Enjoying the calm before the storm

The summer continues along in its usual pattern, and both ourselves and the Europeans have yet to encounter the peak of the tourist travel season. Already, despite the prediction of economists that this would not happen before the end of the year, we are at $60 oil. Remember that once we have reached peak travel for the year, then we move into the purchase and storage of heating oil for the winter. And during both these events demand will continue to grow, and the supply reserve that has been stored away will gradually whittle down toward zero. Which means that it might be optimistic to assume that oil might stay under $75 this year, let alone next.

Next year actually may not get much worse than this, since there are some new projects that should pump oil into the supply, but it all depends on how fast existing fields deplete, with the news on that front, to date, being none-too-good. This is therefore going to be a time when we really don't need to offend those who can help us the most. Bear in mind that history has shown that giving offense in the Middle East can have significant immediate effects, and in today's economy the effects will likely be more far-reaching and severe.

It therefore seems odd (as I noted last post) that the Administration is both hinting that we would encourage a change in Government structure in Saudi Arabia, and is allowing consideration of our being allowed to sue OPEC (hat tip to Past Peak.)

It is fine to play the Godfather when you hold all the marbles, but when the issue is in serious doubt, then (as we have found with Iraq) playing out the game with a known weak hand can significantly cost us oil supply, rather than guaranteeing it.

Apart from proving my nerdishness, perhaps also a brief comment on why this year I came to Alaska. I have posted earlier about this being the last quiet summer, and thus it seemed the best time to take the trip that I have always promised the Actress (the pseudonymous spouse) while it still remains practical and affordable. With the price changes, and their impact, that have now begun their inexorable movement, I do think that we made the trip not a moment too soon.
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The poker game between BushCO and China, BushCo and Iran, BushCo and the House of Saud is building to a winner take all finale.

BushCo has the strength of an empty hand behind them.

That makes them bold, even dangerous. Nothin' left to lose, so nothin' to protect. The house and the car goes on the table.

As much as the pot on the table -- the oil wealth and international hegemony they had lusted after so far -- is the number of years they might face in prison.

That'on their minds now.

They ought to fold. Take their loss.

They can't. They won't.

For some time I have been wondering what the final play for these people will be. How can they continue to deny the geological limitations when we run into this brick wall? The answer isn't pretty. They will continue to deny that we are looking at geologically imposed limits. Instead, it is the under-investment and mismanagement of the Saudis that are to blame. Their primary enemy will become political instability at home. They will need a scapegoat. They will need political instability in the Middle East to blame the plunging oil production on. They will never be able to admit that it is because of geology because the geological explanation is something that our populous will hold them accountable for not having foretold. Therefore, as Saudi goes into decline, there will be an attendant revolution upon which their plummeting crude output will be blamed. This will have the twin benefit of deflecting blame from our political class at home and justifying continued military involvement in the region.

Interesting...The NYT has an article in tomorrow's Travel section of all places about tourists going to Alaska now because global warming is threatening the natural attractions of the state.

A quote from a ranger: "Things are melting pretty fast around here," said Jim Ireland, the chief ranger for Kenai Fjords. Climate change, he said, "has become one of the major new themes for this park."

So, at least some part of the government is actively talking about it...

Several weeks back I made the statement that financial and employment statistics proffered by the government were wrong to the point of worthless, something nobody challenged, which I found amazing. Anyway, this http://www.financialsense.com/stormwatch/2005/0624.html item certainly proves my case regarding inflation. It will also help to further understand Liu's item for those who read it.

There is a major exhibit at the Sea Life Center in Seward (on the Kenai Peninsula) about the dramatic reduction in sea life in the Beaufort Sea - about 80%. All of a sudden ways of life are disappearing. Apparently they have reduced some trawling activity that has caused a small part of the problem, but so far they are not sure what all the root causes are.

Speaking of Alaska and climate change, I highly recommend Real Climate to the Peak Oil community, a blog where the posters are climate scientists. This is where you'll get the real scoop. I comment over there all the time since that's my main interest, the long slower catastrophe rather than the shorter term depression.

Interestingly, if there is a 2nd depression, which seems inevitable, this will slow CO2 emissions for a time and perhaps slow the rate at which this gas accumulates in the atmosphere. However, this is a complicated question involving (for example) oceanic and terrestrial feedbacks (and their eventual saturation), etc.

No doubt its getting pretty warm up north.

Speaking of statistics and forecasts, I took a run through EIA demand numbers so far this year and showed US final product demand is well over 2005 forecasts:

Based on actual monthly demand to date in 2005, and trends to date, demand growth in jet fuel and distillates are likely to substantially exceed Department of Energy projections. Current delta over EIA projections, to date:

* Gasoline: 1.56% over projections
* Distillate Fuels: 41.89% over and trend is higher
* Jet Fuel: 38.39% over projections

Rough conclusion: US demand growth is ahead of projections, and likely closer to 500,000 bbl/day increase.

Re: Mike Whatkins post:

Holy Crap! (what else can one say right now). The IEA was actually projected reduced demand from last year in February (aka global recession). I guess that they will be dissapointed.

I flew today from the OC (thanks Fox TV for making that reference possible) to Detroit. Plane full. More importantly, the line for the flight to Maui, very full (that's with the more expensive tickets from the OC rather than LAX). Silly straw hats and all!

What I can't figure out is where all the costs from rising fuel costs are going (aside from my lunch salad in Westwood Village ... up a buck 25 in the last three months!)

Tedman -

I suspect that for the moment that the higher price of fuel is being paid by home equity loans - a gross oversimplification I admit, but the gist of it is that Americans are paying for oil by increasing their indebtedness. Of course, when the economy goes south or the real estate bubble bursts (which will also make the economy drop) that approach is likely to no longer be possible, and then everybody will pay for oil in prices. End result: stagflation.

Roy -

OK, seeing that I live in ground zero of the real estate bubble in SO Cal, I can see the point about home equity loans. The bubble goes pop, my nieghbors in real estate and finance (there are many) go to the unemployment office. And inflation goes nuts in ways people are used to (like at the grocery store or gas pump)

What policy options does the fed have. Raise interest rates and kill off demand (isn't that what Paul Voker did in the late '70's? But can they do it this time?

Krugman has said that one way to deal with the twin deficits (absent sound policy) is to inflate them away. Anyone for Buenas Aires...

Problem for the Fed is that if they raise interest rates enough to kill off demand, they probably will ensure the popping of the real estate bubble. I'm not at all sure the Fed has any policy options that end anywhere except badly.

Is Krugman up to speed on Peak Oil? I like his writing and viewpoint, but haven't discerned anything to suggest that he thinks things are other than business as usual. At any rate, I think the problem with inflating the twin deficits away is that he isn't visualizing trying to stagflate them away, which may not work so well. I think the lesson of the seventies is that oil-price driven inflation leads to lower economic growth (i.e., stagflation).

Would Paul Volcker have successfully ended inflation if the price of oil hadn't fallen like a rock when he was doing it?

Perhaps, if the price of oil did fall, its velocity notwithstanding. That's because oil supply/demand wasn't structuraly constrained, rather politically. The only way for oil prices to remain steady or fall post-peak is if demand destruction outpaces decline, thereby creating a "surplus." Barring a major war and given the structural nature of the current global political-economy, we'll likely see a series of stagflation to recession to stagflation cycles that will eventually be seen as depression. Perhaps something major short of war will happen, like a massive 50% downdraft of the NYSE & NASDAQ over several trading days, or a bout of hyperinflation as the dollar tanks.