You might have heard that CLZ07 went through $90 today...

here's a place to talk about it. is it going to $100? will crack spreads ever come to where they should be? is OPEC incapabale or are they just making us take our medicine? Or is this all just another meaningless flash in the pan that means we're all overreacting to circumstantial evidence?

Here's a good summary piece to whet your appetite...

And it kept going up after hours, too....

Oil Rises to Record Above $91 on Supply Drop, Iran Sanctions

Crude oil for December delivery rose as much as 64 cents, or 0.7 percent, to $91.10 a barrel in after-hours electronic trading on the New York Mercantile Exchange, the highest since trading began in 1983. It traded at $90.78 at 7:36 a.m. Singapore time.

And this one... (hat tip to Ace)

Michael Klare: Beyond the Age of Petroleum

This past May, in an unheralded and almost unnoticed move, the Energy Department signaled a fundamental, near epochal shift in US and indeed world history: we are nearing the end of the Petroleum Age and have entered the Age of Insufficiency. The department stopped talking about "oil" in its projections of future petroleum availability and began speaking of "liquids." The global output of "liquids," the department indicated, would rise from 84 million barrels of oil equivalent (mboe) per day in 2005 to a projected 117.7 mboe in 2030--barely enough to satisfy anticipated world demand of 117.6 mboe. Aside from suggesting the degree to which oil companies have ceased being mere suppliers of petroleum and are now purveyors of a wide variety of liquid products--including synthetic fuels derived from natural gas, corn, coal and other substances--this change hints at something more fundamental: we have entered a new era of intensified energy competition and growing reliance on the use of force to protect overseas sources of petroleum.

May you live in interesting times.

Is that saying supposed to be a blessing or a curse?

I think I'd like boring times. I can deal with boredom more easily.

It's known as a Chinese curse. But it seems it has nothing to with China, it's just a tricky way of cursing people...

BTW, Tapis at $93.32. Is the sh*t hitting the fan already?

I don't have much luck in my life.

1991. Street fights in Belgrade, almost got hit by a stone.

1992. I went to Sarajevo for studying, I was bombed.

Then I went back to my Belgrade, sanctions, chaos, refugees - misery again.

1999. NATO bombed me.

2001. - A revolution, Milosevic overthrown.

2003 - now. I am here in Australia. Finally peace! But no..

Interesting times, for sure. I'm sorry you've had to go through all that. In my experience you Serbians are friendly, sophisticated and tolerant people, much more so than many others... And yet you were demonised no end and probably still get accused for all that horrible stuff that happened in former Yugoslavia. (Western media, as you know, basically made it out to be all Serbia's fault.)

Let's hope things will be OK for you in the future.

The Serbian government deserved a good bombing, but not the Serbian people. There are a couple of Serb guys I used to work with and when I first met them they said they were from Yugoslavia. I looked right back at 'em and said, "Oh, you mean Serbia." They grimaced a bit, then nodded.

Now we Americans will know how it feels - a government that is just slimy, but only one in four of us support what they are doing.

Something like that. I tell people, especially if they are visitors from the USA, that GWB is an American Milosevic. Everything that's going on now in the USA seems to me like 'deja vu' - patriots vs. democrats, media brainwashing, clumsy lies, insecurity, fear. But there is a difference too, when we compare SM and GWB: our president wasn't dumb. He was cunning and corrupted, driven by only one thing, and that was his pathological desire to stay on power. But I would never say he's stupid, or something similar. GWB, however, sounds like a man that really lacks not just education but also 20 or 30 points on the IQ scale. Now, how it's possible that a man so incompetent becomes a president of the most important country, I don't know. It's a mystery to me. Plus, to be re-elected. I don't get it.

At this moment, as I perceive things, no one in the world expects ANYTHING from the current administration. There are many ongoing crises and conflicts in the world, but people don't expect Bush and Cheney to come with some solution. They must feel blessed. They can push their agenda, no one will try to stop them. Everyone is just waiting for them to leave, AND THEN to start solving problems.

GWB, however, sounds like a man that really lacks not just education but also 20 or 30 points on the IQ scale.

What are you talking about? He's got a BA from Yale and an MBA from Harvard, two of the finest universities in the US! How could such a man be uneducated? ;)

SAT score conversions and socio-historical analyses (sic) put his IQ somewhere between 111-138 on classic IQ scale. Clearly not dumb (at the time of tests), if those are any figures to go by. However, clearly among the least intelligent of the US presidents so far (if you go by the same data/studies).

Personally I don't mind dumb. Lem showed in Cyberiad that even an average sailor is smart enough to run a country and much better than a evil prankster.

But for the sake of balance you have to have:

- competent staff around you (Cheney, Rumsfled, Wolfowitz, Bolton... need I go on?)
- honesty of character (hmm... what did he say about: WMDs, Iraq, oil, 911-intel, torture, domestic spying, withdrawing troops, Katrina, tax cuts, clean air, energy security, global warming... I've lost count on this administration's patent lies)
- ability to lead (New Orleans, anyone, 911 anyone? current polls...)
- uncorruptability (Bin Ladens, DoD deals, Iraq oil deals, ...)
- respecting and protecting the lives of other people (1+ M dead, 2+ M displaced, 2 countries bombed, 2 occupied, more on the list... please don't give us any more of that 'love')

I know I've been critical of my own country's leaders, but Bush as a president with his current staff is like an nightmare that refuses to end. And I don't even live in the US.

And I do agree, it does reflect somewhat poorly on Yale and Harvard.

I wouldn't put too much weight on the Yale and Harvard degrees. My sister was on the Harvard faculty for awhile, and she said everyone knows about the "happy bottom quarter." They are the students who are happy just to pass. Their parents are alumni, often very wealthy and famous alumni, or they would never have gotten in. (She also said grade inflation is insane. Nobody wants to give a student a C, let alone a D or F, because their last name might be Rockefeller.)

There's another possibility as well. Maybe he was once very bright, but fried his brains with drug use. It's pretty well established that long-term abuse of drugs and alcohol can cause permanent impairment.

He was definitely a coke-snorting, heavy drinking frat boy. A friend of mine was roommate with GW at Yale and testifies to the fact ("Shoulda killed the SOB when I had a chance..." he says only half in jest).

    GWB, however, sounds like a man that really lacks not just education but also 20 or 30 points on the IQ scale.

That isn't true. This guy has made it to the top of the State and now Federal government - hell, he even managed to get elected to president ONCE!

He's not dumb; but he's out of his depth in his current job. Luckily, for him, he's surrounded by people who know just what to do with someone like him and so we see cronyism and the corruption of the government from within - the polluters now in the EPA "regulating" themselves, corporations ensuring short term profits over the long term health of the planet, government being bloated, spending & debt & deficit utterly out of control while the destruction of the social safety net goes unabated as the middle class gets fleeced.

Him and his handlers have visions and dreams and they are realizing them - the common people, the world, and reality be dammed.

That isn't true. This guy has made it to the top of the State and now Federal government - hell, he even managed to get elected to president ONCE!

Here's what I say to that;

. all the odds are on the man who is, intrinsically, the most devious and mediocre — the man who can most easily (and) adeptly disperse the notion that his mind is a virtual vacuum. The presidency tends, year by year, to go to such men. As democracy is perfected, the office represents, more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day, the plain folks of the land will reach their heart's desire at last, and the White House will be adorned by a downright moron."

-- H.L. Mencken July 26, 1920, wrote in The Baltimore Sun: " .

We have gotten our heart's desire.

Where are all the BUSH bumper stickers now?

I think everyone who had a bush bumpersticker should have to wear it on their forehead.

Next election season do something that would DRIVE THEM NUTS.

Elect RON PAUL. If for nothing else to than to drive the FED crazy.

Go Ron Paul -

Come on, give the man some credit. He got elected to president twice.

Just not by voters.

He's not dumb; but he's out of his depth in his current job.

Well I think he is doing exactly what he was elected for. And by that, I mean, he is doing exactly what the people that elected him wanted him to do.

It seems that voters, though, are catching up a bit with the scheme. With any luck, they might Actually Do Something (TM). But the odds are heavily stacked against them.

That is the problem when you get an early version of something, be it an Operating System or Democracy. You get to have all the problems and try out many things that do not really work. The trick is upgrading.

He was elected by cheating--twice!

To answer your question as to how GWB could have been elected:

GWB is a mere puppet, under the effective control of a clique of people with a far-reaching agenda. He does what he is advised to do (flattering & fooling himself by thinking that he is "the decider", when in fact he is "the manipulated one"), and says (approximately) what he is advised to say.

The U.S. voting public is manipulated by media propaganda.

All bush had to do to get elected was exactly what he was told to do by his 'advisers', having to much intelligence would have been an impediment.

It's harder to blindly follow orders when you think about stuff.

I can think of dozens of governments that deserve a good bombing. The problem is, you (even if you are the world police) cannot bomb a government without mostly hurting innocent civilians. While I think Saddam deserved to be bombed to eternity, Iraqis in no way deserved any of that.

And now that the US is most assuredly guilty of genocide in Iraq, would it be OK for you if somebody gave a good bombing to your government? I mean, you wouldn't start whining about terrorism, right? Even if 100,000 people were collaterally damaged?

"The problem is, you (even if you are the world police) cannot bomb a government without mostly hurting innocent civilians."

Yes, one can. The reason that no big governemnt seem to try that route is a mistery to me.

Just think a moment. ¿What happens if someone in a local government in the USA (or any other reasonably functioning country) misbehaves and breaks the rules?

¿Does someone bomb them? No.

The bigger government sends the police. The local police does not stand in the way, there is no shootout and no bombing. The offender is detained and brought to justice.

¿How does that work? ¿Why does that work in that scenario, and not in an international scenario?

I guess there is a whole wing of my university's library full of books trying to answer that question, but speaking off my end hole I would simplify it to:

A) A set of rules that are specific enough, and provide people with expectations on what is going to happen.

B) A government with enough force and/or persuasion arguments to convince people to follow those rules.

If you have those things, you do not need to bomb anyone. You might need violence, like the Italian government trying to get a Mafia boss in Calabria, but usually not in the level of 25-TNT-ton bombs. It makes for much better living for almost everyone.


Might makes right.

End of discussion.

It _is_ as simple as that.

Now in Australia? Godzone Country? Things can only look up mate - she'll be right! We can wish away the water crisis, the global warming threat, the destruction of topsoil, the wheat harvest crash, the impoverishment of the rivers and seas, the failure of infrastructure, and the peak oil storm-clouds - as we all know, it's the Lucky Country!

Is the sh*t hitting the fan already?

One would think so.

Oil at $93. Why haven't gas prices been going up?

Gasoline prices have finally started to creep up in NJ. I've seen them go from $2.45 to $2.59 in the past week. My feeling is that we'll see another hike by next Monday.

One thing that does tend to keep prices stable in my state is that they can only be changed once a day. For the toll roads, the gasonline stations can only change them once a week. It may be that we get bit in the ass with that when the stations decide to bump the price $.30 in anticipation of their costs going up.

- Scott
"Winter is coming"

For whatever reason (I'm not going to speculate on motive), my understanding is that the margin on distillates has dropped from 30% to 5% as the price of oil has gone up. (I just read that yesterday ... wish I could remember where! I'm embarrased that I can't cite in this instance.) The result is the price of gas has been relatively stable.

The downside of that is that there are limits to that kind of buffering. At some point, you have to increase the price per gallon for gas or the refineries would be operating at a loss, which ain't gonna happen.

I think we're at that point now, which is why the price of gas is again seeing some upward motion.

Maybe refineries can be operated at a loss when owned by a multinational conglomerate that also extracts oil at the current high price. It would be worth it to keep off the tax pressure from Congress.

I guess we should watch the difference between independent refineries (if there are any) and refineries owned by the majors in terms of financial distress.

the losses would be in the millions of dollars per day for the industry.

not happening.

385 million gallons per day is used.

a one penny loss on each gallon per day puts you at 3.85 million dollars a day out the window or roughly 1.2 billion dollars a year.

Thats for a single penny.

Probably demand destruction.

Here gas is cheap (2.60) but diesel is at 3.20/gal

Hopefully gas prices in the U.S. will hit all time highs as well. The general public needs to open their eyes to the reality of Peak Oil.

Since the U.S. military is completely dependent on oil and its refined products, why aren't they transforming their might at lightning speed into the post-oil world?

Energy Independence from Fossil Fuels is the United States top National Security priority.


Just the stirrings of the greater understanding. We haven't seen panic or over-reaction yet...

We read that major oil consumers have been post-poning purchases and drawing down stores in the meantime yet oil is at record price levels. At some point either this pent up demand rockets price well beyond $100 or we start seeing permanent demand destruction. My concern is that consumption of stores is masking rather signficant production declines, even though I have no evidence to that effect.

At the same time, however, masked production decline seems the most parsimonious explanation for our present situation. Does anyone have hard data?

Given the increasingly frequent appearance of three of the Four Horsemen - falling oil production, falling dollar, falling agricultural stores/yields - I am surprised that we are not seeing the fourth Horseman - falling financial markets.

Derivative prices, which reflect market fear, are up some but no so much by historical standards. I am at a loss to explain why. Surely everyone isn't feeling sanguine about our prospects. It would interesting to see if foreign investors are buying our assets out from under us on the cheap and keeping our market propped up. If so, the recession-triggered market plunge will be stupendous.

I thought we had five years or so before the pain really set in. I don't think so any more. Drought, natural gas constraints, falling dollar, food inflation, etc. are coming together in a perfect storm for consumers.

There are massive numbers of mortgages yet to reset at astronomical interest rate levels. Bernanke can't bail us out without hammering the dollar and making the problem even worse. The Fed is powerless, although I expect they will act to postpone the pain and distribute it as widely as possible.

- Shunyata

From a global perspective, why would a falling dollar and falling agricultural stores be negative signals, let alone horsemen?

As I commented a few days ago, inventories of just about all good have fallen sharply as transportation efficiencies have improved the enterprises reduce working capital. It would appear that lower agriculture inventories are no different than other lower product inventories. I haven't seen any evidence of sustained decreases in agricultural yields.

The falling dollar would seem to be a necessary response to a legacy of bad economic policy. It may well be that the US permanently loses its economic leadership, but whether that is good or bad would seem to depend on where you stand.

Why would foreign investors be buying US assets, if they everyone is feeling sanguine about US economic prospects?

I do think the US is heading into a harsh recession and doubt the world economy can just skate over it. I also suspect that the dominant role of the US in the global economy may be approaching an end.

However, I do think this may well be just a standard garden variety correction. A slowdown would give energy markets a much needed rest and push any supply driven crisis back a bit.

From an economic standpoint, I don't see how we are going to unravel this massive US-China co-dependence, which seems to have reached the breaking point. I expect it will be very painful and end up in a negotiated solution. But compared to other crises of this century, it seems fairly average. Compared to an apocalypse, a walk in the park.

I don't know what you mean when you say derivative prices are up. I thought many (think structured credit, CDOs) had crashed. Spreads on risky debt are a bit higher and banks seem very cautious about trusting each other, which is reflected in money markets.

I agree that mortages are going to be a huge problem, and maybe beyond the US.


Look up the Weimer Republic, i.e., post-World War I Germany. To pay for war reparations they printed money like there was no tomorrow. I think Jim Sinclair is on to something when he says replace "war reparations" with "OTC derivatives" and you get the picture. The Federal Reserve is printing money like mad (so are other central banks, but we're currently king of the hill in that respect) and the stock market is one of the early "beneficiaries" of all this added liquidity. This is believe it or not still the relatively early stages of inflation, where prices seem to remain stable (at least in the "core rate", which apparently doesn't measure much more than the price of a burrito supreme at taco bell).
But if you examine the Weimer Republic during the hyperinflationary stage their stock market went to the moon, while the Mark went to 0. Just wait another year and all the bad effects of out of control inflation here will be too apparent to ignore.

Actually, I definitely do expect crack spreads to recover, but on the back of higher prices for gasoline and other refined products, not lower crude. I'm afraid that the futures traders have smelled the peak and that's what's driving them now...the myriad other reasons in the press notwithstanding.

Energy consultant, writer, blogger

I see the phrase "crack spread" and it makes me think fetish pr0n for those who like plumbers.

I saw a "crack spread" in the store today . . . It was funny. Makes me wonder why people do that . . .

Oil Prices continue to increase today

Tapis 93.40
Minas 91.65

Must be strong demand for that rare oil - light sweet crude

And WTI spot closed at $92.81.

Wait until Oct31

OPEC to heliBen = Go ahead, make my day.

I wonder if these stubbornly high crude oil prices are an indication of limited or reduced supplies from exporters. Perhaps when the oil production and export data for October is published and revised, it will reveal demand destruction. I cannot justify these record prices otherwise. Is there some other explanation?

And perhaps the market is reacting to the "tucked" some same "hidden" request for some very large specialized bunker busting bombs. Located in the recent request for more funds for Afghanistan and Iraq.

and the saying is an old Chinese curse I beleive, its roots are anything but wishing you well.

Venezuelan, Algerian oil ministers: No need to raise OPEC output

The Venezuelan and Algerian energy ministers defended the current oil output by OPEC members on Thursday and suggested there is no need for another production hike to help ease runaway prices. "OPEC will ponder what it can do to alleviate the situation, but with certainty (the problem) will have nothing to do with production," Algerian Energy Minister Chakib Khelil told reporters in televised remarks at the Venezuelan presidential palace.
"There's a good level of stockpiles and there's no lack of production. In any case the prices won't budge because of geopolitical issues and a refining problem," he added.
Ramirez insisted that OPEC's output is fine and there's no need to increase it. "The market is well supplied,"

The December WTI weekly price chart looks hyperbolic. Likely just blowoff speculation but I wonder again if there is an underlying export shortage that the market is adjusting to?

From the link..3.5 inch thick HT steel casing. No wonder Molybdenum is getting expensive..

When will these high prices hit the pump?

I live in northern New Jersey - prices had been holding steady in my neighborhood at about $2.45 (regular)for a couple of months, but now they're slowly rising, up to about $2.55 to $2.65 today depending on the gas station.

$3.15 for regular north of San Francisco

3.09 out here in the Seattle area. It's been rising steadily for 2 weeks.

Aerospace Engineer
Everett, Washington - Cascadia

$3.15 plus in most parts of Los Angeles for regular unleaded.

Just a small reminder guys: Here in Sweden the price is $7/gallon and we 're not dead yet. E85 is now sold in more or less every station and it is $4.65/gallon

You are still very lucky!!!

"You are still very lucky!!!"
No we are not! We do not have the culture let alone the infrastructure of alternative mass transport. Our people are physically and mentally (I might add) incapable of walking or riding a bicycle and our vehicles are extremely inefficient. "The average fuel economy for new vehicles works out to 21 miles per gallon, according to a new EPA report." Those figure do not reflect the true reality of what the average driver really gets. We happen to live in interesting times indeed.

I ride the Bus, or I walk. Granted I did have a Van, but I used it sparingly when I had it, going and parking and walking into the city center or parking arcoss the Arkansas River in North Little Rock and walking into Little Rock.

There seems to be a new influx of city center development here in Little Rock, The arenas and Ball parks are in North Little Rock and the River Market and shops and pubs spread out between the two cities, all very walkable and the city has some trolley and bus service that is getting better.

But I have lived here for close to 30 years off and on and finally they are getting the planning right. But not everyone is a slacker that can't walk or ride the buses. I can walk 12 miles in a little over 4 hours in and out of downtown Little Rock.

God Grant you peace.
God Grant you Love of your fellow man.
God Grant you Faith and Trust.
Write in Candidate for President 2008.
Free Right Now party. No donations.
Term limits for congress, Min wage for them too
Charles Edward Owens Jr.

You have to remember, compared to parts of Europe (Switzerland, Scandinavia, UK, France, Germany, Austria, Benelux), much of the US is virtually a third-world country. $3.15 a gallon here "feels" like $7.00 in Europe.

I have been arguing that for a while. The only thing keeping much of the US from true third-worldship is cheap oil. Maybe that is true everywhere, but in the US, if personal automobiles lose viability, much of the population will be out of reach of basic necessities. Just getting a loaf of bread will be a daunting challenge.

The wholesale price is up to $2.24, a rise of over ten cents in the past few days, so that'll show up at the pumps soon. I expect $3.00 by Thanksgiving, which should put a damper on Black Friday, and I wouldn't be surprised to see a record $3.25 by Xmas. And the past few years prices have dropped over the winter. Next spring and summer, who knows? Given the situations unfolding in the world I try not to think that far ahead, makes me gassy...

As stated above, I concur with the prices in NJ. Our state tends to have the cheapest prices in the country (it helps to have refineries at both ends.) Still, when you see price increases of $.15 to $.30 in a week, there's a little bit of fear that starts coming into play.

- Scott
"Winter is coming"

just a reminder
$95 crude is 2.5 yergins

Based on Yergin's June, 2007 prognostication on oil prices (assume that oil prices will be twice Yergin's predicted price), we should see WTI at more than three Yergins by June, 2008.

My call still is better than 50% prob. that we will have 3 Yergins before Jan 31/2008.

3 Yergins = $114 US/bbl

Seriously, I wonder what the smart people at CERA are telling their clients recently? "It's the speculators...etc."

I would guess "No, you can't have your money back" has come up more than once.



I too am wondering when these higher crude prices are going to hit the pumps where I live. Over the past few years, prices at the local stations very closely tracked crude prices - usually responding within a day or two. But over the past month or so gas prices have been headed down even with crude going up. Right now regular is $2.78. It's Party on, Dude!

Perhaps this is a matter of distributors and filling station operators "flushing out" their summer blends. If so, I'll bet that my good buddy Billy Fourwheeler is gonna get a big spanking any day now when he tanks up the ol' F250.

Hans Noeldner

"Civilization is the presence of enlightened self-restraint"

Perhaps this is a matter of distributors and filling station operators "flushing out" their summer blends.

This is my theory as to why retail unleaded is so low right now. I think we imported way more than we needed this summer due to all the omnious hurricanes predicted that never materialized. Now with winter fast approaching and the fact that gasoline in large quantities cannot be stored easily, the summer blend supply is being let go at a lower cost just to get rid of it. Once we get steady frosts around the norther tier of states, the winter mixture will have to be churned out and the retail price of unleaded may shoot up.

Wait and see, I guess.

Given the lack of evidence of increased production from KSA and the prospects for further dollar weakness, it does seem that $100 a barrel is a matter of time (and maybe not much at that).

What worries me however, is that the US slowdown/recession will soon cut into demand reducing the apparent need of KSA to increase production. If so, this will remove the best opportunity that we have to test peak oil in the short-term.

If oil prices stay at current levels for the next six monhths or so and KSA does not significantly increase production, it really strengthens the case that they can't.

I expect oil prices to continue up for a while until the weakness of the US economy spreads further. But I would guess that prices will be lower in six months than they are now (stripping out currency effect).

Crack spreads (and refining margins) seem to be driven by demand. I would bet that low margins (and hence gas prices) indicate that US demand is weakening.

Given our predictions for net exports from the top five net exporters (peak to zero in 26 years for the middle case), I don't expect there to be much doubt about a supply/demand imbalance.

My oil trader friend told me that India is trying to buy any light, sweet cargo anywhere in the world, regardless of transportation costs.

WT: When one looks at the size of the Chinese and Indian economies in relation to their oil consumption, these prices look very cheap. US politicians are begging China to dramatically revalue the Yuan upward, which would be like adding rocket fuel to the oil price.

The EU seems to be jumping on the revaluation bandwagon. In some ways, I think the EU is the canary in the coal mine. Through no real fault of their own, their currency is bearing the brunt of the US-China codependency.

I think Yuan appreciation is become a self-fulfilling prophesy. The more people expect the Yuan to appreciate the more they will try to move assets out of dollars and into Yuan to take advantage. This strengthens the Yuan more, leading to people expecting further currency appreciation, and move more money.

It can't go on much longer. But now that the US, EU and China are involved, I expect that it is headed for a negotiated solution.

Do they have a burning need, or a burning need to dump their dollar reserves?


There is no reason to think they are buying crude in dollars, so that wouldn't seem to explain it.

How do you know which currency they're using for transactions? I don't know much about that stuff ... do they publicly report their currency holdings?

Exactly, there is no evidence that they are, or are not, using dollars. I don't think this information is publicly reported.

However, it does not seem likely that they would be able to benefit from any arbitrage in dumping dollars through oil purchases over dumping dollars through any of dozens of other avilable mechanisms.

Currencies are a zero sum game. To believe that India could gain currency benefit from transacting oil purchases in dollars, you have to accept that someone on the other end losing currency benefits.

Almost all international trade is done using prices set by the future market (or spot market if the occur instantly). Currency changes are implicit in those prices. Both sides of the deal want to eliminate, rather than take on currency risk in the transaction.

Deleted: duplicate post.

I agree that your Export Land Model was an early and prescient look at the impact that growing consumption in oil exporters will play in the availability of exports to the world. I believed I mentioned this from the start while noting that the model is simplistic and does not account for adjustments that will be made as the cost of these subsidies begin to burden the exporting countries. (Note: all models are simplifications and a simple model can be better than a complex one).

Fuel rationing and a growing budget deficit in Iran are a case in point. Iranian citizen effectively have a choice. Their country can give them x dollars to spend on whatever they want, or x dollars worth of oil products, which is inherently a less desirable commodity than cash. Over time, countervailing pressures will impact the trend towards zero exports. As someone else noted, it is impossible that KSA will stop exporting oil, which will prevent them from gaining forex and buying food. Oil is more valuable as a traded product than one that is consumed at home, although I do think exporters will capture more of the value chain.

I also do not think the net export squeeze will play out over the next six months any more than it has over the last six months. And as we have seen oil prices in a trade-weighted basket of currencies has not really shot through the roof.

I think that the tight supply-demand balance has lead to a huge amount of leverage in the price. I don’t see how a severe US recession can not lower US demand and bring prices down, albeit temporarily.

My forecast: Oil goes over $100, then drops 20% (in currency adjusted terms) over the next year before resuming its relentless climb as the reality of supply constraints becomes more obvious.

I also do not think the net export squeeze will play out over the next six months any more than it has over the last six months. And as we have seen oil prices in a trade-weighted basket of currencies has not really shot through the roof.

Hi all - I'm a new poster here but have been a long-time reader. I am involved in the industry, though on the strategy rather than geological side. I do closely follow the market.

I was interested in the price discussion - we are also trying to understand it. The fundamental data do not appear to support prices and the geopolitical risks have been overdone (PKK will struggle to damage the BTC and it is in no ones interests to damage northern Iraqi fields or the Kirkuk-Ceyhan line - other than the ever-present Sunni insurgents that is). Iran-U.S. are playing hardball, but this is still a diplomatic process. I would not expect to see any threat to supplies until well into 2008.

So we are left with speculators and the tight balance. Speculators are deifnitely involved, but that does not seem to explain the whole picture when you look at the CTFC data on net long non-commercials (admittedly this does not capture OTC trade which is now quite substantial).

The point by WestTexas on India interested me. Perhaps what we are seeing is the effect of peak light, sweet oil? We've known that light crudes are declining, perhaps this is the refinery failures biting back. OPEC doesn't have any light crude left in the tank (until Khursaniyah come on in Saudi in December), so OPEC is then absolutely correct in saying the market is not demanding additonal oil (heavy oil at any rate) and the stock data conceals crude quality. We might have U.S. inventories at the top of the five-year range, but if it's all heavy crude in the tank it's not much use. Look at gasoline stocks - very low and falling. When Q2 hits, unless refiners step up runs very soon, the situation is going to be even tighter. One step forward and two steps back for U.S. gasoline supplies.

Interesting. Still wondering why gas prices are so low, though.

Hi Honorable Mention,

I'm glad you decided to post, and I'd be interested to hear more.

Something I wonder: Given your expertise in strategy, have you given some thought to the "bigger picture" - in the sense of, (for eg.)...what (do you think)would be an ideal energy policy on different governmental levels? Or, what people who are informed can do?

What do you see as the "big picture"? And do you see any short or long term goals as being optimal? (Along with ways to pursue them? Etc.)

Also curious how the industry see itself dealing with the prospect of a global decline situation. - ?

Also, this overlaps with: Given that the industry (or some people within it, anyway) understand the state of the global oil supply, how do they reconcile this knowledge with their role in supplying the public, who are most likely less informed and appear to be headed for a significant problem when supplies shrink?

The Wall Street Journal has an excellent article on today's oil price runup, which, unfortunately, is behind its paywall. Perhaps it can be read for free if you go in through Google.

Oil Tops $90 on Range of Worries


Traders next reacted to a report from Oil Movements, a British company that monitors oil-tanker traffic in an effort to get around the secrecy of major oil exporters such as Saudi Arabia and Kuwait. The company's weekly report, which went out in the morning, said OPEC shipments for the first 10 days of November appeared to be "well below the October equivalents."

The report estimated that October OPEC shipments were likely to be about 300,000 barrels a day more than their September level, "but early indications for next month are that there may be nothing more to come." The world consumes more than 80 million barrels of oil a day, but a minor disruption can have an outsize effect because the margin between supply and demand has narrowed in recent years.


Winter is typically when the world burns the most oil. But according to the International Energy Agency, the Paris-based energy watchdog for Western countries, stocks fell 33 million barrels, or 360,000 barrels a day, between July and September. That contrasts with an average third-quarter increase in stocks of 280,000 barrels a day during the past five years.

The agency in August said the amount of oil in tanks had fallen below the five-year average to about 54 days of consumption.

"We're in an extremely tight supply situation," said Ann-Louise Hittle, a Wood Mackenzie oil-market analyst. That, she said, was giving credence to "peak oil theory" and the idea that supply won't be able to meet growing demand.

Contrast that article with this one in the New York Times:

Oil Price Surge Adds to Economic Jitters


While the escalation in oil prices could cloud the economic picture, some energy analysts questioned whether the run-up was sustainable. “I know that we are closer to an end here because this is like the fireworks,” Mr. [Fadel] Gheit said. “When you see the bigger noise and the biggest glare, then you better hit the exits because it’s going to be over soon.”

The NYT article makes no mention of the Oil Movements report, let alone peak oil. I continue to be impressed with the Journal's coverage and disappointed with that of the Times.

"well below the October equivalents."

Interesting description. As I have said many times, the more I look at the net export math, the scarier it gets. Based on the HL models, all of the top five net exporters are more than 50% depleted, with rapidly rising domestic consumption.

I think you are right on net exports, but for the wrong reasons. Im pretty convinced HL doesnt work on countries with constrained production, like SA. I also think the 'rapidly rising domestic consumption' reflects more energy use by the oil and gas sector, which is a net energy story, as opposed to any wealth or growth effect. Also, the Hotelling theory is/will be starting to finally work, where exporters will begin to maximize rents by producing less than (and possibly much less than) full out because the 'concept' of finite limits has reached the general consensus. Finally, an offshoot of Hotelling is the understanding of a true energy theory of value, that trading energy for dollars may not be in the best interests of exporting countries.

In sum, exports will indeed be lower going forward because of:

1)more energy needed to procure the harder to find energy in export land (declining net energy)
2)Hotelling behaviour due to recognition of scarcity
3)A recognition that energy/real goods are better store of value than paper money.

Interesting that HL could be measuring #1, but no way it predicted #2 and #3, because those would only happen when the world peaked, not a nation, or region.


Can you provide a source for a concise explanation of the energy theory of value? At one level, I think it is similar to the labor theory of value (

I do believe that the labor theory of value is basically discredited. The value of an item is what someone is willing to pay for it, not the value of the inputs. And it is very easy to leverage labor through technology, design, etc.. An Ipod may have $1 worth of labor input but sell for $200.

Initially, I though the same about the energy theory of value. The Ipod again may not contain more than a few dollars worth of energy.

However, I am starting to reconsider. Energy is unique and immutable. As energy prices go up, a huge portion of value appears not to be leveraged. Meaning it is essentially a passthrough of energy to the consumer.

I am starting to think that the energy theory of value applies to a substantial portion of GDP components.

I am wondering if inflation couldn't be divided into to components, similar to, but more evolved then core and non-core.

At first I thought we could have "resource exposed" and "non-resource exposed" CPI. However in many ways, energy is the core resource and does not currently have a substitute.

At this point, i am still mulling the whole thing over and could benefit from a good understanding of the energy theory of value and whether it has every been applied along these lines.


Its 3 am and Im working on something so I cant get too precise, so I will just cut and past a paragraph from a recent paper I wrote:

"There is a rich history over many decades of the concept of an energy theory of value, dating back to Howard Scott and the Technocrats who stated that “A dollar may be worth –in buying power – so much today and more or less tomorrow, but a unit of heat is the same in 1900, 1929,1933 or 2000”.(Berndt 1983) In the 1970s, Senator Mark Hatfield argued that “Energy is the currency around which we should be basing our economic forecasts, not money supply…”. His efforts resulted in passing of the now defunct Public Law 93.577 which stipulated that all prospective energy supply technologies considered for commercial application must be assessed and evaluated in terms of their ‘potential for production of net energy”.(Spreng 1988) And in a still broader sense, ecological analysts have long stated that money does not properly account for externalities. Ecologist Howard Odum stated “Money is indadequate as a measure of value, since much of the valuable work upon which the biosphere depends is done by ecological systems, atmospheric systems, and geologic systems.” This “work” Professor Odum alluded to, requires net energy. (Odum 1994)"

The Berndt paper of 1983 probably gives a good introduction

Thanks for that. I'll google around. I did find this bit on Odum and Emergy.

This framework attempts to give additional factors to the measurement of value other than monetary cost and consumer's willingness to pay.

This link was posted on theoildrum some time ago:

It has a section on Energy theory of value.

Im pretty convinced HL doesnt work on countries with constrained production, like SA

However, the 2006 and 2007 data points on the Saudi HL plot are falling back along the slope of the line that Khebab showed in our Texas/Lower 48 article (using 1991 to 2005 data to calculate the slope).

Basically, if we look at the 1991 to 2007 data inclusive, there are three outliers, the three years that corresponded to a rapid increase in production, as Saudi Arabia, IMO, went to virtually 100% of capacity (2003, 2004, 2005).

So the question is where do they go from here. I predict that they will more or less follow the predicted slope downward. Time will tell.

Beware whenever you see the word "jitters" or the phrase "shrug off" in any business story.

pardojust went through $91 on nymex

What is pardojust?

Some examples of market forces at work...

Oil prices near all time highs (adjusted for inflation):

1) Fuel-efficient compact car sales up sharply:

2) Major auto makers developing plug-in hybrids and reviving the idea of pure electric cars.

3) Urban centers experiencing booms in relatively energy-efficient in-town condos / apartments, reducing the need to commute for many miles in traffic.

Despite all that, oil commands a far lower share of GDP now than it did in 1980 (because we are collectively much richer now, even adjusting for inflation.) Just imagine the changes possible should oil start to take a seriously large bite out of people's pay checks?

Despite all that, oil commands a far lower share of GDP now than it did in 1980 (because we are collectively much richer now, even adjusting for inflation.) Just imagine the changes possible should oil start to take a seriously large bite out of people's pay checks?

unemployment, foreclosures, bread lines...

Market crashes are generally caused by contractions in the supply of money. Really it's an argument for a monetary system other than fractional reserve banking.

Yes, but that would take the incredible power to create money and its interest-bearing revenue, all out of thin air, away from banking corporations. This would remove another scheme to transfer wealth from the bottom up to the top.

We couldn't have that, now could we [/snark].

It would take an ENORMOUS increase in price during a relatively short time period for anything along those lines to occur. Oil prices have quadrupled over the last few years, yet the impact has been muted. As long as the price increase is steady and not seismic, people and the economy will be able to adjust.

We all need to remember that there is a lagging effect to these adjustments, which can take years. We are in fact seeing evidence that this adjustment is occurring over the last year or two. The economy is still growing, but oil production (and hence consumption) has remained flat. That means that efficiency is increasing at the same rate as economic growth.

Hi Ener Ji

re: "That means that efficiency is increasing at the same rate as economic growth."

What about debt in all its various forms? Do you think it enters into the picture?

We might classify debt as "efficiency" in some way, perhaps as the most efficient way to maintain a current trajectory (for any given example). Still, this would only appear to postpone the problem, so perhaps trying to figure how debt enters into the growth picture might be useful. (Assuming a growth picture.)

Despite all that, oil commands a far lower share of GDP now than it did in 1980

In other words, far more economic activity depends on each barrel of oil. Is this good news or bad news? Or am I just restating the point you made?

"In other words, far more economic activity depends on each barrel of oil. Is this good news or bad news? Or am I just restating the point you made?"

Most insightful comment of the day, if I may say so.

What I'm trying to say Plucky is that we are spending less on oil and refined oil products now than we did in 1980, relative to how rich we are. To take a contrived (and completely made up) example:

If I made $100,000 in 1980 and spent $1,000 that year on oil products, I spent 1% of my total income. In 2007, due to inflation I will make a lot more and I will spend a lot more on oil products. However, because I've received raises over the years that outpace inflation, I now spend less than 1% of my total income on oil-based products.

Again, a completely contrived example but on average (across the US economy) that statement holds true.

Now, is that good news or bad news? That's a more complicated question. Generally, because we are collectively richer it means that we will tolerate higher prices for longer. In the early 1980's oil consumption fell pretty substantially as a result of the twin oil shocks. In order to get the same level of oil consumption decrease now will require prices to go much higher than they have so far.

Despite all that, oil commands a far lower share of GDP now than it did in 1980 (because we are collectively much richer now, even adjusting for inflation.) Just imagine the changes possible should oil start to take a seriously large bite out of people's pay checks?

Actually, I like to turn this around and say that one of the reasons that oil prices can go this high is because oil commands a much smaller share of GDP and has largely moved out of the industrial sector and become a consumer product.

Obviously, the smaller the portion of a person's spending goes to energy, the smaller the impact of high prices will be.

If oil prices go up in isolation, then people can cut back on luxury oil use and it will become an even smaller portion of spending. If instead, oil price increaes lead to increases in the price of other elements of consumer spending, it is much harder.

So it would seem that the economy is probably

1) much MORE tolerant to high oil prices than it once was


2) much LESS tolerant to oil unavailability than it once was

That seems fair, the more essential, the more it's worth.

However, in a peak environment, doesn't that suggest rapid price escalation in a shortage, prices running very high before demand-destruction becomes significant, followed by sudden and extensive collapse when either (a) prices hit a level that significant demand destruction does occur, or (b) the quantity of oil available decreases regardless of price.

Jaymax (cornucomer-doomopian)


Interesting comment, however I think it might be a bit of a stretch to assert that the economy is less tolerant to oil shortages. In fact, the US (and other large countries) have created large petroleum reserves to buffer against supply disruptions.

As for your second comment, let me first say that I don't like the term 'demand destruction.' An economist would say 'demand reduction.' It's a subtle but important distinction. Demand is never truly 'destroyed' the same way a tangible good can be destroyed. If someone takes a sledge hammer to a TV, that TV will be destroyed. It will never again be capable of serving its original function. On the other hand, while high prices will reduce demand, if prices go back down then demand will come right back. Demand is never truly 'destroyed.'

The thing to remember about oil demand is that it is extremely insensitive to price in the very short term. That implies that in situations like the one we find ourselves in now, oil can have a tremendous run (quadrupling in a few short years) as the global economy grows and spare capacity shrinks. However, over the longer term, people start to adjust and there is a catch-up effect. We are seeing this now with a growing economy but flat consumption.

Demand can be destroyed. In the '70s, high fuel costs led to concerted effort to increase efficiency. People insulated their houses: this "destroyed" demand for fuel. The homeowner no longer had any need or desire for more fuel than needed to heat that house.

In general, capital expenditures can permanently reduce demand. Build a bridge, the demand for ferry services goes to zero. Build a ground-loop cooling/heating system, the demand for fuel goes down permanently.

It's not so much that "people start to adjust", (change their actions) but that they change things around them so that they no longer need an expensive resource.

The point is JWhitland, demand is never destroyed permanently. If fuel prices stay high, then people continue to insulate their houses. However, should fuel prices drop very low, when people move or build new houses they will stop spending money on all that insulation and begin consuming more fuel. Price acts as a continuous lever to modulate demand. That's why it's more appropriate to say demand 'reduction' rather than 'destruction.'

In light of the moves taken against Iran today by the Bush Administration, it might be worthwhile to re-visit the 30-minute video interview with Petrodollar Warfare author William R. Clark, recorded October 24, 2006, at Scripps College in Claremont, California, in which he raises the specter of a move by Iran (and others) to move their oil-generated currency reserves out of dollars and into euros or a global basket of currencies, as well as using these alternative approaches for denominating their reserves and for selling their rapidly-depleting petroleum stocks, possibly leading to dire consequences for the U.S. dollar and the fragile U.S. and world economies.

Watch the program at: or

Marc Strassman
Etopia News Channel and
The Strassman Report

This is straight from Wikipedia's article on the Iranian Oil Bourse:

Although opening an oil bourse has so far been unsuccessful, Iran has had success in asking its petroleum customers to pay in non-dollar currencies. As of October 3, 2007, Iran currently receives non-dollar currencies for 85% of its oil exports with euros composing 65% and yen 20%. Iran is currently planning on moving the remaining 15% of dollar denominated oil exports to other currencies such as the United Arab Emirates dirham.

The idea that oil is paid for in dollars seems to be an urban legend. Oil is priced in dollars, but can be settled in any currency agreed on between the two parties involved. I have asked many times for any evidence that the EU pays Russia, Iran or KSA for oil in dollars and none has ever been produced.

Of course Iran has has success asking for payment in non-US currencies. Nobody really cares what currency they pay in besides the small premium for conversion if they hold dollars. Again, I suspect that the EU always paided Iran for oil is Euro, the UK in Pounds, etc.

I would guess that now that Iran is afraid to hold dollars doe to sanctions, they offer a slight discount to India and China to cover transaction costs from dollars to Euro or Yen since it is more expensive for them to do the conversion themselves. I would bet that in 2003 Iran received 35-40% of payment in dollars which they have reduced to 15% by getting Chinese and Indians to convert, rather than converting themselves.

None of this has any bearing on the dollar, which is crashing for a set of very good reasons not related to the symbol that is printed in front of the price of oil.

This subject has been debated here before, and I'm sure the debate will go on for ages. I personally just don't know enough to make an informed judgment, but I'm still willing to hear both sides.

I have read William Clark's book, which made sense to me, but I have also read Ron Patterson's objections that sound quite reasonable. I suppose I could say that I am left baffled and really hope you guys who know more about this stuff could find some common ground rather than tell each other "you're wrong, no, you're wrong!".

What people seem to agree on is that the USD is crashing, but whether pricing of oil has anything to do with it, that remains shrouded in mystery for somebody like me.

One side is wrong. The use of the dollar as the medium for oil transactions either underpins its role as a global currency or it doesn't. The entire argument seems to depend on whether the US dollar is a price or a medium of transaction.

I have asked many times for any evidence that it is a medium of transaction. There doesn't seem to be any theoretical reason for why the EU would pay Russia in dollars for oil and no evidence has been produced to indicate that this occurs. If evidence can be produced, it would prove that I am wrong.

The US dollar is crashing and looks likely to continue. Eric Blair's comment and link below show the reason why.

Countries holding US dollars as a reserve currency are what underpins its value. They hold the dollar for a number of reasons. One is that the US dollar asset base is huge and fairly open. It has in the past been able to absorb massive infusions of investment and has a solid track record of decent returns.

This has broken down over the last few years as poor financial management by the US government and individuals have undermined confidence in its long term value. The Euro market is growing and is now able to absorb more inflows. I don't think any private investor has been buying US treasuries because they think they are a good investment. Investments in treasuries appear to come from entities covering exposures (insurance companies that may have to pay out in dollars later) and entities that are manipulating their exchange rates versus the US.

I suspect that this second case is what will either support the dollar at some point, or force a negotiated solution. If China 9or others) moves money from US assets to Euro assets, three things happen: 1) the dollar falls, 2) the Euro strengthens, 3) the Yuan appreciates versus the dollar and depreciated versus the Euro.

So while the fault is with the US, the pain (or a large part of it) will be in Euro. Euro is going to react by either buying US dollar assets or forcing China to let the Yuan appreciate. I suspect the first has already started. But over time, the US and Europe combined have plenty of power to force China to revalue. Investors (and speculators) know this and are piling into China to take advantage. This only makes it harder for China to keep the Yuan down and creates a vicious cycle.

I bet we will see some kind of currency controls by China, protectionism by the US and EU, demands from China for better access to non-paper US assets, demands from US and Euro investors for better access to Chinese assets, all followed 9after much smaoke and bluster) by negotiations.

The U.S. uses 25 barrels per head per year, compared to 12 in Western Europe, two in China and one in India. Of these 25, about nine are produced domestically and 16 imported.

That 25 is likely to drop and probably not voluntarily. At the moment the coercive mechanism is a weak dollar. This is creating a dollar spiral, as a rising dollar oil price increases the U.S. trade deficit, which in turn drops the dollar further.

That should work, via high U.S. interest rates and a massive recession. This would re-base the U.S. economy so that it runs a trade surplus on non-oil to balance its deficit in oil and create the overall balance required for a stable dollar. At present, amazingly, it runs a non-oil trade deficit.

Remnimbi appreciation quicker than its current 3-5% per year merely reinforces this dynamic. The U.S. should be careful what it wishes for.

After the failure of the Iraq invasion to increase Iraqi oil production and drop the oil price, the U.S. may now try to prop up the dollar by using protectionism to reduce its non-oil trade deficit, all so that it can continue at 25 barrels.

This would not work. At $100, the oil deficit would be about $500 billion. Protectionism is always a tit-for-tat game, and is by itself highly unlikely to reduce the non-oil deficit (currently about $400 billion) at all, let alone faster than the rise in the oil deficit.

This doesn't mean that it won't try, however, so Jack may be right. The negotiations he mentions would fundamentally be about how much oil the U.S. uses. Having tried military and economic violence, and failed, the U.S. would have no cards left to play.

I broadly agree with you. However, I do think that the US is in a stronger position than you imply. I am not saying a strong position, but I do think the country has some cards to play and I am not referring to the military.

China has been heavily dependant on exports and the US consumer for its economic growth. At some point this may no longer be true and the Chinese (and other non-US) consumers may step up and take over. I don't think we are there yet.

The Chinese economy is very powerful, but it is also developing and hence more exposed to risks. How would China weather a downturn? No one knows and the Chinese leadership does not want to find out.

The US may well experience a "massive recession". It may get off easier. The US consumer may bounce back, or this may be the end of the era of "mortgaging the future to fill their living rooms with junk" (Financial Times).

In any case, I think it is simplistic to think that if a crash happens, the pain could be isolated in the US.

The US has been lazy and undisciplined to let itself run up huge deficits and run down savings to almost nothing. However, China has also taken the easy way out by pumping out exports and piling up savings. The country has an inability to support its growth needs on the local economy and can not utilize its savings domestically (partially for exchange rate reasons).

China's textile exporters employ millions, operate at margins near 3% and are export oriented. They won't do very well when 20% of their customer base drops like flies. If China let their currency appreciate just a few percent, that alone would sink industries.

Similarly, Europe is not going to let China keep their currency weak while the dollar plunges. Currency strength is a relative game and if the dollar and Yuan stay weak, something has to be strong. Guess what it is.

I don't think protectionism is a good tactic. But you can only play the cards you have. Sure it won't help the US, but it will make China blink.

It may be pitiful to see that the only tactic the US has at this point is to take everyone down with it, but that would be small consolation to hundreds of millions of poor angry Chinese unemployed.

So, I think everyone has incentives to sit down and try to work things out. I do expect it will end up in a huge transfer of wealth out of the US, but it has really already happened.

While you are obviously right in pointing out the role that US oil gluttony plays in this whole mess, it does not yet seem to have become a part of the broader dialogue. I do hope that changes. But, I have a funny feeling that Americans aren’t going to be too happy cutting back on oil just because a bunch of foreigners tell them to. It might be easier to do an about face on climate change and say that is the reason for a thumping big new gas tax.

I don’t know how it will all end, but expect it will be fairly soon.

I expect we will look back at this as something on the level of other post WWII recessions or a global economic/currency crisis. I don't think we are heading for a depression level event. But I think the future is a tricky actor and the range of outcomes is broad in nature and distribution.

Great first post from you 25each. Keep'em coming.

Its more than just oil transactions that are changing. There was an article in Foreign Affairsindicating the Bush administration was badly abusing the trust of the world by frequent seizures under questionable circumstances. There are alternatives to the dollar and those using them prior to July were doing so mostly due to having been driven there.

If the United States has to lose its status as the provider of the currency used in oil transactions for the madness of the Bush regime to draw to a close lets get on with it ...

If the United States has to lose its status as the provider of the currency used in oil transactions for the madness of the Bush regime to draw to a close lets get on with it ...

The US dollar is not the currency used in oil transactions. It is the currency oil is priced in. Transactions are done in any form acceptable to both parties. See my other comments. I do not think Russia sells oil to Europe in dollars. Why would they?

The US dollar faces a lot of threats, but playing a smaller role in oil transactions is not one of them.

I wish someone would clear the misconceptions in this area. Currencies and commodities are obviously not my area of expertise, but I would like to know the basics so I can follow discussions and not make obviously silly statements :-)

Unfortunately, it is not that easy. I have been arguing with the Iran Oil Bourse proponents for a long time and am convinced that I am right. However, I have also been arguing with the gold bugs and am starting to think they may have some very important insights. I'm even coming around on the energy theory of value.

All I would say, is participate in the discussion and in general don't think one side is right and the other wrong. In just about every discussion we have here the two opposing sides frame the issue and the right answer, where there is one, lies somewhere between.

The problem with all of this stuff is that there often is no right answer, especially when it come to trying to predict the future. We are just a bunch of stupid humans and reality is way over our heads.

We are just a bunch of stupid humans and reality is way over our heads.

I've started a scrap book for just these kind of sayings (with attribution of course).

I tend to agree with you, Jack, on the dollar-denominated oil issue. One key point that supports this position (that it doesn't matter what currency oil is denominated in) is the direction of the cause and effect of the dollar's drop.

The folks who think the denomination-currency does matter hold that if a critical mass of countries start denominating oil in other currencies, then the dollar will drop sharply.

What I maintain that we are seeing is the dollar dropping sharply, then countries lose confidence in the dollar and, since the dollar is becoming less and less the international exchange currency, they begin to denominate their oil in other currencies, primarily the Euro.

According to Bloomberg (and yes, they're trying to figure it all out too...)

"For three decades, the correlation between two of the world's most important prices was strongly positive, with oil and the dollar rising and falling in tandem.

Petroleum is bought and sold in dollars. That meant that as oil prices climbed, so did the global demand for dollars. The appetite for dollars increased further during recurrent oil shocks, as rising risk-aversion prompted investors to seek safety in U.S. Treasury securities. The U.S. currency was also buoyed by oil exporters' propensity to both invest their export proceeds in dollar-denominated securities; and when they spent the funds on goods, they usually bought American.

Since early 2002, however, the correlation between oil and the dollar has been negative. When oil rises, the U.S. currency falls."
[As I read this piece, the message is that there's way more US dollars out there than anyone wants to (have to) hold... hence the appeal of the Iranian Oil Bourse, which would presumably follow Iran's recent demands to be paid in Euros and Yen]

Regarding China's purchases of Iran's oil: "The Nippon Oil chairman, Fumiaki Watari, said last week. "We are doing the transactions in dollars." "

Seems pretty clear.

Edited out due to redundancy.

Having been reading this site for over a year this is no real surprise. We all knew it was going to happen, maybe not exactly when but we knew it was going to happen. It's a little frustrating for me having very little money and not knowing how to profit from this. I only see things getting worse but I just don't have any capital to buy options or futures plus I don't have any idea how I would go about it even if I had the money.

I've taken Westtexas' advice and paid off all of my debts, moved to the within walking distance of the subway and sold my car but I only have a couple of thousand dollars savings and can save maybe 3-400 dollars a month from my paycheck. What can I do to lesson the financial impact from peak oil? I know I need to do something but I just don't know what.


If you have been reading for over a year, then you should know that the answer to your question is one that all seek.

This video is of someone that knew commitment, and had a very different philosophy from others.

"be water my friend"

Prisoner X

JKD (concepts lineage)) Student/instructor,.. too.

The dollar is no longer the world's reserve currency. This is the statement you heard twice in one day if you were checking out the news on Bloomberg over the past 24 hours.

I agree with this and expect it can go on as long as the EU is willing to let the Euro appreciate and their economies bear the brunt of the US Chinese codependence (see my other comments in this thread. I just don't think that will be very long.

I think today may make the point in time in which the US dollar has permanently lost its position as global currency, but I don't think that means the Euro takes over.

There is no global currency and the US and Euro will vie for the role.

If you accept that the Euro will become the reserve currency, that means that enormous amounts money will move into it. That will lead to massive Euro appreciation and dollar depreciation. So the first movers will be the biggest gainers, as their holdings will appreciate. So everyone will want to be a first mover.

I don't think thuis adjustment can take place smoothly and I don't think the US is the only one that will be hurt. I don't even think it is clear that the US will be worst hurt.

As I have noted above, once the big players (US, EU, China, Oil exporters) see that this is inevitable, and once they see how much pain it will cause them all, they will sit down at a table and make a deal.

Heating-oil price shock sets in

"People are panicking. They're calling every other day, every day," said Adams, owner of Adams Petroleum in Emsworth, a family business that's been delivering heating oil for nearly 75 years.

"They ask me, 'What should we do?' I tell them, 'My crystal ball is cloudy, I don't know,'" Adams said.


"Heating oil is expensive. It's already at a near-record price and it's not even cold yet," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "Prices have been going up each year but this year's prices could really shock people."


The Energy Information Administration projects that for this winter heating season, which began Oct. 1 and runs through March 31, Northeast retail heating oil prices will be about 40 cents a gallon higher than one year ago, averaging around $2.89 a gallon.


The general populous does not deal with such issues until they are whacking them up-side their head with a large stick.

I saw the writing on the wall when I discovered TOD several years ago. I have 4 acres of hardwoods that will find its way into my Woodstock Soapstone Cat stove over the coming years. I still supplement that supply with downed trees in the neighborhood from Nor'Easters and Tropical Storms.

Anyone looking for wood burning advice may want to check out

And Ace, your comments nearly a year ago that the 4th quarter was shaping up to be "interesting" was spot on. I did make some adjustments based on your call. Thanks.

Last fall, we took out our 32-year-old oil furnace/central AC and put in a geothermal heat pump. I thank web sites such as The Oil Drum, for warning and educating the public about what is coming, which the MSM is most certainly not doing.

From the Yahoo story:

Geopolitical events influenced early trading, with crude rising after Lebanese troops fired on Israeli warplanes. A conflict between Israel and Lebanon wouldn't itself have much impact on oil supplies, but traders worry that any hostilities in the Middle East would eventually draw in big oil producers such as Saudi Arabia and Iran.

Is this really a plausible explanation for yesterday's run-up?

I can see the Iranian and Turkey/Iraq issues weighing on the market. But this Isreali issue seems more like a pretext for higher prices. When isn't there something happening in that region that could potentially blow up the entire Middle East.

From Bloomberg: Nymex Crude Future $91.70 02:23 am

Looking alot like $93 before $79 right about now.

It might be worth reporting the price in terms of grams/ounces of gold.

It removes the effect of the printing of dollars/euros/yen/yuan.

It is always worth looking at the prices of things in gold, although it doesn't offer a picture that is any clearer than other measures. Gold is certainly not a proxy for a universal valuation clear of inflation.

To my mind the best approach is to look at the price in term of trade weighted basket of currencies. If the point is to compare across time, then apply a deflator. If your argument is that inflation is higher than the official CPI your could adjust upwards. If the argument is that gold is better proxy for inflation, your deflator could be drawn from gold.

But there is nothing wrong with reporting or or other prices in gold terms.

The problem with gold is that it is experiencing it's own peak-gold driven inflation in value.

Perhaps against silver, or some multiple-precious-metals index, would provide some context also.

Jaymax (cornucomer-doomopian)

"peak-gold driven inflation in value"

Why do you say this?

"You can never solve a problem on the level on which it was created."
Albert Einstein

"Gold is certainly not a proxy for a universal valuation clear of inflation."

No, nothing's perfect but it's supply is outwith the control of any one agency and generally restricted.

The Euro money supply is increasing at approx 12% per annum. GB Pound supply, 15%. Dollars... no real idea since they stopped publishing various figures.

CNN's Ali Belshi trotted out the old "Oil should be at $60" this morning. The extra $30 is political worries and speculation.

The funny thing was the anchors didn't believe him. They kind of rolled their eyes, and he tried to explain that the reason oil would be $60 through 2020 was the high prices would force us to stop being so dependent on it. One of the anchors replied, "Is anyone buying that?"

For them the strain of uttering those two words (peak oil) is like wating for the really large poop to drop!

However i think the headlines should be reading something like this:

"geopolitical tension created to mask peak oil"

Should be an easy sell considering the commitment of traders levels recently (100k+ noncommercial length)

(Austin, Texas) The Texas Railroad Commission, at their monthly meeting, confirmed their 35 year policy of building reserve production capacity by reducing production at an average 4% annual rate. Commissioners assured reporters that when market conditions warranted, Texas could and would increase its production back to its 1972 level of 3.5 mbpd.

Makes as much sense as the Saudi stuff.

Exactly! I wonder that given the transparency of the Texas Railroad Commission, if it could be used as an open model to understand the closed Saudis. You have made that point that Texas and the US lower 48 as the previous swing producer can be a model for the KSA as the current swing producer. So perhaps the behavior and pronouncements of the Texas Railroad Commission post-peak, are a model for what KSA is doing and saying now.

Satire Alert--my RRC pronouncement was fictional, although I frequently quote the Texas State Geologist, who talked, for real, about the possiblity of Texas matching its peak production.

For some reason, I thought the Yuan was pegged to the dollar. Did this change?

I believe it is a 'partial peg' at this point. The Chinese are letting the Remnimbi rise against the dollar very slowly (I forget the percentage). To me this seems a sensible policy, rather than wrenching the markets with a complete de-pegging.

I think this policy was started almost a year ago (too lazy to look it up).

I've posted this comment also to Alan Drake's thread. I thought it might also go here since the oil price rise depends also from the fact that the unit of measure used (the US dollar) is shrinking.

I've just posted a shorter term utopic/dystopic essay to my brand new blog.

Basically I show that a loose monetary policy from the Fed can bring about a short term scenario for the US that looks exactly like the doom kind of scenarios forecasted after PO, independently from how long away the physical global Hubbert's Peak may be. And that is because that scenario is "Peak Oil now" for the US only, not because of the peaking and subsequent decline of world oil production, but because of the peaking and hard decline of the US' purchasing power for oil (and everything else), brought about by the loss of value of its currency.

An excerpt:

The two paths to rebalancing.

The bottom line is that the US current account WILL eventually be balanced, but, depending on the US Federal Reserve's chosen monetary path, it will happen in either of two ways, which could be envisaged as follows:

A) The Fed follows a tight monetary policy focused on food and energy inflation and the US government adopts a sound fiscal policy, sharply curtailing its military spending and starting an orderly retreat of the troops in Iraq and Afghanistan. The housing market implodes and unemployment rises. Most "structured investment vehicles" and "conduits" fall as banks cut their credit lines to them, honoring their status as "off-balance sheet" entities. The illegal immigration problem solves by itself as millions of former construction workers return to their home countries. The recession causes a substantial drop in non-essential imports (mainly from China) and in the trade deficit. The dollar manages to remain one of the main world trade and reserve currencies.

B) The Fed relaxes its monetary policy as necessary to try to avoid a US recession. Countries with current-account surpluses allow their currencies to appreciate against the dollar - first their central banks stop buying dollars and then, as the dollar loses more and more value, they start dumping them. There is a race to get rid of the dollar whereby its value plummets against those currencies (Paul Krugman's "Wile E. Coyote moment"). Producers of oil and other commodities start pricing them in their own currencies, and consequently their prices shoot up in dollars. As a result, both imported goods (including oil) and US-produced goods that can readily be exported (including grains and most food items) become much more expensive to US consumers, who have to sharply cut their consumption thereof. All imports drop sharply and the trade deficit switches to surplus. Subsidies to farm products are terminated, and there might even be taxes and quotas imposed on agricultural exports to try to moderate the rise in their domestic prices.

The Fed becomes the buyer of last resort for all new issues of US government debt. The massive inflation arising from debt monetization reduces the real burden of both public and private US debts, but feeds a further abandonment of the dollar as international reserve currency and a further plunge in its value. Developing countries indebted in dollars party big time.

In reprisal to oil exporters not accepting dollars and demanding to be paid in their own currencies, the US mandates that US food exports cannot be paid in dollars and can only occur within a "food for oil" framework, whereby a country will be able to buy US food only for the value of the oil and natural gas it has sold to the US during the previous year. Such a de facto repudiation of the dollar puts the last nail on the coffin of its international status. Canada, not needing US food, cuts all exports of oil and natural gas to the US. Out of oil and natural gas scarcity, electricity prices skyrocket. Cities heavily relying on air conditioning and far-fetched supplies like Las Vegas become forsaken. As the rise in gasoline prices makes commuting progressively more expensive, the price of suburban houses falls and their construction stops altogether.

Unable to procure supplies for its network of military bases around the world, the US decides to dismantle it (the network, i.e.) The withdrawal of US troops from Iraq and Afghanistan starts as gradual but turns into a rush out of popular pressure after the TV shows images of soldiers lacking all kinds of supplies. In the US, food and fuel price rises trigger a wave of riots and looting. Martial law is enacted and troops just arrived from abroad are posted to gasoline stations and supermarkets to keep order.

Peak Oilers must have immediately noticed that scenario B looks exactly like the doom kind of scenarios forecasted after PO. And that is because scenario B is "Peak Oil now" for the US only, not because of the peaking and subsequent decline of world oil production, but because of the peaking and hard decline of the US' purchasing power for oil (and everything else), brought about by the loss of value of its currency.

If the US wants to avoid scenario B and retain at least part of its monetary most advantageous position, it needs to do some serious shock and awe. Not of military power, but of monetary and fiscal soundness.