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Countdown to $200 oil: International Energy Agency says current prices justified...
Posted by Jerome a Paris on July 2, 2008 - 11:04am in The Oil Drum: Europe
It is oddly fitting that we touched $100 oil on 31 December and got halfway from $100 to $200 oil on 30 June - so we're on track to reach $200 oil by 31 December this year (in case you're wondering: +42% and again +42% from that level = +100% from the initial level). |
It is also fitting that on that same date, the International Energy Agency published one of its gloomiest ever analyses of the oil markets, asserting that oil prices are justified by fundamentals
Opus 9 of the Countdown to $200 oil series.It said: “Like alchemists looking for a way to turn basic elements into gold, everyone wants a simplistic explanation for high prices,” bluntly adding: “Often it is a case of political expediency to find a scapegoat for higher prices rather than undertake serious analysis or perhaps confront difficult decisions.”
I have been told by a reliable source that the IEA has been forbidden by the US administration from updating their absurdly cornucopian oil supply and demand scenarios until the report that comes out late this year (after the election); that report, which will publish the result of a "bottom-up" analysis (ie a summary of all existing oil fields, their production and/or prospects) is expected to show that oil production is unlikely to reach the levels that so many have blithely assumed - notably on the basis of previous optimistic IEA reports. The IEA, which was deeply unhappy about the current lies to was supposed to present and support, has been leaking word of the expected content of that new report for many weeks now, including an increasingly alarmist tone in its official reports, such as today's Medium Term Market Outlook:
“Structural demand growth in developing countries and ongoing supply constraints continue to paint a tight market picture over the medium-term,” the IEA said in its Medium-Term Oil Market Report, released on Tuesday in Madrid.
“Poor supply-side performance since 2004, in the face of strong demand pressures from developing countries, has forced oil prices up sharply to curb demand,” the watchdog added.
Strong demand, disappointing supply. Hmm, where have I read this already?
The IEA said that despite billions of dollars of investment, the challenge of pumping ever more oil out of their aging fields is proving so great that non-Opec countries will in the next five years have to rely on biofuels, such as corn-based ethanol, for 50 per cent of their growth in overall fuels.
The fast decline of fields – especially in the North Sea and Mexico where production is shrinking by more than 20 per cent each year – means that 14.8m of the 16m barrels of new supply from non-Opec countries over the next five years will go to making up for losses from old fields producing less and less each year.
This is one of the most important trends in current oil markets: the depletion of existing fields, and the decline in their production. It's long been discussed in specialised sites like this one but it's been ignored in the "serious" media for too long. and yet, discussions of new fields coming into production cannot paint a correct picture of future production trends if these declines are not deducted to get net production increases.
And the stark truth is that in most of the world, the declines are bigger than the new capacity additions. This is particularly true in "friendly" production zones like the North Sea, Mexico or even Russia, where overall decline rates are dizzying and actually impact global production numbers significantly.
But Opec is also struggling, with project delays impacting its ability to add new capacity. The IEA substantially downgraded its expectations for Opec crude capacity from 2008-2013, cutting earlier forecasts by 1.2m b/d.
The IEA said it believed Saudi Arabia was having bigger problems than the kingdom, the world’s largest exporter, was willing to admit to, despite its national oil company having gone to great lengths last month to reassure energy ministers gathered in Jeddah that, except for Khursaniyah, its capacity editions were running on schedule.
Now the IEA is getting close to heresy territory, noting that Saudi claims about its ability to maintain or increase its production should be met with increasing skepticism.
Of course, none of that is news for readers of this site or even of my Countdown to $200 oil series, but, as we know, we're not Serious People - but the IEA is the ultimate in Seriousness, so this is big news. And I say that quite seriously (pun intended): many governments, and countless businesses, not to mention pundits, use the IEA numbers religiously when preparing scenarios, business plans or pontificating. Changing these underlying numbers will have MAJOR impact on public discourse on energy.
It's maybe not too late yet.
Countdown to $200 oil: International Energy Agency says current prices justified...
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Countdown to $200 oil: International Energy Agency says current prices justified...
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Hi, Jerome.
Can you say more about what you mean by "It's maybe not too late yet?" Any way that I look at it I seem to arrive at the same conclusion, namely that it is too late.
-André
lol--me too, aangel!
Great post, Jerome.
Its been too late for at least 10 years...
Along with their Medium Term Outlook ($$$), the IEA released this presentation:
http://www.iea.org/textbase/speech/2008/eagles_mtomr2008.pdf
On page 23 it says that mature fields in the OECD are declining at greater that 10% per year.
Great catch.
Some points from the presentation:
And finally:
That if any, is a tacit admission from them for peak light crude at the very least for non-Opec.
They must have really balanced on what to graph and what words to use: they had to make an impact and show things are serious, but at the same time not let the cat out of the bag completely.
It'll be interesting to see how the market reacts to the final report later this year.
I only picked one slide to show, which I think is telling
It seem that they are saying that they do not know (or necessarily believe) that non-OPEC supply can re-gain growth again after 2013.
We know what people here at TOD believe, but it is interesting to see IEA flashing the same - even as a possibility.
Truly they are conservative in their communications :)
Hi
I am confused... if as the IEA say 2008-2013 demand growth is 7M bpd total (abt 1.4m bpd annually) and according to the IEA new presentation posted (I don't have access to the actual report) non-opec is 1.2 and OPEC crude + NGL is 2.5+2.1M bpd over the 2008-2013 period, that is extra demand of 7M bpd vs new supply of 5.8m bpd or about 200,000 bpd a year shortfall in supply. Is that correct or am I being an idiot and missing something? Were does the (say) 3.5m bpd depletion come in? Doesn't that then mean a total output growth of 4.9m bpd (1.4 + 3.5) that is needed to meet demand each year and make up for depletion but the total output growth as stated above of 5.8m bpd divided by 5 for the period in question = 1.16m bpd so isn't this a HUGE shortfall. Are my calculations right or am I misunderstanding something???
My reading:
Incremental supply additions from 2008 to 2013:
Non-OPEC crude capacity +1.2 Mb/d
OPEC crude capacity +2.5 Mb/d
OPEC gas liquids output +2.1 Mb/d - output
World biofuels output +0.6 Mb/d (capacity 2.0 Mb/d)
----------------------------------------------------
Total: +6.4 Mb/d (w/ biofuel cap. 7.8 Mb/d)
Against demand growth +7.x Mb/d (+1.4% p.a.)
NB! This is 2.6 Mb/d lower than the estimate a year ago (MTOMR 2007 in 6/2007).
Incremental = on top of the existing production level (that is, already taking into mature field declines)
Summary: if biofuels (read: ethanol) don't come through in spades and/or Iraq doesn't miraculously recover - we are screwed.
Either way, it's going to be really tough, prices are going to be high, unless we hit Asian/worldwide depression, in which case people have other things to worry about.
And that's just the optimistic IEA scenario :)
yes, and the IEA presentation makes the point that some (Asian) refineries are marginally economic as the margin between sour and sweet crude reaches historic highs.
One reason is that lower sulfur in street-side fuels are increasingly mandated in Indonesia, Australia, Vietnam and other Asian-region countries.
The other reason is that most Asian refineries can only handle sweeter crudes. They are captive to a continued supply of sweet crude.
The global significance is that (in 2005, assume not much changed) Asian refineries handle about 25% of total global crude production.
Local Asian sweet crudes lead the world in price. Today, Minas crude, from Indonesia, overtook Tapis, from Malaysia, as the highest ever price for a crude oil ($US148.66).
Smaller Asian refineries that don't own a share of the 'cheap' sweet fields (i.e.less than $US80 a barrel investment/development assumptions,as Rokman says below) will no longer be viable, and may be closed (as at least one refinery in Australia was, about ?2005).
Ultimately, this must squeeze regional refinery capacity. China, which was - until about 2003 - a major gasoline exporter to Asia, can no longer help. Therefore, more distant light crudes have to be found. 'Draw-off' of low sulfur crudes from non-traditional sources support global sweet crude prices, including US prices. The Asian region can no longer supply its own needs. So long as regional governments have the money, Asia will increasingly look to import sweet oil from outside the region.
This may create an upward spiral on prices beyond the Asian region. Only very large demand destruction in Asia (and/or beyond) can collapse it.
We await the end of subsidized petrol in Indonesia, Thailand, Malaysia, Taiwan, India, Philippines and Vietnam.
In effect, we await the very severe decline in these Asian economies. Oh, all right, financial collapse.
China, as someone here observed, has enough US dollars as reserves to subsidise gasoline for many decades, so must be 'stood out'.
The price consquence of all this? Oil companies that both produce and refine their own sweet crude within Asia have the 'whip hand', they have a handsome degree of freedom to expand the profit margin for their products to the limits of tolerance of their market.
Given the inevitable drive-down in oil product prices in a coming Asian economic collapse, who can blame them for making hay while the sun shines?
And if they drive those refineries without 'company owned' supplies of crude into the red, then out the back door, so much the better!
Ironically, they can substantially 'phat up'the wholesale price of gasoline to the street-side retailer, knowing that the gas station owners will be blamed for the price hikes - even when retail margins remains static!
You will notice that oil companies always point to 1. the price of crude, and 2. thin retail margins as proof they aren't price gouging.
They don't mention the refinery profit margin in the middle of upstream + downstream integrated operations!
Cheers,
Lorenzo
Lorenzo,I can't see how you justify saying that China must be "stood out" of what you rightly call the coming financial collapse of some Asian economies.China does have a lot of reserves in foreign currency but the $US part of it is declining in value and seems set to continue in that direction.I'm not so sure that other currencies are too secure either.
In addition the value of Chinese exports is set to decline as the main buyers of their goods enter what seems to be an inevitable depression.
I am not very knowledgeable about these matters.I'm sure somebody has a contrary view.However,I've been around long enough to have upgraded my bullshit detectors to a fairly high level.When I read all these enthusiastic reports about China's miraculous growth presented as the conventional wisdom I tend to step back a bit and try to examine the underlying factors.What I see makes me suspect that China's economy is,at bottom,extremely fragile.
On the specific suject of Jerome's article it would appear that there needs to be some serious efforts,apart from price,to cut demand in the West.What are the odds on rationing?
Call me crazy, but I thought people rationed as prices increased- like use in the U.S. dropping 2.9% compared to last year as prices increased.
update July 3, Minas light is $US153.98. Tapis is also high, at $US153.03.
Lorenzo
Jerome,
Your reliable source who says that the US administration has ordered IEA to suppress information until after the US election, can this source say if these instructions are in writing and over whose signature? This might be something congress would want to look into though their subpoenas are often ignored. More details would be helpful. Contacting Waxman's committee might be the best path.
Chris
It's way too late to stop $200 oil. The combination of low mileage vehicles and millions of new homes in outer suburbia has cinched the deal.
Let's say that $40,000 (new) SUV getting 12 mpg that is now three years old would have a $30,000 resale value at $3/gal gasoline. At $5 gasoline the resale value goes down, all other factors being equal, such as odometer miles.
So instead of getting parked, or in some cases even driven less, the resale value goes down. If you figue 12,000 miles driven per year, for three years, the discerning buyer wants to be compensated as follows: $2/gal ($5 - $3) times 36,000 miles divided by 12 mpg. That is only $6,000!!!
Even if gasoline goes to $6/gal, that only knocks $9000 off the value of the SUV. So if you fear the price of gas is going to $6, but you want that SUV, you offer $21,000 for what was a $30,000 vehicle, or wait for a distressed seller and offer even less.
In any event, these vehicles will be on the road until they are banned or gasoline goes way above $6/gal.
You are making a really wild assumption that the average SUV owner will, or could, make such a rational calculation.
edit: verb tense
It is not the OWNER of the SUV that will make the calculation, but rather the BUYER of the used vehicle. Let's assume that the OWNER is forced to park the vehicle, or chooses to do so by having a bicycle, another (better mileage) car, etc.
If the vehicle is fully paid for, it is a depreciating asset that is incurring fees, such as lincense plates, insurance, etc. Why not sell it?
The BUYER doesn't have to know 3rd grade math. He knows the SUV will cost double per week/month to operate, compared to a sedan. Can he get a good enough price to justify this purchase?
Very good condition used vehicles will come down in price to make up for their poor fuel economy, I predict, rather than sitting idle.
I agree Pipefit. My coping paln for the next decade includes driving a large SUV that I am going to buy when there are many distressed sellers. I have calculated that $5 (AUD) per litre will still be economical to run for road trips with full family passengers and luggage. Daily commuting however will be by cycle (both motor and bi), bus and walking. Our road trips may not extend beyond a 500km radius from home but where we live we can access beaches, forests, snow, mountains, large metro cities, farmland, pretty much everything you could want to visit. Don't think I'll be making too many overseas jet flights though.
My brother bought a SUV for pulling a camper trailer, that they had yet to buy. Why he did buy it was not because of wanting an SUV perse` but wanting to pull a camper trailer for camping, which they do enjoy. Now he is regretting it, because gas prices are so high, with no sign of going down.
I know a local lady that parks her car to take the bus, just started doing it last month.
There will be a lot of changing habits, as we see in the US higher gas prices and longer waits for them to go down. Look at the Local news that Ford F-150 sales are down for the frist time in 17 years. I don't have a URL for checking that quote.
Paradigms are shifting still, lots of things are still going to be in flux.
Charles,
Still running for US President, as a write in candidate.
Psychoanalyzing the SUV driver is an inexact science, but I'll throw out my educated guess. I think most SUV drivers were psychologically clinging to the days of $1.50 gas. When gas hit $3, people complained, but there was a wait-and-see attitude hoping for the good old days to come back. Now that people have finally accepted permanently high prices, they're really adjusting from $1.50 mindset to a $4.50 mindset. Because of that the drop in price exceeds any rational calculation from the difference between $3 and $4.50 gas.
If you want to research actual selling prices of used vehicles, Ebay is a great resource. You need to log in to see completed auctions. I just looked at auctions of SUVs. A lot of them with 0 bids. A lot more with bids that didn't meet reserve price. Of the few that were sold, they're thousands off blue book price (from kbb.com, no idea how often they're updated). Here's one: 2001 Ford Excursion, 120,000 miles, 5.4l gasoline V8. KBB private party retail $9300, offered at Buy It Now price of $7900, sold for $6500.
Wow! That is a good example.
But, let me convey my experience as a California SUV owner:
My mindset is not stuck on gas at $1.50/gal. Or even something higher ~ $3/gal. But then again, I feel I am informed. I am in the transportation industry, know the cost of operations, and have always followed developments. I also visit this site. So, I am not the least bit ignorant relative to the average Joe.
But then again, I do not feel the average Joe SUV Owner is not all that dumb, either.
I feel the large majority of SUV owners only talked (ie. complained) about the price of gas around the water cooler at work or dinner table at Thanksgiving. Perhaps fewer than 5% took complaints to elected officials or posted on message boards or blog sites. Perhaps less.
As for me, I've had my SUV for 10 years. It's been paid for for many. Last month the transmission went out. I thought about what to do pretty often; replace it with a more fuel effecient car... hybrid or scooter. Or, join a carshare org like Zipcar. After all, I drive fewer than 5,000 miles a year and I really am not too dependant on having a personal vehicle at the ready. And, there are no less than 3 bus lines near me serving nearby major destinations. I also happen to be centrally located near downtown San Diego... which can explain why I do not accumulate many miles and pay through the nose for fuel.
With that said, I got the transmission fixed for $3000. This is more than what I could have sold it for IF the transmission had been working. Had I known what it would cost upfront, I may have reconsidered the decision. But, my SUV is paid for and I do not need to pay any large upfront cost for a replacement vehicle. The convenience and price is worth it.
Additionally, I have no idea where fuel prices are going. It could be that fuel will not be a bargain for any vehicle in the mid-term future... even for hybrids. So, I decided to ride the pump for the time being... and advocate for alternative fuels and energy sources.. and minimize my driving as much as practical. At current rate... my driving could dip below 3600 miles a year; or 300 miles a month.
When the future appears a bit more clear, I'll make a decision about what to do with transportation. More hybrids should be available in the next 2-4 years... providing a greater range of choice and lower prices (I suspect).
(edit: inserted important word)
Wholesale values for SUVs and pickup trucks dropped 25% in May alone. Dealers have largely stopped taking them in trade, since they choke their lots. A lot of them may get kept around as "third cars," to be used only when there are loads that require them, since they essentially can't be resold at a price that's worth it to current owners, except in financial emergency. Those in the last category will end up selling a few to teenagers and the like, but most teenagers are sensitive about gas price, so they still won't get driven much. Except for tradesmen who need their trucks for work, and for the SUVs of the truly rich, this rolling stock is all going to quit rolling quite soon.
This subject of SUVs seems to be rather emotive.We call them Urban Assault Vehicles in Australia.
It is true that a lot of urban dwellers in particular who own them certainly don't need that type of vehicle.It is a bit of an ego trip.
However,a lot of owners have a legitimate reason for driving them,especially in the bush.I have a Toyota Landcruiser diesel purchased new in 2001 for around $50,000 and I have added gear to bring it up to scratch.I would probably be lucky to get much over $20,000 for it now and I would need to buy another 4 wheel vehicle to replace it.In fact it really can't be replaced because of the specialized uses I have.The sums just don't add up even at the current $1.70/litre for diesel and that will get worse,I know.There would be a lot of people in a similiar situation.
I have reduced expenses a little by using it less and driving more economically.An old habit anyway,just needs reinforcing.
I have bought a 250cc trail bike to do the work that the 4WD is not needed for.It returns better than 30km/litre.So,at the moment I am getting by.Who knows what the future holds.
I don't really think that owning an SUV or 4wd vehicle is really an
ego trip when it comes to Australia suburban dwellers.
A lot of people in Australia own 4wd's simply because of the standard of the roads roads.
Australia has a 12th of the population in roughly the same area as the US. So Aus has to maintain the same length of road with 1/12th of the budget.
As a result Aus doesn't have high quality roads. Most sealed roads are aggregate with a 2 coat (+primer) bitumen seal. Only in the cities and on main roads do you use a cementitious hot mix asphalt which is a better wearing product. As a result our roads are subject to a higher incidence of potholes.
I own a Toyota Rav 4 and live 30km outside of Brisbane, Queensland in what would essentially be called the suburban sprawl and where the SVU owning 'egoists' live. I don't go bush bashing with my car. I don't even rack up the kilometers. The car is 7 years old and has just done 100,000 km. I drive 7km each way to the closest train station each day to get to work into Brisbane. I would pretty much do the same trip on the weekends to shop and I also travel to visit family about 100km away every second weekend.
For the travel distances I cover and the fact that for 99% of my trips it is only me in the car I could probably buy a 4 cylinder Toyota Yaris with perhaps almost half the fuel economy.
I don't drive an SUV because of ego, I drive it because it is the most economical option. A Yaris would be wrecked within a couple of years becuase of he road quality. Unless I want want to buy a new car every two years I need a vehicle with higher underside clearance.
I belive this is probably one of the most important points that the economists haven't figured out about oil supply and demand curves. They keep on trying to tell us that the 'rules' of economics 101 tell us that we should be dropping demand when the price rises and that we should be pursuing substitutions which are now economically viable.
Unfortunately we can't subtitute because there is no form of substititution available. Essentially I drive to get to work and back. The public transport in my area does not exist in any significant form and will not perhaps exists for over a decade.
I haven't worked out how uneconomical petrol would have to be for me to stop driving because it would also mean that I would essentially not be working. If petrol goes to $2 per litre or even $5 per litre I will still be driving. I will be eating cat food before I stop driving.
Essntially we will all keep doing what we are currently doing until the system ultimately collapses and then perhaps we can rise from the ashes anew.
You bring to mind an interesting twist on how our current plans to deal with the future can be impacted severely by unanticipated changes. For example, maintaining our road and bridge infrastructure has never been economically simple. If funds for road and bridge maintenance are cut substantially as the economy becomes chaotic, we will be caught in a downward spiral. I'm going out on a bit of a limb as I'm not an engineer, but my understanding is the rate at which roads and bridges deteriorate accelerates as maintenance is delayed.
Our current (and planned) energy efficient vehicle designs may be rendered obsolete just when we need them the most:(
Well given that on average our roads need serious maintenance every 15 years at least in the US.
I don't see much sense in buying a EV until we find out if we will have roads to run them on.
Given most will probably be in poor conditions the current hybrids/ev are probably not all that useful.
Given the extra weight of a truck like EV not sure they really work out. So for me at least my approach has been to eliminate driving as much as possible and simply not rely on any car.
Much later depending on how things go I'll look at post peak transportation options.
I'd like to get a diesel motorcycle that can run on soybean oil.
But diesel bikes are rare.
http://www.dieselbike.net/
If traffic does indeed decrease then only a fraction of the current road network would need maintaining anyway, dual carriageways would become single, a lot of roads would simply be gravel, which is fine at low speed etc.
Heavy lorries also do around 1,000 times as much damage to road surfaces as cars, so your thesis that goods transport by road will decrease greatly makes maintenance much easier, and a shortage of asphalt would lead to far more durable concrete being used.
So if EV's do not work out then the roads would not be needed anyway, but to the extent that they do then it would not seem an overwhelming problem to keep roads to use them on.
It should be noted that in-wheel motors and the lack of a need for mechanical connection mean that truly independent suspension is possible in EVs. A criticism was made against this idea on the grounds of weight, but on this site here it was argued that the weight is about the same as for mechanical brakes, so the additional mass would not seem critical.
Electric scrambling bikes etc would do the job fine.
My sister lives outside Brisbane, and I've been there myself. Can't say I've noticed much of a road problem. Funny about how people rationalize their current choices but I suspect when you start in on the cat food you may be thinking about moving closer to work or more creative ways of not wasting so much. I know I prefer good food far more than happy time commuting.
There are some SUV hybrids right now that get pretty solid mileage. In the US, the Ford Escape hybrid is over 30 miles per gallon. I believe the Toyota Highlander hybrid is close to that.
I can tell you that while I live in a suburban location, my weekend trips can take me places that high road clearance is mandatory. Very few cars have such road clearance. If I could get a hybrid Rav4 or hybrid CRV, I'd certainly consider it.
Cat food is not that cheap. If you live in a semi rural area, maybe you hould considerasamll garden and maybe tethering a fe goats in the back yard.
Farmers, tradies and the like may need 4WD's (we have an old 'Cruiser trayback), but most owners buy them for Ego or a mistaken belief that they 'need' them.
But we don't have to maintain the same length of road. Our sealed roads are predominently in a narrow coastal strip running from Cairns in the north to Sydney/Melbourne, and across to Perth, with secondary roads north and west. We don't have a massive network of Interstates linking everywhere with everywhere else.
I live an hour out of Brisbane. I drive a small four-cyclinder which has no issues with road quality. In fact, the last time I hit anything bigger than a small bump was when Main Roads widened the main drag here, and left a 5cm edge between the new and old surfaces over the weekend. Without knowing more closely where you live, I'd say you're making excuses.
If you want better economy with higher ground clearance, buy a 4cyl Toyota or Nissan ute and put a small lift-kit in it.
Most UAVs/SUVs/4WDs only leave the sealed road to park on the front lawn so they can be hosed down.
It was either here or over at wwww.autobloggreen.com that, I read of an unfortunate soul who, had bought a Ford Expedition a year or two ago for 50k and was trying to get it traded in based on the Kelly Blue Book value of 23k. He was offered 8k by a dealer. The numbers might be off but, the basic jist was that the differnce between what he bought the vehicle for and the price he was offered as a trade in, could have bought a Prius.
Now if gas goes to $6/gal and that only knocks $9,000 of the value, you offer -$1000 for what was a $8000 vehicle??? Oops. Lets try again. You offer $14000 for what was a $23000 vehicle. Hmmm. It seems that, the dealer that offered 8k, is expecting gas to go to a bit more than $6.
Alan from the islands
Scrap value is probably higher than this. The battery and a lot of the other parts probably work in a number of models etc. The steel scrap value and copper has to be a few hundred bucks.
Above this if its a diesel then for some of these I'd give you a few thousand as a farm truck.
So see they have a lower price of between 50-2000k
Not zero :)
Whats amazing as hell is that some are still being built. Thats whats mind boggling.
Brings to mind the option of 'Piecing out' your SUV to those who are trying to keep theirs running.. that, or waiting to see if the scrap value blossoms with time, as the vehicle values nosedive. (Keep the Battery and the Muffler (Cat Conv) inside.
I actually linked that Autobloggreen story in a comment. He had bought an Excursion (even bigger than an Expedition). It cost $50000 new, but he either bought a demo or an off-lease used, so let's say he paid $40000. http://www.autobloggreen.com/2008/06/18/trapped-in-a-ford-excursion/
Also, the Blue Book lists three resale values: dealer retail (asking price at a dealer), private party retail (likely selling price in private party sale), and dealer trade-in. Don't try to compare trade-in value to private party resale value directly.
I'm a US citizen with very little respect for the current administration, but really - is it believable that US ordered the IEA to delay publication of a report AND that IEA responded by actually delaying the report? IEA is in Paris. Do IEA people have so little respect for French legal system that they actually fear US in Paris? Or is the reality that French actually run the World and have conned US into doing their dirty work?
Possibly the superrich have influence in both France and the USA, just possibly.
The IEA is an inter-governmental organisation. You know, like NATO or the OECD. It does what its members want it to do, and it works on the basis of consensus, usually on the basis of expert advice. If one member, the most powerful of all, is hellbent on having one prognosis remain the official version (especially if it simply means keeping the existing prognosis, which everybody is used to, in place), who will fight them?
Most European governments are either waiting for Bush to go or are actively trying, for some unfathomable reason (see Sarkozy, Berlusconi) to please him - or at least to not piss him off.
I doubt these instructions would be in writing, but who knows? In any case, the incriminating documents would be in Paris (where the IEA resides) rather than in Washington, presumably.
Well Jerome, if you do not know, perhaps no one knows - except maybe "the source." Would you be willing to bet your life on "your source" that this is accurate information?
Usually bureaucrats will ask for that kind of thing in writing to cover themselves and whoever made the request would have kept a copy of the corespondence in Washington. That is a document that can be requested by the congress. It could be that there is a reason given such as not wanting to spook the markets with incomplete information. Bottom-up has to be exhaustive, etc.... They may be stupid enough to say something about the elections in writing. The political considerations in appointing federal district attorneys were writen down, for example. It is an interesting story and should be pursued further especially with the history this adminstration already has in manipulating data deceitfully.
EDIT: Came across this through Drumbeat: http://www.spiegel.de/international/world/0,1518,562291,00.html
Chris
Of course, the all powerful US administration got the IEA to suppress their reports till after the election but somehow could not get Goldman Sachs, Morgan Stanley and countless other American securities firms from make continuously higher price predictions about oil. That's because the US govt. holds such sway in France but in the US they are helpless.
Oh, and which candidate is $145 a barrel going to help? Would that be McCain who is in the same party as the President who is presiding over this economic meltdown?
Ooooo spooky spooky its the Bilderbergers and the Trilateral Commission who secretly want Obama as pres because he is the Manchurian Candidate.
Thanks for the humor.
What does fundamentals mean?
Okay, I know nothing about markets.
I think I understand costs.
Costs + 20% = Price, right?
Let's say that the new technologies cost twice the old technologies per unit. I would assume that the market would average the old cost with the new cost and multiply by 1.2 to get the new price.
Lets say the cost of NEW deepwater is $55 per barrel and the typical NOC royalty tax is $5 per barrel. Total $60, $72 with mark up. These are the fundamentals.
If there is a supply shortage of 5% and the short term price inelasticity for oil is ~.2, then the price should rise 25%. $72 x 1.25= $90. Not $200 a barrel.
Oil prices do not yet reflect the finiteness of supply. Up until roughly now it was possible to apply ordinary economic analysis to the matter, cost, profit, etc. No more. Now the price will more and more reflect the finiteness of supply. This means up, up and away. The question is: who gets the profits from this naturally created monopoly? And at point does the public realize that far too much is at stake to leave this whole matter to the market. Blue jeans, yes, but survival, no.
Short supply does not a monopoly make. There are competitors at every level. Nor are the profits out of line for the capital investment required. The only true windfall here is to those who own the oil in the ground. Since most of them are sovereign, the only way to not leave their profits to the market is to launch armed invasions. How is that working out?
Let's take Iraq as an example. You are right about armed invasion having its difficulties. But Exxon, Shell, BP and Total just got no bid contracts despite the difficulties. Where is the windfall going in this case? And what effect does this have on decisions by the Saudis and others looking on with interest? Does it put any limits on how they dispose of their vast hoards? They would have been out of the dollar long ago if it didn't. Petrodollar recycling I believe it's called. Does it have any influence on their weapons acquisitions from US and other suppliers? Yes, of course, they have some wiggle room because of the "difficulties" , and are exploiting it, but that in no way invalidates the above.
It is precisely the finiteness of supply that is heating up the struggle over this monopoly, over control of it.
The profits are very small compared to the investment made -- that's true. But the oil cos didn't make the major investment, it was the US public that did. What matters are the returns on amount the oil companies ponied up.
Huh?
Er, what windfall, exactly? The no-bid contracts are very short term, essentially meaningless contracts. The majors are happy to put in a few million to stay in the game, but they are not investing anything, and won't get much oil, if at all, out.
It's very simple:
- oil majors will not invest until there is a stable framework to do so;
- there will not be a stable framework for as long as US troops are in the country and a legitimate government has emerged;
- once US troops are out, all laws put in place when they were there will be ignored or abrogated
ergo: there will be no oil for oil majors for as long as the Americans are in Iraq. If the goal is to deny the oil to the market, then mission accomplished. otherwise, not quite.
It was whit who introduced the concept of windfall and described the NOCs as the sole recipients of same. And this line of thinking is very much in tune with a mounting campaign that paints the possessors of the oil as the villains-in-the-making and the majors as simply businessmen in pursuit of buck, and somewhat disadvantaged in that pursuit.
But it is no so simple, or if it is, more likely it is simple in reverse. Cheney invited these guys to his energy task force meetings before Iraq, before even 9-11 interestingly enough, and all that we really know of those meetings so far is that they were looking at maps of Iraqi oil fields.
One cannot disentangle the US military actions from the oil cos. Whether they are ultimately able to extract a profit from Iraq is a matter of conjecture. You won't convince me that they don't hope to. It does not yet look like the US gov't has any intention of getting out on its own. Whether it will be forced out, or is forced out by over-reach and collapse is another matter.
Everyone tries to distance themselves from failure, no matter what their complicity in the initiation of an enterprise. Krupp, Siemens, Thyssen continued after Hitler's gambit crashed and burned. They were just businessmen -- all innocent.
You're way off on your inelasticity estimation, majorian, as least for the U.S. and short- to intermediate-term elasticity. You can expect the price to go up roughly 15% for every 1% increase in demand or decrease in supply, all other things being equal, and it takes a long time for further adjustments. Here are some recent studies on price demand elasticity:
University of California Center for the Study of Energy Markets study: http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1062&context=u...
Congressional Budget Office study, 2008: http://www.cbo.gov/ftpdocs/88xx/doc8893/01-14-GasolinePrices.pdf
One of the things the studies have found is that demand is slower to adjust to prices now than it was in the past (the 1970s). That's because we already made a number of efficiency improvements in the 70s, and further efficiency improvements are more difficult. See the studies above.
Also, Westexas has posted an argument that demand is likely to be more resistant to destruction after the first waves of demand destruction knock out the demand of the poor. In other words, after the first wave of demand destruction, there are richer people (or more efficient people) remaining in the bidding, and they are likely to be able to afford much more of a bidding war. In my opinion, his thinking is likely right.
From May, 2007 to May, 2008, oil prices increased at about 6% per month (from $63 to $125, monthly average, WTI spot). We had an accelerating rate of increase in June, probably to at least 7% per month, which of course has continued in July.
Let me put it this way, at 6% per month (from May, 2008), the average price for July would be $141, and on the second of July we are at about $142.
I think that we have a toxic (for energy consumers) combination of an accelerating net export decline rate, and a requirement for an accelerating rate of increase in oil prices, in order to balance supply against demand, as forced energy conservation moves up the food chain.
at 7% per month that would put us at $213 / bbl by year end.
This would be a 50% increase from $141.
If so, would gas then be $5.75 per gallon?
Oil makes up for about $2 of the $4 cost of gas (the rest being refining costs, distribution costs and taxes). A 50% increase in oil prices will increase gas prices, all other things being equal, by $1 from current levels.
That would be correct if none of the other contributing costs went up as well. But some, such as refining charges and some taxes, are pegged at percent of crude price or percent of supply price, and so go up by the same proportion as the crude itself. The last time I saw figures, the proportional costs were about 75% of the total at the pump. But the pump price was under $3 then. I'm guessing proportional prices are now maybe 90%, and a 50% increase in crude price would be a 45% increase at the pump.
AFAIK, so far they haven't. Refining, Distribution & Marketing, and Taxes have been at ~$1, give or take, for the past eight years. There has been some variation, for instance 2005 was higher than 2008 has been, while 2000 was lower than both, but for the most part, give or take ~$.10-.20, oil price increases have been what's driven gasoline prices.
In a situation like this we can expect people to start prioritize their needs in energy and pay only for the more important stuff. How low can we get? Perhaps we should start categorizing consumption in a hierarchy like this.
Everything is 1, 2 or 3 is waste. Once it is eliminated, we are left with 4, 5 and 6. The question is if we are brutally forced to stop doing 1, 2 and 3, do we still have enough energy to do 4, 5 and 6? If the answer is yes, we have on our hands an economic crisis and a mutation of our way of living, but civilization will survive.
Another way to ask the question is what is the minimum energy that is needed for doing 4, 5 and 6? If this is lower than the energy that remains once oil and natural gas is gone, then we have a way out of the incoming crisis. If it is higher, then we are working against a deadline to avert the collapse of our civilization. This is not the same deadline if we want to avoid the collapse of the current economy.
Item 4 is a grey zone. We can encroach on it for a while if we need to buy time to perform a transition, but not permanently.
Way off?
Your paper says .2-.34 for 1975-1980 for price inelasticity and .034(!)-.077 for 2001-2006.
Anyone can calculate a price inelasticity, but the idea is to calculate a number that tells us about real demand not speculation--there is a difference.
I used .2 but I also used 5% as the shortage--
Oil production has been stuck at 84.6 for the last 3 years.
Have we really seen a 5% worldwide growth in demand?
Asia overall is up 4% since 2004 and the OECD which has 60% of the market is flat. That should average out closer to 2.6% which the EIA gives as the world average. Also, demand in the OECD is actually falling slightly which makes sense in the price inelasticity theory but rising in developing countries which does not.
http://www.eia.doe.gov/emeu/international/RecentPetroleumConsumptionBarr...
And if I used .1 instead of .2 the result would be
$72 x 1.5 = $108 per barrel not $200.
Your explanation of incredible inelascticity doen't add up.
Don't forget that we only see actual demand, not potential demand that has been destroyed by higher prices. If prices were still at $40 like they were 4 years ago, by how much would have demand increased? Maybe you need to look at demand growth in these years to guess what it would have been without the price hikes.
It's not an easy question.
It's not an easy question but I can't resist trying.
I would think 0.2 is not so unreasonable a guess for world price elasticity of demand. It's naturally going to be less in the United States, though probably not by as much as it used to be: The demand curve is not a straight line, and I think we are now finally moving into the part of it that is less steep, so it seems with the recent decline in products supplied in the US. I suppose it's unlikely to go back to the levels of 1970, but who knows. When it forces the economy into recession we will see. At the least, a slowdown in the price rise would be likely if supply remained constant.
World demand growth, measured as the quantity we would have consumed at a constant price, might well be rising at 5% per year. If you look at the trend 2002-2005, around the time demand in Asia started really taking off, and adjust for the rising price during the period, it is not so far off.
Crude oil production 2002-2005 increased at roughly +3% per year. Price increase was very roughly 25% per year. Assuming no big change in stocks then, quanity consumed at a fixed price might've been growing at 5% per year if supply and demand had anything to do with the price, even with price elasticity of 0.1. If demand was still growing at the same rate since 2005, but consumption was constrained by supply which didn't change much, it might easily account for 30%/year price increase. Then you can factor in things like monetary conditions, inflation, and $140 seems quite reasonable.
That is just a guess, but it's not the worst abuse of economic reasoning I've seen presented as truth. I think it is enough to show that at least it is possible that oil could be fairly priced for now.
By the way, movement along the demand curve does not count as "demand destruction" as I understand it, which is what happens when people adapt more permanently to getting by with less. Of course it makes no sense at this point to say that demand (of the kind you talk about when you're measuring price elasticity, the demand curve) has fallen in the US. This confusion is silly, it is time for everyone to recognize that "demand" is not the same thing as "quantity demanded", now that production is getting a bit constrained. Maybe everyone got away with that assumption back when you had supply capacity well beyond what was needed, and the benevolent OPEC (or whatever) setting the price, but it's time to give it up I think. I suppose we'll have to wait for the IEA to go first before anyone takes that advice.
Moe_Gamble,
Thanks for the links. One thing that is not being considered is that gasoline is still very inexpensive even at $4 a gallon. The biggest response in late 1970's was not VMT but a switch to improved vehicle mpg, over a 10 year period(30% improvement). As there is not technical reason why a similar improvement is not possible( from present 25mpg average cars and light trucks to 33 mpg or even better 37mpg). Europeans have done this as a response to $5-10 a gallon prices over last 10-15 years, so would not be surprised if same thing happens in US. The problem in the past was the continued increase in VMT in US, canceling out mpg improvements. This may not happen this time because the population is aging, many more households have no children to drive around, retired people won't commute to work, may travel together to shop etc. We are just about to start seeing the post WWII born population bulge retiring in very large numbers. Also if prices stay high for longer a larger improvement in mpg is possible.
Another factor is that more vehicles per household gives more choice to use the high mpg vehicle on longer trips. I don't see new SUV's being scrapped but perhaps sold to people who will only drive a small amount so that gasoline prices are not significant. These may be the apparently foolish people who are still buying new SUV's. The big influence on future gasoline use is going to be the the mpg of new cars purchased by high VMT owners. If a substantial number buy HEV's getting 50mpg, we could see a very big drop in gasoline consumption without much change in total VMT.
You can only talk cost + markup = price when you have adequate supply. When there is limited supply you either have rationing or price rises to determine who will receive what's available. Of course, the latter is what we have now except in cases where government has fixed the price and then it has been rationing. In China they set the price but people have to wait a long time to get anything at that price. This whole thing is nothing new at all. Do you think Coca-cola is sold according to cost + markup? Pricing for most goods has always been decided by what the market will bear.
" Do you think Coca-cola is sold according to cost + markup? "
Yes. In the Coca-cola business there are all sorts of 'costs' that are there only because business is good and management is too busy enjoying life to run a tight ship. So, cost+20% results.
It is always incorrect to relate Price to Cost. The buyer does not care what the product cost the supplier, the buyer cares only what value the product brings to him. The price of a good (especially in an auction market) is the value of that good to the pool of purchasers.
--
JimFive
majorian - Neither time nor space permits an adequate response to your post. But, let me posit that you find an ounce of gold on the sidewalk. You value your time, so you allocate $25 of cost, so your price is $30? Or, could there possibly be any other factors that influence your price. Like maybe, you found the ounce of gold 40 years ago when the price was $32, and gee, since the market price (willing buyers) will pay $800 an ounce, that is your price.
Gold is a good example of a speculative commodity which has little practical use upon which to base its demand. People buy gold because of its traditional role as a placeholder for cash or an luxury which is expensive because jewelry is SUPPOSED to be expensive.
Oil OTOH is a practical commodity which gets consumed.
I'll glady accept your analogy and pick up that ounce of gold is you agree to pick up its equivalent in oil(about a ton of petroleum) and slide it in your pocket.
Don't forget that gold is a valued metal precisely because it does NOT get consumed. It doesn't oxidize, and while pretty for baubles and gauds, it is both durable and scarce. The example of finding a chunk of it on the street is, of course, weighted by the extreme unlikelihood of finding a chunk of it on the street, which affects the value, too. Desired, Useful and Rare. (It would be wrong to say that pretty jewelry is not useful, either.. Money can't buy you love, but it's had no small effect on the genetic and political pathways of our species..)
Little as I like the Bushies, I have to think that they are not the only OECD government that would like to have some time on this. I don't know about any other elections, but certainly several Ministries of Truth will need some time to explain the forthcoming
rise in the chocolate rationfall in the price of petrol.Also, this is the originally announced schedule: prelim in July, final in November.
So here's a question. What purpose does it serve to avoid putting out this information now?
What is Bush trying to avoid doing?
Moe,
On the one hand I would like to think our gov't is "hidding" the truth. On the other hand, maybe they don't fully grasp the depth of the problem.
As far as the question regarding how oil companies figure a reasonable profit when they sell their oil: they don't. Just like every other commodity seller they seek as much as the market will allow. Currently companies are pulling in rates of return for wells drilled a few years ago at much higher oil price levels then they used in the economic analysis. I've been a petroleum geologist for over 30 years and have seen hundreds of such models. The basic assumptions are: 1)cost to drill; 2)reserve potential; and 3)price expectations.
Price expectations often present as much risk as the technical aspects of the deal. At the moment recent succesful projects are generating much greater revenue than ever expected. But it swings both ways. I've seen operators sell their oil at prices that wouldn't recover half of what they spent to drill the well. Same situation: they sell for what the market will bear. During the price spike in the late 70's companies invested huge amounts of money in new wells. When oil dropped to $10/bbl hundreds of oil companies went belly up.
Just the nature of the business. Right now much of the oil industry is paranoid over price expectations. No one is using $140/bbl in their forecasts. Most are still in the $70 to $80 range. But that still allows for a lot of drilling opportunities even though drilling costs have actually risen higher as a percentage than oil prices. Times are great right now. But most of the current oil industry management were there when they saw Saudi crank open their wells in 1986 and drive oil prices down. Along with the price drop they saw the US drilling rig count drop from 4600+ to less than 600 and about 500,000 oil patch jobs disappear.
And, just like me, they know why oil prices crashed: the 70's oil price spiked caused a world wide recession in the early 80's that cut demand deeply. Neither new drilling, alternatives nor voluntary conservation will push oil prices lower in the short term (5+ years). But if this price spike produces results in the world economy similar to that seen in the 80's we could realisticly have $40/bbl oil in a few years.
Not a prediction but just a valid economic model. But if it happens those companies that bet on $80/bbl oil this year will loose their butts...again.
I still don't see the connection to prices going to $40/bbl. In the case of the 70's and later supply was ample the combination of recession and increasing supply is what drove down oil prices. Take one of the factors away and you can't make the same argument.
Also right now and for some time it seems that our recession is in the financial/luxury item economy. And yes I treat homes bought by people as luxury items along with new cars etc etc. This can go on for some time and it will certainly effect demand for oil but on the same hand it will take a while for the base economies to really start to have problems. You can use the % of oil per dollar GDP to show you can have a lot of economic contraction and redirection of cash flow to buy oil before you have a general drop in oil consumption.
I just don't see the argument that if oil prices are driving the recession that the recession will cause oil prices to drop if supply is also dropping.
For me at least the right picture is that economies will spend more and more on oil and eliminate non-essential parts of the economy. Nail Salons for example and doggie daycare. Feng shui consultants will be hard hit along with interior designers etc etc. I think most people are missing that we are talking about a economic transition to a economy more focused on necessities. Although demand does go down given this sort of transition lower prices do not seem to result.
In fact given the model of economic transition prices stay consistently high as producers of essential items can and will pass on higher fuel costs while non-essential industries which cannot collapse.
The strong growth in fuel consumption in the rapidly growing economies points to a lot of it being related to expansion of essential services and its supported in general by subsidies not just exports. As exports decline the growth rate will slow but its a long way from slowing to contraction.
At best as non-essential industries collapse the rate of increase in prices will slow but the problem is because of the housing bubble we have just collapsed the number one non-essiential industry thats a heavy user of oil. The big one if you will is well on its way to collapse in the US and moving forward in other countries. Collapse of other industries will free up more money to spend on oil without a similar decrease in oil usage.
Closing half the stores in a mall does not lead to near the reduction in oil usage that stopping work on a farflung suburb does. When the suburb construction fails you lose all the oil associated with construction plus all the extra commute times that represent longterm consumption as people populate the suburb.
Past housing downturns have flattend the VMT in the US given the size of the current one its not surprising consumption is going down. But as other noncritical industries collapse we get less bang for our buck on the reduced consumption side and the remaining consumers have deeper pockets. They can spend more on oil.
I've got long diatribes showing how if people default on housing and credit card debt and move to renting they can almost double the income they can spend on food and fuel.
In California simply moving from owning to renting a equivalent home in general takes you from spending about 4000 a month on housing to 2000 a month. You can buy a awful lot of food and gasoline for 2 grand a month. If you go to renting a smaller place later you can save even more.
If you look at the economic indicators then what we see is exactly this people are defaulting on long term debt and the housing market is collapsing. Its really impossible to determine whats going to happen next on the demand side but on the same hand the economic transition concept does not show lower oil prices as a result. Instead it goes higher until people reduce demand for non-essential items freeing up money for food/gasoline. The only demand destruction is coming from people becoming unemployed and unable to work. But this cycle works because oil prices spiral ever higher collapsing more and more non-essential industries. Never does the price of oil decrease substantially.
Certainly at some point in the future you will impact critical industries and be forced to move off oil based transportation in a big way but this transition seems to be well into the future at least 5-10 years from now. We have a long way to go before the economy recognizes oil is gone for good and starts redoing itself to stabilize and then grow in a post peak world.
I think it's also important that in the 70s there wasn't such high and rising demand from Asia. Even if their economies follow suit they have a lot more affluence now and some of that will translate into consumption. Ditto the M.E.
This insures that any reduction in usage in the Western nations will be absorbed by the expanding economies in Asia. Certainly as exports falter these economies will slow but they are a long way from contraction.
Next on the oil supply side we face a huge problem that not even been acknowledged on theoildrum.
CERA reported the data.
http://www.cera.com/aspx/cda/public1/news/pressReleases/pressReleaseDeta...
Now lets reverse these numbers.
14% of production is comming from 5% of the worlds reserves and this is located in small field with a average life span of say 7 years around peak production.
Decline rates in these fields are steep 10%+ depletion rates are 10-20% so production tends to drop quickly in the smaller fields. The 14 year decline number is a bit of a red herring since in general production decline steeplys and advanced extraction methods if used only result in much lower production during the 14 year decline phase. Regardless lets look at the math.
Next we know from WebHubble's work that discovery is well in the past this is true for both large and small fields. So replacement of small fields with new production should have already begun to drop off and indeed we have not had reserve replacement in most areas since the 1990's.
http://www.theoildrum.com/node/4171
Lets take world oil production to be 84mbpd.
84*.14 = 11mbpd
The worlds largest producer that can be easily grouped is not KSA or Russia but the collection of small fields and its producing from 3% of the reserves at a 10-20% depletion rate now without significant reserve replacement.
Houston we have a problem.
We will almost certainly see a initial steep decline in production over the next 5 years this is enough to ensure that oil prices remain high for the foreseeable future regardless of how the economy shrinks.
Yeah I'd say that you're onto something memmel. Now all you need isa catchy name like the Minnows Land Model and you are well on your way to TOD Land fame :)
I suspect he's trying to avoid histeria. Or, influence on the November elections.
By the way, how do we really know the US ordered that no new updated information be provided until the bottom-up comprehensive estimations report is completed? Does the White House have direct control of=ver the organization like they do with many federal Departments?
The US is a member country. http://www.iea.org/about/membercountries.asp It may be exercising a member priviledge.
Chris
So here's a question. What purpose does it serve to avoid putting out this information now?
What is Bush trying to avoid doing?
Moe, I think the guy writing this has the right line of thinking on this.
From todays DB.
Yes-the EIA, for example is extremely consistent in always painting the best case scenario as the most likely. In the same way that equity analysts issue buy ratings more often than sell, there is a strong bias built in that is obvious. Yergin, had he been a doomer and as wrong as he has been, would not be still being treated with deference by the MSM-he would be a laughingstock in the MSM, not just on TOD.
memmel,
That is exactly my point. Perhaps I lost you in my ramblings. The collapse of oil prices in the 80's was the combination of WW recession and excess production capabilites. Of course removing one or the other changes the equation. I offer the same conditions as the basis for my extrapolation.
My model for the near term is identical. But your point regarding demand decreases vs. supply decreases is right on. And it's part of the model. I don't recall the number off the top of my head and I hate to guess but I'm sure someone here has the data at hand. But I think consumption dropped on the order of 10+ million bopd. The only reason it took 3 or 4 years for oil prices to tank was the Saudis cutting back production to make up for production increases by other OPEC members. It was reaching the point where Saudi was going to have to shutin 100% of the production. That's when they said to hell with OPEC and opened their wells back up.
Again, this is just a model and not a prediction. Also, bear in mind that the economic responses to the oil price run up have been minimal compared to the 80's: oil consumption world wide has continued to increase. We all have our own guesses but I see max oil deliverability peaking around 2012. But if (a model statement...not a prediction) world comsumption drops 10 to 15 million bopd and OPEC is no more effective as being a cartel then they were in 1986, it's very easy to forecast $40/bbl oil. In fact, it could go lower. Right now Angola is China's primary source of oil. The Chinese have invested billions of $'s there. If oil prices crash China et al will pull their wells as hard as possible to maximize cash flow. Saudi just invested $10 billion in ramping up their latest field project. It's anybody's guess but I doubt Saudi would shut down that field and loose market share. They didn't in 1986.
As you know, the key price drop was in 1986, when the Saudis boosted production. The question to ask is what would have happened to prices if the early Eighties production decline had continued indefinitely.
Note that the 1979 to 1985 world production decline (largely a function of Saudi cutbacks) was only -2.5%/year (C+C), only slightly higher than the long term Lower 48 decline. BTW, Matt Simmons is not convinced that this production decline was totally voluntary. He suspects that the very high 1979 to 1980 Saudi production rates may have damaged their fields.
I expect to continue to see an accelerating net export decline rate worldwide, which went from about -1.1%/year in 2006 to -2.2%/year in 2007.
westexas,
I decided to not be lazy and searched the data base also. Came up with roughly the same numbers: production dropped from a peak of 62 million bopd to 52 million bopd. Or about 16% over the 5 years period.
That 16% drop doesn't sound like much to many but it helped precipitae and oil price drop from $35/bbl to $10/bbl....a 70% decline (ignoring all the various price schedules.
And the dynamics are different now in many ways. But I still think most are unpredictable. If consumption does drop so far would Saudi/OPEC et al respond the same? Or would they accept the PO future? Could they afford to not produce all out regardless of price? Some might and others might not.
But back to my point: Price expectations are a significant factor in evaluating large capital oil field projects. The oil patch is watching the balance very closely. I can promise you that if the industry collectively sees the onset of conditions like those seen in the early 80's there will be a quick and drastic cutback in expendatures. No need to shed tears for us but a well that cost $8 million 5 years ago now cost $22 million. Economics still work at $80/bbl but really suck at $40/bbl.
But memme's point regarding the race between consumption declines and production declines is a good one. After 1986 we had 15 years of fairly cheap oil. If we do see a WW recession and an oil price crash soon I doubt we'll have another long run of low prices following it. It's likely the net decline rates will jump and we'll be running towards PO faster than ever.
Whoa there cowboy. Care to rephrase this? Falling production causes falling oil prices?
What precipitated the 1986 price crash was the Saudi's announcement, in early 1986, that they were significantly increasing production, which they did with a vengeance, which led to the price drop to $10 a barrel. If memory serves, prices dropped from about the $27 per barrel range.
The devil is in the details since prices are set on the margin :)
Given my small field collapse concept coupled with exportland and the declines in the large fields. Loss of 10mbpd in production esp exported production is pretty much certain. Also understand that most of the marginal exports we don't generally cover such as Columbia will become importers given most models over the next few years. This is not huge amounts of oil but you go from being a 100kbd exporter to a 100kbp importer your blowing out the marginal export supply. Its small changes like this that have a bigger than expect impact on prices when overall oil supply cannot meet demand.
Getting a 10mpbd drop on the demand side given that total potential world demand is still growing even today is really tough. To give you and idea this is like 40% of the US consumption. We hit todays prices with about a 2mbd drop in supply/demand.
Its a catch 22 to get 10mbpd drop you need prices to skyrocket therefore lower prices don't work given that its oil supplies that are at the end the driving force for the demand drop. Its physically impossible for low oil supplies to result in low oil prices.
There is no driving force to reduce oil demand substantially in the real economy while on the other side of the coin we have plenty of ways that consumers can free up cash flow to purchase gasoline/food by defaulting on mortgages not buying cars and defaulting on credit card debt. By moving to less and less desirable living conditions they can ensure that their base needs for oil are met after defaulting on debt and in fact their monthly cash flow actually improves substantially after debt defaults.
The Housing and Auto legs of WT iron triangle are dead dead dead but the Oil industry will hang on for a bit longer since we are only dealing with the end of expansion of the other two legs. Basically no new houses and no new cars but the existing ones are not going away.
All you get out of this is small precentage drops in demand not the huge drops needed to cause a 10mbpd cut.
Of course the financial industry is toast and the Fed has all but admitted the party is over.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aboaHbnfqqds&refer=home
The death of Wall Street is not the death of Main Street. Wall Street had already decoupled from the real economy with most of its gains coming from the housing bubble these can be erased by default. And again as people default their purchasing power for necessities that cannot be bought easily with credit oil/food increases. And of course they will use up their credit cards first.
Bottom line is the real economy can easily outlast the supply of cheap oil and continue to run well into the era of very expensive oil. We won't be buying houses or cars or getting the dog professionally groomed and most of us will have no credit but we can continue as a group. Standards of living will drop dramatically esp in housing but this does not mean that demand for oil will drop.
I'm not disputal your rational memmel. But I clearly recall all the same points made in 1979 as to why demand would never drop enough to cause a decline in oil prices. And I mean no one....not one economist of note, not one oil big wig, not one politician. Not only did no one see it coming but if you were't predicting at least $80/bbl by 1990 you were deemed a fool.
Yes...it would take a substantial drop in cinsumption...maybe 15 million bopd acception significant supply side declines. But it is a possiblility (note: I didn't say probability). I'll tack on below a story that just popped up regarding what might be some signs of a crash hitting India soon.
But first I think your point regarding our angry villagers giving up luxuries to maintain their oil consumption profile is not only right on but may also one of our biggest assets. We are a "fat" society and waste much. Being forced to cut back on excesses is a lot different then giving up essentials as much of the world may have to.
INDIA:
Just six months ago, India was looking good. Annual growth was 9%, corporate profits were surging 20%, the stock market had risen 50% in 2007, consumer demand was huge, local companies were making ambitious international acquisitions, and foreign investment was growing. Nothing, it seemed, could stop the forward march of this Asian nation.
But stop it has. In the past month, India has joined the list of the wounded. The country is reeling from 11.4% inflation, large government deficits, and rising interest rates. Foreign investment is fleeing, the rupee is falling, and the stock market is down over 40% from the year's highs. Most economic forecasts expect growth to slow to 7%—a big drop for a country that needs to accelerate growth, not reduce it. "India has gone from hero to zero in six months," says Andrew Holland, head of proprietary trading at Merrill Lynch India (MER) in Mumbai. Many in India worry that the country's hard-earned investment-grade rating will soon be lost and that the gilded growth story has come to an end.
7% is still growth and increase in demand :)
Look the economist are always wrong that we can be certain of.
I'm pretty much a super doomer my family has nicknamed be the Master of Doom and as a super doomer I'm saying demand will remain surprisingly strong for some time.
Here is how I see it unfolding oil prices will continue to rise and in general the economy will continue to deflate mainly by defaulting on long term debt to pay short term expenses. This will slow growth but also keep oil demand robust at least for the next two years or so.
Now at some point the oil prices will rise enough to cause demand destruction to infuence the price downwards but in my opinion this is not a fall from 140 to 80 but a fall from 500-600 a barrel to 400 a barrel or 800-1000 a barrel to 500-600 a barrel. Your 100% right that eventually we will see demand destruction that will ensure a cap on oil prices and also demand will shrink enough and prices will be high enough that alternatives are viable but its well beyond prices most of us think are possible.
When are we going to hit this wall ?
My best guess is earliest is 2011-2012 right now. I brought up the possibility as early as 2009 but this was before I factored in the freeing of cash flow by defaulting on long term debts.
The maximum price for oil is fairly easy to calculate its when gasoline is priced between 10-20 dollars a gallon in todays dollars. At this point all kinds of alternatives and substitution is possible most of it permanent.
Most people thought todays prices would never be reached and that they would collapse the worlds economies. Instead they are causing at best a economic slow down from the top of a massive bubble we have a looong way to go before the pain really seriously sets in.
For example my estimate for the price of oil in 2010 is at least 300 a barrel.
If you have a large mortgage on your house you probably have lost a lot of money or if your in the commercial construction or airline industry etc. But up to 300 a barrel its only people that are stupid enough to buy homes with loans that are screwed the rest of the economy trundles along.
So bottom line is all I see is people setting on a lot of debt who are now deeply underwater that are going to default other than that no real problems until we crossover 500 for a barrel at that point essentials such as food become a issue.
Short term over the next few years stunning losses in real estate will dwarf peak oil effects as the economy converts to one focused on essentials.
Needless to say if you have a house loan or are dependent on your property retaining more than a fraction of its value you should really reconsider your position. After that you can worry about the price of gasoline.
I would disagree about real estate. The entire country did not have huge run-ups like certain areas of California, Florida, and Arizona. There's a whole lot of country out there that isn't having huge crashes in real estate values. My area (outside Philadelphia) is off ~7%. A decline, but not the end of the world. The decline has also brought buyers out looking for bargains.
Defaulting on long term isn't the panacea you make it out to be. A credit rating still means something, Default on debt, and one's rating goes down the tube. That effects future ability to rent, borrow, and possibly get a job.
Lastly, rents have been rising - sharply. When rampant real estate speculation was taking place, there was a glut of available rentals on market. Investors were willing to accept less on rent since they counted on appreciation to be the real money maker. The defaulters have been absorbing the excess in the market. Investors have realized that they can't necessarily count on appreciation, so they raise rent to cover their mortgages. Losing money on a property is not a long term solution, and at minimum, owners will raise rent enough to cover the debt, taxes, maintenance, and insurance on the property.
I would agree about an ultimate cap on oil prices. There is a certain level where demand destruction won't allow it to rise anymore. Various industries will die off, one by one, until balance is reached. After that, it will be a balance between declining production and dropping demand.
Real Estate can only lose so much value. It is energy value embodied. My stepfather is a builder, and if he can't build a house for profit, he'll simply not build new stock and move to maintenance and repair. Eventually, the excess will get wrung out of the market and values rise again. Actually, now is a very good time to buy, since the cost of a home right now may temporarily be less than the sum of it's raw materials, labor and energy needed to create it. People can't go without shelter any less than they can afford to not eat.
The US is already in heavy competition.
There have been ongoing news segments on CBC Radio One's "World Report" on China's aggressive expansion into many countries; building infrastructure in order to find and export commodities. By 2010 China will be the entire continent of Africa's largest trading partner.
In fact, the expansion has happened so fast and so aggressively that some African statesmen worry about China becoming Africa's new colonial power.
I agree with your point dantoujours. I'm not sure one can even make the argument that the US is competing with China at all. Take a news story just today: Angola has just replaced Saudi as China's number one supplier of crude. China has spent billions of $'s in Angola buying into existing fields as well as capitalizing new projects. And China will have the "call" on much of the future production. I've drilled several wells of the west coast of Africa for a US major. But while it might have been a US company that production is shipped to
Europe because much of it is under long term contract (as well as being a cheaper shipping route). Another example of sovereign power: China has supply contracts inplace with Venezuela that were signed a couple of years ago. and they also have major investments in Venz which gains them title to some production.
While we can always compete with China in a bidding war for some of the crude on the market, much of China's current investments provide them direct title to much crude. As far as I know the US gov't has no such relationship in the world with any producer. The Angolan and Venz crude will be going to China regardless of what US companies/consumers might be willing to pay. China essentially owns the much of this crude as it flows out of the wellhead.
It would be interesting to know more about this aspect in regards to pricing. If China begins to buy oil on world markets less and less due to their contracted supply coming into play then that may be a significant force on price decreases. I have no idea what the relative pressures are now - not sure if anyone does.
I do think that their is a serious time lag in price impacts and that what we see now with $143 oil is just starting to filter through to the economies. I'd be very surprised to see $500 oil not because such heady numbers are scary but because even full years of current prices are going erode the world economy enough.
http://www.reddit.com/info/6pydu/comments/
http://www.reddit.com/info/6pyqw/comments/
http://www.reddit.com/info/6pye4/comments/
It is hard to say what prices will do with the upcoming election. It's possible that a new president in office could help things to settle down a little bit.
http://www.dumpitinthepump.com
Only if he and is entourage walks to the inaugural. Hopefully, he will also dump that big motorcade of SUVs that follows the President around wherever he goes. Let the secret service use Priuses or motorcycles. And, oh, how is the White House heated, anyway. Some solar thermal would be in order.
What kind of gas milage do you think a Prius would have after adding the armour plating (and putting 5 adults inside)?
--
JimFive
Riding an electric bicycle to the inauguration would certainly make a statement. ;)
I think the IEA report on November 12th will result in a big spike in oil prices. I always thought that when the truth of the worlds oil reserves was officially acknowledged by a "repsected" entity we would see a panic in the oil market. My only question was when the world would come to that realization and who would or could expose it?
I now think that the day may be November 12th, 2008.
Keopele
Having been a (lurker) here prior to making any posts,
and being sensitive to people who advocated a softer
landing during peak oil VS the doomer regulars who
held a more apocalyptic Mad Max view.......I have to say, looks more like a Mad Max scerino is about to unfold.
Many of the above posts relate how the ultra rich wont
be effected or wont be effected as much by P.O.
I wont say I speak from a position of wealth because
it has been my internet experience that every man in a chat room or blog is a internet billionaire and has
a 14 inch sclong.
I see the markets around the world dropping faster
then prom dresses on prom nite.
The largest markets sinking faster then Vito with
a pair of cement shoes and a lead bullet labotomy.
The ubber rich cant heat their McMansions with the
fake gas log fire place when there isnt natural gas.
I also see many references to the intectual among
us. I dont have a GED let alone a PHD or even a
community college degree.
I dont think survival depends as much on intelligence
as it does on adaptability.
I dont believe survival depends on the fittest as much
as it does on adaptability.
Before you argue with me....look at all the posts on this site where you all bemoan the lack of adaptability as the cause celeb for this bad horror
flick we are being forced to screen.
Its all lack of adaptability and the rich and wealthy
are gonna suffer with wailing and gnashing of teeth
like everyone else.
You are half right-I am not an Internet billionaire.
We will see in New Zealand tomorrow truckers holding us to ransom on our motorways blocking in all cities transport for the peak hours morning and night. This in protest at the rise in road user charges sprung on them without warning overnight by our Government. The rise a modest 10%.
Wait until they are paying $5-6NZ per litre at the moment $1.90 no amount of disruption will bring that cost down and no western Government can do anything about it.
JK
Why is it I start out in TOD USA and end up stuck in TOD Europe, Canada, Australia, etc? Methinks we need some back links here.
Because "It's a small world after all."
For now.
Oil price getting closer to $200.
Today, both Tapis and Minas are over $150/barrel.
http://www.upstreamonline.com/market_data/?id=markets_crude
I must take exception with some of the analysis here- namely that a large segment of the population is going to default on long-term debt and gladly spend "$2000" on food and fuel. First, I was unaware that this huge swath of the American populace held long-term debt that could easily be relinquished and that financial institutions would sit by and just say, "Hey, they defaulted! Let's not pursue them for a judgment and garnish their wages and bank accounts. Let them spend that extra $2,000 on gas and food!" Those who qualify for bankruptcy will only qualify for Chapter 13 and are going to be put on a strict diet by the bankruptcy trustee. Finally, if they had $2k to blow, they wouldn't be defaulting on their houses. This analysis also leaves out the continuing shrinkage between rents and sale prices. The cost for rentals is going through the roof. No pun intended.
As prices remain high, the pace at which people begin to change their behaviors will only accelerate and, as more and more people get laid off from jobs as a result of the higher energy prices, people aren't going to have $2, let alone $2000, to spend on gasoline. This bubble, along with the housing bubble, the dot.com bubble and every other one created by fiat money is going to come crashing down. The only question is when. At what point does increased production/lower demand/alternate fuels/increased interest rates cause the sheep who gladly dump their dollars into oil futures to realize they are as stupid as the person who bought the home worth $200,000 for $500,000 in some crappy California suburb with the hopes of reselling it for $700,000?
As more is spent on fuel, and less on other goods, the overall demand for fuel would still drop- since more fuel is used in the production of goods than in transportation, when there is less demand for production there is less fuel used regardless.
It would not suprise me to see demand in the US to be 5-7% lower than the year previous in just a few months. At some point the Fed is going to have to increase interest rates and cannot ignore food and fuel inflation and a substantial amount of liquidity will be soaked up. If the Fed were to announce a half point increase in the rates you'd likely see a 10% drop in crude prices in just a couple of days.
The emerging markets, where per capita income is 1/10th of what it is in the Western world, and whose use of fuels is least efficient, is hardly in a position to increase consumption particularly when so much of that income relies on exports to the West which will dramatically decrease over the next few months.
Call me crazy, but I don't have much faith in governments or agencies predicting future economic pictures or future prices with much clarity. (Despite that comment, I attempted to do just that above). I would guess (since my guess is as good as any one else's here) that you'd see peak prices within six months followed by a collapse.
Oh, forgot to post this link- this Mad Max doomsday scenario reminded me of what happened in Alaska a few months ago- the city of Juneau reduced its energy use by 30% in a matter of a couple of weeks as energy prices soared due to an avalanche.
http://www.nytimes.com/2008/05/14/us/14juneau.html
Banana,
Yep....China would be buying less crude on the world spot market due to their developing ownership in new fields as well as sourcing long term contracts. But remember they would also be removing the same amout of oil from the market place. And these new devlopment projects are the new production we see replacing at least part of the declining production base. In a couple of years US refiners might be able to out bid everyone for Angolan crude but it won't matter because much of it will be owned by the Chinese and won't be on the market.
I can't judge the magnitude of the approach the Chinese have been employing for the last 5 years or so but the goal is obvious: guarenteed access...not pricing. Perhaps a better way to visualize their process is that they are transforming (at least partially) themselves into a mini-Saudie. Saudie is producing around 9.5 million bopd right now. Imagine in 5 to 10 years China owning (not buying) 9 or 10 million bopd in other countries. Not a pretty picture for the rest of us buying on the spot market.
Freudian slip? ;)
The IEA’s demand forecast for developing countries is flawed as presented in a compelling case by Nel and Cooper in
“A critical review of the IEA’s oil demand forecast for China”
, Energy Policy, Volume 36, Issue 3, March 2008, Pages 1096-1106. Nel and Cooper point out that the demand forecast for China could be underestimated by 2 million barrels per day (Mbpd) by 2010, 5 Mbpd by 2015, 8 Mbpd by 2020, and so on.
These figures could increase considerably if other developing economies are included. Nel and Cooper’s analysis assumes that the IEA’s economic growth outlook for China is plausible. An alternative view is of course that, if the oil demand cannot be met, the economic growth outlook is overstated.
Who is the IEA playing for? It seems that a religious following of the IEA numbers must have faith based roots.