (cf. the Hotelling Principle and its derivation).
What you said...plus Russian production is in decline.
It's all about the rate of extraction and the scale of the problem. On a global scale we are soaking up ~85 million barrels of oil each day, and the physics of oil reservoirs means that they experience declining rates of production (they start, peak, and start an irreversible decline). Global decline rate is ballpark 4%, so this year the first 3.4 million barrels a day of new production will go to keep us flat - then any new production above and beyond that will result in a production increase.
ac, your perspective is abysmally short-sighted. You're like CNBC - "where's my explanation for TODAY'S price move?" Speculation CAN move the front month price on a day to day basis - witness oil going from $128 to $135, then back down to $129, then back to $133, then back down now to $126. But without storing the oil, they're not affecting the longer-term price.
As for fundamentals, how about today's 8.8 mb drop in US crude inventories? Supposedly "explained" by weather problems in the gulf. Some seriously delusional speculators have shorted oil in the hopes that the delays last week will lead to a monster build this week. Won't happen - those speculators are going to lose some money.
Meanwhile, finished gas inventories have moved from far above the top of the average range to the bottom of the average range in about a month-and-a-half. This will soon cause gas prices to spike high enough to motivate the refiners to up their utilization rates above 90%. Oh, you thought gas prices had already spiked? Silly you.
Production of oil costs per barrel factor in the fixed upfront costs of development and infrastructure amortized over the life of the field.
Therefore, even in a "high" cost field is developed and the cost of oil drops, as long as the marginal cost of extraction exceeds the marginal revenue, these expensive fields will still be pumped.
Speculation CAN move the front month price on a day to day basis
...
But without storing the oil, they're not affecting the longer-term price.
I am not convinced of that. Imagine lots of money in long-only funds investing in long-dated futures, never taking delivery, and rolling them as they near expiry. By pushing up "next year's" price of oil, they would create an incentive for producers to voluntarily curtail (specifically, delay) production. Again, see the Hotelling Principle.
I do not know whether speculation is responsible for these persistently high oil prices, but I do believe it is possible in principle.
Pablo Escobar --
Therefore, even in a "high" cost field is developed and the cost of oil drops, as long as the marginal cost of extraction exceeds the marginal revenue, these expensive fields will still be pumped.
True. And the people responsible for pushing the aggressive expansion will be fired.
We saw this on a grand scale in the 1980s, which is why in the face of $70 oil you saw the private oil companies giving money back to shareholders rather than spend it exploring.
I have been telling everyone I know that oil is going to drop drastically in a very short period of time. No one believes me. The price HAS been manipulated upwards despite what the "supply and demand" folks say. The reason they call OPEC a cartel is that they do have the ability to manipulate prices.
The only real alternative to oil is conservation - get used to it.
Also - I agree with linear algebra...
but a price that I personally find very interesting--though it only changes slowly and is only reported sporadically, is the pricing assumption used in the energy industry to base projected capital expenditure rates of return. That obviously varies from organization to organization, but from what I've read over the past few years it has risen from around $40-45/barrel to around $60/barrel. That capital expenditure decision making process determines how much additional supply comes on line, and the people making those decision are not focused on the peaks and troughs of spot prices.
I worked as a chem engineer in ag processing (ethanol in the 80s in the first mega plants) and can tell you how these budgetary decisions are made having seen it done... if they say the 'hurdle' is $60/bbl - they mean they won't let prices get close to that, they'll pull high cost capacity off line before they get close to that.
Sure there is a chance some other lower cost producer will pick up the slack & under cut price - like Saudi & North Sea did in the 80s... but who has that much low cost capacity available now necessary to flood the market and drive prices at the margin down? Nobody has that much cheap spare capacity.
Oh and one other factor not mentioned - interest rates. The higher the interest rate environment the higher the price hurdle needed for projects to be approved. Why? Because the projects take so long & eat so much cash on the front end before they produce positive cash flow - its all NPV & IRR time value of money type logic all the way.
If we see long bond interest rates go to 8-10% again... I don't even want to think about what the hurdle rate in $/bbl will be necessary to get them to pop for more exploration & extraction. But in a ZIRP world PV=FV everywhere on the 't axis'.
If oil drops drastically by 25% to a hundred bucks a barrel, thats $28 more than it was just after Katrina and Rita.
And after Katrina and Rita us in the industry were playing the fun game of 'Find the Rig', as some of them got ... moved ... from where we'd left them.
Therefore, even in a "high" cost field is developed and the cost of oil drops, as long as the marginal cost of extraction exceeds the marginal revenue, these expensive fields will still be pumped.
Pablo Escobar | 05.29.08 - 7:47 pm | #
That depends on the price elasticity at that time & alternative spare capacity & interest rates. If no one else can fill that supply vacuum as cheap or cheaper than the producer in question AND if that producer can drive up the price by holding back - then it becomes more of a time value of money problem and less of a marginal cost of additional revenue problem.
In the 80s there WAS a lot of excess supply capacity so if you held back you lost out - somebody else pumped (like the Saudis).
Likewise interest rates were high making production today FAR more valuable than production tomorrow even if at the same price per barrel (discounted cash flow wise).
Unless we know both of those condition in the future (how much other low cost capacity there is available AND what the interest rate & time value of money environment looks like)... we can't know if pulling some of those fields out of production or not would make sense.
I have been telling everyone I know that oil is going to drop drastically in a very short period of time. No one believes me. The price HAS been manipulated upwards despite what the "supply and demand" folks say. The reason they call OPEC a cartel is that they do have the ability to manipulate prices.
char
ok, name the trade... i'll throw 100g's at it....nymex options? XOM? uso? the bigger lever, the better.
Nemo, you make a good point about futures beyond the front month - of course speculation can affect those prices within the time frame of the futures contract. But we're always talking about the front month and/or spot price of oil. The effect of futures trading is neutral without storage of oil.
As for enticing producers to keep it in the ground as speculation - granted, it's possible - but realistically only for Saudi Arabia. No one else has excess capacity they're withholding, and the possibility that Saudi Arabia is speculating on peak oil and therefore holding back some production now should give no peace of mind.
In any case, this scenario is not what is usually meant when people cry foul about speculators - and, in fact, if speculators are causing this, they are doing us a huge favor by helping us save some oil for the future.
Mike Q:
More regulation? Ugh. Just what we DONT need.
Why are oil prices higher?
Could it be because while oil supply has increased, demand has increased even more, producing a net deficit along with declining inventories? Hmm. More sold than produced, declining inventories, .prices should go down! (NOT)
(mil. Barrels / day)\tQ1 2007\tQ2 2007\tQ3 2007\tQ4 2007\tQ1 2008
World Production\t84.2\t\t84.37\t84.33\t85.49\t85.86
World Demand\t85.36\t84.48\t85.08\t86.66\t86.34
Surplus / Deficit\t-1.16\t-0.11\t-0.75\t-1.17\t-0.48
(millions of barrels)\t\t\t\t\t
OECD Inventory\t2,598 \t2,668 \t2,670 \t2,574 \t2,543
BTW Saudi production is up! Biggest declines are from Norway and Mexico. Nigeria hasnt helped either.
Changes are Year on Year\tQ4 2007\tJan-08\tFeb-08
Largest Producers\tPct. Change\tPct. Change\tPct. Change
1. Saudi Arabia\t2.08%\t\t0.00%\t\t6.98%
2. Russia\t\t0.48%\t\t-0.65%\t\t-1.04%
3. United States\t1.98%\t\t6.77%\t\t-0.66%
4. Iran\t\t\t-2.31%\t\t0.00%\t\t3.59%
5. Mexico\t\t-5.02%\t\t-10.95%\t\t-6.96%
6. China\t\t\t1.23%\t\t-1.21%\t\t0.21%
7. Canada\t\t-1.89%\t\t-2.39%\t\t-1.07%
8. UAE\t\t\t-3.72%\t\t3.67%\t\t5.29%
9. Venezuela\t\t-2.01%\t\t2.52%\t\t2.39%
10. Norway\t\t-7.60%\t\t-8.31%\t\t-11.33%
11. Kuwait\t\t0.92%\t\t4.08%\t\t7.44%
12. Nigeria\t\t-4.41%\t\t-1.48%\t\t-2.51%
13. Brazil\t\t\t-2.09%\t\t2.30%\t\t0.80%
14. Iraq\t\t\t12.22%\t\t22.82%\t\t2.56%
\t\t\t
Total Supply\t\t1.03%\t\t1.80%\t\t1.91%
HK_Vol, again, like ac, your timeframe is too short. In 2005, Saudi Arabia produced 9.6 mbpd. In 2006, they produced 9.2 mbpd. In 2007, they produced 8.7 mbpd. In 2008, they are not on track to beat 2005.
Ian, I don't put too much stock in the satellite analyses or in the water cut analyses. They may or may not be right - I have no way of verifying. I can, however, feel confident about oil price, exports, production, and investments into future oil sources, and I try to stick to things I can have such confidence in.
I suspect net oil exports are beginning the process of falling off a cliff and that may be why oil has gone from $90 to $130 in just a couple months.
As for enticing producers to keep it in the ground as speculation - granted, it's possible - but realistically only for Saudi Arabia. No one else has excess capacity they're withholding, and the possibility that Saudi Arabia is speculating on peak oil and therefore holding back some production now should give no peace of mind.
Well, I am not an expert on oil. But what is the evidence for "no one else has excess capacity"? I thought most of the oil producing countries, particularly in the Middle East, considered their capacity to be state secrets.
Then again, Saudi Arabia alone would be enough...
and, in fact, if speculators are causing this, they are doing us a huge favor by helping us save some oil for the future.
Yeah, but only by accident and only temporarily. Despite my libertarian (small "l") instincts, I would prefer deliberate public policy over the outcome of a speculative bubble. At least there would be some control over the timing of the public policy decision; 20 years ago would have been ideal...
Also, if we are seeing sheer speculation, it could unwind at any time, violently. It is awfully hard (for me, at least) to look at that parabola on the chart and not suspect some kind of speculation is responsible.
Not hugely knowledgeable about the oil market. However, when I see that institutional investors are ramping up commodities' purchases, I get a bad taste in my mouth.
Commodities markets tend to be thin...they're complex, and tend to draw from limited cash funds. The moves over the last year speak of slosh coming into a thin market...that distorts contract price.
Remember, there are pension-401k funds with cash, looking for a return higher than the FFR below inflation interest rates. And fund managers looking for paper gains. It doesn't matter that "bubble" prices aren't returns (not realized until sold), just that mark to market valuations show a return...on the books.
These funds BOUGHT RMBS and CMBS products. They know they're in the sh*t with them. I think they're trying to recapitalize with a new bubble.
Dear Ray: Under the heading "Not Just electricity": The Dow Chemical Company (NYSE: DOW ) announced today that on June 1 it will raise the price of all of its products by up to 20 percent depending on their exposure to rising energy, feedstock and transportation costs and will review all terms to all customers.
So how do you unwind a 20% increase in pampers and seranawrap. Cheers
"Gas and break pedals don't drive cars. Humans do. That's why we need stoplights."
Assinine!
How do stop lights (a machine..programmed by humans) cause brakes to activate? And don't get me started on stop light cameras...another "wonderful" gov't regulation.
BTW in many countries, they use the much safer and efficient round. No stoplights needed.
Anonymouse writes:
But has anyone here cut back on gas because they can't afford it? I stopped driving over 3 years ago when gas reached $1.70
Anonymouse | 05.29.08 - 7:56 pm | #
I havent because I never wasted any that I could or couldnt afford to start with. If people were to stop pissing money away on things they really dont need like bottled water (try a Brita filter) or $4 coffee etc. they would find it easy to make up the difference in gasoline costs. There are so many more examples of wasteful spending in America. I could go on and on!
Mike - you say that Saudi Arabia is at fault for higher prices b/c they're not producing more oil. Then you say it is the fault of the "speculators" in the futures market. Well, which one is it?
As for Saudi production, Matt Simmons could well be right. They are not producing more oil simply because they can't. The water cuts continue to go higher, implying the oil is running out. In addition, Saudi Arabia has pumped 40 billion barrels of oil, yet their reserves have continued to be unchanged for the past 30 years, remaining constant. Have they really been discovering new oil at a consistantly constant rate equivalent to annual oil production? I doubt it.
The problem is with the rate of demand growing more than the rate of supply - not "evil speculators" who need to be regulated.
The conclusion in this article is completely stupid. Wonder who pay's them. Price per barrel will never go below $100 ever again, not even inflation adjusted. Price will be short of $200 by years end. No more SUV's, Hummers and all that. Already shows on the used car sales lots . Thanks god.
In all, according to the Energy Department figures, net exports by the world's top 15 suppliers, which account for 45% of all production, fell by nearly a million barrels to 38.7 million barrels a day last year. The drop would have been steeper if not for heightened output in less-developed countries such as Angola and Libya, whose economies have yet to become big energy consumers.
"The problem is with the rate of demand growing more than the rate of supply - not "evil speculators" who need to be regulated."
Whilst I do not consider speculation evil, I do question your insistence that there is no speculation occurring. The flood of money from institutional investment funds into commodities is rather substantial. Fund managers earn spiff (fees) from book value. Commodities trades book to market (for now).
I agree with S&D analysis, but this market is/has moved beyond that.
There are massive areas that remain unexplored because of long-held faulty assumptions about oil's location - assumptions the Russians have quite successfully abandoned.
Sorry, Chip, but this is complete nonsense. It is just not true that the Russians "use different models." They just have a couple of vocal crackpots too.
Oil moves around a lot--it is liquid, after all--and the place where it ends up (the "reservoir") is not typically the place where it formed. There's a small field in central Nevada (Trap Spring/Eagle Spring) where the oil is hosted by volcanic rock! But it didn't erupt from volanoes--the source of the hydrocarbons is organic matter in late Paleozoic shales. Finding oil in non-sedimentary rocks says nothing at all about where it formed. (And it's also routine to fingerprint the ultimate sources of oil by using things like gas chromatography--"GC".)
Furthermore, as I posted last fall: back in the late 1980s the Swedes drilled a deep (and very expensive) hole in their Siljan basin to test the notions about abiogenic oil. It was to be a step to making Sweden the "Saudi Arabia of the North" (an actual quote from one of the Swedish officials).
I attended a special session at a Geological Society of America meeting on results from this hole. Shoddiest science I've ever seen. For just one example, a bunch of oily gunk which had been trumpeted in the popular press as an oil show, was shown (by GC) to be degraded drilling lubricant. But to this day you can still read all over the net about the "80 bbls of oil" found 10 km down that The Scientific Establishment Ignored. (And this result also underscores the value of "science by press release.")
One Swedish official said at the meeting that they "believed" in abiogenic oil. Well, I guess they didn't believe hard enough, because the hole was as dry as they come. It doesn't happen, in a serious oil exploration hole, that hydrocarbons are so sparse that you mistake drilling lubricant for them! And making such a mistake merely indicates the grossest incompetence. By the way, if you want to see a serious evaluation of the Siljan hole, see John Castaño's paper in US Geological Survey Professional Paper 1570 ("The Future of Energy Gases.") PP 1570 is available as a PDF from the USGS web site. (Not, to be sure, nearly as much fun as all those Web sites talking about the Suppression of Evidence about the Origin of Oil.)
The Swedes finally pulled the plug, after sinking tens of millions into this hole. But (as I posted yesterday), if you want to believe that the professionals don't know what they're doing, and want to hare off after crackpottery like abiogenic oil or whatever--well, go spud some hole and show us how it's done. It's your money.
But be prepared for a very expensive reality check.
The conclusion is highly suspect. The politicos usually let Civil Service economists write most of the verbiage, but they sharply edit the conclusions and summary. Anything as sensitive as an oil price forecast would be controlled by political appointees.
Back in 2004 when the Energy Dept. released its oil price forecast we got a good laugh out of the disconnect between the text and the forecast. The text was a very thoughtful analysis of how the oil market was expected to tighten sharply in coming years, but the oil price forecast was a ridiculous statement that prices would average $30 through 2025.
Nemo, if the price is up due to the speculation of Saudi Arabia leaving oil in the ground, it will only "unwind" by the production of enough oil to cause a big drop. This is hardly the "speculation" everyone means around here.
Bunker Hunt brings back memories. As background, I will tell you that just before the Hunt brothers were blown out of the water, I was offered a seat of the silver exchange. In those days the brokers on the floor were flying high. Everyone was making more money than they thought possible. I ultimately choose to go to law schooland turned down the seat--in those days you had to buy it--you couldn't lease it-- but during my first year in school, the market crashed-- hard. Alot of brokers and clearing houses failed. It was quite bloody on a human level
All well and good, but as the US contracts eventually the countries that sell to us will also.
I see the US going under an about $150 to $165 a barrel,Europe now having problems
going under at $210 to $250 a barrel. (Peak at $267.86 a barrel)
Japan fails somewhere between the US and Europe,Korea just after Europe.
Nope, China vs. India is a non starter because it would have to be a naval/air war,both sides have a high manpower that tech/volume.(Nepal?)
Hannibal crossed the alps but over the backbone of the world? Mt. Everest?
Maybe if India allied w/Pakistan? Nuke exchange?
I'm thinking of 1944 and the German capture of Ploesti (sp?) The Romanian oil fields.
SLG - thank you for your civil reply - in contrast to the rather pompous one from Mr. Whitchurch whom we are to presume is or was associated with Northern Territory Oil and who received his formal education in Economics as opposed to, say, Geophysics. As for the Oildrum blog, my own connections to the industry being in the Persian Gulf as opposed to North America, it is the opinion of my friends who actually explore for oil that Oildrum draws false conclusions from a smattering of facts that are twisted into half-truths or total misrepresentations (Disclaimer: I do not read that particular blog, but I did seek an expert opinion about it). I'm sure we may rest easy that poster Whitchurch has no connection to Oildrum.
My reference relative to abiotic oil is based on the extensive research, documented by J.F. Kenny, of the findings of the Russian Academy of Sciences' "Joint Institute of the Physics of the Earth" linked here:
as well as notes such as this that I have from an article of about three years ago:
Roger Andersen, an oceanographer and executive director of Columbias Energy Research Center proposed studying the behavior of this reservoir. The underwater landscape around Eugene Island is weird, cut with faults and fissures that belch gas and oil. The field is operated by PennzEnergy Co. Andersen proposed to study the action of the sea bottom around the mountain and the field at its top and persuaded the U S Dept of Energy to ante up ten million which was matched by a consortium of oil giants including Chevron, Exxon, and Tex Corp. This work began about the time 3-D seismic technology was introduced to oil exploration. Anderson was able to stack 3D images resulting in a 4D image that showed the reservoir in 3 spatial dimensions and enabled researchers to track the movement of oil. Their most stunning find was a deep fault at a bottom corner of the computer scan that showed oil literally gushing in. "We could see the stream," says Andersen. "It wasnt even debated that it was happening."
And there are the questions I have not yet seen answered, such as, if oil is not abiotic, how did so much biological detritus get all the to the bottom of the North Sea? Did all fish go there to die?
Finally, my proposal was in terms of critical thinking. Neither SLG nor Whitchurch addressed my comment about Brazil, yet that country's recent discoveries will double its known reserves within 20-3 years and will propel in into something like third place int the world. Instead, all I read is about those countries with declining known reserves. When a suggestion of any sort is dismissed out of hand, such as by Mr. Whitchurch, then critical thinking is not going on. Absent the latter, there is no point in my posting on the subject -- whether or not that is the intent of his oh-so-superior reply. In my view, debates worth conducting do not begin with the equivalent of "screw you," except perhaps in a very immature milieu.
Clearly, it's the latter. As in the 1970s when the Clowns of Rome (aka Club of Rome) announced we would be running out of Aluminum (while the ground in all the tropical rainforest areas consist of bauxite several meters deep), the peak oil sectarians will come out at each oil bubble. When the price declines after the bubble peaks, they will be silenced again only to come out screaming again with the next price move. Always exclaiming: "This time it's different!" - Like we haven't heard this before. "Oil prices have reached a permanently high plateau." Me wonders why so many regular CR reader can see thru such BS in the RE market so clearly, only to fall for it in a different one. Also, after you credited Ben Bernanke for the ascend in the oil price, will you do the same for the coming descend?
As for the coming months and years, oil is following the other commodities down. Metals and Ags have started the new trend that oil is simply following. Oh, I know for oil it's totally different this time. Maybe in the realm of sect-thinking, not however in the laws aof physics and economics.
O-Joe
Remember the real estate boom? They were justifying the absurd price increases to supply and demand. Sound familiar?
Did the demand for oil suddenly go up? Or did the supply go down? Neither really.
Oil prices have gone up because of speculation with borrowed money (margin). The margin requirements for oil is only 5%. Again sound familiar? (Flippers buying houses with zero or 5% down)
The argument heard often is that speculation is not responsible for the high oil prices and therefore increasing margin requirements will not have any effect on oil prices. Well, if that is the case, why not increase margin requirements to 100%. It won't affect oil prices. Right?
More male bovine manure from the people long on oil.
Darkness writes: Was there a sudden explosion of their consumer population in the past few years?
Yes.
"In particular, China and India, being the two countries with largest new consumer totals, registered average annual increases of 19% and 14%, respectively."
Sorry Darkness, those are not "new consumers". The populations of China and India are not growing annually at 19% (thank god). Just because some study defines them as new consumers doesn't make them so. They are only richer consumers, courtesy of economic growth funded by debt in Western economies, primarily the USA.
My point remains. Sudden drastic changes in prices and economic activity are brought about most often by money/credit creation, and the boom-time psychology that it generates.
Yes, I will credit the Fed with the coming implosion of asset prices, including oil prices, because there would not have been a bubble to implode were it not for them.
I just wonder if they are determined to bring about the implosion through a currency collapse. That's why I am holding onto my precious metals, even though I recognize the risk.
"Ask Bunker Hunt how his attempt to corner the silver market worked out...."
and the only thing that stopped him was regulation that allowed everyone to realize he really WAS cornering the market. we can't even tell IF anyone is cornering the mkt (courtesy of the ICE), much less enforce it.
You might want to talk to an actual geophysicist or geologist about the difference between the two. The rough and ready difference is that a geophysicist will tell you where oil is, and a geologist will tell you why it's there.
Yup, I'm not either. Officially, I'm the guy who translates between the guys who sign the cheques and the guys who talk to the rocks.
I am glad you are confident in the ability of Petronas to quickly produce high temperature, deep, subsalt oil, on a time frame faster than, say, Thunder Horse.
Briefly, subsalt means seismic dont work, so each expensive hole you get to roll the dice blind.
High temperature means your drill bits and production pipe melt.
Deep means everything else gets more difficult and more expensive.
Next, regarding the oil at Padre Island. Pressure differentials can cause migration of fluids from deeper formations via faults - news at eleven !
Next, "And there are the questions I have not yet seen answered, such as, if oil is not abiotic, how did so much biological detritus get all the to the bottom of the North Sea? Did all fish go there to die?"
OK, you've established you can use google, so look for 'Mandal formation ekofisk'. That will get you some pointers on the Upper Jurassic Mandal shale, which is the major source rock for a lot of the North Sea. It got laid down in the Jurassic, before there was something we'd recognise as the North Sea.
Finally, google 'biomarker oil source' for why us in the industry are so wedded to the idea of Biotic Oil. Basically, it works.
Um, how so? If you are trading bananas for seed rice and that's your transaction for the week, you aren't a consumer. If your cook-fire is brush, then you aren't impacting the world price of oil.
I actually didn't make up that label, the report did. Did you follow the link? That paragraph was pasted in from the report. You asked, I delivered.
Have you been to India and China? People DO go from near barter to having money to spend on retail. Millions of them, every year. I guess you needed to make your question clearer.
Wait wait wait... I just started reading the other thread here. Some people think oil isn't biotic? o__O Does this particular population of believers have a high overlap with the Jesus rode a dinosaur crowd?
"...if oil is not abiotic, how did so much biological detritus get all the to the bottom of the North Sea? Did all fish go there to die?"
I can't even parse that... what does it mean? ... or does it mean it's late and I need another beer?
Yes, it's great that those "new consumers" in developing nations now have enough money to spend on things beyond their subsistence.
But what was the trigger? How did they suddenly stumble across the extra cash? What happened in the past decade to shower them with the purchasing power?
The answer is that Americans have been sending dollars to them, and their governments have been swallowing our dollars, printing local currency, and lending our dollars back to us. Debt creation.
I'm just saying, it has more to do with money creation and global imbalances, as opposed to demographics.
And by the way, I think it's silly for the study (yes, I read it) to call these folks "New Consumers". Didn't they consume before? Does that mean the poor people in the US don't count as consumers? We all consume, to some level.
Well, here's another warning for the peak everything crowd: gold timers way to optimistic - from M. Hulbert:
"As contrarians like to say, bear markets like to descend a slope of hope. And what we're seeing among gold timers right now has all the hallmarks of exactly that. "
I really can't give a short course on petroleum geology here, but there are lots of books out there. Check them out. Just a few points:
a) That paper you linked to consists of a set of assertions for which there are many alternative explanations. In particular, I wearily repeat that the mere occurrence of oil in crystalline rock says nothing at all about the origin of oil.
And again, it's a serious misrepresentation that these notions are typical of "Russian" oil geologists in general.
b) The North Sea is floored with sedimentary rock of biological origin! As indeed are most seas and former seas; that's where "sediments" tend to collect, after all. And that's the sort of place where oil can occur--depending on whether a great many geologic factors work out favorably. Sorry for my impatience, but this is just Geol 101.
And oil doesn't come from "dead fish", either, old commercials notwithstanding. Again, go look at a book on petroleum geology.
Indeed, we see the sorts of sedimentary rocks ("source rocks") that, with a little cooking under the appropriate geologic conditions, will yield oil. That's what "oil shale" (really kerogen marl, but that's not very sexy) is.
c) Injection of oil doesn't show it's of abiogenic origin! In fact, Eugene Island seems to be receiving some oil from a deeper, but still conventional, reservoir. This is again a case where there is a straightforward conventional explanation.
But again, if you think the pros are all wrong there's nothing preventing you from exploring yourself. But I would seriously suggest some due diligence first--including a perusal of all that conventional literature.
Oh, and the Brazilian find is ca. 30 billion bbl, as I recall on the most optimistic estimates. The US currently blows that much oil in about 4 years.
Re: New Overdue Home Loans Swamp Effort to Fix Mortgages in Default
"It's going to take a while before you see the impact of the government's plans, if you can even see a discernible one"
Sigh, why should the government even bother? There's a part of me that just wishes that the government let the levees break to clear the detritus on both sides. Meanwhile, I've got to decide between a candidate the promises everything under the sun (without any means to pay for it) and one that relies on Greenspan as his economics guru.
Shortcourage, I think you overestimate the livelihood encompassed by "subsistence living". It involves money only rarely. People pay taxes with livestock and grain. They pay for their bride with livestock (or get livestock with the bride, depending).
But onto your more interesting question:
But what was the trigger? How did they suddenly stumble across the extra cash? What happened in the past decade to shower them with the purchasing power?
Now we are getting somewhere. In China, it's pretty clear, people plonk down factories to make stuff for the U.S. and Canada, funded by the Communist party (which controls quite a bit of wealth) initially or, now, simply obscenely wealthy Chinese businessmen. I saw where huge cities of factories and cheap, illegal housing had appeared in farm fields in under a year's time. Why? cheap, hardworking labor, and no environmental or safety laws. The U.S. has pretty clearly demonstrated that they will change suppliers to save even pennies an item. People (mostly young people) flock from the countryside to the factories and then send part of the money back to their home village. That's a critical part of spreading the wealth around, actually.
India has gone less the manufacturing route than the services route, partly because they speak English in large numbers, and partly because space is a more of a premium. The Brits left them with English and a taste for education and they are using it. Call centers, tech support, outsourced engineering, etc. I spent last November in and around Bangalore/Bengaluru. The place is insane. If you can do anything, even just answer the phone politely and clearly and can follow a script, there is a job for you there as an Indian. Biggest number one problem they have now: shortage of qualified labor. It's crimping the heck out of everything.
Same thing tho. The villages benefit from a massive cost of living difference between the cities and the rural areas. Young people send part of their paychecks home and relatives back there use that living and for their own business development. Literally every person in India is an entrepreneur. Everyone has something going, even kids. Honestly, if their roads didn't suck, they'd be kicking our butts in everything, not just answering the phones for Dell.
About that sending money home thing. Interesting thing about that. Recent crackdowns on the Mexican border in the u.s. have changed the dynamics in rural Mexico. Used to be farm workers would go home part of the year to spend their money where it would go farther, but since getting back in is so much harder, they don't leave, so they need all of their money to live here, full time, and the money flow going back home has dried up, and you can see Mexico's rural areas suffering from that. In all of these situations, part of the money you are seeing in these new consumers is relatives sending money from a higher wage-earning area to a subsistence area.
For the record, we sent India 92 million in aid in 2006. That was 9 cents per person there, so I don't think you're seeing that. Not sure if that's what you meant by us sending money there. Four other countries sent them more than we did.
Let me just say that I find this discussion of oil pretty awesome... a nice break from the same-old-same-old housing/credit/mortgage/heloc/comsumer-tap-out disaster. Sitting here and reading these oil comments of which the technical details I understand ~ 30% (generously) reminds me of most of the stuff I see at work (aerospace)... but at least I know that a) I used to only understand 10%, and b) no one else fully understands it except for the PHDs... and they can barely explain it.
What's the difference between the PHDs and the rest of us? Everyone else majors in BS, but PHDs actually know what they are talking about... and there's too much non-BS for everyone to swallow. I mean to be complimentary towards PHDs and derogatory to us mouthbreathers who are still trying to figure out what was said weeks ago... I mean when I'm sitting in a meeting and only the PHDs are talking to each other and they understand completely what's going on... its scary since you know there is some good exchange of "smart" stuff and have no clue wtf is going on...
It's really simple - we keep having asset/commodity bubbles in reaction to the fed dropping interest rates below or close to zero. First we had technology, then we had housing, now we have commodities.
Oil/gold/etc are all shooting up as a result of loose monetary policy. People arguing otherwise are as delusional as those that argued housing was a safe bet, and that the usual business cycle rules didn't apply to the internet.
Shortcourage, sorry continuing OT, I just realized you asked one other thing. "Aren't they consuming?"
Well, yes. They obviously consume food and water and air. But as far as business is concerned, they aren't "consumers" as in "buying stuff". These people eat what they grow and trade for what they don't. They have nominal impact on world prices of anything, which was the original topic.
Maybe this story will demonstrate better:
We were driving along once on our last trip and the road was covered in all this weed-like debris and we asked the driver what it was and he stopped and talked to the women there and opened the door to reach down for what looked like weed seeds clustered on little stem. Didn't look like a grain to me, but I mostly grow tomatoes.
Turns out it's too expensive and difficult to take this special grain with a hard husk to the miller, so they spread it in the road for the cars to drive over. These grain farmers weren't even consuming milling services. Well, they were, sorta, but not in a business-statistically meaningful way. I mean, really, how in the world to account for that as economic activity?
What I find most interesting about traveling in India, especially, is that humanity lived like most people there do for millennia past. Only the last sliver of history has been anything else. Watching a society leap that transition in a fraction of a generation is like watching human history compressed. It's fascinating. I recommend a trip. It's dirt cheap once you get there if you can handle getting the plane tickets. Oh, and the shots. The rabies shots weren't cheap...
Whats the bottom line? Absent supply disruptions, it will be difficult to sustain oil prices above $100 (in 2008 dollars) over the next 10 years.
After running it through the fed-speak machine learning translator...
What's the bottom line? We're scared! Speculators are running rampant in commodities. Maybe we can try jawboning the market down. Does anybody have Volcker's cell number?
Probably a dead thread but never mind. A few days ago there was some supposedly credible person called Michael Masters in front of congress who testified boo hoo hoo the nasty ol speculators (he's lookin at you, pension funds...) were driving up the price of oil blah blah blah. It turn out (via The Mess That Greenspan Made) that he actually runs a hedge fund that is losing money hand over fist due to investments in companies sensitive to the oil price. So no impartiality at all.
Is oil overbought? Probably. Should it come down short term? Wouldn't surprise me. OTOH I think long term the price will only move higher, so we should relax and view any coming decline as a chance to get in cheap. I hope it drops to $80, that would be awesome.
Hmmm, so the CFTC is on the case and they've got the gas consumers' backs huh? And the house passed a bill to sue OPEC? This just strikes me as the height of bluster and hubris. Do they really have jurisdiction? If OPEC has the product, surely they can set the price, particularly since the C in OPEC stands for "cartel". Sadly for the US it is the consumer, not the seller, and so it doesn't get to legislate prices (denominated in loo paper) set in other countries (nice try tho). Will tightening margin requirements really have anything more than a transitory impact, particularly since a lot of these "index speculators" (pension funds) don't use margin and don't change their asset allocations very often? I suspect they will just ride this out, maybe even picking up more as prices slide.
umm - it's not just a pure supply and demand argument - it's also a matter of how much more costly these new development projects will cost in terms of extraction and delivery to global markets. expect these exotic field extraction costs to sustain new price floors above $100.
I am amazed that the typical CR reader, who correctly saw real estate as a bubble, probably correctly saw equities as a bubble circa 2000, but don't seem to see commodities as a bubble. I started out as a geophysicist in the mid-80's, just when the last commodity bubble was imploding, so I feel like I've seen this movie before, and expect commodities to go through a nasty correction for the next few years. Like the tech bubble though, the market has the right fundamental idea, but is getting swept away in a speculative frenzy at the moment. Technology is accelerating and becoming a bigger and bigger part of life and the economy, and the world is starting to run out of cheap, sweet crude. A good fundamental investment thesis is not a good investment at any price though.
The collapse of oil prices in the 1980s followed as all sorts of new (and non-OPEC) production came on line (North Slope, Mexico, North Sea), not to mention which the US had also kissed'n'made up with the Saudis, who could still play swing producer for the world. Where's the new production waiting in the wings now?
It's also hardly unprecedented for prices of food and fuel to keep rising even as the prices of labor-intensive items drop, as David Hackett Fisher documented in The Great Wave.
But it's different this time. Seems I've heard that line before, too
The price cycle for oil has not been repealed - but the new "low" price will be as mind boggling in its way as $135/bbl is for the most recent new high (and not for how low it is).
I guess the guys at the Dallas Fed didn't read a book called The End of Oil which addresses the so-called "quick development of new sources" and how difficult it actually might be.
Like I said, right idea long-term, total speculative frenzy in the short-term. I wouldn't be surprised to see oil trade back down to $60-70 by 2010, but then I'd look for $180-200 in 2008 dollars by 2018. Commodities trading has all the elements of a speculative bubble today, and all the rationalizations that go with it. People looked at me like I had two heads when I told them to buy oil companies instead of tech in the late 90's. I'm not going short, but after a 10 year bull market, that's now become the mainstream rage, I think I'll move to the sidelines for a while and see if we get a washout.
I love the fact that since Oil has gotten over $130 the MSM/news outlets have started reporting on the price. Something like... Oil dropped today... it was down 2 dollars to $126. $2 is such an insignificant drop! Wake me up if it gets down to $115 or $100!
Torbo your point is valid but we are not at the point where joe bloggs daytrader is using the last few dimes he can scrounge from his house to double down on commodities through leveraged ETCs (exchange traded commodities). It's still pretty niche even though the pension funds have caught on. Until you have the shoeshine boy touting molybdenum and screaming "take these dice from my cold dead hands" I don't think we are at the "bubble" stage yet. Course, that doesn't mean someone won't preemptively try to pop it for once.
A couple weeks ago mainstream newspapers were carrying stories about stocking up on canned goods and bulk rice as "investments," complete with pictures of J6P backing up the suv at Costco. Close enough for me. I'm staying long COP and CVX, but I've unloaded all of my other commodity and oil trust investments for now. I could well come to regret it, but I also think the emerging markets will soak up any demand destruction in the developed world argument is going to prove a bit of a reach in the short-run as well.
Turbo: I more or less agree and took some profits in my oil stocks last week. I kept a core position and will look to add if prices correct. I get nervous when anything goes up very fast, but I suspect energyecon is correct and we will see higher lows.
YSLP,
Agreed, IMNSHO we do not have $100/bbl oil effects priced through the economy - so when oil gets under $100/bbl and stays there for a month - that will be news. The current price movements are noise on the signal in terms of macroeconomic impact.
This is going to be an interesting hurricane season - one sh!tkicker of a storm in the oil patch in the Gulf of Mexico - things will continue to be interesting...
My other problem with oil prices is the fact that we've had one of the most-pro oil administrations in decades for the past 8 years (a lifetime in some traders' eyes).
Since 2000, we've:
1.) started 2 shooting wars in the mid-east
2.) granted enron traders (and any one else following that lineage) carte blanche.
3.) continued to fill the spr with $100+ oil - despite it being 97% full - market effects aside...that is the worst signalling i have ever seen.
4.) devalued the currency to levels not seen since early 90's (via various bubbles)
The most recent legislation, while some might be hollow gestures, enacted by congress in the past few weeks is more anti-oil action out of them in 8 years. Don't think that will stop when GW is out (in fact, he's vetoed each and every piece of anti-oil legislation).
ShortCourage writes:
ac, I hear ya. It's funny to hear these "fundamental" explanations pointing to the huge populations in Asia, for instance. Was there a sudden explosion of their consumer population in the past few years?
Yes there was, not in their overall population, but in the population that can afford things like cars and air conditioners and other energy consuming items that we take for granted. I have seen it first hand in India, and know the process is happening to an even greater extent in China. As the incomes rise, so does the consumption of protein (more so in China than India, where avoidance of meat has more of a religious base than an economic one). This has been one of the major factors in the rise in food costs as well. Durring the last oil crisis in 1980, india consumed 0.643 million barrels per day(mb/d), or 1.0% of the worlds total, in 2006 (last data avaiable from the BP statistical review) India consumed 2.575 mb/d or 3.1% of the world's total. In 1980, china consumed 1.694 mb/d or 2.7%, in 2006 it was at 7.445 mb/d or 8.9% of the total. The numbers for both were probably significantly higher in 2007 than 2006. Of course on a per capita basis both are far behind the U.S. or Europe. In 2006 the U.S. consumed 20.589 mb/d and its population is apx 1/4 of either of China or India.
By the way folks, my latest Strategy Report was mostly on energy issues. If you are interested shoot me an e-mail at dvandijk@zacks.com and I will send you a copy, sort of as a way to say thank you to the readers and commenters here.
Only slightly off topic ~
10000 new cars per week, or month, in China. I think it was "week". Huge increase in milk and meat consumption in China, and all ag depends on some energy inputs, similar to conversion of coal or shale-to-liquids. 1.1 units used for 1.0 unit of energy created with ethanol - net loss, never mind food prices. Cellulose may someday help? 200 year US supply of coal would be focused on in event of oil depletion creating, maybe, 40 year supply? 10. Uranium now 130. None of these will run the cars. Someone please tell me how we can get past this coming upheavel without total economic disruption. Washington avoids renewables like the plague, it is taking California, Oregon, Texas, nascent initiatives in Florida and AZ, to push policy. Like turning the rudder of the Exxon Valdez - too little too late. My opinion only. Looking for ideas.
I have heard that if the Oil Companies did not receive their multi-billion subsidies from the US government, that oil prices would be much higher than they are now. Any truth to it?
SLG - it is very late (and thus unfair) to respond now, however I want to thank you for your courteous and intelligent reply. I will indeed look into your recommended references. As I intimated in my earlier post, it normally is only through polite discourse and disagreement that we arrive at satisfactory acceptance of hypotheses. While the occasional reader of a thread such as this might conclude that I'm a contrarian by nature, that is not the case. I just happened to have spent many years in the Persian Gulf working with and among some very smart people who have knowledge of and views about oil and its potential volume that disagree with views I read in this thread. Such is discourse. I enjoyed it, I hope that more than one person did. Thanks to CR and Tanta for the "floor."
Wow! Michael Master's testimony posted by 'Risk Averse Alert' should be an eye opener for all the people who think that high commodity prices is a result of supply and demand. It is a must read indeed.
ok i get it 1+2+3 does not equal 6
so much for conclusions
I think it is going to be a damn interesting next 10 years or so.
here's a conclusion
i know little about the oil industry
my brother and father were oil traders (had their own company) before there was a new york mercantile exchange (Reagan years) and after.
both tell me , yeah oil could drop if there is a world wide, deep, recession, but absent a significant competing alternative, both say we will look back wistfully on 4$ a gallon gas sometime in the near future
my brother is now a geologist...and is standing by his story...but what do i know...jack
I get it. These were the people (DAL FED) that told us when the price was $50/barrel that it was going to $130? I missed that report.
It still remains to be seen if end users will actually pay $130/bbl equivalents for petroleum products.
As mock pointed, their math leaves a little to be desired, so perhaps their idea of ten years is off as well. So, a little rewrite:
Whats the bottom line? Absent supply disruptions, it was difficult to sustain oil prices above $100 over the past 10 years.
Yup. That sounds more accurate.
Can somebody explain how fundamentals explain the drop over the past few days?
Did China lose a few hundred million people?
If we're going to use fundamentals to justify the upside I demand fundamental explanations for the downside.
Why did gold prices also start rocketing up on August 27, 2007 right alongside oil prices?
Why did both gold and oil dive today?
Do cars run on gold also?
Why is Fred "Super Cuts" Mishkin suddenly gone now that we have rising voter angst and protests over energy prices?
Their optimistic conclusion seems to follow from the following statement in the report:
Both the futures markets and EIA forecasts currently anticipate some softening of oil prices over the next few years, suggesting markets expect supplies to gain ground on demand. International Strategy and Investment, an energy consulting business, has documented a substantial number of projects under way that would boost world oil supplies. The development of these resources could undermine the expectations underlying the higher oil price scenarioseven those of oil nationalism.
In other words, (a) the futures markets, and (b) ISI's claim of "substantial number of projects" are their only justification! I'd say pretty weak!
Whats the bottom line? Absent supply disruptions, it will be difficult to sustain oil prices above $100 (in 2008 dollars) over the next 10 years.
They left themselves a nice out with "in 2008 dollars". When 2008 dollars are worth half as much in ten years, oil will be $200.
ac, I hear ya. It's funny to hear these "fundamental" explanations pointing to the huge populations in Asia, for instance. Was there a sudden explosion of their consumer population in the past few years?
Two things can be changed quickly and bring about abrupt changes in economic activity and asset prices.
(a) Cheap and plentiful credit.
(b) Psychology, driven by (a)
Of course, I meant "When dollars are worth half as much in ten years, oil will be $200".
I say bring on $150/Bb so we can quit this awful addiction. But that could be the hippy in me....
We don't seem to give much space to new discoveries, such as those of Brazil. Nor do we even broach the possibility of significant future finds in China and other parts of the world. There are massive areas that remain unexplored because of long-held faulty assumptions about oil's location - assumptions the Russians have quite successfully abandoned.
And $100 a barrel oil is affordable? That is like saying that when gasoline drops "down" to $3 a gallon, I will buy that SUV I've always wanted.
sc and ac,
No relief in sight
"Supplies could be bolstered by nonconventional oil sourcestar sands, oil shale, coal-to-liquids."
Uuuh, no. Those supplies are minimal now, and only come on line when prices stay where they are or go higher. Once oil drops, those sources are non-economic - costs too much to take it out of the ground. And furthermore, year after year they make this argument, and the cost of extraction keeps exceeding their expectations.
Instead of a war on Iraq, why don't we ask teh fed to have a war on energy. Funnel money into research alternative now! That billions spent on Iraq could have solved the whole root of mess.
They're vying for a promotion.
India and China will sop up any diminished demand from the US.
The best place to follow megaprojects is here
The Oil Drum | Update on Megaproject Megaproject
Basically, yes, there are big projects coming on line, but we also have fields like Cantarell falling off a cliff production-wise.
Chip,
Bullshit on all counts. Soviet oil geology (and I know who Alexi Kontorovich and Victor Sokolov are) was all about the source - Bazenhov formation, Kuonomaskaya black shales, and so on. Show me an abiotic oil field, or shut the heck up about "long-held faulty assumptions about oil's location".
Jack, Brazil et al
Civilians under-rate exactly how difficult and expensive these fields are going to be. Basically, you're looking at a 10-15 year development cycle, as we need to invent, get the bugs out of and produce a bunch of new techniques to deal with the combination of subsalt (*), deep water and deep resulting in high temperature and pressure.
Finally, EOG just had a dry hole in the Bakken "resource play". Looks like Parshal field and Elm Coulee might be the exception, rather than the rule.
(*) This is important, because the industry's basic geophysical technique - seismic - doesnt work through salt.
No mention of production declines in existing fields, and the huge amount of new production needed each year just to offset them?
For that and other reasons this study is useless.
Spot prices get enormous amounts of attention, as do traded futures contracts, and the relationships between them, but a price that I personally find very interesting--though it only changes slowly and is only reported sporadically, is the pricing assumption used in the energy industry to base projected capital expenditure rates of return. That obviously varies from organization to organization, but from what I've read over the past few years it has risen from around $40-45/barrel to around $60/barrel. That capital expenditure decision making process determines how much additional supply comes on line, and the people making those decision are not focused on the peaks and troughs of spot prices. The upward trend in their pricing assumptions is cautious and informed, and implies quite a bit about the likely floor for oil prices, at least.
Chip: no one will see oil from the recent deep sea Brazil discovery under the salt dome until 2014 at the soonest. Quite likely much later. The much lauded Jack resevoir discoveries in the Gulf of Mexico don't have any current timeline for extraction of resources. Sure, the little seven aren't producing as much each year, but they're not desperate enough yet to try and touch the really difficult stuff.
If oil costs $100/bbl to extract who's going to sell it for $20-40 ? Yeah, right not oil in production doesn't cost that much. But the cost of such capital projects keeps going up, and $120 oil/energy hasn't worked it's way out the python yet.
As for the "fundamentals" of oil's recent dips; probably some people taking some profits. I like James Hamilton's writing over at Econbrowser.com . He indicates that the run up in price is a bit of supply/demand and a bit of speculation. Impossible to say which is responsible for more.
So yes, oil will go down and go up. But my jaw will drop if we ever see $89.99/bbl in 2008 USD without worldwide recession. $89.99 was chosen since OPEC claims they'll support a trading range of $60-80/bbl .
The conclusion in this report may suggest that other sources of energy that weren't discussed, i.e. non-hydrocarbon sources, fusion, fission, etc. may supply a greater proportion of our total energy needs in the future and may keep oil prices under pressure.
Without much attention, the price of natural gas has gone up about 50% in the last year.
The conclusion is moronic.
This article is total malarkey, another example of the wishful thinking that has gotten us to where we are today... in deep trouble.
Even energy Secretary Bodman has had to admit that supply has not exceeded 86mbpd over the last 3 years even with the spike in the price.
The recent drop was caused I think by 3 factors. Profit taking, some countries announcing the termination of subsidies (over half the world's population gets subsidized fuel ) and the movement of Congress to diminish leveraged bets in commodities.
ShortCourage | 05.29.08 - 6:05 pm "Two things can be changed quickly and bring about abrupt changes in economic activity and asset prices.
(a) Cheap and plentiful credit.
(b) Psychology, driven by (a)"
You've smashed the nail smack-dab on the head. "It's the credit, stupid." (My appologies to the James "The Ragin' Cajun" Carville.) And, the credit is contracting daily, as CR and Tanta point to several-per-day reports write-offs, write-downs and restructurings.
As the liabilities disappear, the collateral does, too, in an apparently endless reductive loop. Lather, rinse, and repeat... all the way down to the point where insolvency is washed out of the system and historic norms for the appetite for risk is restored. Say, 2012 or 2014?
Oil at $50 or less per barrel? I can see it... over the deflated credit-supply horizon.
It still remains to be seen if end users will actually pay $130/bbl equivalents for petroleum products.
Rob Dawg
sure they will...everyday.
they purchase on credit often also. And that credit is spun, woven, and tied in the globalarbitrage blanket, and written off 5 years later. voila! Inflation, and ho-humness at us$7/gal.
Stupid fed hucksters keeping rates below inflation again!
Keep up the great work of inflating out of our debt mess while bankrupting the middle class.
FWIW, George Soros says that there's good news and bad news. The good news: the oil price run up looks like a bubble. The bad news: It won't burst until the economy in the US and UK goes into recession.
Soros: Skyrocketing Oil Prices a Bubble « naked capitalism
Also, not all oil is equal. $130/barrel is for WTI and Brent. There is a big discount for heavier grades. It is difficult to refine, particularly for low-sulphur diesel. So there are really 2 markets.
And the term, "absent supply disruptions"? Given the political stability in Iraq, Iran, Nigeria and even Saudi Arabia, I'd say supply disruptions are almost a given.
Yes.
"In particular, China and India, being the two countries with largest new consumer totals, registered average annual increases of 19% and 14%, respectively."
more here:
http://www.pnas.org/cgi/content/full/100/8/4963
Interesting, car purchases are outpacing economic growth. Must be an easy credit boom in these places too.
India's economic growth rate doubled after 2000, so the pace has accelerated.
I'm interested in picking up a used crystal ball if any of the above posters have one for sale cheap.
Must be guaranteed to forecast accurately or no deal.
Thanks.
Me thinks the conclusion paragraph was written before the analysis, and perhaps not by the study authors.
They also failed to discuss, that demand is being driven higher by internal consumption in many oil producer's domestic economies (aided by subsidized gas prices and rapid growth generated by rapidly rising income in those states because of the higher oil prices).
ac --
Can somebody explain how fundamentals explain the drop over the past few days?
Neither supply nor demand react instantly to price changes. A few percent in daily fluctuations is pure mo-mo trading noise.
A better question is how fundamentals can explain a doubling in the past 365 days...
As for production being stagnant, that could either mean Peak Oil is here, or that producers are simply reacting rationally to artificially inflated long-dated futures options (cf. the Hotelling Principle and its derivation).
Ian,
What you said...plus Russian production is in decline.
It's all about the rate of extraction and the scale of the problem. On a global scale we are soaking up ~85 million barrels of oil each day, and the physics of oil reservoirs means that they experience declining rates of production (they start, peak, and start an irreversible decline). Global decline rate is ballpark 4%, so this year the first 3.4 million barrels a day of new production will go to keep us flat - then any new production above and beyond that will result in a production increase.
These guys sound a lot like the CERA bunch.
Even at $130, oil is cheap energy (relatively speaking). As Simmons often notes, we pay much more for bottled water than we do for gasoline.
I get my bottled water for free at a local spring.
ac, your perspective is abysmally short-sighted. You're like CNBC - "where's my explanation for TODAY'S price move?" Speculation CAN move the front month price on a day to day basis - witness oil going from $128 to $135, then back down to $129, then back to $133, then back down now to $126. But without storing the oil, they're not affecting the longer-term price.
As for fundamentals, how about today's 8.8 mb drop in US crude inventories? Supposedly "explained" by weather problems in the gulf. Some seriously delusional speculators have shorted oil in the hopes that the delays last week will lead to a monster build this week. Won't happen - those speculators are going to lose some money.
Meanwhile, finished gas inventories have moved from far above the top of the average range to the bottom of the average range in about a month-and-a-half. This will soon cause gas prices to spike high enough to motivate the refiners to up their utilization rates above 90%. Oh, you thought gas prices had already spiked? Silly you.
Production of oil costs per barrel factor in the fixed upfront costs of development and infrastructure amortized over the life of the field.
Therefore, even in a "high" cost field is developed and the cost of oil drops, as long as the marginal cost of extraction exceeds the marginal revenue, these expensive fields will still be pumped.
But has anyone here cut back on gas because they can't afford it? I stopped driving over 3 years ago when gas reached $1.70
Mike --
Speculation CAN move the front month price on a day to day basis
...
But without storing the oil, they're not affecting the longer-term price.
I am not convinced of that. Imagine lots of money in long-only funds investing in long-dated futures, never taking delivery, and rolling them as they near expiry. By pushing up "next year's" price of oil, they would create an incentive for producers to voluntarily curtail (specifically, delay) production. Again, see the Hotelling Principle.
I do not know whether speculation is responsible for these persistently high oil prices, but I do believe it is possible in principle.
Pablo Escobar --
Therefore, even in a "high" cost field is developed and the cost of oil drops, as long as the marginal cost of extraction exceeds the marginal revenue, these expensive fields will still be pumped.
I think you meant the opposite of what you wrote.
Pablo,
True. And the people responsible for pushing the aggressive expansion will be fired.
We saw this on a grand scale in the 1980s, which is why in the face of $70 oil you saw the private oil companies giving money back to shareholders rather than spend it exploring.
it will be difficult to sustain oil prices above $100 (in 2008 dollars) over the next 10 years.
In 2008 dollars! Oil may be $300 in 2018, but that will be less than $100 in 2008 dollars!
Merlin,if Brass will do plenty of posters here could help.
I have been telling everyone I know that oil is going to drop drastically in a very short period of time. No one believes me. The price HAS been manipulated upwards despite what the "supply and demand" folks say. The reason they call OPEC a cartel is that they do have the ability to manipulate prices.
To me this roughly translates as..."It's not our fault and yes you all are on your own! Peace, Love, and Chicken Grease.....Seacrest...OUT!"
The only real alternative to oil is conservation - get used to it.
Also - I agree with linear algebra...
but a price that I personally find very interesting--though it only changes slowly and is only reported sporadically, is the pricing assumption used in the energy industry to base projected capital expenditure rates of return. That obviously varies from organization to organization, but from what I've read over the past few years it has risen from around $40-45/barrel to around $60/barrel. That capital expenditure decision making process determines how much additional supply comes on line, and the people making those decision are not focused on the peaks and troughs of spot prices.
I worked as a chem engineer in ag processing (ethanol in the 80s in the first mega plants) and can tell you how these budgetary decisions are made having seen it done... if they say the 'hurdle' is $60/bbl - they mean they won't let prices get close to that, they'll pull high cost capacity off line before they get close to that.
Sure there is a chance some other lower cost producer will pick up the slack & under cut price - like Saudi & North Sea did in the 80s... but who has that much low cost capacity available now necessary to flood the market and drive prices at the margin down? Nobody has that much cheap spare capacity.
Oh and one other factor not mentioned - interest rates. The higher the interest rate environment the higher the price hurdle needed for projects to be approved. Why? Because the projects take so long & eat so much cash on the front end before they produce positive cash flow - its all NPV & IRR time value of money type logic all the way.
If we see long bond interest rates go to 8-10% again... I don't even want to think about what the hurdle rate in $/bbl will be necessary to get them to pop for more exploration & extraction. But in a ZIRP world PV=FV everywhere on the 't axis'.
Car,
If oil drops drastically by 25% to a hundred bucks a barrel, thats $28 more than it was just after Katrina and Rita.
And after Katrina and Rita us in the industry were playing the fun game of 'Find the Rig', as some of them got ... moved ... from where we'd left them.
quick...what's the difference between $90 oil and $135 oil!?!
other than $45, not much else. How in Jeebus' holy name could producers/consumers possibly have reacted...in either direction...within mere months?!
That's why this market needs more regulation. Massive intertemporal disconnects between the physical and paper markets.
Therefore, even in a "high" cost field is developed and the cost of oil drops, as long as the marginal cost of extraction exceeds the marginal revenue, these expensive fields will still be pumped.
Pablo Escobar | 05.29.08 - 7:47 pm | #
That depends on the price elasticity at that time & alternative spare capacity & interest rates. If no one else can fill that supply vacuum as cheap or cheaper than the producer in question AND if that producer can drive up the price by holding back - then it becomes more of a time value of money problem and less of a marginal cost of additional revenue problem.
In the 80s there WAS a lot of excess supply capacity so if you held back you lost out - somebody else pumped (like the Saudis).
Likewise interest rates were high making production today FAR more valuable than production tomorrow even if at the same price per barrel (discounted cash flow wise).
Unless we know both of those condition in the future (how much other low cost capacity there is available AND what the interest rate & time value of money environment looks like)... we can't know if pulling some of those fields out of production or not would make sense.
Tom Stone, I assume that's a ref to the content % of the balls...
If so, I fold...hilarious!
Kohn says bank access to Fed cash comes at a price
UPDATE 2-Kohn says bank access to Fed cash comes at a price
| Reuters
Sure does, $130 oil.
I have been telling everyone I know that oil is going to drop drastically in a very short period of time. No one believes me. The price HAS been manipulated upwards despite what the "supply and demand" folks say. The reason they call OPEC a cartel is that they do have the ability to manipulate prices.
char
ok, name the trade... i'll throw 100g's at it....nymex options? XOM? uso? the bigger lever, the better.
Nemo, you make a good point about futures beyond the front month - of course speculation can affect those prices within the time frame of the futures contract. But we're always talking about the front month and/or spot price of oil. The effect of futures trading is neutral without storage of oil.
As for enticing producers to keep it in the ground as speculation - granted, it's possible - but realistically only for Saudi Arabia. No one else has excess capacity they're withholding, and the possibility that Saudi Arabia is speculating on peak oil and therefore holding back some production now should give no peace of mind.
In any case, this scenario is not what is usually meant when people cry foul about speculators - and, in fact, if speculators are causing this, they are doing us a huge favor by helping us save some oil for the future.
Mike Q:
More regulation? Ugh. Just what we DONT need.
Why are oil prices higher?
Could it be because while oil supply has increased, demand has increased even more, producing a net deficit along with declining inventories? Hmm. More sold than produced, declining inventories, .prices should go down! (NOT)
(mil. Barrels / day)\tQ1 2007\tQ2 2007\tQ3 2007\tQ4 2007\tQ1 2008
World Production\t84.2\t\t84.37\t84.33\t85.49\t85.86
World Demand\t85.36\t84.48\t85.08\t86.66\t86.34
Surplus / Deficit\t-1.16\t-0.11\t-0.75\t-1.17\t-0.48
(millions of barrels)\t\t\t\t\t
OECD Inventory\t2,598 \t2,668 \t2,670 \t2,574 \t2,543
BTW Saudi production is up! Biggest declines are from Norway and Mexico. Nigeria hasnt helped either.
Changes are Year on Year\tQ4 2007\tJan-08\tFeb-08
Largest Producers\tPct. Change\tPct. Change\tPct. Change
1. Saudi Arabia\t2.08%\t\t0.00%\t\t6.98%
2. Russia\t\t0.48%\t\t-0.65%\t\t-1.04%
3. United States\t1.98%\t\t6.77%\t\t-0.66%
4. Iran\t\t\t-2.31%\t\t0.00%\t\t3.59%
5. Mexico\t\t-5.02%\t\t-10.95%\t\t-6.96%
6. China\t\t\t1.23%\t\t-1.21%\t\t0.21%
7. Canada\t\t-1.89%\t\t-2.39%\t\t-1.07%
8. UAE\t\t\t-3.72%\t\t3.67%\t\t5.29%
9. Venezuela\t\t-2.01%\t\t2.52%\t\t2.39%
10. Norway\t\t-7.60%\t\t-8.31%\t\t-11.33%
11. Kuwait\t\t0.92%\t\t4.08%\t\t7.44%
12. Nigeria\t\t-4.41%\t\t-1.48%\t\t-2.51%
13. Brazil\t\t\t-2.09%\t\t2.30%\t\t0.80%
14. Iraq\t\t\t12.22%\t\t22.82%\t\t2.56%
\t\t\t
Total Supply\t\t1.03%\t\t1.80%\t\t1.91%
You do those Iraqi increases from the Ninties? They were producing a heck of lot more then...
EIA - International Energy Data and Analysis for Iraq
Thanks, Bush.
Tj & the Bear writes: ". . .we pay much more for bottled water than we do for gasoline."
That is a non sequitur. I pay more than that for a lot of things, i.e. favorite brew, but I can't run it in my tank.
Here take my Polish mother-in-law!
THE FED
Fed might accept foreign collateral: Kohn
Should broker-dealers have regular access to funds, or only in crises?
Fed might accept foreign collateral, Kohn says - MarketWatch
Mike,
That scenario has been kicked around, but it doesnt match what satellite photos and export numbers show the Saudis are actually doing.
Haradh III has come on line - the Saudis have put their startegic reserves into play. And it hasnt helped.
HK_Vol, again, like ac, your timeframe is too short. In 2005, Saudi Arabia produced 9.6 mbpd. In 2006, they produced 9.2 mbpd. In 2007, they produced 8.7 mbpd. In 2008, they are not on track to beat 2005.
Ian, I don't put too much stock in the satellite analyses or in the water cut analyses. They may or may not be right - I have no way of verifying. I can, however, feel confident about oil price, exports, production, and investments into future oil sources, and I try to stick to things I can have such confidence in.
I suspect net oil exports are beginning the process of falling off a cliff and that may be why oil has gone from $90 to $130 in just a couple months.
Mike --
As for enticing producers to keep it in the ground as speculation - granted, it's possible - but realistically only for Saudi Arabia. No one else has excess capacity they're withholding, and the possibility that Saudi Arabia is speculating on peak oil and therefore holding back some production now should give no peace of mind.
Well, I am not an expert on oil. But what is the evidence for "no one else has excess capacity"? I thought most of the oil producing countries, particularly in the Middle East, considered their capacity to be state secrets.
Then again, Saudi Arabia alone would be enough...
and, in fact, if speculators are causing this, they are doing us a huge favor by helping us save some oil for the future.
Yeah, but only by accident and only temporarily. Despite my libertarian (small "l") instincts, I would prefer deliberate public policy over the outcome of a speculative bubble. At least there would be some control over the timing of the public policy decision; 20 years ago would have been ideal...
Also, if we are seeing sheer speculation, it could unwind at any time, violently. It is awfully hard (for me, at least) to look at that parabola on the chart and not suspect some kind of speculation is responsible.
Note to calendar.
2/2014: Start shorting Exxon.
Not hugely knowledgeable about the oil market. However, when I see that institutional investors are ramping up commodities' purchases, I get a bad taste in my mouth.
Commodities markets tend to be thin...they're complex, and tend to draw from limited cash funds. The moves over the last year speak of slosh coming into a thin market...that distorts contract price.
Remember, there are pension-401k funds with cash, looking for a return higher than the FFR below inflation interest rates. And fund managers looking for paper gains. It doesn't matter that "bubble" prices aren't returns (not realized until sold), just that mark to market valuations show a return...on the books.
These funds BOUGHT RMBS and CMBS products. They know they're in the sh*t with them. I think they're trying to recapitalize with a new bubble.
Just my 2 friggin' cents.
Cheers,
Without much attention, the price of natural gas has gone up about 50% in the last year.
Which is going to affect the price of electricity generated from nat gas.
RayOnTheFarm,
I'm gonna start eating more beans and bottling the results.
Cheers,
Dear Ray: Under the heading "Not Just electricity": The Dow Chemical Company (NYSE: DOW ) announced today that on June 1 it will raise the price of all of its products by up to 20 percent depending on their exposure to rising energy, feedstock and transportation costs and will review all terms to all customers.
So how do you unwind a 20% increase in pampers and seranawrap. Cheers
An internet savvy 10th grader with critical thinking and good composition skills can blow away this piece of pablum without much effort.
These idiots wrote their conclusion first and didn't evoke the REAL Facts of matter change their premeditated intent.
HK_Vol
Gas and break pedals don't drive cars. Humans do. That's why we need stoplights.
Supply and demand doesn't drive futures markets. Humans do. That's why we need regulation.
sp: "brake" pedal
mike q,
"Supply and demand doesn't drive futures markets. Humans do. That's why we need regulation."
Pfffttt!
Does GOD write and enforce regulation?
Are the idiots in Congang and the rest of gov't "officials" drawn from a pool of "intemellectual" giants? How about the killers...erm...enforcers?
Regulation existed to stop the tech and housing bubble. 'Twas not enforced.
Regulation is written by the regulated.
Cheers,
Mike q,
"Gas and break pedals don't drive cars. Humans do. That's why we need stoplights."
Assinine!
How do stop lights (a machine..programmed by humans) cause brakes to activate? And don't get me started on stop light cameras...another "wonderful" gov't regulation.
BTW in many countries, they use the much safer and efficient round. No stoplights needed.
Anonymouse writes:
But has anyone here cut back on gas because they can't afford it? I stopped driving over 3 years ago when gas reached $1.70
Anonymouse | 05.29.08 - 7:56 pm | #
I havent because I never wasted any that I could or couldnt afford to start with. If people were to stop pissing money away on things they really dont need like bottled water (try a Brita filter) or $4 coffee etc. they would find it easy to make up the difference in gasoline costs. There are so many more examples of wasteful spending in America. I could go on and on!
Mike - you say that Saudi Arabia is at fault for higher prices b/c they're not producing more oil. Then you say it is the fault of the "speculators" in the futures market. Well, which one is it?
As for Saudi production, Matt Simmons could well be right. They are not producing more oil simply because they can't. The water cuts continue to go higher, implying the oil is running out. In addition, Saudi Arabia has pumped 40 billion barrels of oil, yet their reserves have continued to be unchanged for the past 30 years, remaining constant. Have they really been discovering new oil at a consistantly constant rate equivalent to annual oil production? I doubt it.
The problem is with the rate of demand growing more than the rate of supply - not "evil speculators" who need to be regulated.
The conclusion in this article is completely stupid. Wonder who pay's them. Price per barrel will never go below $100 ever again, not even inflation adjusted. Price will be short of $200 by years end. No more SUV's, Hummers and all that. Already shows on the used car sales lots . Thanks god.
I'm not sure if this has been posted, but this article from WSJ claims "Oil exporters are unable to keep up with demand":
Oil Exporters Are Unable To Keep Up With Demand - WSJ.com
The following passage is interesting:
In all, according to the Energy Department figures, net exports by the world's top 15 suppliers, which account for 45% of all production, fell by nearly a million barrels to 38.7 million barrels a day last year. The drop would have been steeper if not for heightened output in less-developed countries such as Angola and Libya, whose economies have yet to become big energy consumers.
HK_Vol,
"The problem is with the rate of demand growing more than the rate of supply - not "evil speculators" who need to be regulated."
Whilst I do not consider speculation evil, I do question your insistence that there is no speculation occurring. The flood of money from institutional investment funds into commodities is rather substantial. Fund managers earn spiff (fees) from book value. Commodities trades book to market (for now).
I agree with S&D analysis, but this market is/has moved beyond that.
Cheers,
Crisis sweeps $50 billion from Turkish banks
http://www.turkishdailynews.com.tr/article.php?enewsid=105827
Chip wrote:
There are massive areas that remain unexplored because of long-held faulty assumptions about oil's location - assumptions the Russians have quite successfully abandoned.
Sorry, Chip, but this is complete nonsense. It is just not true that the Russians "use different models." They just have a couple of vocal crackpots too.
Oil moves around a lot--it is liquid, after all--and the place where it ends up (the "reservoir") is not typically the place where it formed. There's a small field in central Nevada (Trap Spring/Eagle Spring) where the oil is hosted by volcanic rock! But it didn't erupt from volanoes--the source of the hydrocarbons is organic matter in late Paleozoic shales. Finding oil in non-sedimentary rocks says nothing at all about where it formed. (And it's also routine to fingerprint the ultimate sources of oil by using things like gas chromatography--"GC".)
Furthermore, as I posted last fall: back in the late 1980s the Swedes drilled a deep (and very expensive) hole in their Siljan basin to test the notions about abiogenic oil. It was to be a step to making Sweden the "Saudi Arabia of the North" (an actual quote from one of the Swedish officials).
I attended a special session at a Geological Society of America meeting on results from this hole. Shoddiest science I've ever seen. For just one example, a bunch of oily gunk which had been trumpeted in the popular press as an oil show, was shown (by GC) to be degraded drilling lubricant. But to this day you can still read all over the net about the "80 bbls of oil" found 10 km down that The Scientific Establishment Ignored. (And this result also underscores the value of "science by press release.")
One Swedish official said at the meeting that they "believed" in abiogenic oil. Well, I guess they didn't believe hard enough, because the hole was as dry as they come. It doesn't happen, in a serious oil exploration hole, that hydrocarbons are so sparse that you mistake drilling lubricant for them! And making such a mistake merely indicates the grossest incompetence. By the way, if you want to see a serious evaluation of the Siljan hole, see John Castaño's paper in US Geological Survey Professional Paper 1570 ("The Future of Energy Gases.") PP 1570 is available as a PDF from the USGS web site. (Not, to be sure, nearly as much fun as all those Web sites talking about the Suppression of Evidence about the Origin of Oil.)
The Swedes finally pulled the plug, after sinking tens of millions into this hole. But (as I posted yesterday), if you want to believe that the professionals don't know what they're doing, and want to hare off after crackpottery like abiogenic oil or whatever--well, go spud some hole and show us how it's done. It's your money.
But be prepared for a very expensive reality check.
Does GOD write and enforce regulation?
I know more than a few folks who would say "Yes He does". They vote too BTW.
The conclusion is highly suspect. The politicos usually let Civil Service economists write most of the verbiage, but they sharply edit the conclusions and summary. Anything as sensitive as an oil price forecast would be controlled by political appointees.
Back in 2004 when the Energy Dept. released its oil price forecast we got a good laugh out of the disconnect between the text and the forecast. The text was a very thoughtful analysis of how the oil market was expected to tighten sharply in coming years, but the oil price forecast was a ridiculous statement that prices would average $30 through 2025.
dryfly,
"Does GOD write and enforce regulation?
I know more than a few folks who would say "Yes He does". They vote too BTW."
This is problematic/systemic. Kinda sucks really.
Cheers,
When people start to drill for oil in their own back yards, you know oil prices are too high. This is insanity!!!
FFDIC are you on-line?
Speculators never win for very long if the supply / demand picture doesn't meet their positions.
Ask Bunker Hunt how his attempt to corner the silver market worked out....
HK_Vol,
"Speculators never win for very long if the supply / demand picture doesn't meet their positions.
Ask Bunker Hunt how his attempt to corner the silver market worked out...."
Well of course. The oil market is a bit harder to corner than silver...but your point is????
Cheers,
Nemo, if the price is up due to the speculation of Saudi Arabia leaving oil in the ground, it will only "unwind" by the production of enough oil to cause a big drop. This is hardly the "speculation" everyone means around here.
HK_Vol, I think you've seriously misread me.
Bunker Hunt brings back memories. As background, I will tell you that just before the Hunt brothers were blown out of the water, I was offered a seat of the silver exchange. In those days the brokers on the floor were flying high. Everyone was making more money than they thought possible. I ultimately choose to go to law schooland turned down the seat--in those days you had to buy it--you couldn't lease it-- but during my first year in school, the market crashed-- hard. Alot of brokers and clearing houses failed. It was quite bloody on a human level
Cheers
All well and good, but as the US contracts eventually the countries that sell to us will also.
I see the US going under an about $150 to $165 a barrel,Europe now having problems
going under at $210 to $250 a barrel. (Peak at $267.86 a barrel)
Japan fails somewhere between the US and Europe,Korea just after Europe.
End result: World Crash.(Late 2011, early 2012)
Any bets on a Russian-China war?
Steve,
What odds vs. China-India (roll in a massive wheat crop failure for grins)...
Nope, China vs. India is a non starter because it would have to be a naval/air war,both sides have a high manpower that tech/volume.(Nepal?)
Hannibal crossed the alps but over the backbone of the world? Mt. Everest?
Maybe if India allied w/Pakistan? Nuke exchange?
I'm thinking of 1944 and the German capture of Ploesti (sp?) The Romanian oil fields.
SLG - thank you for your civil reply - in contrast to the rather pompous one from Mr. Whitchurch whom we are to presume is or was associated with Northern Territory Oil and who received his formal education in Economics as opposed to, say, Geophysics. As for the Oildrum blog, my own connections to the industry being in the Persian Gulf as opposed to North America, it is the opinion of my friends who actually explore for oil that Oildrum draws false conclusions from a smattering of facts that are twisted into half-truths or total misrepresentations (Disclaimer: I do not read that particular blog, but I did seek an expert opinion about it). I'm sure we may rest easy that poster Whitchurch has no connection to Oildrum.
My reference relative to abiotic oil is based on the extensive research, documented by J.F. Kenny, of the findings of the Russian Academy of Sciences' "Joint Institute of the Physics of the Earth" linked here:
"The overwhelming preponderance of geological evidence compels the conclusion that crude oil and natural petroleum gas have no intrinsic connection with biological matter originating near the surface of the Earth
as well as notes such as this that I have from an article of about three years ago:
Roger Andersen, an oceanographer and executive director of Columbias Energy Research Center proposed studying the behavior of this reservoir. The underwater landscape around Eugene Island is weird, cut with faults and fissures that belch gas and oil. The field is operated by PennzEnergy Co. Andersen proposed to study the action of the sea bottom around the mountain and the field at its top and persuaded the U S Dept of Energy to ante up ten million which was matched by a consortium of oil giants including Chevron, Exxon, and Tex Corp. This work began about the time 3-D seismic technology was introduced to oil exploration. Anderson was able to stack 3D images resulting in a 4D image that showed the reservoir in 3 spatial dimensions and enabled researchers to track the movement of oil. Their most stunning find was a deep fault at a bottom corner of the computer scan that showed oil literally gushing in. "We could see the stream," says Andersen. "It wasnt even debated that it was happening."
And there are the questions I have not yet seen answered, such as, if oil is not abiotic, how did so much biological detritus get all the to the bottom of the North Sea? Did all fish go there to die?
Finally, my proposal was in terms of critical thinking. Neither SLG nor Whitchurch addressed my comment about Brazil, yet that country's recent discoveries will double its known reserves within 20-3 years and will propel in into something like third place int the world. Instead, all I read is about those countries with declining known reserves. When a suggestion of any sort is dismissed out of hand, such as by Mr. Whitchurch, then critical thinking is not going on. Absent the latter, there is no point in my posting on the subject -- whether or not that is the intent of his oh-so-superior reply. In my view, debates worth conducting do not begin with the equivalent of "screw you," except perhaps in a very immature milieu.
Peak Oil or Peak BS?
Clearly, it's the latter. As in the 1970s when the Clowns of Rome (aka Club of Rome) announced we would be running out of Aluminum (while the ground in all the tropical rainforest areas consist of bauxite several meters deep), the peak oil sectarians will come out at each oil bubble. When the price declines after the bubble peaks, they will be silenced again only to come out screaming again with the next price move. Always exclaiming: "This time it's different!" - Like we haven't heard this before. "Oil prices have reached a permanently high plateau." Me wonders why so many regular CR reader can see thru such BS in the RE market so clearly, only to fall for it in a different one. Also, after you credited Ben Bernanke for the ascend in the oil price, will you do the same for the coming descend?
As for the coming months and years, oil is following the other commodities down. Metals and Ags have started the new trend that oil is simply following. Oh, I know for oil it's totally different this time. Maybe in the realm of sect-thinking, not however in the laws aof physics and economics.
O-Joe
Maudlin has in his post an exerpt from stratfor on the global oil game
Safe Haven | The Geopolitics of $130 Oil
Remember the real estate boom? They were justifying the absurd price increases to supply and demand. Sound familiar?
Did the demand for oil suddenly go up? Or did the supply go down? Neither really.
Oil prices have gone up because of speculation with borrowed money (margin). The margin requirements for oil is only 5%. Again sound familiar? (Flippers buying houses with zero or 5% down)
The argument heard often is that speculation is not responsible for the high oil prices and therefore increasing margin requirements will not have any effect on oil prices. Well, if that is the case, why not increase margin requirements to 100%. It won't affect oil prices. Right?
More male bovine manure from the people long on oil.
Darkness writes:
Was there a sudden explosion of their consumer population in the past few years?
Yes.
"In particular, China and India, being the two countries with largest new consumer totals, registered average annual increases of 19% and 14%, respectively."
Sorry Darkness, those are not "new consumers". The populations of China and India are not growing annually at 19% (thank god). Just because some study defines them as new consumers doesn't make them so. They are only richer consumers, courtesy of economic growth funded by debt in Western economies, primarily the USA.
My point remains. Sudden drastic changes in prices and economic activity are brought about most often by money/credit creation, and the boom-time psychology that it generates.
margin was available when oil was $10/bbl also, at 5%. what makes it different now.
O-Joe,
Yes, I will credit the Fed with the coming implosion of asset prices, including oil prices, because there would not have been a bubble to implode were it not for them.
I just wonder if they are determined to bring about the implosion through a currency collapse. That's why I am holding onto my precious metals, even though I recognize the risk.
"Ask Bunker Hunt how his attempt to corner the silver market worked out...."
and the only thing that stopped him was regulation that allowed everyone to realize he really WAS cornering the market. we can't even tell IF anyone is cornering the mkt (courtesy of the ICE), much less enforce it.
Thanks FFDIC.
Chip,
Congrats on the Google search.
You might want to talk to an actual geophysicist or geologist about the difference between the two. The rough and ready difference is that a geophysicist will tell you where oil is, and a geologist will tell you why it's there.
Yup, I'm not either. Officially, I'm the guy who translates between the guys who sign the cheques and the guys who talk to the rocks.
I am glad you are confident in the ability of Petronas to quickly produce high temperature, deep, subsalt oil, on a time frame faster than, say, Thunder Horse.
Briefly, subsalt means seismic dont work, so each expensive hole you get to roll the dice blind.
High temperature means your drill bits and production pipe melt.
Deep means everything else gets more difficult and more expensive.
Next, regarding the oil at Padre Island. Pressure differentials can cause migration of fluids from deeper formations via faults - news at eleven !
Next, "And there are the questions I have not yet seen answered, such as, if oil is not abiotic, how did so much biological detritus get all the to the bottom of the North Sea? Did all fish go there to die?"
OK, you've established you can use google, so look for 'Mandal formation ekofisk'. That will get you some pointers on the Upper Jurassic Mandal shale, which is the major source rock for a lot of the North Sea. It got laid down in the Jurassic, before there was something we'd recognise as the North Sea.
Finally, google 'biomarker oil source' for why us in the industry are so wedded to the idea of Biotic Oil. Basically, it works.
Um, how so? If you are trading bananas for seed rice and that's your transaction for the week, you aren't a consumer. If your cook-fire is brush, then you aren't impacting the world price of oil.
I actually didn't make up that label, the report did. Did you follow the link? That paragraph was pasted in from the report. You asked, I delivered.
Have you been to India and China? People DO go from near barter to having money to spend on retail. Millions of them, every year. I guess you needed to make your question clearer.
BTW, regarding the collapse of the commodity bubble... I am skeptical it will happen as long as real interest rates are below the rate of inflation.
Sorry, that should have read: as long as real interest rates are negative.
New Overdue Home Loans Swamp Effort to Fix Mortgages in Default
New Overdue Home Loans Swamp Effort to Fix Defaults (Update3) - Bloomberg.com
Good news for the bulls..
Wait wait wait... I just started reading the other thread here. Some people think oil isn't biotic? o__O Does this particular population of believers have a high overlap with the Jesus rode a dinosaur crowd?
"...if oil is not abiotic, how did so much biological detritus get all the to the bottom of the North Sea? Did all fish go there to die?"
I can't even parse that... what does it mean? ... or does it mean it's late and I need another beer?
Darkness,
Yes, it's great that those "new consumers" in developing nations now have enough money to spend on things beyond their subsistence.
But what was the trigger? How did they suddenly stumble across the extra cash? What happened in the past decade to shower them with the purchasing power?
The answer is that Americans have been sending dollars to them, and their governments have been swallowing our dollars, printing local currency, and lending our dollars back to us. Debt creation.
I'm just saying, it has more to do with money creation and global imbalances, as opposed to demographics.
And by the way, I think it's silly for the study (yes, I read it) to call these folks "New Consumers". Didn't they consume before? Does that mean the poor people in the US don't count as consumers? We all consume, to some level.
Well, here's another warning for the peak everything crowd: gold timers way to optimistic - from M. Hulbert:
"As contrarians like to say, bear markets like to descend a slope of hope. And what we're seeing among gold timers right now has all the hallmarks of exactly that. "
Gold newsletters remain too bullish Mark Hulbert - MarketWatch
O-Joe
"Ask Bunker Hunt how his attempt to corner the silver market worked out...."
Bunker's claim was that all the shorts were in Chicago and they changed the rules.
Chip--
I really can't give a short course on petroleum geology here, but there are lots of books out there. Check them out. Just a few points:
a) That paper you linked to consists of a set of assertions for which there are many alternative explanations. In particular, I wearily repeat that the mere occurrence of oil in crystalline rock says nothing at all about the origin of oil.
And again, it's a serious misrepresentation that these notions are typical of "Russian" oil geologists in general.
b) The North Sea is floored with sedimentary rock of biological origin! As indeed are most seas and former seas; that's where "sediments" tend to collect, after all. And that's the sort of place where oil can occur--depending on whether a great many geologic factors work out favorably. Sorry for my impatience, but this is just Geol 101.
And oil doesn't come from "dead fish", either, old commercials notwithstanding. Again, go look at a book on petroleum geology.
Indeed, we see the sorts of sedimentary rocks ("source rocks") that, with a little cooking under the appropriate geologic conditions, will yield oil. That's what "oil shale" (really kerogen marl, but that's not very sexy) is.
c) Injection of oil doesn't show it's of abiogenic origin! In fact, Eugene Island seems to be receiving some oil from a deeper, but still conventional, reservoir. This is again a case where there is a straightforward conventional explanation.
But again, if you think the pros are all wrong there's nothing preventing you from exploring yourself. But I would seriously suggest some due diligence first--including a perusal of all that conventional literature.
Oh, and the Brazilian find is ca. 30 billion bbl, as I recall on the most optimistic estimates. The US currently blows that much oil in about 4 years.
Re: New Overdue Home Loans Swamp Effort to Fix Mortgages in Default
"It's going to take a while before you see the impact of the government's plans, if you can even see a discernible one"
Sigh, why should the government even bother? There's a part of me that just wishes that the government let the levees break to clear the detritus on both sides. Meanwhile, I've got to decide between a candidate the promises everything under the sun (without any means to pay for it) and one that relies on Greenspan as his economics guru.
Darkness,
Yep. And then they get snooty when people dont treat them with the respect they think they deserve.
Basically, abiotic oilers are up there with the flat-earth crowd.
Shortcourage, I think you overestimate the livelihood encompassed by "subsistence living". It involves money only rarely. People pay taxes with livestock and grain. They pay for their bride with livestock (or get livestock with the bride, depending).
But onto your more interesting question:
Now we are getting somewhere. In China, it's pretty clear, people plonk down factories to make stuff for the U.S. and Canada, funded by the Communist party (which controls quite a bit of wealth) initially or, now, simply obscenely wealthy Chinese businessmen. I saw where huge cities of factories and cheap, illegal housing had appeared in farm fields in under a year's time. Why? cheap, hardworking labor, and no environmental or safety laws. The U.S. has pretty clearly demonstrated that they will change suppliers to save even pennies an item. People (mostly young people) flock from the countryside to the factories and then send part of the money back to their home village. That's a critical part of spreading the wealth around, actually.
India has gone less the manufacturing route than the services route, partly because they speak English in large numbers, and partly because space is a more of a premium. The Brits left them with English and a taste for education and they are using it. Call centers, tech support, outsourced engineering, etc. I spent last November in and around Bangalore/Bengaluru. The place is insane. If you can do anything, even just answer the phone politely and clearly and can follow a script, there is a job for you there as an Indian. Biggest number one problem they have now: shortage of qualified labor. It's crimping the heck out of everything.
Same thing tho. The villages benefit from a massive cost of living difference between the cities and the rural areas. Young people send part of their paychecks home and relatives back there use that living and for their own business development. Literally every person in India is an entrepreneur. Everyone has something going, even kids. Honestly, if their roads didn't suck, they'd be kicking our butts in everything, not just answering the phones for Dell.
About that sending money home thing. Interesting thing about that. Recent crackdowns on the Mexican border in the u.s. have changed the dynamics in rural Mexico. Used to be farm workers would go home part of the year to spend their money where it would go farther, but since getting back in is so much harder, they don't leave, so they need all of their money to live here, full time, and the money flow going back home has dried up, and you can see Mexico's rural areas suffering from that. In all of these situations, part of the money you are seeing in these new consumers is relatives sending money from a higher wage-earning area to a subsistence area.
For the record, we sent India 92 million in aid in 2006. That was 9 cents per person there, so I don't think you're seeing that. Not sure if that's what you meant by us sending money there. Four other countries sent them more than we did.
Let me just say that I find this discussion of oil pretty awesome... a nice break from the same-old-same-old housing/credit/mortgage/heloc/comsumer-tap-out disaster. Sitting here and reading these oil comments of which the technical details I understand ~ 30% (generously) reminds me of most of the stuff I see at work (aerospace)... but at least I know that a) I used to only understand 10%, and b) no one else fully understands it except for the PHDs... and they can barely explain it.
What's the difference between the PHDs and the rest of us? Everyone else majors in BS, but PHDs actually know what they are talking about... and there's too much non-BS for everyone to swallow. I mean to be complimentary towards PHDs and derogatory to us mouthbreathers who are still trying to figure out what was said weeks ago... I mean when I'm sitting in a meeting and only the PHDs are talking to each other and they understand completely what's going on... its scary since you know there is some good exchange of "smart" stuff and have no clue wtf is going on...
It's really simple - we keep having asset/commodity bubbles in reaction to the fed dropping interest rates below or close to zero. First we had technology, then we had housing, now we have commodities.
Oil/gold/etc are all shooting up as a result of loose monetary policy. People arguing otherwise are as delusional as those that argued housing was a safe bet, and that the usual business cycle rules didn't apply to the internet.
Shortcourage, sorry continuing OT, I just realized you asked one other thing. "Aren't they consuming?"
Well, yes. They obviously consume food and water and air. But as far as business is concerned, they aren't "consumers" as in "buying stuff". These people eat what they grow and trade for what they don't. They have nominal impact on world prices of anything, which was the original topic.
Maybe this story will demonstrate better:
We were driving along once on our last trip and the road was covered in all this weed-like debris and we asked the driver what it was and he stopped and talked to the women there and opened the door to reach down for what looked like weed seeds clustered on little stem. Didn't look like a grain to me, but I mostly grow tomatoes.
Turns out it's too expensive and difficult to take this special grain with a hard husk to the miller, so they spread it in the road for the cars to drive over. These grain farmers weren't even consuming milling services. Well, they were, sorta, but not in a business-statistically meaningful way. I mean, really, how in the world to account for that as economic activity?
What I find most interesting about traveling in India, especially, is that humanity lived like most people there do for millennia past. Only the last sliver of history has been anything else. Watching a society leap that transition in a fraction of a generation is like watching human history compressed. It's fascinating. I recommend a trip. It's dirt cheap once you get there if you can handle getting the plane tickets. Oh, and the shots. The rabies shots weren't cheap...
Pretty funny blog I ran across, Confessions Of A Subprime Underwriter
Some good reading there.
Whats the bottom line? Absent supply disruptions, it will be difficult to sustain oil prices above $100 (in 2008 dollars) over the next 10 years.
After running it through the fed-speak machine learning translator...
What's the bottom line? We're scared! Speculators are running rampant in commodities. Maybe we can try jawboning the market down. Does anybody have Volcker's cell number?
Probably a dead thread but never mind. A few days ago there was some supposedly credible person called Michael Masters in front of congress who testified boo hoo hoo the nasty ol speculators (he's lookin at you, pension funds...) were driving up the price of oil blah blah blah. It turn out (via The Mess That Greenspan Made) that he actually runs a hedge fund that is losing money hand over fist due to investments in companies sensitive to the oil price. So no impartiality at all.
Is oil overbought? Probably. Should it come down short term? Wouldn't surprise me. OTOH I think long term the price will only move higher, so we should relax and view any coming decline as a chance to get in cheap. I hope it drops to $80, that would be awesome.
Here 's themessthatgreenspanmade story link.
The Mess That Greenspan Made: More fun with the Michael Masters report
Which has less credibility - the election year announcement of a CFTC investigation into high oil prices, or O.J.'s search for the "real" killer?
At least O.J. had the courtesy to stay on the golf course and not actually go so far as to frame someone.
But with oil prices high, the price of exploring and exploiting these new resources will also be high...
Looks like an administration edit.
I bet the original text read "below $200."
Hmmm, so the CFTC is on the case and they've got the gas consumers' backs huh? And the house passed a bill to sue OPEC? This just strikes me as the height of bluster and hubris. Do they really have jurisdiction? If OPEC has the product, surely they can set the price, particularly since the C in OPEC stands for "cartel". Sadly for the US it is the consumer, not the seller, and so it doesn't get to legislate prices (denominated in loo paper) set in other countries (nice try tho). Will tightening margin requirements really have anything more than a transitory impact, particularly since a lot of these "index speculators" (pension funds) don't use margin and don't change their asset allocations very often? I suspect they will just ride this out, maybe even picking up more as prices slide.
particularly since the C in OPEC stands for "cartel".
Oops, my bad. OPEC = Organisation of Petroleum Exporting Countries. Must have been freudian or something...It's still a cartel
umm - it's not just a pure supply and demand argument - it's also a matter of how much more costly these new development projects will cost in terms of extraction and delivery to global markets. expect these exotic field extraction costs to sustain new price floors above $100.
I am amazed that the typical CR reader, who correctly saw real estate as a bubble, probably correctly saw equities as a bubble circa 2000, but don't seem to see commodities as a bubble. I started out as a geophysicist in the mid-80's, just when the last commodity bubble was imploding, so I feel like I've seen this movie before, and expect commodities to go through a nasty correction for the next few years. Like the tech bubble though, the market has the right fundamental idea, but is getting swept away in a speculative frenzy at the moment. Technology is accelerating and becoming a bigger and bigger part of life and the economy, and the world is starting to run out of cheap, sweet crude. A good fundamental investment thesis is not a good investment at any price though.
The collapse of oil prices in the 1980s followed as all sorts of new (and non-OPEC) production came on line (North Slope, Mexico, North Sea), not to mention which the US had also kissed'n'made up with the Saudis, who could still play swing producer for the world. Where's the new production waiting in the wings now?
It's also hardly unprecedented for prices of food and fuel to keep rising even as the prices of labor-intensive items drop, as David Hackett Fisher documented in The Great Wave.
But it's different this time. Seems I've heard that line before, too
The price cycle for oil has not been repealed - but the new "low" price will be as mind boggling in its way as $135/bbl is for the most recent new high (and not for how low it is).
I guess the guys at the Dallas Fed didn't read a book called The End of Oil which addresses the so-called "quick development of new sources" and how difficult it actually might be.
Like I said, right idea long-term, total speculative frenzy in the short-term. I wouldn't be surprised to see oil trade back down to $60-70 by 2010, but then I'd look for $180-200 in 2008 dollars by 2018. Commodities trading has all the elements of a speculative bubble today, and all the rationalizations that go with it. People looked at me like I had two heads when I told them to buy oil companies instead of tech in the late 90's. I'm not going short, but after a 10 year bull market, that's now become the mainstream rage, I think I'll move to the sidelines for a while and see if we get a washout.
I love the fact that since Oil has gotten over $130 the MSM/news outlets have started reporting on the price. Something like... Oil dropped today... it was down 2 dollars to $126. $2 is such an insignificant drop! Wake me up if it gets down to $115 or $100!
Torbo your point is valid but we are not at the point where joe bloggs daytrader is using the last few dimes he can scrounge from his house to double down on commodities through leveraged ETCs (exchange traded commodities). It's still pretty niche even though the pension funds have caught on. Until you have the shoeshine boy touting molybdenum and screaming "take these dice from my cold dead hands" I don't think we are at the "bubble" stage yet. Course, that doesn't mean someone won't preemptively try to pop it for once.
A couple weeks ago mainstream newspapers were carrying stories about stocking up on canned goods and bulk rice as "investments," complete with pictures of J6P backing up the suv at Costco. Close enough for me. I'm staying long COP and CVX, but I've unloaded all of my other commodity and oil trust investments for now. I could well come to regret it, but I also think the emerging markets will soak up any demand destruction in the developed world argument is going to prove a bit of a reach in the short-run as well.
Turbo: I more or less agree and took some profits in my oil stocks last week. I kept a core position and will look to add if prices correct. I get nervous when anything goes up very fast, but I suspect energyecon is correct and we will see higher lows.
YSLP,
Agreed, IMNSHO we do not have $100/bbl oil effects priced through the economy - so when oil gets under $100/bbl and stays there for a month - that will be news. The current price movements are noise on the signal in terms of macroeconomic impact.
This is going to be an interesting hurricane season - one sh!tkicker of a storm in the oil patch in the Gulf of Mexico - things will continue to be interesting...
My other problem with oil prices is the fact that we've had one of the most-pro oil administrations in decades for the past 8 years (a lifetime in some traders' eyes).
Since 2000, we've:
1.) started 2 shooting wars in the mid-east
2.) granted enron traders (and any one else following that lineage) carte blanche.
3.) continued to fill the spr with $100+ oil - despite it being 97% full - market effects aside...that is the worst signalling i have ever seen.
4.) devalued the currency to levels not seen since early 90's (via various bubbles)
The most recent legislation, while some might be hollow gestures, enacted by congress in the past few weeks is more anti-oil action out of them in 8 years. Don't think that will stop when GW is out (in fact, he's vetoed each and every piece of anti-oil legislation).
ShortCourage writes:
ac, I hear ya. It's funny to hear these "fundamental" explanations pointing to the huge populations in Asia, for instance. Was there a sudden explosion of their consumer population in the past few years?
Yes there was, not in their overall population, but in the population that can afford things like cars and air conditioners and other energy consuming items that we take for granted. I have seen it first hand in India, and know the process is happening to an even greater extent in China. As the incomes rise, so does the consumption of protein (more so in China than India, where avoidance of meat has more of a religious base than an economic one). This has been one of the major factors in the rise in food costs as well. Durring the last oil crisis in 1980, india consumed 0.643 million barrels per day(mb/d), or 1.0% of the worlds total, in 2006 (last data avaiable from the BP statistical review) India consumed 2.575 mb/d or 3.1% of the world's total. In 1980, china consumed 1.694 mb/d or 2.7%, in 2006 it was at 7.445 mb/d or 8.9% of the total. The numbers for both were probably significantly higher in 2007 than 2006. Of course on a per capita basis both are far behind the U.S. or Europe. In 2006 the U.S. consumed 20.589 mb/d and its population is apx 1/4 of either of China or India.
By the way folks, my latest Strategy Report was mostly on energy issues. If you are interested shoot me an e-mail at dvandijk@zacks.com and I will send you a copy, sort of as a way to say thank you to the readers and commenters here.
"one sh!tkicker of a storm in the oil patch in the Gulf of Mexico - things will continue to be interesting..."
Notice that these Fed guys hedged their bets, with that wonderful phrase, "Absent supply disruptions,".
Absent rain, this summer will be very dry....
Only slightly off topic ~
10000 new cars per week, or month, in China. I think it was "week". Huge increase in milk and meat consumption in China, and all ag depends on some energy inputs, similar to conversion of coal or shale-to-liquids. 1.1 units used for 1.0 unit of energy created with ethanol - net loss, never mind food prices. Cellulose may someday help? 200 year US supply of coal would be focused on in event of oil depletion creating, maybe, 40 year supply? 10. Uranium now 130. None of these will run the cars. Someone please tell me how we can get past this coming upheavel without total economic disruption. Washington avoids renewables like the plague, it is taking California, Oregon, Texas, nascent initiatives in Florida and AZ, to push policy. Like turning the rudder of the Exxon Valdez - too little too late. My opinion only. Looking for ideas.
I think this year 10 million new vehicles in China, most of them passenger cars. This points to well over a 100,000 cars per week.
Ten years ago, the Chinese car market was a few hundred thousand vehicles.
I have heard that if the Oil Companies did not receive their multi-billion subsidies from the US government, that oil prices would be much higher than they are now. Any truth to it?
Michael Masters' testimony before the U.S. Senate Committee on Homeland Security and Governmental Affairs sheds a lot of light on commodities hyper-inflation. A must read I think, particularly the first paragraph on page 4.
SLG - it is very late (and thus unfair) to respond now, however I want to thank you for your courteous and intelligent reply. I will indeed look into your recommended references. As I intimated in my earlier post, it normally is only through polite discourse and disagreement that we arrive at satisfactory acceptance of hypotheses. While the occasional reader of a thread such as this might conclude that I'm a contrarian by nature, that is not the case. I just happened to have spent many years in the Persian Gulf working with and among some very smart people who have knowledge of and views about oil and its potential volume that disagree with views I read in this thread. Such is discourse. I enjoyed it, I hope that more than one person did. Thanks to CR and Tanta for the "floor."
Wow! Michael Master's testimony posted by 'Risk Averse Alert' should be an eye opener for all the people who think that high commodity prices is a result of supply and demand. It is a must read indeed.
Thank you for posting the link.