Is Peak Oil Already Here? Is that why GS Reweighted?

Tonight, for your discussion, here's this piece:

Tim Iacono submits over at Seeking Alpha: Is Peak Oil Already Here? That seems to be the simplest explanation behind the most recent re-weighting of the Goldman Sachs Commodity Index as reported by the New York Post. The story reports a reduction in the amount of some energy commodities that the index will carry in 2007, this purportedly being linked to the recent plunge in the price of oil. There may be more on this subject here in the days ahead and Barry Ritholtz is on top of things so far with many related links, but here's a quick look at the latest developments in the continuing story of Goldman Sachs and energy markets...).

More posts of interest on this topic at Tim's blog.

Interesting that such significant index reweightings, by as much as 50%, seem to be ignored by the usual suspects.

Kind of analogous to the change in home foreclosures since last year, which apparently went up by 50%.

These numbers seem extremely significant but when couched by subtle shifts in other indicators, you have to wonder what is actually going on under the covers.

If Peak Oil was here, and I knew it, I certainly wouldn't reduce my energy holdings. I would invest every spare penny I could in energy holdings. Post peak I think the energy companies will see returns like they did post-Katrina.

I suspect you are right about the returns energy companies will see once peak happens. My concern would be the political reaction engendered by extremely high prices and huge oil company profits. Even today, the political wind seems to be blowing from a more confiscatory direction.

My concern would be the political reaction engendered by extremely high prices and huge oil company profits.

I have thought about this a lot. Short of nationalization, I can't think of much they can do to really hurt profits long-term. Most of the measures they will try are punative, and will result in lower investments into production, leading to reduced supplies, and higher prices.

"I have thought about this a lot. Short of nationalization..., "

Seriously, at what point in declining production might we see states/regions within nations trying to secure their energy "rights" from other states/regions within the same nation?

How "profoundly local" do we get within "nations" - if the whatever cluster of "solutions" we attempt fail to some degree ????

If we start slip-sliding away down the curve, at what percentage of decline do we see food and energy shortages regionally (leave global warming out for a minute)?

I'm not necessarily asking you directly Robert, but you can certainly answer if you care to let your mind wonder in this direction.

A serious collapse, doomer scenario, or fast decline will hurt the oil companies. A slow squeeze will be very lucrative. I believe we are in for a slow squeeze. What I believe will happen is sort of like post-Katrina in slow motion. People will hate the oil companies more than they do now for profiting while they are paying through the teeth for gasoline. The politicians will enact more and more taxes. But none of that will do anything to increase oil supplies.

Seriously, a major reason I came to work for an oil company was that I considered the position they would be in post-peak. I think post-peak, an oil company is not a bad place to be (barring a significant collapse). I once thought that post-peak oil companies would just be out of business, but the more I started thinking about it, the more I came to believe that they would be printing money as oil supplies dwindle (or as demand starts to outstrip supplies).

Thank you. A very thoughtful and reasonable response in the first paragraph and good thinking in the second.

So you do not see, at no point in decline under a "slow squeeze" time frame, any intra-national energy and food distribution problems? I'm talking mostly about the First Worlders like N.A., euroland, S.A. or parts of asia...??

At no point in the oil decline curve will their be a USSR-like breakdown and subsequent bickering between states for any major first world countries?

Robert, one of the issues though in the slow squeeze scenario is not just production, but distribution. Look at Venezuela right now. When things turn sour, how many more nations will nationalize their oil companies? My primary impression is one of a slow squeeze also, at least for the first decade or so. But rising population and declining production is going to make that very ugly very fast. Can we count on enough non-US oil being available to us?

To me, the decline from peak starts to play wildcards, like rate of nationalization and confiscation of oil companies and resources, resource wars, etc. And none of those are predictable. We can look at the declining rate of production and say all other things being equal that oil companies are a good bet, but will all other things remain equal? That, to me, is the unknown.

By the way, I am arranging my own immediate affairs as if other things will remain roughly equal. Why? Because if they do not we get into areas like martial law, nationalization, national emergencies, rationing, etc., and there is no real way to invest against that. I view survival preparations as insurance against such unknowns so they do not take up all of my investments but only a fraction, though that fraction may grow over time if I believe the situation is worsening faster than I expected.

In short, I think your hunch is right, at least for the first few years post-peak. I also think that confiscation is inevitable as the situation deteriorates, barring some technological breakthrough. The question there is simplty when?

Agree 100% :)

By to hold for 5-10 years and you will make a killing.

Even if we get rid of the personal car and replace it we still need a lot of oil to run heavy equipment airplanes etc etc etc. We will basically run this stuff on oil with electric making a slow replacement where possible.

The point is even if we do the right thing about peak oil and change we will still use all the available oil. This is a given. In later years it will be used where it makes sense but it will be used.

To reply to my own post :)

I say at 10 dollars a gallon for gasoline we max out on fuel cost because at 10 buck a gallon any energy source is reasonable. So at ten buck a gallon we can afford to pump all the remaining oil thus we will.

10 dollars a gallon in todays money is really the max or true price for energy above this it makes sense to conserve energy uses or minimize so it will never get over ten.

Brutal for the American crap lifestyle but if your a doomer it does show that their is a upper bound and its really not that high. England is at 7 dollars a gallon now as well as a lot of Europe so they are not far from having a economy that is peak oil insensitive.

Might as well keep talking to myself :)

I read this

Pretty doom and gloom but he is postulating that oil prices will drop while we
say they will go up if we are at peak. So for all those happy people out their consider his scenarios with rising oil prices or worse of course my prediction of volatile prices with spikes.

I'm just saying the the psychological consequences on the group mind with everything going down and oil prices rising will not be pretty.

At the end of the day the effects of peak oil are psychological.

It's tough to even talk to an investment advisor about the economic future, if one believes that we will have a shrinking economic pie. The standard investment mantra holds that over the 'long term' a portfolio that is properly diversified will alway grow. In the coming energy starved world this very well may not be so, but try telling an investment person that. It may be more sensible to do the now verboten thing of making carefully targeted investments, rather than broadly diversified ones. In any case, I expect the next 5 - 10 years to be so volatile that no strategy will actually be reliably predictable.

Although other forecasts show that peak oil is at least a few years away, based on my forecasts below, we are already at peak oil.

The first chart shows forecast crude oil and condensate(C&C).

This chart is a revised first scenario from my guest post

However this chart forecast excluded natural gas plant liquids (NGLs ie ethanes, propanes & butanes)

So I did the following forecast which shows an annual NGL production increase of over 2% due mainly to the large Saudi NGL projects Khursaniyah and Hawiyah.

Combining the decline rate of -0.8% for C&C with the 2.3% increase rate for NGLs produced a total liquids decline rate of -0.5%.

The -0.5% decline rate was applied to total liquids supply. The chart below shows a significant demand gap starting in October 2007 causing oil prices to increase.

Forecast assumptions:

World total liquids supply declines at -0.5%/year and demand increases at 1.7%/year.

The demand growth comes mainly from China, Other Asia and Middle East while growth rates from OECD vary from 0.1% to 1.0%. These growth figures are based partly on the IEA monthly market reports. Liquids include crude oil, lease condensate, NGLs and processing gains. Although forecast demand is greater than supply, the gap is closed by increased price because ultimately demand must be approximately equal to supply.

Mild northern hemisphere winter weather is assumed to continue and the price forecast from Jan2007 to Jun2007 is assumed to be a simple linear regression forecast based on the oil price (SDR) historic trend from Jan2002 to Dec2006.

Price elasticity of oil demand is assumed to increase from 0.10 in Jul2007 to 0.52 in Dec2010. The elasticity is assumed to be the same for increasing and decreasing prices. Elasticities are assumed to constant for all countries. For an interesting paper on elasticities –

The oil price is forecast is SDRs (Special Drawing Rights) which simulate a global currency. The USD has devalued significantly against the Euro during the last few years and oil price increases measured in the USD gives a distorted view. It is assumed that the USD:SDR exchange rate remains constant at 1.50 from Jan2007 to Dec2010. The SDR is explained in

The time dimension unit of a month was selected because supply figures are given monthly. Demand data is quarterly and is assumed to be the same for each month in the quarter. Prices are assumed to be month end and are from
“All Countries Spot Price FOB Weighted by Estimated Export Volume (Dollars per Barrel)”

World total liquids supply declines at -0.5%/year and demand increases at 1.7%/year.

I think your negative decline rate, at least in the next 3 or 4 years is wrong. But I think you are right in that demand increases will outpace supply increases, which will keep the pressure on prices. That's why I am bullish on oil prices (although fairly bearish this year, as demand destruction has created a bit of a glut at the moment).

Thanx Ace for the corrections to your model. By using the EIA price forecast, u have also eliminated the demand destruction concerns that i had for the usa.

I am still surprised that your new "total liquids" scenario sees Demand outstripping Supply in the short term. You have not been clear on how u reconcile your supply projection with the "partly IEA projection". IEA's medium term Outlook of August was bottom up based. It forecast 91.3-mbd by 2010 yet your "IEA modified" supply appears to be only 83-mbd. This implies a diff of 8-mbd in your projection from IEA's. Yet your C+C analysis only shows a 2mbd dropoff which we can extrapolate to a liberal 4-mbd in 2010. Why are u attributing a 4-mbd shortfall from the IEA study over and above C+C attribution?


You don't actually trust IEA forecasts, do you?

As I don't subscribe to IEA, I found their "World Energy Outlook 2004".

From page 105: "World oil supply is projected to grow from 77 mb/d in 2002 to 121 mb/d in
2030." 121 million barrels/day in 2030!! Page 106 shows OPEC producing 64.8 million barrels/day in 2030. I'd like to see the spreadsheet they used to calculate that number! As WT says - lets buy more SUVs to drive to the suburban mortgage.

There are different types of bottom up based forecasts - some are based partly on reserves which can be misleading. That is the main reason why I built my own model using only production and decline rates from existing fields and future projects out to Dec 2010. (sourced mainly from Chris Skrebowski's megaproject list). I do not use reserves or yet to be discovered reserves to forecast oil production.

Try building your own model - you will learn a lot about forecasting and also how organisations such as CERA, IEA and others forecast for their clients. If you have already built your own model please post it on TOD!

Cute, Ace. You trust IEA enuf to use their Demand projections but then shit on their Supply targets. And yes, i do subscribe to their targets. When we go back ten years ago, IEA predicted 2006 Supply would be 80-mbd (compared to actual 85-mbd). Within 10%. When we look at the Peakster view of 2006 thru the eyes of Colin Campbell, it was 64-mbd. Out over 20%. The Peaksters should never engage in pissing contests wrt to forecasting, Ace.

BTW, IEA has no spreadsheets to merit the 2030 forecasts. In my criticism of IEA, EIA & others i have condemned their continued use of long term Supply targets based solely on a factor of projected Real GDP growth. OTOH, since 1998 their short and medium term targets are based on bottom-up flow analysis.

U and Bakhtiari are the only folks i know forecasting decreased supply after 2006. Samsam is an idiot and a liar so he's covered. After your two presentations, we have little explanation from u wrt which countries or what components of total liquids will cause a 7-mbd shortfall from the other 2010 Outlooks. If u wish to reside in a realm of smoke&mirrors, that is certainly your privilege...

The weight of the 13 recognized medium term Outlooks say u are very wrong. Bakhtiari has fraudulently changed his definitions to protect the integrity of his forecast that Peak has occured. He credits decline in KSA as his basis for Peak Oil. His 81-mbd Peak is bunk and he is easily dismissed. It is your privilege to defend or choose not to defend where your Scenario differs from consensus; either based on geography or liquid component.


According to the EIA weekly stock report over the last four weeks, the US consumption dropped by 890.000 bd as compared to 2005/06, while domestic production of liquids increased by 883.000 bd, reducing the "call" on world markets by 1,77 mbd. Jet fuel demand dropped by 8,8% in the US, in my opinion not a sign of a healty economy.
Austria is one of the three richest nations in the EU besides Denmark and Ireland, not counting Luxemburg , which is a statistical artifact with 400.000 inhabitants. The eight Million Austrians consume 220.000 barrels a day, so with Austrian energy efficiency the US could become "energy independent".

On a side note, the temparature curve in our region (central europe) inverts around the 13th of january. The average daily temparature over thirty years shows increased variability around the seasonal turning point.

Peak oil might be here, but consumption might still drop faster than production.

What do you mean by stating that "the temperature curve inverts"?

point of lowest temperature. Both summer high peak and winter low "peak" (trough) are behind the longest and shorest days of the year by a certain number of days which vary by location. Known as the 'flywheel effect' peak heat is after the longest day(summer solstice) and the reverse for winter solstice(dec 22). The earth takes time to heat up and to cool off - the build up of each is "after the fact" of solstice.

Yup, OB, in Whitehorse Yukon our flip is today (jan 11th) but our coldest day of the winter is usually the 27th in last ten years. Our summer flip is July 20th with hottest summer day on Aug 6th of late.

It was -42 last nite. With the sun setting behind the peaks around 1:20pm, we are looking forward to "warmer" nites and we've been gaining about 1/2 hr of sunlight this past week. We've got 55cm of snow outside in the coldest winter since 1944 thus far...

My new year's resolution was not to respond to trolls, but so many people are listening to Fraudy Nutter that I must point it out - his statements are without exception false, even on the weather outside his window!
The twentieth most severe winter(November-December)since 1942, and December substantially warmer than the norm!

our one liner from the lunatic fringe has graduated. Two lines today!

Peak oil might be here, but consumption might still drop faster than production.

Based on the markets it appears that oil demand is much more sensitive to environmental factors. We may be close to peak but the unseasonable weather has resulted in a global surplus.

Would it be possible for Khebab or one of the other statisticians to determine the degree of this sensitivity? It would, I think, make a very interesting article.

Two conjectures for the future:

1) OPEC throttles back production to compensate for reduced demand due to unseasonable warmth. In the subsequent year we encounter unseasonable cold and stocks evaporate, prices surge and . . .?
2) Unseasonable winter warmth is followed by unseasonable summer heat. Given the poor stocks of NA NG and the demand associated with peak cooling what are the impacts?

Acct, lack of heating oil sales is only one-third of the picture. I reming u et al that the inventory buidup started in 2006Q2 and continued in Q3. Some of that was based on false demand by speculators. The end-of-year figures coming in show us something more important.

Non-OPEC supply was up 0.65-mbd in 2006 over 2005. And worse, non-OPEC supply is poised to increase 1.7-mbd in 2007. Concerned OPEC members are shitting bricks at the prospect. Their undiversified economies are critically vulnerable to this combination of both quota cuts and lower prices ...

Your own concerns about NA nat'l gas are unfounded. USA Production was up 2.9% in 2006 over 2005. Stocks are now 12% over last year. Last month i forecast that the Spring trough in working gas would be at least 1500-Bcf. I am increasing that in this month's Report to 1600-Bcf due to continued el nino effects. A nat'l gas spike in the next 12 months is virtually impossible.

Their undiversified economies are critically vulnerable to this combination of both quota cuts and lower prices ...

The implications are economic problems for KSA and friends. This already a woefully unstable part of the world and if KSA lacks funds to employ the growing population, to continue to increase oil related capex, to revamp the military, and to maintain the 4,000 princes in the style to which they have become accustomed, then what happens next?

If KSA does in fact have shutin supply then I fear we may see a KSA decision to return to the strategy employed in mid-1980's of driving the price of oil down to eliminate competition from present and future non-OPEC production and destroy investment in all renewables and alternates.

This is the complete opposite of current conventional wisdom. I think it is likely.

"If Peak Oil was here, and I knew it, I certainly wouldn't reduce my energy holdings. "

What if you thought Peak Oil was a few years out - would you reduce your holdings in energy? How would you try to time this Wave?

As the crises grows, where will current paper wealth flow? What do central banks hold in their reserves besides fiat? I think gold is one thing, but I would imagine they would hold "paper" on just about anything energy - provided it was geopolitically safe and there was a market for it.

(Again, this is not necessarily directed at you Robert, just picking up on a train of thought you started. ;)

What if you thought Peak Oil was a few years out - would you reduce your holdings in energy? How would you try to time this Wave?

The short-term volatility can kill you, but as I replied to Ace I think demand is going to outpace supply going forward. This will cause prices to climb again; maybe later this year, maybe next year. So if I was investing for 5 years, I am definitely bullish on oil. If I was only investing for this year, I am much more cautious.

If you, as I do, believe that we are in a fifteen to twenty year bull market for oil, then it does not matter when you get in, just that you get in. And, generally speaking, the earlier the better. Whether you buy Anadarko at $41 or $50 won't matter if it is going to $150. When I shoved all my chips onto the table in 2003, I saw some declines thereafter, but nearly four years later I am happy across the board. And I am now staying away from options, except at the fringes of my portfolio.

There are two sides to the profit equation. One is the price of the product you're selling (oil) and the other is the cost of developing and extracting it. When natural resources experience large jumps in prices, there's a several year lag before the costs associated with producing that resource rise. We are now seeing that in the oil industry as well. The costs of tar sands extraction have soared ($3 billion per 100 kbd capacity a few years ago; $12-13 billion now), rig rates are way up, labor costs have risen sharply. Already a number of natural gas companies (e.g. Anandarko) have stated plainly in their annual report that they may reduce drilling this year because of rising costs. Assuming that high oil prices turn into pure profit is a bit of folly--you have to be very careful which company you are investing in and understand the cost side of the equation as well. I don't see costs discussed here very much.

That would be very stupid. Peak Oil mean large swings in prices to the point that most business models will be hit hard unless the business has very deep pockets. In short you can't run a business with wild price swings.

A few smart companies with a lot of money will weather peak oil and be big winners in the long run. But most simply won't have the balls to weather the swings.

After peak oil when we are really going down and its obvious oil companies in general will make money but at peak its a fools market unless you know the company understands peak oil and has the plans and the capitol to win.

Peak Oil mean large swings in prices to the point that most business models will be hit hard unless the business has very deep pockets. In short you can't run a business with wild price swings.

In addition to the business model impacts there are also state budget impacts. KSA is looking at a 40% population increase and therefore needs to create jobs and ensure it has the required increase in revenues to support this increased population in addition to absorbing the increased costs of further E&P activity.

The price instabilty described would threaten both business models and the viability of those states dependent on resource revenues.

GS itslef is not holding or selling any oil by this re-weighting of their index. All it means is that when they publish this index as a way to keep a general tab on the energy market, they will not rely so heavily on the weight of oil. Now fund managers who offer funds based on this index are forced to reduce oil holdings to match the index, but it does not necessarily reflect GS's view of whether oil will go up or down. GS is indirectly forcing fund managers to reduce their oil holdings, but GS could increase or decrease their oil holdings as they please without having to change their index.

"Is Peak Oil Already Here? Is that why GS Reweighted?"

I agree with one of the responses to Tim's article - it looks like it had very little effect in the reweighting so what is the fuss about exactly?

The paranoid could say this change somehow caused substantial selling of energy stocks, benefiting the buyers of said energy stocks = "Shaking the tree" in energy. The current buyers becoming the Sellers later at much higher prices after the Herd Catches On to peak oil and starts buying ...

Agreed that the herd mentality is driving an overcompensating selloff of oil now, just as it drove prices up unrealistically in 2005.
Do you need to time the absolute bottom? Remember that superimposed on PO is the dollar crisis, which means we'll see asset inflation across the board this year and next. "Better a year too soon than a day too late."

Are you serious? Me and OilRig Medic wanna hang out with you. Plus my boys from the Italian side of the family. But that ain't no big deal. Serious. Hothgor wants to join us. We already cleared him a year ago. Didn't we, fellas. We know you are scared. That's natural. We like you. See 'The Good Shepherd.' ?

Kinda fucked me up. I was gonna head out, but oilrig was like help me on this stupid eastcoast bitch. And I was like, I owe you my life, oilrig, you got any other requests? I never abandon oilrig. Ever. When you understand than you'll know how to race.What about oil? Dance mutherfucker.

There was little change overall in the GSCI energy weighting: in June 2006 energy was 74.36% of the index, in Sep. 2006 it was 70.66% and yesterday it was 67.58%.

However, the regular unleaded gasoline weight was cut from 8% to 2.3% (plus 2.4% for RBOB) before the 2006 elections. Goldman said they did it to account for the switch from regular unleaded to RBOB gasoline, but then again Mr. Paulson, lately CEO of Goldman Sachs, was (and is) Secretary of the Treasury. So come to your own conclusions.

Just keep in mind that in our "free market" world the tail wags the dog almost always. They should call it the "free to manipulate the market" world. Really. If you haven't experienced it live and in action you almost won't believe it.

Of course once in a while the "fundamentals" surface and "the market" adjusts violently.

There wasn't any significant re-weighting of the energy component of the GSCI. The NY Post story got it wrong, and everyone has piled on to the story, but there has been no announcement of re-weightings of the GSCI since November. At most, the energy component of the index, was reduced from 71.00% to 68.00%, over the course of 2 quarters, beginning with the 2H of 2006. But again, that change was already telegraphed. Such a change does not even come close in scope or severity to the re-weight of the Gasoline component, which took place last Summer.

This story is not as ridiculous as the Iranian Oil Bourse story, but it's close.

So let's review. 1. There has been no announcement from GS about a significant re-weight to kcik of 2007. 2. A 3.00% reduction of Energy from 1H 2006 to Q1 2007 doesn't even come close to explaining the price action of Oil over the past 9 trading sessions.
3. The NY Post story was so poorly done that the writers actually mixed up the word equity with futures.

GSCI Site:


I'm kind of surprised this story got so much play. It's the NY Post, fer crissakes. They have wacky energy stories all the time. They're a tabloid. The paper that, if someone sees you buying it, you blush and say, "I only read it for the sports."

Either way,

The crude futures on Feb are down to $52.33, and all bets now seem to be for the high forties soon, unless something bad happens on the international/war front.

If we do happen to go back into the mid forties, and you figure the time factor of the that we are now 6 years into the new century, (that's right folks, already 6% percent of the new century down, for you statistical types...and not long to a tenth done of it done....ever think of that way? Time flies when ya' don't know what the helll your doin' don't it?) In other words, normal inflation is pushing prices so that a $45 dollar oil price will be viewed by the customer as a STEAL....or to translate, the road goes on for ever, and the party never ends....and there won't be any use telling them that oil and gasoline prices were at a historic low, and the economy was roaring just months before the U.S. peak in '71 (I mean folks here at TOD are "in the know" (supposedly) and even they often ignore the fact that the price signal tells us NOTHING about real supply. Truth to tell, the Saudi's seem to have called it right for now....even with them supposedly cutting, the Mexicans supposedly callapsing, and the Brits for sure collapsing, oil for now is rushing in from somewhere....Sauid fears of a 1982 back to the teens on crude price scenario seem well founded.....a drop that would destroy the oil industry investments made at higher projected prices. Now the other shoe many "widow and orphan" funds and pension funds bought in to oil at $75 dollars and run the risk of getting busted in this price collapse?

It's going to pizz Kunstler off if more people get wiped out in the oil price collapse, and sooner, than get wiped out in the housing collapse! Long live that suburbia thing! :-)

Roger Conner known to you as ThatsItImout


I wonder what the price of oil would be if we had had a cold, or even normal winter, with low, instead of high heating oil stockpiles?

In any case, a warm winter, a normal winter, or a cold winter for 2006-2007 has no effect on long term supply fundamentals, but markets trade on short term factors.

I am sure you are aware of the huge overhang in the NG market which has stabalised on forecasts for a reall cold spell for at least 2 or more weeks. While oil is collapsing like there is no tommorrow. Why do u think there is such a difference in attitudes about NG and oil?
I would like to share another observation with you. The last 2 days huge decline has not been met with equal declines in oil and oil service stocks. If not for COP announcement the XLE would actually be up for the day. I have seen this kind of action 4 times over the last 2 years. Each time it has signalled that oil was very close to bottoming.

I responded to Freddy upstream and was making much the same point you make here.

I think we may be headed for the Unpeak, a shortlived apparent surplus which may wreak an enourmous amount of economic havoc.

If it happens, Yergin will look like a genius.