Nate's Reality Report Interview - Hurricanes, Financial Markets and Peak Oil

Last week, Nate Hagens was interviewed by Jason Bradford on the "Reality Report". The radio program is about 47 minutes long, and Nate's interview is the last 40% of it. A link to his interview can be found


The first part of the show is an interview with a woman who has been living without electric power since Hurricane Gustav hit. She talks about how the experience has changed her life, and about her thoughts regarding preparing for future energy shortages. The latter part of the show is an interview with Nate on various subjects related to hurricanes, the credit market, hedge funds, and peak oil. He talks a little about the Fannie and Freddie bailout, and about trying to change people's way of thinking about the future.

The Global Public Media site describes the program as follows:

Hurricanes in the Gulf of Mexico are a major concern for the whole United States as our economy relies on the fossil fuels and their byproducts from the region, and Gulf ports for global trade. This program explores how our anxiety over these storms reflects the lack of resiliency in our current energy and trade systems. Guests are Nina Tassin, a resident of Donaldsonville Louisiana, and Nate Hagens of University of Vermont and The Oil Drum.

Well that was fast. We already need a new oil price poll. Light Crude has already traded as low as $91.

Looks like I made the right choice in the last poll. Trends generally continue until they end. It doesn't pay to try to predict where they will end going up or going down.

Markets have a tendency to go to extremes either way. There was a possibility of a 1/3 correction which would have halted the downtrend at about 100 but that has now failed. So it appears that the market wants to try for 50% which means about $75.

With refineries shut down and the release of the SPR it may make it. Add to that the financial hurricane on Wall Street which is forcing some players out of the game and the likely target seems reachable.

Market downtrends frequently stop at 50%. The reasoning is that most things are worth more than zero, so zero has to be the absolute bottom. We know that the top was $147 so the middle must be about right. Here comes $73 crude.

Peak Oil remains as valid as ever. On a per capita basis which is what really matters, oil production peaked in 1971 and we are 37 years post peak. It makes energy wars, financial collapse and worsening food/economic conditions in many countries even more understandable IMO.

As I've predicted in the threads following the previous two polls I still anticipate that we will bottom out at about 80-90 USD/BBL. (Cost of production of last barrel). However, with the current market situation, and in particular the strengthening of the USD, I believe that I may have over estimated the bottom and that oil prices may even fall to anywhere between 50-70 USD/BBL.

I am still intersted in a serious response from all those avid oil-drum contributrs who have stated again and again in earlier threads that: "oil prices can never fall below USD 102", "We will never see double-digit oil prices again".

Amazing how confident and eager these fellows are when oil prices are going up - and how quiet they are when oil prices are falling.

in 2007 WTI fell some 36% from 78 to 50 USD. WTI has now fallen some 35% from 148 USD to 97 USD. Weekly RSI is now as low as it was then. Possibly this might indicate we're about to see a change in oil prices?

"John Hofmeister, the former president of Shell Oil Co. and one of the most influential voices in the oil industry, called for short-term gasoline rationing by introducing odd-even purchases based on an automobile's license plate and by limiting the amount of gasoline drivers can purchase.

The United States will be in "a world of hurt" for the next four to six weeks as the oil industry recovers from the damage from Hurricanes Gustav and Ike, said Mr. Hofmeister, who recently founded a new company, Citizens for Affordable Energy. The areas where rationing will be needed include the Southeast and extend northward toward Denver, the upper Midwest and Washington, D.C., Mr. Hofmeister said in a newsmaker interview Monday morning with editors and reporters of The Washington Times. "

It's evident for some of us that we now are very close to a situation where oil supply will dictate future oil price rather than the oil demand. Almost everybody on chat sites as this one as well as proffessional analysts still focus on the demand side and many argue there now is demand destruction for oil and thus we can expect lower prices.

First of all if that where to be true woulden't possibly future lower prices then make demand increase at some point of time? Thus making the case for higher oil prices going forward even stronger? Secondly, if we look at actual demand as well as the predictions for 2008 and 2009 according to EIA this is now what it looks like:

Oil consumtion from 2005 EIA:

2005: 83,65 mbpd
2006: 84,70
2007: 85,53
2008: 86,31
2009: 87,30 (expected)

To me at least is seems ww demand in fact seems to progress in quite a steady pace.

Then according to (IEA) we are now losing some 5,2%/annually (or some 3,5 mb per day) from existing oil fields.

2007: 4%/year
2008: 5,2%/year = 3,5 mb per day

However citing people like Boone Pickens and Matt Simmons they indicate it could be more:

"World oil production, I believe, has peaked, and the world’s current oil fields are declining at the rate of 8 percent a year." (Boone Pickens 17 june, 2008)

"a more realistic rate of decline is 8% to 10% a year. The decline rate is probably going to end up averaging 10-15% over the next decade Mr. Simmons said."

According to CERA "Individual offshore fields are declining at a 10 percent annual rate compared with six percent for onshore fields, and deepwater fields decline at 18 percent annually."

"Simmons said in some deep-water fields, the decline rates have been above 30 percent."

A resent study made by ASPO in Uppsala, Sweden and Robert Hirsch indicated production decline from oil fields starting it's decline today is higher (annual average 12%) compared to oil fields that entered in to decline in between 1960-1990 (average (5-6%) as well as fields entering in to decline before 1960 (4% annual decline on average).

Given the fact that peak discovery occured 1964and new oil discoverys has declined ever since and that we since 1990 have consumed more oil than what we have found new per year, we do not have new recovery per yer necessary to compensate even for the now occuring annual and possibly from now on ever increasing supply decline, not mentioning then the the demand increase.

Now the implication of oil fields peaking are quite severe as as only 507, or 1 % of the total number of fields, are giants. But their contribution is striking: over 60 % of the 2005 productionand about 65 % of the global ultimate recoverable reserve (URR).

A majority of the largest giant fields are over 50 years oldand the discovery trend of less giant fields with smaller volumes is clear.

Clear is that when a giant field peaks and starts to decline the implication on world oil production may be quite significant. As an example Cantarell in Mexico, once the worlds third largest oil field discovered 1974, currenty is falling out of a cliff having lost some 50% by now of it's production capacity.

Bottom line: still we see oil demand increase, decreases in OECD for sure but increases basically everywhere else. This as basically the only oil consumers at the moment paying full market price for oil are consumers in the OECD countries, that is the once without any oil. Oil field decline rates seems to be increasing and as larger and larger filds now risk to enter in to decline the implications on world wide production may be quite severe.

There has been some decrease in the ww oil demand increase rate but we still ww have a clear total increase of demand.

Given the supply destruction of some 3.5 MB per day and add to that the expected demand increase of some 1% equivilent of some 1 MB per day and what then needs to be added every day is some 4.5 MB of new production. This is the same as a new oil discovery equivilent of Saudi Arabia every second year.

The question is whether ww demand for oil will start to decline in the future and if so if that decline to any extent can match the at least 5.2% annual supply destruction(possibly even higher) in the future?

What really will happen is that oil price will not be dictated as it used to, by demand but in fact by the availability of supply. Ever srinking and most likely escalating supply declines from now on indicates ever increasing future oil prices.

Expect this insight to "enlighten " the broader investor community as the new IEA supply report will be presented November the 12th this very year. From then on it is very probable valuations of oil companies with possible future increases of reserves will be rewarded. Especially if they are activ in geopolitical "safe" regions of the world.

About the true value of the average decline rate, there are a lot of estimates flying around probably because there are talking about different definitions of the decline rate, is it:
1. the average decline rate of fields in decline
2. the decline rate of the resource base (i.e. without new supply additions)
3. the average decline rate of new supply additions
I would say that 3 is probably around 12-15% because new supply is mostly offshore (think Norway), decline rate 2 is probably moderate and is probably around 3-4% because it includes some production growth, 1 is probably higher around 5-6% . Also, the decline rate of a sum of declining productions is not necessarily equal to the average of the decline rates of the individual productions so the way decline rates are estimated is important.

Consumption (i.e. satisfied demand) is flattening and supply is still increasing, unless there are long term structural changes in demand (e.g. more efficient cars are used), consumption will probably go back up as soon as oil prices settle around $80 and below. We are entering now an extremely non-linear regime where feedback mechanisms between supply growth, economic slowdown, demand structure and oil prices will dominate.

Can you expand on what you mean by "extremely non-linear regime" as opposed to linear regime and how that effects feedback mechanisms? It's a little esoteric for me...Tx

A linear system is when a response y (e.g. oil supply) can be modeled as a linear function of a set of independent predictors x (e.g. price, demand, GDP growth) using usually a generalized least square approach. Interactions between predictors and feedback from the response to predictors make it impossible to use that simple approach. When a system is stable, you can assume that some predictors are known and set them to a fixed value with a good confidence (e.g. demand growth humming at a constant 2% per year).

OK...Would it be fair to say that because of turmoil like we're experiencing disruptions from hurricanes and military conflicts (nigeria, iraq, nauseum), capital market chaos, changing patterns in consumer spending and other stuff that modeling of any kind made today would be highly complex and results suspect?

"Consumption (i.e. satisfied demand) is flattening and supply is still increasing"

Key poins here are that ww oil consumption is increasing. Sure in OECD oil demand is decreasing and has been now for quite some time. In Sweden as an example oil consumption is reduced almost by half since 1975. In the developing world however the increse is significant not to say aggressive in oil producing countries. Combine OPEC with Russia and Mexico and this today is the worlds second largest oil consumtion market second only to the US larger than Western europes and some 60% larget that Chinas oil consumtion. They are developing their economies in a very, very aggressive manner today. Russia today is Europes largest automarket and they prefer large american cars like e.g the Hummer. Saudi Arabias uses it's oil domestically for all sorts of industrial projects e.g. like aluminium production but also desalination.

Regarding production of crude OPECs been unable to increase it's crude production and last 3.5 years ALL production increases in fact has been related to natural gas. Russia that earlier provided for some 80% of all production increases in Non OPEC now is unable to increase it's production.
Nigeria is way of it's target to produce 3 mbpd and in fact today is able to produce less than 1 mnpd due to what now in fact is a civil war in that country.

Even worce is the situation when you then look at the ability to export. The worlds largest oil exporters today (Saudi Arabia, UAE, Iran, Norway and Russia) will be unable to export any oil already by 2030. For the US the situation is quite seriouse as two of it's largest providers of oil, Mexico and venezuela now are down some 19% YOY on oil exports.

The possible increases in new Saudi Arabian oil production will be as times goes by offset by Ghwar future decline and the Sudies domestic oil demand indreas.

I think what we see now is "wild fluctuation of prices while entering the undulating plateau".

Let's wait a couple of month for the debris of the business banks settling.

The world is still burning 85 million barrels of oil a day, and I am very sure that current prices are not reflecting the equilibrium price of supply and demand.

Let's wait a couple of month for the debris of the business banks settling.

I can't image that it'll be that fast.
How long till the toxic investments of Lehman (and Merril?) get dug up marked to market? It'll be neat seeing what happens to all of the counter-party agreements Lehman had.

Demand destruction will take time. For instance Alt-A foreclosures will not really hit until next year and will continue for a year after that. There is still the whole CDS insanity to settle. Expect that to take around 2 years till we're thru the worst of the housing and be bottoming. Has anyone seen a solution to the muni bond/insurance yet - that's pretty a immediate issue?

Bank failures have barely started and demand destruction hasn't kicked in much yet. After that there will be the effects on countries supplying the unsustainable USA consumption (their own to boot) and that'll take time as jobs are lost, local economies sink and home losses take place.

The winter season will be interesting - yea old play of reserves, demand, demand destruction and whatnot.

Then there is the PEMEX issue - slow motion crash right before our eyes - a loss of supply that's going to be covered by ????

... a loss of supply that's going to be covered by ????

some of it should be offset by tar sand production after 2010:

some of it should be offset by tar sand production after 2010

Where will the natural gas be sourced from to allow all this increased tar sands production?

Is it just me who feel cheated? Here we were lead to belive that 140 dollar+ oil was all about fundamentals, yet we see a fall of more than 50 dollar! And the global production is steadily increasing with record production recently. I feel there was way too many people that got carried away with 140 dollar+ oil and they should apologize I think.

I really don't think so. We hjave seen these types of movements in oil many times before and this most certainly will not be the last one. Volatility is name of the game and one of the real idicatios of a finite resource going scarceer.

In 2007 WTI fell some 36% from 78 to 50 USD. WTI has now fallen some 35% from 148 USD to 97 USD. Just go back a couple of years and see these types of movements are part of an ever increasing uppward trend for oil where highs keep getting higher and lows as well keep getting higher. At the levels we're at today onlöy one year ago would have been assumed to be the end of the world.

We have been shown that U.S. natural gas wells have a much steeper decline rate than during the 80's, but the drilling fleets were growing rapidly and production has been rising, in spite of the fact that decline rates are high. A natural gas well has a steep initial decline curve that flattens out after a few years. Daily production continues for years after the initial steep decline drop.

Much of the oil in the United States was produced from stripper wells. Some of these fields watered out years ago, but small amounts of oil yet bubbled up from the depths.

If not for the deep GOM, and tight Bakken oil plays, the United States would be declining in production in 2008 instead of having increased from 2007. Not all nations have been able to increase oil production in spite of record high oil prices.

Because OPEC exists and these nations rely on oil sales to run their governments, there is potential for a decrease in supply not due to natural declines, but attributed to political declines in OPEC nations. Indonesia was the first OPEC nation to withdraw due to inability to export oil after natural declines. Most OPEC nations were showing production and or production capacity increasing. Worse problems might appear in tne next decade as Saudi Arabia planned peak production capacity to occur in 2009, Kuwait has been rumored to be approaching production declines, likewise the UAE might experience production problems by 2015. Algeria might find increasing difficulties with crude production. Ecuador needs to turn to heavy oil or offshore production if it is to reverse declines. Libya had sanctions applied for years and was seeing its production increasing after the lifting of sanctions.

Russia is close to sideways now, yet they have some Rosneft projects close to completion, thus it is difficult to predict year end production. The Indian oil industry races to try to develop deep offshore deposits as its existing fields will decline. China was showing slwo steady increases in oil production from the Tarim Basin and offshore zones.

West Africa, Brazil, Canada, the Caspian, and parts of the Persian Gulf nations might continue to increase or maintain production for years to come.

I feel there was way too many people that got carried away with 140 dollar+ oil and they should apologize I think.

Price is an incorrect signal for long term resource shortages and environmental problems. Other than some traders on here, what does $145 oil or $80 oil have to do with our long term oil shortage problems? (other than the obvious of being counter to peoples 'beliefs' that the concept of peak oil is somehow validated by higher prices? What you mean to say is that you've made changes to your life based on high oil prices that look somewhat foolish, and you'd like an apology for someone who told you about high oil prices??? Not sure I understand...

Interesting that not one of the comments on this thread was on the content in the interview linked above, which considering I had bad cat allergies, was relevant to what is happening. I guess that kind of reinforces notion that (most) people care about short term crude price and how it affects their own situations

"Interesting that not one of the comments on this thread was on the content in the interview linked above"

Several big reasons.
1. Link requires registration for most
2 registration process tedious
3. audio link a pain for us on slow connections, or with bandwidth limits

Please post a easily accessible text link in the future. I keep scanning the comments to get an idea of what was said, but no luck.

OK-finally got a connection. Nina-her neighbors and her are getting together, but she doesn't expect it to last, and what she misses is laundry capability-don't really think of not being able to dry clothes and the rot/mold problems.

As for your comments on the need for prices high enough to curtail consumption but not enough to cripple the country, I agree. I tried to get the portion to replay where you speak of the 25 billion fund to control the market to more productive uses, but it flipped back to the start of interview and I'd have to listen to the whole kit and kaboodle again. Got mad at it, kept clicking, and pretty soon an instrumental of my son's from a number years ago was playing. Forgot about that piece, it was nice, I'm not the most computer savy.

Never heard beyond 37 minutes, but care to elaborate on your fund and yesterday's report from the Commodity Futures Trading Commission that financial trading hasn't been driving prices?

Hi Brachio,

I become totally confused about how one day oil is "worth" $150 and the next week, when all hell is breaking loose, it is only worth $90 or less.

Being intelligent is a handicap, because the price of oil seems not to be based on any intelligence.

Sentiment--maybe. Manipulation--very likely. Conspiracy--yes but at the sub-conscious level for gaining advantage for number one.

One thing is definite. ALL the reasons analysts, reporters, and the media give for the "flavour of the day" market Up or Down are their own Subjective garbage.

We as people take on mass hysteria, fashions, religions, follow the leader and stay with the crowd.

I personally think that there are a few key people setting the required hysteria for the markets, which become reinforced by a subconscious conspiracy on our part to stretch whatever the envelope is for our own imagined advantage while it lasts.

Market Fundamentals are mere distractions.


Are you prepared to apologize for the days not so long ago that oil sold for $10/barrel?

I can almost hear the brakes being applied to new drilling prospects as we speak.

Argue the disconnect between supply and demand till the cows come home, its the price at the pump that the
public cares about. Weather crude is $20.00 or $140.00
a barrel makes absolutely no difference when the price at the pump remains $4.00 or $5.00 a gallon. Lipstick wearing pitt bulls driving the kids to soccer practice or guys commuting between their 7 homes don't care about the price of a barrel of oil, its the gallon price of 87 octane they pay, and think about.
John or Jane Doe never ask how much a barrel of diamonds cost on the world markets, they shop at Kay's for a 1 carat @ $4995.00. Americans can't be bothered with how much chop cost, to feed a chicken, its the cost of chicken wings per pound that gets their attention.
The people here on TOD have the benefit of elevational see what goes into the hot dogs, thats why you're reluctant to eat the product the media is selling you, and you get confused. Cause apparently the rest of the crowd is eating and they appear okay.
Just they seem a bit boisterous collectively, isnt that BAU for the circus and bread throngs? you ask yourself.
Train wrecks became inevitable the day the train was Iam going back to the smoking car and
finish that scotch I smuggled on in a brown bag...any
one else for a wee bit o dram fer ye draught?

IMHO the fall of oil prices is due to three components:

  • Speculative long positions that are being suddenly closed and turned to short positions.
  • Fear of a deep economic recession, with impact on oil consumption.
  • Fall of demand due to the closing of many big refineries in Texas and Lousiana

How long will the fall last? It is difficult to say, but its deepening to 70-80 $/barrel is not unlikely. In the long term, however, the fundamentals will prevail, and price will surge again. IMO, it is time to buy some call option on oil.
BTW, here in Italy, despite the fall of oil prices, the gasoline price does not decrease significantly. Probably, it is due to shipping of refined products from Europe to US, to compensate for refinery closure.
Since the middle-man (the refineries) is out for some time, we are seeing a drop in oil price, and a surge in gasoline price.

You left one out -

Political intervention due to the upcoming election.
The Republicans had to get price of oil down to get elected.
Next, price of gas will go down too.
By Nov 7, gas will be $3 or less.
If Republicans get elected, then oil and gas will go back up.
If Dems get elected, it will continue to go down.
Wait and see......

I think there's something wrong with your brain. Or have you been licking the back of your Obama bumper stickers?

Nothing wrong with my brain, take a look at history.

When Bush, SR, was in office, gas was high due to mid-east conflicts that he drove. When Clinton was in office, gas was low. When GW Bush took office, gas went back up to benefit all the buddies in the oil business. You think I am kidding? This is serious.
If McCain gets elected, gas will go right back up to help the oil companies again.
It is time to stop this cycle, and move on to new energy.
Oil companies act like they are moving in a new direction, but have done nothing to prove it.

Bush Sr told Saddam Hussein to invade Kuwait? Bush Jr planned 9/11, told Saddam to break countless UN resolutions, controlled every single major intelligence agency that said Saddam had an active WMD program AND forced Congress and the House to overwhelmingly vote for presidential war powers? Wow, this family is seriously powerful! It's no wonder they've been steering all those hurricanes into the gulf and screwing up production/refining!

Bush Sr told Saddam Hussein to invade Kuwait?

Probably not. However his ambassador April Glaspie told Saddam that how he resolves his dispute with Kuwait is an intra-Arab matter and the US wants to stay out of it. Saddam took this as a green signal to invade Kuwait. So either April Glaspie screwed up big time or Saddam was setup.

Bush Jr planned 9/11,

I don't think so.

told Saddam to break countless UN resolutions,

Israel has broken many more UN resolutions. When is the US going to invade Israel? Since you believe in the sanctity of UN resolutions, can you tell me which UN resolution authorized the Iraq war?

controlled every single major intelligence agency that said Saddam had an active WMD program

The adminstration knew that Saddam didn't have WMDs and only used that excuse to rally public opinion. Wolfowitz admitted as much in a Vanity Fair interview. Bush continued to claim that Saddam imported yellow cake from Niger even after the claim was rubbished by the CIA. He and Cheney insisted that Saddam was behind 9/11 even though they knew it was false. Cheney made several trips to the CIA headquarters and twisted their arms to give him the intelligence he was looking for. And even if Saddam had WMDs, so what? He didn't have the means to deliver them and he had no desire to commit suicide by attacking the US either directly or via proxy. Saddam had WMDs during the first gulf war and didn't use them. Remember: the US has more & bigger WMDs than any other country and the means to deliver them. Deterrence works.

forced Congress and the House to overwhelmingly vote for presidential war powers?

The congress didn't want to look weak and spineless on national security affairs. The administration propaganda (using a compliant media) made it look like you were a traitor or a coward if you didn't support an attack on Iraq.

As oil ran up toward $150, there were plenty of posts about the price pattern during the end days of whaling and the depletion of caviar, and other less esoteric product shortages.

A common facet of ALL was a pattern of price oscillation, generally increasing in magnitude but always overlayed upon a long-term increasing trend. Nobody here seemed surprised to see the run-up, but many seem surprised to see the drop back down.

We all know that there is a significant lag function for oil prices to drive new drilling and production, and first we saw a price overshoot while production lagged and demand escalated and now we're seen an undershoot as production expands and demand decreases. It's a classic feedback system that has gone into oscillation.

Once we go past "way too cheap" and production destruction occurs and demand recurs, it'll go back again the other way to "even more unreasonably expensive". My only worry is the rate of the oscillation -- I figured it would be 2 years up and 2 years down, while this looks more like a direction shift every quarter or two.