Holding Daniel Yergin and CERA Accountable
Posted by Prof. Goose on January 10, 2008 - 11:15am
This is a guest post by Glenn Morton, a geophysicist in the oil industry. For Kerr-McGee Oil and Gas Corp., Glenn served as Geophysical Mgr Gulf of Mexico, Geophysical Mgr for the North Sea, Dir. of Technology and as Exploration Director of China. Currently he is an independent consulting geophysicist, and he is known here at TOD affectionately as seismobob.
This post started when I heard Daniel Yergin, the CERA Energy Analyst interviewed by Larry Kudlow on Sept. 14, 2007 on CNBC. Yergin claimed that the high price of oil was not supported by the fundamentals. My jaw fell to the floor. Last year (2006), the price of oil deserved to plummet by 20% (which it did). The amount of oil in storage tanks was very high. But this year, week on week, the oil in storage has dropped, meaning that the fundamentals do support a higher price than last year. The chart is below; note that in 2007 (red curve) the US storage numbers are way way down from what they were in 2006 and we haven't even had a hurricane.
After the interview, Larry Kudlow said something to the effect that Yergin was the authority on oil and he would believe what he said. Over the past week, I have emailed Larry Kudlow's show twice about this silly claim, but, haven't received any response. I decided to look at CERA and Yergin's claims over the past few years and see if their prognosticative powers were as bad as I suspected.
As a note of confession, I must tell the readers that in 2003 when I was Director of Technology for a large independent oil company, I had a discussion with the VP of marketing for my company. I asked him why on earth we paid for CERA's research when their stuff was constantly wrong. He said he knew that they were wrong but that we always wanted to listen to alternative views. With that I agree, but in the press, CERA is constantly proclaimed to be a 'highly respected' research firm. There may be less respect than is proclaimed. I do agree with my friend, the former VP of marketing, that one should always listen to alternative viewpoints.
Respect is earned. That is what I always told my children. By that standard, CERA does not have my respect. Their predictions have been too wrong too often to win my respect. As a personal note, in 2004, I invested in some energy mutual funds. If I had believed CERA and Daniel Yergin's predictions, that would have been an incredibly stupid thing to do. Since 2002 at almost every opportunity, Yergin and CERA have proclaimed that the oil prices were about to fall. If I had believed them, I would have sold out early and often. As a convinced Hubbert Peaker, I am convinced of the opposite.
The picture below is of three energy mutual funds compared with the Dow Jones Industrials. I own two of them and invested in them because I didn't believe the utter rubbish that Yergin and cronies were putting out.
The Dow is the orange curve. Since 2004 it has gone up by 35%. The other curves are energy mutual funds. The large drops in the prices of the mutual funds at the end of 2006 are dividends. Mutual funds, when they give dividends drop in value. But, if the dividend is reinvested, as I did, then one can take the price history after the dividend and lift it up to the top of the drop. This would mean that the green curve should have a total return of an additional 30%, and the red curve an additional 15%. This means that energy mutual funds have gone up 70% to 120 percent while the Dow Jones Industrials has only gone up 35%. And according to my calculations, allowing the dividends to be reinvested, the total return is over 200%. That gets an oil investment over the past 2 years into serious money territory.
Yergin's predictions, if followed, would have cost someone the opportunity to make a fortune. One of my sons decided to invest in energy mutual funds in January 2007. He is a happy camper. I hope he doesn't ever believe Yergin's or CERA's predictions. Looking at those energy mutual funds (don't ask me which they are, I don't give stock advice, nor am I a qualified broker. Don't blame me for your bad investments), one gets the feeling that there must be a serious reason they are going up. There is: it is called scarcity.
The price of oil has increased similarly. The price of oil has more than doubled, from $34 in January of 2004 to over $81 in Sept. 2007; that is more than a 100% increase. Here is the chart of oil price over that time period.
Yergin, and CERA believe that peak oil is garbage. They said as much.
"Peak Oil theory is garbage as far as we're concerned", said Robert W. Esser, a geologist by training and CERA's senior consultant/director of global oil and gas resources, according to Business Week online national correspondent Mark Morrison (Sept 7). http://energybulletin.net/20418.html
One of the reasons they give for rejecting peak oil is this:
"Peakists' projections of the date a peak would be reached continue to come and go, the most recent targeted around Thanksgiving Day 2005, give or take a few weeks." http://www.cera.com/aspx/cda/public1/news/pressReleases/pressReleaseDetails.aspx?CID=8444
In other words, past predictions have been wrong, therefore peak oil is wrong. What abysmal logic. But, it is interesting to me that the present peak in black crude oil production was May, 2005, and the current peak in world liquids production is July, 2006. See http://home.entouch.net/dmd/oilpeakispast.htm
That aside, let us hold CERA to their standards, if past predictions are wrong, then present predictions are wrong and see how they live up to their own standard.
We are going to plot CERA's and Yergin's statements on top of the oil price curve. A Google search of news archives brought forth the following snippets, which can be garnered free from the search. I have simply copied the search results. The source is first, the price and owner of the report is second followed by the date. Beneath it is the quote, which I put in quotations. The search results are put in italics to differentiate it from what I have to say afterwards.
February 2002
Technology may help combat volatile oil prices, study suggests....
$6.95 - Oil and Gas Investor - AccessMyLibrary.com - Feb 1, 2002
"oil prices are projected to average $20 a barrel in 2002, compared with approximately $26 in 2001, CERA president Joseph Stanislaw said."
What was the reality? Well in 2001, according to the BP Statistical World Review of Energy, the price of WTI averaged $25.93. CERA predicted $20, but BP says the actual number was $26.16--totally in the wrong direction. The price went UP, not down as CERA said.
February 2003
US commercial oil stocks reach low
Subscription - Financial Times - Feb 20, 2003
"Cambridge Energy research Associates (Cera), the Boston-based consulting group, expects world oil prices to drop after any war to the low to mid $20 range."
The reality was that the average price in 2003 was $31.07 and the price never did fall into the low $20's range after the Iraq war.
February 2004
As Demand Rises, Oil Firms Focus on Finding New Reserves, Expanding...
$6.95 - Dallas Morning News - AccessMyLibrary.com - Feb 11, 2004
"Oil prices are expected to remain in the upper $20 to low $30 per barrel range through 2005, CERA Analysts said Tuesday. "
The reality was that the price ended up at $65 at the end of 2005. Wrong again.
June 2005
Putting a cap on oil supply worries.
Subscription - Dallas Morning News - HighBeam Research - Jun 22, 2005
"The growth in oil supplies could force prices well below $40 a barrel as early as 2007, The CERA report said."
This is a full paragraph report on the same claim
"In
a June report, CERA said it believed that between now and 2010 there will be a
substantial increase in worldwide oil production capacity, providing a supply
cushion of 6 million to 7.5 million barrels per day that could cause oil prices
to "slip well below $40 a barrel as 2007-08 nears."
Peter Enav,
"Uncertain Saudi Supplies Hold Key to China's Growing Thirst for Oil,"
Pittsburgh's Post-Gazette, http://www.post-gazette.com/pg/05236/558766.stm
This year, started at oil in the mid $50s but as everyone knows, we are now at $80/bbl. Cera's perfect record continues.
It was this prediction, which caused Jeff Brown to declare "Daniel Yergin Day," when, contrary to Yergin's prediction of $38/bbl, the price reached twice that value in little more than a year! http://graphoilogy.blogspot.com/2006/07/daniel-yergin-day-july-13-2006.html
2006
As near as I can tell, CERA and Yergin took 2006 off and didn't predict future prices. Indeed, the few comments made in 2006 seemed to indicate that Yergin and CERA were beginning to get the idea that the fundamentals of supply and demand were favorable for higher prices. Yergin was quoted as saying:
"The world oil market is in the grip of a slow-motion supply shock, in which a $70 to $75 barrel price reflects an aggregate disruption of over 2 million barrels a day," Daniel Yergin, the chairman of Cambridge Energy Research Associates, said in remarks this week at a Washington energy conference.
http://www.signonsandiego.com/uniontrib/20060427/news_1b27oilecon.html
But, it appears that he was right, but for the wrong reasons. On July 15, 2006 he ascribed the rise in price to geopolitical tensions:
CRUDE
TOPS $78 PER BARREL ON M-EAST, NIGERIA SUPPLY WORRIES
Subscription - All Africa - HighBeam Research - Jul 15, 2006
"the oil price has become a register of geopolitical tensions and fears," said Daniel Yergin, who heads Cambridge energy Research Associates."
According to this theory, I presume, if Rodney King had his way, and we could all just get along, oil prices would plummet. If this is the true explanation for the rise in oil price over the past 5 years, the world must be becoming more geopolitically tense and fearful.
June 2007
But as we enter 2007, Yergin and CERA are back pounding the drum that oil prices will fall. This is what I heard Yergin imply on Larry Kudlow's program. It reflects what he said in print earlier in the year. In June, 2007, a Yergin interview reported this:
"ISTANBUL,
June 27 (Reuters) - World oil prices will drop to the low $60 range by the
beginning of next year as long as the security premium in the world oil market
does not rise, said Daniel Yergin, chairman of Cambridge Energy Research
Associates."
http://uk.reuters.com/article/oilRpt/idUKL2727647820070627?pageNumber=2
At the time of that prediction, oil was $67.84/bbl. Today, it is hovering at $82. The one thing I know personally. If Yergin and CERA ever predict the price of oil is going through the roof, I will sell all my oil investments. It will be a harbinger of doom for the price of oil.
September 2007
I watched a video from CNBC where Yergin made these points:
- $80 is not supported by the fundamentals unless there is a war with Iran or a hurricane.
- $85 or higher this year
- Next year we will see a build up of supply
We will watch to see if this prediction happens.
For graphical enjoyment, we will show these predictions against the price of oil for the past 5 years.
It would seem to me that CERA's numerous predictions of the fall of the price of oil have been false every time. The chart above speaks volumes about their inability to foresee even the near-term future. Maybe their view of the world energy situation is flawed, leading them to be overly optimistic about the future price of oil.[sarcastic mode on] nah that couldn't be! They are the CNBC oil analysts![sarcastic mode off] Like many in the peak oil community, I use Yergin and CERA as a contra-indicator for how I should invest. So far, it is working quite well.
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Your VP of marketting is on to a very lucrative strategy. Pay to find out what Yergin says and then do the opposite.
I agree. I noted in late June, 2007 that Yergin had sent out a strong "buy signal" for oil, by asserting that oil prices would be back down to $60 in 2008. As I have previously noted, the "Yergin Indicator" suggests that oil prices will trade at about twice Yergin's predicted price within one to two years of his prediction. Do a Google Search for Daniel Yergin and click on "Daniel Yergin Day."
My take on Yergin's role in the Iron Triangle:
Net Oil Exports and the “Iron Triangle” (July, 2007)
http://graphoilogy.blogspot.com/2007/07/net-oil-exports-and-iron-triangl...
As I have also suggested, perhaps we should be using Yergin's predictions as an opportunity to unload highly energy dependent assets on the true believers in the Yerginite Community.
I have always admired Yergin Day and am quite impressed with it. How many Yergins are we now at?
Presently at 2.5 Yergins (one "Yergin" = $38 per barrel)
Its like the joke of the research assistant who sent away a paranormal test subject because they always called a coin toss wrong...
Just because Yergin gets it wrong so often doesn't make him useless. Rather he typifies a particular mindset, a particular view of the world. Understanding what that worldview thinks is useful because it shows you how they will react.
Yergin exemplifies the type of 'analyst' that is always searching for local upsets to explain away price movements. They are invested in a continuing growth model and 'status quo' and turn away from any contrary evidence. When they start to change this mindset we can expect to see a shift in the market - an acceleration in price for one. Keeping tabs on that tendency has value.
Yergin and his ilk are probably why we are already not accelerating past $120 a barrel. We should thank him for that.
Eagles soar but weasels don't get sucked into jet engines
Is it possible CERA is doing just that? Trying to calm things down and prevent a train wreck?
No, I have a friend who tried to submit an article to CERA week talking about peak oil. He got a really nasty reply rejecting the paper. They simply ignore peak oil, which at the very least is a viable position which needs to be discussed, not ignored.
The reverse CERA investment strategy?
I have heard of pump and dump...maybe this should be called slump n dump.
I think you want to say red curve?
Chris
got it...thanks!
http://science.reddit.com/info/653m5/comments/
http://business.reddit.com/info/653me/comments/
http://digg.com/business_finance/Holding_Daniel_Yergin_and_CERA_Accounta...
The first paragraph says that the blue "curve" (line) is 2007. But the legend on the first chart says that blue is 2006. I think that the first paragraph should say red.
got it...thanks!!
People, especially smart and successful people, focus on the patterns that led to their success. Peak Oil, whether its here in full force yet or not, will change the 'rules' by which traditional analysts will view oil markets. I have been writing here for over 2 years on 3 topics that to my knowledge, CERA doesn't address:
1)the difference between actual production and productive capacity. Actual production is what moves the supply side half of the market price equation, and will always be less than productive capacity.
2)the difference between net and gross. The easy oil has largely been found, though we are still pumping it. The new oil costs much more to procure, in both energy and dollar terms. So over time, as depletion rates increase in the 'found oil', this production is being replaced by expensive oil, which takes more of a (consuming) countries oil and gas to devote to its delivery, freeing up much less than 86mbpd than it would have when all the oil was 'easy'. Also, things like ethanol, tar sands and Natural Gas Liquids are being included in the headline oil production numbers of CERA - these have smaller kilojoules per unit than regular oil (NGLs and ethanol 60-70% of oil). It also requires much more energy to create these alternative liquid fuels, energy that has to be drawn from the total pie. So what was worth a million barrels under the 'old rules' doesn't have the same dampening impact on prices, nor productive society under the 'new rules'.
3)Oil optimists neglect human social behaviour. Once the perception of scarcity arises, whether its justified by Peak Oil or something else, peoples behaviour will change to be more consistent with Hotelling theory - where they attempt to maximize rents by 'hoarding', keeping energy in the ground for higher prices in the future etc. Also, many of the exporting nations will need more energy themselves, so less will be available for importers. And finally, energy is finite, dollars are not. We cannot look at a Gaussian distribution of oil and expect that the second half will just look like a mirror image of the first. Energy is worth orders of magnitude more than its dollar price. Conservatively if its 15,000 hours of human labor - thats $350,000 a barrel at $20 an hour. Since the market has always been adequately supplied or had substitutes, crude has traded at the marginal barrel, going up on short term supply disruption news etc, but always falling back. Now there is an underlying recognition growing in the markets of 'systematic bias' as Gail wrote about yesterday, and that cheap oil is the commodity that largely is responsible for this bias. Once this is recognized, and it clearly already has been, geopolitics changes the situation from one of simply quantifying oil resevoir capacity, to something much more complex.
I expect oil prices will go down again, especially if the credit crisis unfolds for the worse, but where they stop will be a 'higher low' in what will be a long term moon shot for this precious resource. (that is until the 15% or so that is not nationalized, will be)
Venezuela's "capacity" to the rescue:
Things just get stranger and stranger with Venezuela. First they do their best to keep other OPEC countries from producing more, then they boast about a production increase when they are apparently 760,000 mbpd off their stated production figures! Is it possible that amount of oil just fell off the shipping lists?
The price of oil isn't necessarily going to go down with the unfolding of the credit crisis if the Plunge Prevention Team succeeds in injecting enough "liquidity" to inflate out of the crisis. Seems pretty hard to me to predict anything, given that as usual, we can only guess at what cards the really powerful players actually have
Then the dollar tanks on forex and global wage arbitration prevents any real increases in wages.
You can't have traditional inflation without wage increases. Sorry no way out of this one.
Also I don't quite understand why people think that the TPTB are going to suddenly take the side of Joe6pack and try and bolster the middle class that have worked 100 years to destroy.
Not to be cruel but the next big boom would be the flow of manufacturing back to the US once salaries take a dive to Chinese levels. This is of course assuming we have enough oil etc to boom.
Most of the money not going to the wealthy would be spent for resources with very little going out as salaries. And of course the focus would be on high priced basic necessities not consumer goods.
Wage arbitrage will continue to force prices down as we can now compete with China. As far as who the actual consumer is well its the line manager and above not the workers so your looking at a 10-100:1 reduction on the size of the consumer pool.
And not surprisingly this is the level of economic activity that could be supported with our dwindling oil supplies. Also look for recycling to become huge under these conditions with cheap labor.
I assure their is a lot more blood to squeeze out of the turnip just I don't think it will happen the way your saying the powerful are not done yet with raping the masses.
Don't forget that shipping costs will also favor localized production. There's also the question of experience; a friend of mine who did contract work for NASA told me that as of the mid-1990s (20 years later) we already forgot the technology used to get us to the Moon. So will we remember all the tricks that we need to manufacture paper clips, or will we need to relearn in addition to learning how to do with less energy?
A rather simple observation in this respect. I have two potato/carrot peelers. One is new (made in China), one is old (made in US). The new one is crap.
Ah, The vitamins are in the peel. I never peel. Maybe it is all for the best.... ;-)
prairiedog -
Ain't that the truth!
My late mother complained that her toaster was junk when it finally gave up the ghost after well over 25 years of hard service. In that same time span I've probably gone through at least four toasters, each one progressively crappier than the last one. Ditto for refrigerators and washing machines.
When I was in high school and college, on weekends I'd sometimes work with my uncle, who was a plumber. We'd often remove pipes from old houses, and I can tell you that it was not uncommon to encounter an original 80-year-old brass sink trap that was heavy enough to run your car over it without deforming it. Today, a sink trap is a chrome-plated piece of paper-thin metal that you can almost crush in your hand like a beer can. They usually last about 6 to 8 years or so in my house before they corrode through.
The problem is that we've gotten conditioned to this sort of impermanence and shodiness and have unconsciously grown to accept it. It's a good reminder that there was a time when you bought an appliance or tool and had the expectation that it would last a real long time.
Of course, back then appliances were more expensive in terms of inflation-adjusted dollars, so I guess there is some compensation. Still, I think it's a trend in the wrong direction.
I've probably gone through at least four toasters, each one progressively crappier than the last one. Ditto for refrigerators and washing machines.
Now I can't help ya much on toast, as I make mine on the gas stove. Nor can I help much on the stove (but Sunfrost is a common brand on the energy conservation circuit.)
But I *CAN* help on the washing machine question.
http://www.staber.com/
You can run 'em off a bicycle frame - for that "I'm a doomer but I'm CLEAN!" look
Here's a tip for anyone w/ a sunfrost. If you add latches (like the kind on ski boots) it will work much better because the seals aren't great. Maybe it would help with normal friges too. I got the idea from the old ones that closed w/ that kind of mechanism.
It's called "planned obsolesance" (?spelling?). In order to keep the economy going things are designed for a limited service life so that customers need to come back for more.
People think I'm overly pessimistic as to the aftermath of peak oil; but 20 years after the factories shut down due to insufficient energy all our water heaters, kitchen appliances, outdoor plastic pails, and other everyday items will no longer be of use. We'll be closer to Stone Age technology than most people will be prepared to deal with.
These thoughts used to cause me feelings of anxiety. Now, it's all become a weird perverted hilarious comedy. I just have to laugh... heck, might as well get some enjoyment out of it.
joule - Right there with ya. About 10 years ago I declared a moratorium on buying cheap Chinese kitchen utensils and never looked back! Give me heavy gauge stainless steel, or nothin'! (Which has turned out to be a good thing in terms of post-peak preparation as well.)
So now I regularly go off on LONG hunts for things that are well made. And in terms of toasters, I found it: the Dualit! They're hand made in Britain with stainless steel components, and made for commercial duty. Should last you a lifetime, and if one ever needs repairing:
Plus it has a number of smart design advantages. Check it out! They're quite expensive at new retail prices (over $300), as anything good is, but you can find sort-of reasonably priced ones (with a few distress marks, or refurbished) on eBay.
You can't have traditional inflation without wage increases, but you can still have a big increase in commodity prices (which is a different thing from traditional inflation).
Oil is not a luxury like furs or fancy cars. It's a wealth-producing asset, even for low-income people. Remember all the TOD articles on how much human labor energy a barrel of oil represents. People will use oil more efficiently, but they will continue to use it, because wise use of it generates wealth.
Also, Bernanke is playing it tight, but not that tight. Didn't you catch his speech today? Bernanke understands, correctly, that he has to keep inflation coming to keep capital in the game.
I don't disagree and thats why I think problems will be bad.
Most people think of this price inflation as a issue for consumers but the bigger issue is it puts a squeeze on manufactures retailers etc etc. This will force them to lower wages to compete.
So the consumer gets squeezed on both sides falling wages and rising prices driven by expensive commodities. This commodity price pressure on business virtually assures that wage increase are not going to happen. Now of course this feeds back to the producer as the consumer ( his employees ) lose purchasing power he will be forced to lower prices to try and retain business. A lot of our business's today have low margin and high volume requirements. In a sense we are hedged to the hilt on large scale manufacturing. Whole swaths of business become unprofitable below certain volume levels. Generally the easiest way to deal with this is to close factories and aggressively downsize the business. Thus demand destruction is simply the name for Depression driven by resource depletion.
Also note that this process makes it painfully clear they we have never had a true fiat currency the real currency of the world has always been oil. Central banks can change the peg of a monetary unit to a barrel of oil but what really happened as we left the gold standard was we moved to a oil standard.
I think this is why a lot of people try to prove that the dollar and other currencies are not tied directly to oil and resulting industrial production because as with gold the owners of the gold mines rule the world. And this is why its impossible to inflate our currencies we can't since we don't own the real money that drives the world.
If indeed globalization is steadily driving us towards a 'perfect market' regarding labor, then the logical extension is that eventually there will develop a universal global wage scale. Thus, if you're a working person, it won't matter whether you're in Gary, Indiana or Bangledesh, you will have the same wage status and won't have much say in the matter. And once that condition is in place, we will then have a truely global proletariat .... with all the sinister connotations that very loaded word evokes.
It's not going to happen, because something big and unpleasant will happen first. Where, when, and who ... I don't know, but something is going to give way before we reach that point. I think this is a major blind spot in the thinking of the powers that be.
Well you needs a universal currency also for this to happen. Central Banks can and will manipulate their currencies vs other currencies. This has the effect of keeping wages or better buying power in certain countries low.
This is why inflows of petrodollars ( Not US dollars ) are vital to china and for that matter the worst offender Japan and even worse OPEC. The breaking of the peg of oil to the dollar recently is probably the biggest shift on the planet since it will eventually blow up all dollar pegs include the peg of the US dollar to the petrodollar.
As long as the US had wealth to drain from the middle class this game worked. Now that the US middle class has finally run out of money and has been shown to not have the military might it claimed a new game is afoot.
I do think that if it can be done globalization will continue but now I think the goal is to break the control of governments over money so that the global companies can control wages not governments. Thus real wage arbitrage with money accumulating with the global companies not Central Banks. They want to take the trillions of dollars that have accumulated in China, Japan in the ME from the robbing of the worker/consumer.
With oil now scarce the current fiat currencies are not needed and oil itself like gold in the past can be used directly and wealth.
I don't think that peak oil really changes the game a lot except to unmask it and make it more ruthless since the rich are now eating a slowly shrinking pie.
Think about it anyone who can do simple math can figure out that China and India would never be able to create a western style living standard for a two billion people. This was always going to fail way to many resources are depleting. So I don't think the real game has changed with peak oil all thats happened is we have named one of the critical declining resources for the second half of the great globalization game. We all knew in our hearts it would end this way.
Memmel, I cannot thank you enough. In some of the comments in some other key posts, everybody’s been so horrible about inflation. It’s this, it’s that, it’s not this or that, and here, at last, we know what it is. Memmel, how do you do it? Damn, I think I got ahead of myself here. Sorry Memmel. What I meant to say was at last we know there’s traditional inflation and all those other, evil and nasty probably, kinds of inflation. That’s okay Memmel, nobody else has even gotten us this close. I know you can point the way. I know you can bring light to the darkness. I just know it.
Memmel, I know with such surety it’s rude to ask without offering to pay, but there we are, just how do I know traditional inflation from all the other nasty and brutish kinds? Not to mention all the impostors and impersonators and, well, you get the picture? I mean, I could just wake up one sunny Sunday, pop down to the newsagents to pick up the Times on Sunday and The Observer (what can I say, I’m a tortured soul) and, bam, be confronted with at least two versions of inflation. Talking about the very same subject! How do I recognise traditional inflation? What if some non-traditional inflation is masquerading as traditional inflation (just to get in my good books or maybe, even, to deceive me!), how do I recognise it for what it is and banish it to deflation (or wherever non-traditional inflation should be banished to)?
I know I shouldn’t ask, but I’m at a loss. And there’s nobody else, well, maybe a good few actually, that can waffle as long about something in a single comment, let alone a thread, as you can. So I know if I ask you that after some arbitrarily high number of comments at some point you may actually say something that will help me to really, and I mean really, identify what “traditional” inflation is. That way, when I see it, I’ll be able to say to it, get thee to the deflation (or hell, or wherever). Or something like that. Can inflation be made to spin its head round on its shoulders and puke green all over the local padre?
Please help me. I feel like that poor witch that was so brutally treated at Dorothy’s hands with that bucket full of traditional inflation (I know, it was water, but with Hollywood’s writers out on strike I’m stuck doing Leno’s DIY material) and just find myself melting, melting, melting.
Sorry to be “doing a Memmel” as it were, but sometimes waffle’s are just better than pancakes.
So, to bring this bollocks to an end, what is “traditional” inflation. Is it different from “inflation.” Does this imply there are forms of non-traditional inflation. If so, what does non-traditional inflation look like and what does it imply. Does this mean there are an infinite number of forms of non-traditional inflation? Does this mean, on balance, non-traditional inflation is more likely to appear than traditional inflation? Are some forms of non-traditional inflation more likely to lead to traditional inflation than others? Can traditional inflation metastasise into non-traditional inflation? If so, what are the precursors? Thanks in advance for your kind consideration.
I know you're being a bit of a troll and that I should let memmel respond or not as he will, but here goes:
Traditional inflation (that is inflation as traditionally defined) is an increase in the supply of money relative to a standard measure. In a gold backed currency that would be an increase in the supply of money relative to the owned quantity of gold. In a fiat currency it is something like an increase in the supply of money relative to the GDP. This increase in the money supply can (and should) cause prices to rise, but the price rise is a result of inflation. Not all price increases are a result of inflation.
This is at odds with inflation as commonly reported which considers any price increase to be inflation (or an indication of inflation).
If the price of oil goes up for fundamental market reasons (lack of supply, increase in demand, etc.) then that is not traditional inflation. If the price of oil goes up because the Federal Reserve is issuing 0% short-term loans that is inflation.
Our current reporting of inflation numbers based on the cost of a basket of goods works acceptable most of the time but falls apart drastically if there is a fundamental change in the market such as that which would be caused by resource depletion.
--
JimFive
Troll or no, the notion that “traditional” inflation requires rising wages demands clarification.
For the record, at least you have provided a reasonable definition of inflation with which to work. Thanks for that.
There's only one thing missing, the assertion that "traditional" inflation requires rising wages. Are rising wages an essential component of “traditional” inflation? In essence, are they a traditional component of “traditional” inflation?
Possibly he was referring to the constant comments on TOD that we are "going back to the 70s". The 70s exhibited strong wage rate growth in the USA, partially offsetting the negative effects of inflation for the median worker. Those days are gone, which means that money dropped from helicopters by Bernanke will be reluctant to find its way into the pocket of the average homeowner. A high historical rate of inflation combined with falling wages would be considered "non-traditional" in the USA, it is more in the South American/Mexican tradition.
I think I would disagree with that assertion as well. I would think that wages rising due to inflation is a common result, just as price rises are. I wouldn't think that either result is REQUIRED by inflation.
--
JimFive
Correct its not required and thus my term traditional inflation ala 1970's US as other mentioned.
I'd say that in general in inflationary environments wages tend to increase it takes a pretty strong
force to prevent it. Today global wage arbitrage is such a force. I don't know the in and outs
of the various South American monetary schemes and collapses but the US is so much larger that I'm not
sure how relevant the situations are. However the outcome which is a large class of desperately poor people
which both foment revolution and provide a ready source of cheap labor is probably the same.
I tend to not like the concept that prices get tied to inflation since this screws up the real problem
which is a mismatch between the economy and the supply of money. In a perfect world the right amount
of money should be created to match the economy and better business practices should always lower
the price of a good or service while increases in quality or ability should initially get a premium.
In short in a perfect world prices should be trending downwards and the goods and services should
get better and better and the value of a dollar only increases in time.
Interest as we know it probably would not exist but would be tied directly to a real equity stake
in the borrower. So lets say I borrow money to buy a house the loan would be for say 70% of the value
of the house. They would give me 70% of the current value but the loan amount itself is based on the
homes current value in time. If it goes down in value then the amount owed decreases. A transfer of
ownership back to the creditor could easily triggered based on any number of covenants.
I think that such and approach would ensure that creditors would work hard to ensure that properties
do not decrease in value and borrowers that allowed the property to decay would be shunned.
Also you would have a lot of pressure to ensure that anything purchased with borrowed money was built to last.
Also all resources are renewable etc etc. Utopia or as close as we could get.
I bring this up because I find it helpful to think about whats happening now vs this perfect world scenario.
1970's inflation which I call traditional differs quite differently from this perfect world vs whats happening
today. This is not clear if you try to directly compare today's events with past events.
The importance of global wage arbitrage which actually would be true in a perfect world becomes clear.
In our imperfect world with a gamed financial system the introduction of global wage arbitrage is
a hydrogen bomb. Couple this with resource depletion and we are in for a ride.
In retrospect we should have solved a lot of other problems before trying to globalize.
Wages monetary system resources etc etc.
Instead we took a powerful tool and misused it to our detriment and probably the worlds.
"We cannot look at a Gaussian distribution of oil and expect that the second half will just look like a mirror image of the first. Energy is worth orders of magnitude more than its dollar price. Conservatively if its 15,000 hours of human labor - thats $350,000 a barrel at $20 an hour."
Arggh! This is even worse than the cup of water comparison. Maybe in the Stone age is the energy in a barrel of oil worth $350,000. Of course, if energy costs as much as its comparative value in human labor, we'll be back in the stone age pretty quick. In any case, if oil costs that much the alternatives would speed along pretty quickly.
Take a look at this:
http://www.energycurrent.com/index.php?id=3&storyid=8040
A 30 million gallon biodiesel plant built this year by an oil drilling company. Now that's what I like to see in recapitalization. Hopefully more traditional oil companies will invest along similar lines. In any case, I don't think biodiesel prices will be anywhere near $9,000 per gallon ;).
Don't forget that this is a presidential election year and there will be pressure applied in the media from die-hard Republicans to talk oil prices down before November. Kudlow is a good buddy of Cheney and no doubt understands his role in this process. Energy pundits like Yergin epitomize what the political right will do to put lipstick on this pig. Unfortunately for them, fundamentals will prevail in the long run and oil prices will continue to rise as demand outstrips supply. It is not nice to fool with mother nature!
Yergin performs a vital function, he reassures oil exporters so they will pump themselves dry. [/sarcasm]
Nice work! I am so tired of economists quoting this nonsense and then ending a conversation. I agree with the comment immediately above this, well said.
I never thought about it that way. That actually has a feeling of truth to it. If the 'goal' is to get the most oil, then places like TOD might be hindering that objective and CERA, even though they are 'wrong', might be 'right' in the eyes of the govt....
some of my skeptical (word used advisedly) friends believe TheOilDrum is an industry shill to create panic and drive up the price!
I guess you can make any story seem reasonable, if you restrict access to data.
You don't have to restrict access to data. Just leave it out of the argument. If anyone brings up the missing information, just imply that is more insightful to omit it. This is done in religious sermons all the time. CERA is just using a common though fallacious technique when preaching to the faithful. EROEI does the same thing. If it is brought up that leaving the price factor out of resource allocation is nonsense, the reply is that it is more inciteful to ignore price and just look at energy use treating all energy as equal. The true believers in CERA'S case are Peak Oil deniers and in the EROEI case are the PEAK OIL believers. The believers respond with amen when they hear what they want to hear.
I prefer PROPI to EROEI.
That looks to me to be an even more problematic and bogus measure.
From the link:
Our ability to harvest energy from wind and solar is not infinite - it is limited by a host of material and environmental factors. And so we still would have issues to do with the "best use" of those resources.
It very much matters.
Hey, you read the post. You'll forgive the hyperbole. My point was only that if they're going to be stupid, there is a better way. Thanks for dropping by Phil.
For a given process that generates fuel, we need a measure of both how much CO2 is released to the atmosphere per btu encapsulated in the resulting fuel (and transporting it), and how much CO2 will be released when the fuel is combusted to get that btu.
Similarly, we need measures of other resources used, like water, land, etc; other environmental impacts; opportunity costs, e.g., food supply lost by using land for biofuels.
This is in addition to the EROEI, which addresses the energy side of the books.
There is no one number that can encapsulate all these impacts. Buy maybe a simple graphic can be developed to communicate all these aspects for fuel generating processes for quick comparisons.
I knew better than to post anything here. You people just pick it to death. That is why nobody will ever take you seriously. Do your pie in the sky musings about zero CO2 and meanwhile, in another thirty years they'll be incinerating trash to make electricity. Oh well, time to do another CO2 study.
Forget your meds?
I knew better than to post anything here. You people just pick it to death.
2 responses and that is your reaction?
Drama queening, a weak argument, or 1 of the 2 nailed a rebuttal - which is is?
Hello it's the internet. You should not expect anything less.
My, what a handsome man made out of straw I see before me!
inciteful? hmmm, it seems that you're the inciter here.
EROEI is fundamentally important. Without considering it, we can pour good oil and money after bad.
Leaving ecological and resource constraints out of the equation, and focussing solely on bogus measures such as money is the root cause of most of our ecological problems in the first place.
Real and ultimate EROEI is important. The problem is new projects and technologies are front loaded to be generally high EROEI. Also, EROEI analysis can be tweaked a hundred different ways. Often it just supports a previously held point of view or assumption.
I think the important point of EROI is the direction its taking. Like a vector regardless of the scalar value of EROI for oil right now its fairly easy to convince yourself that its decreasing. In fact its pretty much not in doubt. Given that the direction of oils EROI is down and that the absolute amount of oil produced each year is declining. Its not hard to consider that not only is the EROI declining but its decline is accelerating as oil gets more expensive ( I'm assuming that higher cost for energy is equivalent to less energy) from the lower levels of overall production. This means in time that the overall energy return will decrease for oil.
Ethanol also seems dubious its competitive with food production etc etc.
The nice thing about EROI is that solar window fission and eventually fusion look pretty sensible with EROI arguments and a fission->fusion transition conjecture in say 100 years is doable.
I think we we really worked hard we could have commercial fusion in less than 30 years.
And innovative fission reactors already exist and novel designs are quite possible.
Thus EROI and more important the direction vector of EROI really helps to focus arguments on approaches that could run a high tech civilization for thousands of years.
>> some of my skeptical (word used advisedly) friends believe TheOilDrum is an industry shill to create panic and drive up the price!
If this were true, then the majors wouldn't be overstating their reserves (re. Shell and BP). All they would have to do to create panic is report their actual, lower, reserve numbers.
Or better what I think they have.
If I'm right then you will be thankful for a long time that the oil companies have lied their ass off about peak oil. I hope they can keep the dance going as long as possible.
The problem is if I'm right or more correctly M King Hubberts world URR prediction was right
then no way in hell can we mitigate peak oil. Throw export land in the mix and I have no desire to see the "truth" from the oil industry.
If they can keep everyone hoodwinked for a few more years all the better it gives me more time to prepare.
If you think we can mitigate then its a travesty if you think not only that we can't mitigate but the post peak declines will be steep then let then more power to em. I hope they can run this game till it hits the wall.
Brutal but thats what happens to people that give up their critical thinking skills.
My broker called me today to tell me what he heard on CNBC. He said that some lady discounted the idea that we would have $150/bbl oil because every time people start talking about the oil price going through the ceiling, the next day some country announces the biggest oil field ever found. Apparently she said this happened all the time.
My broker, kidding me, told me that my strategy must be flawed because CNBC said so. Then he asked, (he already knew) "When was the biggest field in the world found?" 1948 I replied. and we laughed.
Perhaps we can approach this from another angle by considering what the impact would be of Yergin proclaiming that prices look set to rise substantially in the next year?
Regards, Nick.
Thanks for documenting this. I'm always amazed when I see Yergin on CNBC. As most of you probably know he won a Pulitzer for his book on the history of Oil, which really is a world history of the last 150 years.
How can he be so wrong all the time? I saved a recording of a recent Squawk Box appearance where Joe Kernan asked him point blank why we aren't seeing more oil produced with the price so high. Which by Yergin's theory should have already happened.
Yergin squirmed through a response that added new excuses for being wrong. "Increased costs for projects and a lack of personnel to man them is causing delays in bringing new oil to market."
Ummm, yeah. It's getting harder to produce oil. Go figure. If anyone cares I'll pull up the recording and transcribe excatly what he said.
It's truly a shame in our country that our pundits, whose value ostensibly is their analytical abilities, are never penalized for being wrong time and time again. Take the case of William Kristol, recently installed at the NYTimes.
http://glenngreenwald.blogspot.com/2007/01/bill-kristol-pundit-superstar...
He is but one example of how wrong pundits continue to get air time and continue to be sought out. People who were right about the war, like General Wesley Clark, who in 2002 predicted many of the problems (the long time-frame, the insurgency, etc.) get excoriated and rarely are given airtime.
Nobody likes a Cassandra.
I'd like to see this one if you still have it.
I have it on my Tivo. I specifically saved the episode of Squawk because of Yergin. I'm reading his book (The Prize) and he clearly can be considered an expert on the oil industry. That's what amazes me when I hear him on CNBC spouting his "there is no reason for these high prices" spin.
I'll pull up his segment this weekend and transcribe it.
One other thing. As they say on Wall st., there always has to be someone on the other side of a trade. Anyone listening to Yergin is definitely on the opposite side of my trades. Since this post listed unnamed mutual funds I'll list my favorite which was up a measley 55% last year. FSESX. I'm piling into it as fast as I can so I suppose Yergin is doing me a service by providing people on the other side of the trade at these low levels.
Thanks Danny
I read The Prize a year ago. Within the last week I took it out to see what he had to say about peak oil. It's not listed in the index at all. Hubbert's not listed either.
Filed under "Cambridge Energy Research Associates (CERA)" (opens new window).
http://www.inspiringgreenleadership.com/blog/aangel/oil-drum-best-index
Don't take this as a defense of CERA (it's not, I think they are doing a horrible disservice to humanity), however, it seems to me that, if all the projects come online in time, 2008 just may see oil go down because of a large projected boost in supply. Things are far less rosy in later years, though.
http://en.wikipedia.org/wiki/Oil_megaprojects
-Andre'
P.S. My speech on peak oil to Sun and eBay employees went well yesterday but the mood was definitely somber afterward. Text and slides available here: www.savinggreenbygoinggreen.com/downloads/SunSpeechWithSmallPics.pdf (9.2MB pdf)
I think that list of projects counts the maximum projected output for each project as if it will occur on the first day of operation. Some will take years to get to the projected maximum output. If they ever do.
It does seem that 2008 has a lot of projects scheduled to come online but I think they will not have the impact on overall production that some assume they will.
Hmmm....good point.
Maybe the next step for the Taskforce is to do the equivalent of a cash flow analysis....spread the oil out over time.
-Andre'
Excellent presentation. I particularly liked the zen like design simplicity of your charts.
Are you familiar with http://green-broadband.blogspot.com/.
(ps I've given several talks on peak oil & climate change to civic, business and engineering organizations and developers.
Thanks for the compliment.
I didn't know of that blog...it's got some great posts on it. Is it yours?
-Andre'
P.S. It's full of interesting pieces, like this one: "New undersea cable to Iceland to enable zero carbon data centres"
http://green-broadband.blogspot.com/2007/12/new-undersea-cable-to-icelan...
No, I wasn't familiar with it. Thanks for introducing me to gree-broadband.blogspot.com. My first article on peak oil was written in 1999 and published in 2000. Back then, when I spoke of it in the exploration departments, people thought I was wacked out. Today, I don't find hardly anyone inside an exploration department who thinks we don't have a serious problem on our hands
Why am I not more famous in this area? Because I chose a low key out of the way place to publish because I chose to make money on the problem so I could buy a farm for my family to live on. I have just bought the farm, as my youngest son loves to say. Last fall The Oildrum was kind enough to publish my article on agriculture and peak oil. The world is going to have lots of trouble finding enough food when oil gets scarce. 35% of the world's energy comes from oil.
Greetings, first post here but I've been lurking for probably close to a year now.
I wish I had the ability to buy a farm somewhere. It's one of those things where I'm too young to have been able to take advantage of the various economic booms to be in a position where I can have (more) financial freedom.
Leaves me kind of in a pickle - how do I best provide for my family's future? Even if I pay off my house, install solar hot water and electricity, rainwater collection, etc, how do I know these tech crutches won't get confiscated/stollen when TSHTF? How do these crutches help with the food dilema in an urban setting?
Sometimes hard not to get overwhelmed with a feeling of helplessness.
-Fab
ftillier wrote:
"Leaves me kind of in a pickle - how do I best provide for my family's future? Even if I pay off my house, install solar hot water and electricity, rainwater collection, etc, how do I know these tech crutches won't get confiscated/stollen when TSHTF? How do these crutches help with the food dilema in an urban setting?
Sometimes hard not to get overwhelmed with a feeling of helplessness."
There are no guarentees in life. Of course guys with bigger guns can steal what you work so hard for. But if one doesn't try, then the only one you can blame is yourself.
But that's exactly the point. All projects will not come in on time. If you read the article in today's Drumbeat about the CIBC analysis of future supplies (http://www.earthtimes.org/articles/show/news_press_release,253905.shtml) you'll see that they found project delays are now the norm, not the exception. If you read the Economist article about de Margerie of Total, you'll find de Margerie's estimate that the decline rate has been running 5-6 million barrels per day, per year. And the two articles discuss how the decline rate is increasing, because of the nature of new wells brought online. (Deepwater declines faster, for example.)
Even the Wikipedia megaprojects article for which you provided a link discusses how the number of barrels listed as coming online are meant to reflect peak flow, not flow in 2008.
Also, demand is not falling off at a higher rate as the economy has been slowing--it's still falling off at the same old rate of 1% of demand reduction per roughly 15% of price increase. And that's in the U.S. In places like China and the oil-producing nations, demand continues to go up. Haven't you been following the Drumbeat articles on India's new $2500 car, and all the masses of new cars that China is putting on the road? And now China is freezing fuel prices.
The price of oil will always wobble around a bit while it's in a trading range, as it is now, and it will usually bounce off significant new highs, but it's not about to fall in 2008. My estimate is that we get another price increase of 60-90% this year, and that's taking into account a significant recession in the U.S.
One thing to think about is the introduction of the Tata, a $2500 car for the peoples of India. While it gets 54 miles per gallon, it will do wonders for increasing the demand for oil. Lets see, a billion Indians and a quarter of them by this tiny car and use 5 gallons per week. If I did the math right, there isn't enough oil.
They're selling the Tata in the wrong place. They need to market it in the US. At 2500 and 54 mpg, I'd buy one.
As for your analysis, I tend to agree. I think we'll begin to see the real effect of Chinese and Indian oil subsidies this year. The China one is a bit weird. They seem to be socking it to the refiners. So I wonder what incentive they have to continue producing oil products, if not for a profit?
In any case, the subsidized developing economies are really going to do a number on the OECD. It's a calculated manipulation that has so far worked in favor of China and India. I'm very curious to see what will happen this year as the lasting harm to the US and other economies becomes more apparent. Will OECD countries respond with their own price fixing? Or will they just abandon their consumers as the developing world eats up their economic growth via opportunistic demand destruction. With reserves falling and shortages starting to break out, at what point does this start to get nasty?
Robert Marston wrote:
"The China one is a bit weird. They seem to be socking it to the refiners. So I wonder what incentive they have to continue producing oil products, if not for a profit?"
Just for clarity and openness, I lived in China for a year and a half, speak Mandarin, and have met many deputy ministerial level officials. The incentive China has is political stability. Governments do not do things for economic reasons in the same way that a business would do them.
I did, indeed, read it and had a question. Anyone have any idea if that 5-6 million comes out of the crude total of 72mb/d or the all liquids total of 86mb/d? The depletion rate for those two calculations is, I believe, 6.4% to 7.5%.
Scary. If my spreadsheet is correct, and it probably isn't what with me knowing diddly squat about math or spreadsheets, at 6.4% that's a loss of around 50mb/d by 2020... and another 25mb/d needed if demand were to climb at 1.7%...
Ain't this fun?
Cheers...
BTW: if anyone has a clue how to embed a spreadhseet-type function with a GUI sort of interface so people can play with depletion and demand numbers on my blog site... let me know.
I just saw that TATA (india) is now selling the cheapest car in the world USD 2500 http://www.wheels24.co.za/Wheels24/News/Industry_News/0,,1369-1372-2095_... and is planning to "sell X millions" to the developing world markets!!! and I saw some interviews with local people and of course all the low income households in India can't wait to get the chance to buy one.
Seems that the oil stocks will just fall off a cliff if/when all these cars start taking over from motorcycles in the target markets.
Obviously Mr Tata has not heard of peak oil just yet.
Just what the world needs, even more access to something the world clearly does not need -- more automobiles. And where are the roads to drive them all?
"Obviously Mr Tata has not heard of peak oil just yet." It depends on the timeframe in which they plan to sell them in. If they plan to sell this model for just 10 years (say), and a "production plateau or better" happens for 10 years, then it's irrelevant to Tata whether oil production declines more starkly after that. After they've made the sale of the car, they don't make any more money from the customer. (This is assuming that, like in the west, any purchase loans are farmed out to another company that suffers any defaulting on car payments.) Presumably though adding this number of cars would presumably require opening many more petrol stations (and garages, etc). The petrol station owners have a huge amount to lose if petrol doesn't stay "locally affordable" for a much longer time-frame, so it'll be interesting to see if oil majors start up petrol stations in these areas.
In general, people selling consumables are better weather-vanes than people selling gadgets.
[I'm wouldn't say "production plateau or better" is what will happen, but even if you've heard about peak oil it's a reasonable position to hold.]
I think we're all aware of how dismal CERA's track record is; thanks for digging up the references, posting the predictions and comparing them with reality.
Back to the subject of your post, though: How, precisely, do we hold Yergin and CERA accountable? Letters to the editor? Direct communication with influential journalists? Perhaps the TOD Inner Braintrust should start releasing your own Press Releases to the media debunking the CERA myths?
Hi, Cyclelicious.
That's actually a very good idea. PR teams and political campaign teams know the value of having a counterpoint ready for every message that gets out there that doesn't portray their own message accurately.
Just like the rest of us, I think journalists who write about these things don't want to look stupid and I truly believe that the overwhelming majority of them want to be accurate within the confines of whatever system or worldview they are operating within. (Oblique reference to Noam Chomsky here.) So even if they go ahead and publish a quote by Yergin, after receiving direct correspondence showing CERA's inaccuracies they will likely be gun shy the next time. In the least they will make sure there is a counter quote to hedge their bets the next time.
The next task force should be the Peak Oil Media Awareness Task Force. Line up a bunch of responses with proper, well-referenced data, a group of people who are responsible for responding the moment an inadequate message gets in the media, and then let the emails fly.
The Peak Oil Media Awareness Task Force will need a point person who can provide those counter quotes so that they can answer telephone interviews by journalists on a deadline.
That person should be highly credentialed -- someone with decades of experience in the field.
There are many people who could take this role but I nominate Jeffrey Browne (westexas) if he'll take job. I saw him handle himself very well in that panel he was on (sorry, don't have the link handy).
Cycleiscious, would you be game to prepare the talking points? Your writing is clear, direct and cogent. I think you would do a bang up job given the press release you just wrote. And having met you in person I am sure you would get the numbers correct. Estimated time: maybe 5 hours per week once the initial work is done.
Jeffrey, what do you think? You would do a fabulous job: you keep a cool head and are very articulate. You will have the opportunity to shape the message that gets out there. This job may require perhaps up to 10 hours per week to answers phone calls during busy periods. Some weeks there will be no activity.
I'll help run the team.
-Andre'
------------------------------------
Peak Oil, Climate Change and Business
Free, Bi-Weekly Executive Briefing
www.inspiringgreenleadership.com/peak-oil-climate-change-and-business
I'll also kick in a subscription to www.prleads.com.
-Andre'
...and your name is good too, I'm not attached to mine. I was just thinking and typing quickly and forgot that you had already proposed a name.
Thanks for the kind comments, Andre. I'm just a computer nerd with no real marketing or PR training, so I'm not sure I'm the right guy to write good copy. I threw out that faux press release partly in jest, but I do believe good marketing is required.
Are there any marketing pros here on TOD?
Regarding the "OMA" name, I just whipped that up on the fly. A name suggestive of energy expertise would be good. How about the Clearinghouse for Energy Reporting Accuracy (CERA)? :-)
I don't know how to hold them accountable. Above I told of another idiot CNBC analyst. No one called her out on her stupid claim that we find the biggest field in the world often. It makes one wonder how brainwashed we all are with all this stupidly erroneous information going around.
I emailed Kudlow and company again over Christmas with the same effect. Maybe if others tried.
Maybe we should downgrade the term "analyst" to "guesser?"
Here we have some expert guessing going on at CNBC...
"Well I heard somewhere some economist say something about how when prices go up we always find a giant field. So it must be true. Right?"
And this recently from the expert guessers at CERA...
"Oil production won't peak. Instead we will reach a sort of wavering and undulating plateau."
"What's that? No, a plateau is certainly not like a peak. A plateau is flat. A peak is pointy."
"Constrained supply? Well I don't see how that has anything to do with it. As the price goes up we'll see more supply."
"How is a plateau in supply more supply? Well I didn't say that. I just said it wasn't a peak. Who's asking these questions anyway?"
With regard to the June 2005 citation in the Dallas Morning News, this op-ed piece appeared in the Washington Post in July 2005.
It's Not the End of the Oil Age : Technology and Higher Prices Drive a Supply Buildup
At one point maybe a year ago I saw an analysis of how much of this new 16 mbd capacity had come online. I'd be interested in how this prediction is holding up now. It also seems like he is talking about net capacity after declines have been taken into account, but he doesn't state this in the piece.
I recently bought and started reading The Prize. I'm only a couple chapters in, but so far it is an excellent book. Yergin knows full well about depletion and he chronicles it well for Titusville, for example.
Also, don't forget about a book Yergin co-edited called Energy Future: Report of the Energy Project at the Harvard Business School (PDF book review). Here's a quote from the summary of the review:
I would not trust CERA to forecast how much oil there was in a full quart can.
After reading Why We Can’t Stop $100 Oil at Newsweek, I sent them off a grumpygram.
Basically I said it was beyond the pale that this guy, who's been getting everything wrong (demonstrably, measurably wrong, for years now) should be allowed to basically steal westtexas' concept/realization, from a place where he is routinely held up for criticism, and use it for his own aggrandizement.
Didn't get a reply of course, but hopefully they'll see the article here.
While WT certainly popularized a variation of the concept here on TOD, and Jeff Rubin recently on CNBC, the quantification of exporters using more/demanding more energy was written about in 2002 and published in 2004 by Hallock,et al, "Forecasting the limits to the availability and diversity of global conventional oil supply", that appeared in the peer-reviewed Journal - Energy.
I was planning on 'summarizing' this paper on TOD, but I just won't have the time. So theres a link if someone else wants to.
I always try to note that I am building on prior work by Simmons.
BTW, regarding the excerpt from Newsweek, the writer was not completely clear. I'm not sure if the writer, or Yergin, is noting that three quarters of the production increase stayed in the region.
Hi again, thanks for the link -I've just reread your piece: http://www.inveslogic.com/aggregator_redirect?iid=961692
One thing that is just dawning on me is the asymetry of the upcoming experience. I think a lot of people probably look at the Hubbert Curve and assume that if -"worse come to worse"- we are at or near Peak Oil it simply follows the bell shape lower resulting in life in 2017 being somewhat like 1997 energy wise (not so bad perhaps), 2027 may be like 1987 -OK, bit worse but we where all OK back then no? Etc...
In actual fact not only is the future decline highly asymetric due to the ELM and various other factors discussed here at TOD (EROI, etc) but the impact is going to be far far worse due to our complete dependance on the cheap energy system that has developed. I think this fact has yet to sink in with a lot of people.
It would be interesting for example to try and judge future years from a total energy available per head of population what the comparitive year would be. As an example if we find that the UK has 500mbpd available in 2020 that would be the equivalent of going back to 1965 in just 12 years (I don't have the exact figures just guessing). Of course this would probably also fail to give the overall global picture but I think it could start to dispel any myth of 'the future being somewhat like the past but with iPods...'
I would like to see the critical 'upto 2020' timeframe expanded, as I see the next decade as absolutely the critical period and it would be nice to see the forecasts in a bit more detail. Just a thought.
Best Regards and Luck, Nick Outram.
Note that the ELM, with consumption = 50% of production at peak, would only export about 10% of post-peak production.
Our middle case is that the top five will only show post-2005 net exports of about 100 Gb or so, which--at their 2005 rate of export--they would go through in about 13 years, which is why their net export rate is declining. My guess is that the rest of the net exporters may only export about 150 Gb or so.
So, if we assume that 250 Gb in remaining cumulative net exports is a reasonable guess, we would, at the 2005 rate of export, burn through the remaining net export capacity in about 15 years.
The average yearly decline rate from Fig. 17 is shown as -6.2%. If its a linear decline as it appears to be (difference between exponential decline and exponential consumption of Fig 16. what is the your view of why we are not seeing greater NET decline rates right now? [sorry I seem to be missing something here as my understanding was that you said the decline rates would start slowly and get worse over time, 1 or 2mbpd at first...]
Also is that 15 years from 2005 -i.e. 2020.
Regards, Nick.
A linear decline is a fixed volume, e.g., one mbpd per year. This is an accelerating decline rate, i.e., the decline rate per year increases, although the volume is constant.
For example, start with the ELM, exporting one mbpd at peak, and let's assume that net exports drop at a rate of 100,000 bpd per year, hitting zero in 10 years. The decline rate would increase because the denominator, the prior year's net exports, is declining, will the numerator, 100,000 bpd, is constant. This is a good approximation for what the ELM showed, peak to zero in 9 years.
Based on year to date data, it appears that the top five are going to show back to back net export declines of about one mbpd per year in 2006 and 2007. At this rate, the top five would hit zero net exports around 2029, which is quite close to our middle case estimate of 2031.
In regard to my guesstimate of 250 Gb for remaining total net export capacity, at the 2005 rate we would burn through our remaining net export capacity in 15 years, but this is why total net exports should continue to decline. We don't export, or produce, at maximum capacity and then go to zero.
The other aspect that's going to make it far far worse, is the 'above ground' factors.
While Hubbert might have applied reasonably cleanly to the fairly strictly open competition model that applied within the US at the time, this time around there's going to be all the deliberate reduced energy extraction, energy resource wars, energy resource targeted terrorism etc.
It gets me every time you read someone saying the current situation is not because of the geology situation, but because of new above-ground factors. If it wasn't for the geology, those 'factors' wouldn't exist. If US hadn't peaked in '71 would Shell's overstatement of reserves, Limited refining capacity, Nigerian rebels, or Kurdish skirmishes have ever achieved column inches?
I've think I'm yet to see an MSM interview where someone saying it's 'above-ground' gets challenged as to whether supply constriction or expansion difficulty could perhaps be an underlying factor.
So anyway, not only do we have near total dependence, I'm also expecting a drop off in exports significantly faster even that WT (acknowledging earlier work ;-) predicts, once a significant chunk of the public in remaining oil exporting countries accepts the reality of peak.
I love this too. It's pointing at the symptoms and labeling them as the cause. Like saying 'my runny nose caused my cold.'
Who said that the edge of the plateau looks like a cliff?
Seems like Yergin is talking out of both sides of his mouth. While he won't affirm the concept of Peak Oil itself, he does seem to support a good number of the underpinning arguments.
Glenn, I enjoyed your post, and found it very interesting that the VP of your company knew CERA was wrong.
Now someone should take on Tim Evans of Citigroup (terrible predictions--no wonder that outfit is going broke) and Peter Beutel of Cameron Hanover (another great contra-indicator).
I also enjoyed the article in today's Drumbeat in which Lehman is sweating it out, and saying OPEC should pump more to allow inventories to be replenished. LOL! This is another group of clowns who relentlessly call for the price to fall.
Going back 30 years, I remember my Statistics 101 prof pointing out that it isn't hard for a junior grade analyst to be reasonably close predicting curves that were always increasing; but skill is required, and it is much more valuable, to predict when trends are changing direction.
CERA and Yergin keep on predicting changes in direction for oil price that never come true, and never predicted oil production will fall, which has apparently come true.
Do they have any skill at all?
CERA and Yergin appear to be a sales and marketing company. Not to defend them, but their record is at least as good as the average equity analyst or mutual fund manager. His company is very successful in spite of an inability to predict oil prices or oil supply, so why should he be overly concerned with accuracy?
Just another point: I think it was on TOD the other day that someone pointed out that in 2000 Cramer (that screaming "advisor" on TV) promoted a bundle of stocks, which, if one had followed his advice, would have resulted in the sucker losing 95% of his capital. He would have literally wiped you out. This hasn't hurt his career or money making ability one bit. Both the Amaranth guy and Nick Leeson are back running money borrowed from their cronies at financial institutions. You think they would get a nickle to play with if it wasn't coming from unaware third parties? In the grand scheme of things Yergin is just another guy trying to survive/thrive in the giant sales/BS based USA economy of 2008.
Always a mind game. Should you then short all of Cramer's picks and make a fortune :-), or is it double bluff :-)
Maybe set up some reverse investment funds -- CERA, Cramer... Who's next on the list?
I have seen Cramer on TV. Man what a nut.
"Do they have any skill at all?"
They are in the prediction business. They have been in business for quite some time. They must have some skill --- except if you realize that my first statement might be wrong. They might not be in the accurate price prediction business. But what is the business at which they are succeeding? Some sort of tricky shell game? Maybe oil company management wants predictions of lower prices. That way when prices rise it is evidence of management's astute marketing of the product, For this business, the predicted price must be lower than the current price, but not so much lower as to be entirely unbelievable. --- just a thought.
I thought it was quite funny. I laughed when I saw that last graph.
My Theory on why CERA will never be proven wrong about Peak Oil
It seems to me that many people seem to misunderstand the role that CERA play in the world. I do not believe that they even care remotely about being correct with their forecasts of future supply. I suspect that their entire role is to present optimistic projections to the BAU world. When you perceive this as their purpose then everything they say makes sense. The BAU world wants business-as-usual to continue forever. BAU has, until recently, been operating in a world of sub $30 oil prices. They want to hear, during these tumultuous times of high prices, that those days will be returning soon. Because if they don't, and this rising trend continues, then "death" will be the result for many businesses. And death is number one on the list of things humans don't want to think about/talk about/experience.
CERA don't care about being correct, they simply say what their customers want to hear.
As to why they will never be proven wrong about the nature of peak oil, it seems to me that they cannot go wrong embracing 'above ground factors'. In my opinion, tight supply due to below ground factors (BGF) is starting to constrain the world's oil supply. However, this is amplifying the effect of above ground factors (AGF). Now for Peak Oil to gain recognition as geologic in nature it will have to take place without AGF occurring that reduce supply, because any AGF will receive 100% of the blame.
It appears far more likely that a significant AGF will occur before 2010, reducing world supply, and cause a domino effect that will lead to more AGF further reducing supply. ("Oh, it was that trouble in Nigeria that crippled their supply, and led to a downward spiral of worldwide oil supply problems" for instance.) Thus "peak oil" will be considered as being due to AGF's, and BGF's will be dismissed as even ever having even begun to become a problem, and CERA will win. They will claim that oil supply could have continued rising as per their forecasts, if it hadn't been for those damned AGF's.
A very significant AGF that might happen with really big consequences for oil production is serious treaty restrictions on burning fossil fuel. But, these will only happen when most major governments realize that it is pointless to continue negotiating because oil production is dropping and each government will decide that it might as well accrue some 'Brownie Points' for signing a Good Treaty. Of course they will not check with TOD to see if TOD agrees on why production is falling. They want people to believe that it is because of the Treaty and the statesmanly negotiating that went into producing it. So what situation causes what result?
Also true of just about everybody who reports on business news on Fox...especially Larry Kudlow!
Kudlow isn't on Fox
Glenn, thanks for writing this. Similar reviews of EIA and USGS pronouncements on future price, reserves, and daily production for oil are also valuable when assessing the credibility of "experts" who seem to be consistently wrong, in the same direction. The data is all out there, and some TOD writers have done some work with it. Ron Patterson has also written about it. Note that IEA is finally getting skeptical about USGS pronouncements and intends a new review of how they develop their numbers.
I like your chart with the "prediction arrows" vs. reality. I showed it to my state-level senator (Massachusetts) on Monday as part of a pitch to start a Peak Oil Caucus in this state (other MA residents, please contact me if you're interested).
Re. projects being delayed, note that Skrebowski in his periodic megaprojects updates incorporates a fudge factor to the optimistic industry pronouncements to anticipate some % of them being delayed by X months or years. It's not an exact science of course but he tries to calibrate it using the historical record for that type of projects (Tar Sands vs. Saudi projects, for example). That will be more accurate than simply taking industry schedules at face value with no skepticism.
Another point Skrebowski made to me (I think it was Denver ASPO-USA, 2005) was that his numbers for new production capacity were not all that different from CERA's; what made his bottom-line result (peak by 2010 or 2011) dramatically different from CERA's was depletion rates. Dan Y / CERA think depletion will be offset by all that "new technology", if they think about it at all.
Dick Lawrence
ASPO-USA
dlawrence (at) aspo-usa.com
Dick,
I saw a huge ad for CERA Week today in the Wall Street Journal. Needless to say, Matt Simmons was not on the list of speakers (Alan Greenspan seems to be about the only peak oiler on the agenda). Has anyone from ASPO-USA or the peak oil community been invited to attend the meeting and/or give a talk? Can you crash the party as a regular attendee?
Hello Calorie,
Great find, this CERA Weak-link! TOD and ASPO should ask to become approved sponsors:
http://www2.cera.com/ceraweek2008/sponsorship/0,3431,,00.html
-------------------------------------------
BECOME A SPONSORING PARTNER
We are pleased to invite you to join us as a CERAWEEK sponsoring partner. Sponsors have the opportunity to enhance their profile and position in the energy community through strategic branding, thought leadership, and relationship building.
For more information, please contact Kathleen Doherty, Director, Sponsorship at +1 617 866 5194.
---------------------------------
Sure would be fun to have Simmons, T. Boone Pickens, the TopTODers, and ASPO's topdogs mixing in with this CERA crowd.
On the other hand, if they are refused admittance: the film footage of CERA's security staff hustling these people outside to the curb would be Priceless.
Bob Shaw in Phx,Az Are Humans Smarter than Yeast?
I have been to part of a CERA week. I know a guy who submitted a critical article and got a really nasty note from them. But you can buy a ticket to the thing and attend if you want to.
Dick --
Two questions:
1. How do I join ASPO?
2. How do I help start a Peak Oil Caucus in Virginia?
Best wishes.
I guess you can join here: http://www.aspo-usa.com. If nothing else, you can order DVD sets from ASPO-USA meetings (the ones from last year haven't shipped yet, but ought to come out soonish, I think).
There are a handful of us here in Virginia, but I am not sure how many. I am not sure what a Peak Oil caucus would actually do though - I am not aware of one that already exists. To an extent it is all tied to politics - there is occasional discussion of energy issues at http://www.raisingkaine.com, but this site covers other issues relevant to Virginians, but it is also devoted to electing more Democrats.
Tom Whipple at the Falls Church News-Press often writes about Peak Oil issues:
http://www.fcnp.com/index.php?option=com_content&task=view&id=2358&Itemi...
I believe that Tom's wife, Sen. Mary Margaret Whipple (VA), has effectively already started a PO caucus in VA. Suggest you get in touch with her.
If you divide the Dow values by the Jefferies/Reuters CRB index you'll find that the DOW has actually not been doing to well since 01, as value gained has been eaten up by inflation. The CRB is an inflation index which is a basket of real commodities such as gold, silver, copper, food and energy. We all know the federal inflation numbers do not include food and energy and are therefore understated at the moment and will most likely continue to be. This is based on the belief that food and energy prices will remain fairly constant over time, but us "Peak Oil Activist" know that these fundamentals will not hold true without the availability of cheap energy.
Check out the graphs in this article from April 2007:
http://goldsilver.com/the_dow_is_crashing.php?#OLE_LINK4
It shows the price of the DOW in gold, silver, oil, etc over a ten year period. Very nasty looking...
When I bring up peak oil and the oil drum concerns, Pat O'Connell cites CERA.
Energy is not my areas of expertise.
I don't know who is right or wrong.
But this is sure interesting to watch!
"Fun" may be the wrong word.
Best from all of us.
http://climateprogress.org/2008/01/10/major-advance-in-plug-in-hybrid-de...
The "researchers" at CERA, led by Daniel Yergin, have hindered serious consideration of conservation policies and planning for Peak Oil impacts. According to the research that many of us have done, Peak Oil impacts mean global population decline, which means billions of deaths from starvation, exposure to cold, and social and political violence. One can only guess at the millions of additional deaths that will accrue due to the flawed research of Yergin and his cronies. The fact that Yergin was once a Peak Oiler
http://www.energybulletin.net/36930.html
leads to the conclusion that he's in it for the money and that he values his material prosperity more than humanity.
The words of Colin Campbell (2005) come to mind:
"Throughout history, people have had difficulty in distinguishing reality from illusion. Reality is what happens, whereas illusion is what we would like to happen. Wishful thinking is a well-worn expression. Momentum is still another element: we tend to assume that things keep moving in the same direction.
The world now faces a discontinuity of historic proportions, as nature shows her hand by imposing a new energy reality. There are vested interests on all sides hoping somehow to evade the iron grip of oil depletion, or at least to put it off until after the next election or until they can develop some strategy for their personal or corporate survival. As the moment of truth approaches, so does the heat, the deceptions, the half-truth and the flat out lies."
cjwirth wrote: "Wishful thinking is a well-worn expression. Momentum is still another element: we tend to assume that things keep moving in the same direction."
Shoot, who wants to think of a world without oil. My wife only half believes me. As I said above, I bought a farm. I take possession of it tomorrow and will be there the next couple of days. It is far from big cities and on a dead end dirt road. If anything further needs responding to, I will do it Sunday.
You ought to see if you could put a turbine or two up and some solar panels on that farm. Bergey Wind Turbines is the largest manufacturer of small wind turbines in the world, They cost a bit though. Their located in Norman, OK.
http://www.bergey.com/
For Kerr-McGee Oil and Gas Corp.
http://query.nytimes.com/gst/fullpage.html?res=9B0DEEDB1E31F935A25752C1A...
Asking for Dan Yergin to 'be held responsible' is rather low on the list I would think VS other things for 'people to be held responsible' for.
Kerr-McGee has 'done some bad things' - what have you done to 'hold them responsible'?
Until this moment, I had never heard of this. Secondly, it was in 1987. I was merged into Kerr in 1999 from Oryx Energy. so, the short answer is nothing.
That's all I have to say.
The needed Kudlow disclaimer:
Kudlow has an addiction problem and it comes through in his lunacy.
A shame, really. Over a decade ago The Prize was my first real introduction to the real-world petroleum industry and an eye-opener vis-a-vis how much the world runs on oil. The history was fantastic, and the workings of the business end grounded me, I felt, in solid reality with regard to markets and supply and demand governing the price of oil and (in the US) gasoline. Ever since reading it I have been able to hold my own with those who claim "oil company price gouging" or the equally hysterical "government price manipulation". Popular conspiracy theories for the Happy Motoring American public. The Prize helped me get beyond that.
What do people here think? Was Yergin a solid fellow at one time and subsequently went insane? Did he pimp himself out to the highest bidder? Or maybe he never knew as much as he thought he did in the first place. It's a shame to see someone I once respected revealed for a charlatan lo these many years later.
Maybe TOD should formally offer him / CERA right of reply to this thread?
It'd be the decent thing to do... Not that I expect he'd take up the offer, but that'd say something of itself. Just a thought.
I suspect that at the end of the day, ensuring the best possible future for his gene-set (sometimes called 'greed') pushed him towards the approach that raised the most money. I wonder if he's got a nice farm somewhere quiet also?
--J
CERA would probably charge money for the reply.
It could just be that BAU is in a sense the dominant paridigm. Peak Oil is a new paradigm, and shifts like this are difficult for some people to make as it involves a change in their entire worldview.
It's hard to lie about history. Guessing about the future is just guessing. You can say he should know this or that but Yergin's not even a geologist. In his view, geologists have never had anything interesting to say about the economics of petroleum production in the macroscopic view of things, only the microscopic (field to field) view. I don't think of Yergin as a charlatan but as someone fully vested in his particular world view, right or wrong.
I'll second that.
I think Yergin is sincere in what he says his beliefs are.
We Peak Oilers are heavily invested in the Hubbert's curve concept (although not perhaps in the precision of that specific model). It is such a big factor in our thinking process that we can't see how someone might have an alternate view of reality.
But suppose you could heavily discount in your head the importance of Hubbert's curve. Suppose you can heavily credit the Market model and the Progress-is-Forever model. Then perhaps you can grok how a Yergin thinks.
In fact many an uber-optimists here at TOD think the same way about "history". The human race seems to have this exponentially rising curve of "progress" in its history. You can easily build a model in your head that predicts the "singularity" is just within our grasp. I'm sure Wiley Coyote does that every time before he runs past the cliff's edge. (beep beep :-)
Yergin is a historian. The Prize is an excellent history of the oil industry. But, that doesn't make him an expert on oil production. What he did was parlay his history into a perceived expert.
You have to wonder why experts like Yergin are given such large exposure.
Take Kudlow and his "goldilocks scenario". He's forever optimistic and will be the last person to admit the the US economy is in a recession. He regularly brings on guests who affirm his views.
Maybe Kudlow is deluded. Or maybe he just wants to help avert a financial panic in the US and so tries to keep his viewers believing.
Or maybe there is something less wholesome operating, akin to what one saw during the dot com bust.
If anyone is still reading this post, I Tivo'd an episode of Squawk Box from August 16, 2007. Yergin was on at 7:18 AM along with some guy in Port Arthur Texas. They were discussing Hurricane Dean which was just getting rev'd up and was projected to maybe hit the US Gulf.
Joe Kernan took the opportunity to ask Yergin about the price of oil. I saved the show because I couldn't believe what Yergin was spinning. Here is the transcript:
JK: Why is Oil down today? (It was down $1.91 to $71.42) Does $70 plus per barrel already factor in that there will be a storm or is it just supply + demand?
DY: No. I think that we would see the price go up higher if it was thought that the storm would hit the vast Gulf of Mexico energy complex.
JK: How tight is supply and demand? Have you changed any of your view
on what a fair price for a barrel of crude should be right now?
DY: No. We are still seeing this years price in the low $70's as long as there are no major disruptions and next year we think the price is several dollars lower. Perhaps mid $60's as the supply and demand balance looks different. But right now the question is what is going to happen to the overall economy? What's going to happen to overall oil demand and that's a changing picture.
JK: Dan, big picture, Where is the demand destruction ... where is the increased production because you can sell it for $70 per barrel, where are the normal things that happen when the price of oil quadruples in a short period of time? Why isn't it happening?
(That excellent question gets Dan stammering + stuttering)
DY: Uhhh, it's you know, it's sort of happening in a very slow motion because you're short of people, you're short of equipment, ummm, I was talking to one uhhh, one of the national oil companies who was trying to recruit in Venezuela to get some new people and the people they sent down there actually got arrested for 3 days. That, that's a particularly graphic example of how tight it is in terms of people. So delay is now the name of the game, rising costs, people estimate a new oil field would cost $800 million now will cost a couple billion, it get's postponed. So that's in the system right now. So it's a slow motion response Joe.
That was the end of the interview. According to Yergin 2008 should see $65 oil for the year. Even though according to him Oil projects are being postponed due to high costs and shortages of people + equipment. Forget the economy and how much increased demand there may or may not be. What about depletion? How can "slow motion" new production even keep up with depletion?