Countdown to $200 oil (12) - betting on Yergin

It's been a while since I did a Countdown diary - no wonder, given that oil is now below $60, ie at the same level as when I started the initial "Countdown to $100 oil" series back in 2005...

While the $200 target looks to be some ways off right now, given the expectations of a massive global downturn, the mechanism that has been pushing prices down is the same one that had been pushing prices up in the first part of the year. As I explained in this recent opus of the series: it's the marginal cost of demand destruction that matters, rather than the marginal cost of production. Demand was driving prices up when it was strong, and it is now driving prices down just as brutally by crumbling just as spectacularly (whether directly, finally, because of high prices, or indirectly via the economic crunch).

But we now, unexpectedly, have a strong "buy" signal again: an article by CERA's Daniel Yergin telling us that current prices are justified.

Yergin has an unbeaten track record of being wrong on oil prices this decade, as this graph suggests:

Back in May, as oil prices touched $130, he famously wrote:

Two years ago, CERA created its Break Point scenario, to explore how supply disruptions and delayed development would lead to $120-$150 oil. What was not fully anticipated was the impact of rapidly rising costs. Not anticipated at all was a falling dollar, and how it has stimulated a rush by investors into oil. The real question in the scenario was what would be the response to such high prices.

After years of claiming that prices would go down, Daniel Yergin was suddenly claiming that he had predicted $150 oil all along, and announced an era of more expensive and less dominant oil.

Today, he writes this:

The world oil market is caught in what Cambridge Energy Research Associates two years ago described as a “Global Fissure” recession scenario. Total US oil demand over 2008 is down 1m barrels a day compared with last year. The last time demand dropped this much was in 1981, on the eve of the recession that was – until now – known as the “worst recession since the Great Depression”.

So he's shamelessly telling us that he predicted the crash in oil prices, and announcing that this will threaten investment in alternative energies, thus ensuring that oil remains dominant.

Beyond the lack of intellectual honesty, this should be seen as a sign to buy oil again--just like his earlier article was seen by various people, including some editors of the Oil Drum, as a sign of a good time to sell oil...

The big question of the day, as the collapsing world economy brings about demand reduction, is whether that demand reduction will be faster or not than production reduction, as investment in new capacity is delayed, and existing capacity declines. It is these relative speeds that will drive oil prices in the short term, until production decline clashes with any pickup in economic activity and causes more price jumps.

:: ::

See also the Countdown to $100 oil series.


I'd like to see your countdown delayed until the US and Europe can get off of oil. Fairly rapid demand reduction would need to occur to see this happen. Do you think Europe would be interested in essentially eliminating oil use over the next 15 years or do you think the oil interests are too powerful to allow setting such a strong policy?


Do you think Europe would be interested in essentially eliminating oil use over the next 15 years or do you think the oil interests are too powerful to allow setting such a strong policy?

I bet everyone is interested in essentially eliminating oil use over the next 15 years. Much easier said than done. In fact it would likely be impossible even if the world thought there was a problem. Besides cars and trucks, you have airplanes, ships, farm machinery, construction equipment, pesticides, asphalt among even more uses of oil. And since the world for the most part has still not even reached the first stage of a solution - realizing there is a problem - getting off oil in 30 years seems an unrealistic goal.

I concur with the opinion that weaning ourselves off oil, or at least fossil fuels in general, is not going to happen within 15 or even probably 30 years.

One additional factor however is, in my opinion, it has been found recently that we have a whole lot more natural gas in the US than previously thought, due to the fact that we now know how to tap into the "unconventional" sources like the "shales" (Barnett shale, etc)

Probably the stupidest energy strategy is to do nothing, in which case it won't be long before we are paying 4,5, 10 dollars per gallon for gasoline. As was pointed out in the original post on this thread, even with demand dropping in an economic downturn, supply will be dropping even faster based on the very rapid dropoff in oil production of existing fields that all analyses have been projecting.

A somewhat better strategy is if we start switching over our ground transportation system to natural gas. If we can do those as hybrids, all the better.

Once we did that we would probably be able to continue, as J Kunstler likes to put it, "happy motoring", in my opinion for 2-3 more decades. I agree with a lot of his assessment of what we may be facing in the future, but I think his time frame is way shorter than the way things are actually going to play out, particularly due to all the natural gas supplies that we now have in the US.

What about other countries? Not sure. They may be able to do a similar scenario relying heavily on LNG from places like Qatar.

Anyway, my view is the peak fossil fuel crisis is certainly coming, but it may very well be posponed a couple decades on account of natural gas.

Ironically, we may have a severe transportation fuel crisis in the next 10 years or so, not because of the time lag to switch over to renewables, but because of the time lag to switch over to natural gas.

What about electric cars? Well, if better batteries are perfected fast enough, maybe we can switch over to those in nearly the same time frame as a switchover to natural gas vehicles.

But functionally a natural gas vehicle will be very similar to a gasoline one, a little crummier because of the large tank, but otherwise about the same. Getting the same functionality out of a pure EV I think may still be quite a ways off.

Of course, if we didn't have fossil fuel vehicles, we would certainly settle for whatever we could get, people would certainly drive something along the lines of a battery powered golf cart than not have a personal vehicle at all. But, so long as there are fossil fuel vehicles to be had that aren't prohibitively expensive to run, which I believe will be the case for natural gas cars for several decades, people are liable to prefer those.

Unfortunately, that means we may wind up with a long period of complacency driving our natural gas cars instead of gasoline cars.

That era of course will eventually end as well. If society is smart enough to continue to improve EVs during that time, then perhaps they will be able to make a fairly painless switchover.

In terms of switching over to renewable energy in general (not just with regard to vehicles), I believe we are looking at about a 100 year transition.

When I talk to lay people who are renewables buffs they think I am nuts to believe it will take that long. However, when you look at the writings by experts on renewables, they talk in terms of goals like 20% of our electricity from renewables by 2020. If we just look at electricity, one would figure, well we ought to be able to do the remaining 80% a lot faster than just at a linear 1% more per year, which is the rate we would be going at if my 100 year hypothesis proved to be correct.

However, I think that there are some important challenges that most renewables advocates, especially those without science or engineering background, fail to recognize.

If to have a renewable electric grid all we had to do was replace all our existing power plants with wind and solar generators, then the switchover indeed could be quite fast, because economy of scale would allow us to ramp up our renewables sources at an exponential, not linear rate.

However, once we reach a certain percentage of renewables, the intermittency problem starts becoming a real thorny one. I saw a discussion on TV from some conference in Seattle recently and one utility guy seemed to be contending that the way you deal with intermittency is you simply change the price on a minute by minute basis. When the wind is blowing you buy your electricity dirt cheap, when the wind is not blowing and the sun is not shining then you pay through the nose.

I guess that's one approach, although not one that is likely to be too popular unless there is no alternative, the alternatives being as far as I can ascertain either 1). huge energy storage facilities or 2). a massive highly-efficient global power transmission system (I believe Al Gore is a proponent of the latter).

The technology does not yet exist for either of those. The second of the two not only has technological challenges; geopolitical considerations might also be a show stopper for that one.

Then of course the other big problem with transitioning to renewables is that not all end-uses of energy can run on electricity. The most commonly cited example, of course, is aircraft. If we're lucky, we may be able to produce enough biofuels for those things that absolutely need hydrocarbons.

Anyway, a renewables world is a long ways off. But for those who think we can get there a lot faster than I do, I think we can all agree on one point. We need to develop them as aggressively and quickly as possible.

One disagreement. You discount the Realtime market for electricity as a nearterm solution to intermittency, apparently on popularity grounds.

I saw a discussion on TV from some conference in Seattle recently and one utility guy seemed to be contending that the way you deal with intermittency is you simply change the price on a minute by minute basis. When the wind is blowing you buy your electricity dirt cheap, when the wind is not blowing and the sun is not shining then you pay through the nose.

I guess that's one approach, although not one that is likely to be too popular

You need to revisit your incorrect assumptions, whatever they may be. Modern digital control and communications technology can make all this operate invisibly in the background for you. It can be done cheaply (eg. <$5 / month / point) and be repaid by giving every customer direct access to the wholesale electrical market, where electricity sells on average for less than half what retail customers pay and in off-peak hours could charge your EV essentially for no noticable cost, eg. <$0.01 / kwh.

That system is the real fix for intermittent renewables.

It should also be noted that the very times when electricity is the most expensive on the wholesale market, because everyone is trying to buy it, (4 pm on a hot summer day) is exactly the same time that solar panels tend to be producing a lot of power. When the sun isn't shining, electricity use is actually a lot less "naturally." And sure lighting does use some power, but far less than AC or heavy industry or buildings that have to have the lights on because they don't have any windows. And most of those use power in the day, not at night.

Getting access to the wholesale pricing schedule is what makes solar panels a lot more cost effective. For instance, I sell the power produced by my solar panels at 13 cents/kwh in the middle of the day when I'm not even home to use it, and then buy power at 6 cents/kwh late in the evening to cook dinner. Not only can I use a lot more power than I produce, and still only have to pay the metering charge, but the power company is making money on this arrangement too.

“Do you think Europe would be interested in essentially eliminating oil use over the next 15 years or do you think the oil interests are too powerful to allow setting such a strong policy?” Posted by mdsolar

Not gonna happen, not in Europe, America, or any industrialized economy, nor in any of the “emerging economies” that have recently caught the “economic growth” virus.

There are only two ways that I can see to cause this level of demand destruction, 1, a kickass worldwide depression, or, 2., some decades from now when the great oilfields are but carcasses, strewn with no more than stripper wells. In the depression scenario, oil could be $5 per barrel, but in a depression, everyone is pretty much broke, and $5 might as well as be $500.

One thing I’ve always been curious about, and maybe Westexas or Robert or one of the oilmen here might know, and that is how long is it realistic for any oil to be produced? In 100 years, is there any chance that places like Ghawar and Texas could still have maybe numerous stripper wells still producing? In 1,000? Or will all production have faded away sometime in the next century”

Antoinetta III

We cannot eliminate oil use. Not in the US, not in Europe. Everything we do, everything we have and everything we eat requires oil & ng. Fertilizers, plastics, elastics, nylon, polyesters, condoms & even the pill. People get food from supermarkets, money from jobs transporting things & baking air.
All over the 'globalized' world, we need constant and preferably rapid growth to keep the system going: only growth can promise affluence for everyone.
Inverse growth or contraction will cause a major fight over remaining resources: witness the glorious way the good old boys are 'privatizing' the next x-ty years of taxes.
We all know the world isn't ruled rationally. But in this globalized world, everything is connected to everything, and all of its systems are at full capacity or over.
Even if global warming wasn't there, we are doomed to worse than unpleasant times. And as for global warming, I can only hope for fast and furious demand destruction of fossil fuels. Faint hope...
The next bit is misery followed by death.


Would you like to tell me which fertilisers come directly from *oil*. Not natural gas, but oil?

Would you like to tell me just what percentage of oil goes into your laundary list of other products - is the entire output of Gwahar required for the pill? Would oil increasing in price by a factor of 100 affect the manifacturing costs of condoms much?

And, of course, how many of these uses are absolutely non-substitutable, even given that negative EROEI oil sources are prefectly OK as a source of industrial feedstocks?

Have you put even the slightest thought into this subject? Learned any science outside of the Offifial Doomer Line (tm)?

Subsitiution of static Oil and Gas use (Heating, some electric and feedstocks) is a relatively trivial problem to fix; Nuclear power with climate-appropriate renewable contributions can fix this on century-plus timescales. Substitution of transport varies in difficulty; most commuting a local travel can be substituted with EVs with current technology; Air travel and long distance haulage are the harder problems.. but we'll have enough oil for them for decades to come.

There is no particular reason why we need fast growth, this is not the requirement for debt repayment as commonly asserted here (you forget inflation).

Try to be critical of anything you read that agrees with what you already think.

Have you put even the slightest thought into this subject? Learned any science outside of the Offifial Doomer Line (tm)?

excellent. the (tm) is priceless.

Also correct in every sense.

Did you ever calculate how much effort, design, advertising, packaging and transport go into your ergonomically formed throw away razors?
How much oil is used in the process?

I think there are alternatives to growth and it is not a case of affluence or death.
Ask the 36.4 million people below the poverty line in the US.


I should clarify: eliminate oil use as a transportation fuel (other than for aviation) in the next 15 years....


From CNN - The IEA expects demand for oil to rise from 85 million barrels per day currently to 106 million barrels per day in 2030 -- 10 million barrels per day less than projected last year.
World energy demand to rise 1.6% per year, while cost of crude is expected to reach $200 a barrel by 2030.

What a joke! Production will not reach 106 mb per day ever....
By 2030, we should be off of oil as production will be at 50 mb per day or less.
Oil will not be a tradable commodity in 2030, it will be owned by governements and
only given to their needs and interests. In other words "priceless".

Yergin has to make a living somehow, so if he can reinvent his predictions to show that they are right, then he's back in the saddle again. Unless someone calls him on it.

I do remember his last prediction late last year or early this year where he said he could see situations where it could rise to $150, or drop to $40. Of course, such a prediction is bigger than the side of a barn, so it's not hard to miss...

so it's not hard to miss...

Ehem, you of course mean, not hard to hit...then again, given Yergin's track record maybe you meant what you said.

Right, I'm assuming it will exceed $150; dry humour is not easy with simple text.

I think equating Peak Oil with increased price is a mistake. Increased 'unaffordability', 'unavailability', and 'volatility' will probably be better proxies.

Increases in price, except when financial markets are fully functioning and growth is not only possible but expected, are the only times when price will be increasing in nominal terms. We may see your $200 - but I doubt we see $300 - I just don' think the system will be able to handle it.

Now - by HISTORIC supply and demand measures, oil should be in the $1000's per barrel and would one day get there -but somewhere between here and there will mark the end of publicly traded oil.

I disagree. There will be volatility in the short term, but medium to long term oil prices will go up. A barrel of oil has a huge amount of intrinsic value, and the real price of oil will come to reflect that as it becomes scarce.

I also disagree with Nate on this one. The oil will continue to be needed. There's no real alternative to it for transportation (despite what's said). The cost of producing it will continue going up. The price will, at some point, top off, collapse in fact, when the global oil based economy collapses. But I don't think this is the final collapse -- not yet. The world will come out of this with a much shrunken middle class, yes. As somebody said, was it Greenspan or Bernanke?, there's always the printing press. They can inflate us out of this to an extent. But a significant resumption of global growth is out of the question. Even if no-one else has oil, the military and their industrial base will have it, and will pay any price.

Anyway, that's what my crystal ball says -- today. No less accurate than the models used at Lehman and the rest.

Undoubtedly it is wrong to equate Peak Oil with maximum price of oil. As usual, oil prices will be dominated by demand fluctuation in the short run and production cost (supply) in the long run. Now what is going to happen to demand? I don't know. We may have inflation, we may have deflation. We may have stagflation, or we could fairly abruptly fall into a Greater Depression if people such as Roubini turn out to be correct. The one future I'm pretty sure is not going to happen is real global GDP growth returning to its long-term trend of about 3% or 4%, which is predicted by the conventional wisdom.

Rather than obsess about demand fluctuations and nominal prices for oil, I think it is best to keep our focus on long term supply factors--the marginal cost of developing new oil, decline rates in production and net oil exports. Quantity supplied will never be more than quantity demanded, but the supply curve for oil sets limits on how much oil can be produced at various prices. At very high prices, say $250 per barrel, the supply curve goes vertical and almost certainly also shifts to the left from increasing depletion, i.e., for geological reasons. At this point higher prices will not bring forth more output of oil, though they could and probably will bring forth more substitutes, such as methanol (or diesel or gasoline) from coal.

At what point will international oil markets stop functioning? Here I think it is a mistake to focus on price; I think it makes more sense to look at volume. So long as volume is at least half of what it is today, I think markets will function reasonably well. If the volume traded falls to a quarter of what it is now, it is hard to say what exactly will happen, but it is possible that markets could still function fairly well. I do not think that growth is necessary for markets to function. For example, during the Depression, economies went into sharp declines for years, but the commodity markets continued to function, though at reduced volumes.

Is there a ceiling price for oil? Sure there is, but I think it is set by the costs of substitutes. Who knows, we might turn to electrically produced ammonia as a substitute for the transportation uses of oil (or methane or methanol made from renewable resources or nuclear energy). There is probably a lot of oil in the ground that can be produced at $400 a barrel that will stay in the ground forever; I don't think it will ever be economically viable to produce oil at $400 a barrel except perhaps in extremely small volumes for highly specialized purposes. Markets are resilient and can take a lot of price fluctuation--and quite a lot of volume fluctuation as well.

There is probably a lot of oil in the ground that can be produced at $400 a barrel that will stay in the ground forever; I don't think it will ever be economically viable to produce oil at $400 a barrel except perhaps in extremely small volumes for highly specialized purposes.

It wont ever be produced at that price from fossil resources. At that price you can produce diesel fuel from water, limestone, and nuclear/solar power.

It wont ever be produced at that price from fossil resources. At that price you can produce diesel fuel from water, limestone, and nuclear/solar power.

Sorry, I have to disagree with that statement. Perhaps you said the above in jest but producing diesel from limestone as suggested would make tar sand oil look dirt cheap and the height of efficiency.

I wasn't jesting, but in no way do I expect we'll be producing diesel from limestone in the near future. But the production price of $400/bbl is over ten times that of tar sands.

We can make projections of costs based on existing costs of power reactors and synfuel plants. A CTL facility costs about 5 billion per 100,000 bbl a day capacity, and the infrastructure for that isn't going to be much different than synfuel from hydrogen and CO2. Add in the price of the reactors an cement plants to produce hydrogen and CO2 and you're looking at some $25-50 billion per 100,000 bbl capacity and you have an established absolute price ceiling, which is why we wont ever produce oil or hydrocarbon products with production prices above this price.

I don't think I quite agree. If I recall rightly, this whole crash thing started with a very slight lack of supply.

I think I see the point and agree.

We are seeing these constant arguments and speculation about he price in $ of a barrel of oil.

But what does that even mean? It is somewhat pointless how many $ a barrel goes for if you don't have some idea of what a $ is worth.

So how do we know how "affordable" a barrel of oil is? What do we compare it to?

Maybe we should look at the how the price of a barrel of oil evolves as a percentage of average/median income per capita?

If we get a massive economic downturn, as one poster put it, we could see $5 / barrel and it would still be expensive because everyone is basically broke.

So in the end the $ value is meaningless since it doesn't tell us at all how (un)affordable the oil really is.

Putting a value on things from oil to houses to all sorts of commodities and currencies is an interesting task, especially in times like these where the value of just about anything is uncertain and jumping all over the place like the line of the horizon seen from a boat in a storm....

Affordability is a better way to measure value. Something you can barley afford but badly need is obviously valuable. Energy and especially Oil is highly valuable when production increases are impossible and geological declines like those seen in Mexico or the North Sea are inevitable for the global average soon.

But when cash is not at hand any more (because you are out of a job, under water with your mortgage, behind with your hospital bills or all of the above) then paying a lot of cash for something valuable is out of the question. You make do without it or with a lot less of it. So the price collapses as it has done for oil. Still at the current price, filling up the heating oil tank in a suburb of Detroit is just as unaffordable for many as it was when oil stood at $150 and the pink slip from your company had not been printed yet....

Oil will go up in $$ denominated value (price) only if there is once more a lot of cash to throw around. Till then oil will be precious nevertheless. The trillions thrown by the US Government at the bottomless pit of the financial crash have not yet made any appearance in peoples hands as cash to spend. They simply went from one blip on somebodies computer terminal to another. One virtual value set against the loss of another. It could have just as well been spend in 2nd Life dollars in the same named virtual reality game.

Welcome to the slide on the other side of the peak of humanities global economic venture. How do you like the slide?

The reality is we may never seen oil at $200 dollars a barrel for long periods of times. Each time the price would rise to that level, it'll force recession on the world. The higher energy prices will slowly move people away from fossil fuels for transportation.

I'd love to see the numbers on how much oil we'd consume if we pulled transportation out of the mix ? We'll always use oil for plastics & other things, but what IF we drive electric cars & heat our homes with Geo Thermal using wind & solar power ?

You can only get so much of certain products out of a barrel of Crude Oil. Robert Rapier is far more knowledgeable about this than I am, but I believe a correct 'ballpark' figure is that roughly 55-60% of each barrel of oil can only be refined into gasoline/diesel/jet fuel. If we were able to wave a magic wand and electrify ALL transportation, aviation included, we would see an instant drop of 51 million bpd of demand, leaving us with roughly 34 million bpd needed.

Now the issue is obviously more complex than that, as you eluded too when referring to plastics, and 'other things' such as power generation and asphalt, so some demand will always be in place. Someone more knowledgeable than I would need to step in and explain to us the 'minimum flow rate' needed for us to satisfy these needs.

The oil companies are building/built billion dollar cokers that turns asphalt into gasoline and distillates. Which is why the price of asphalt tripled.

Can't agree with you Elvis; oil could go way over $200 within the next year in spite of (or because of) a global recession. All it takes is for the financial deleveraging to reach a stage where Yank dollars are at a lower level of demand (such as after meeting margin calls or redemptions) and the fundamentals (US mega debts/deficits, over supply of newly minted dollars, low interest rates etc) may assert themselves.
If the US dollar resumes its slide then it may collapse. If the dollar becomes worth a tenth of what it is now then in foreign currency terms $200 oil in a year may be as cheap as $20 oil now.
Of course I could be totally wrong as in September I doubted oil would get to $70-80 (at the time low $90s).
BTW does anyone know why OPEC didn't defend the rumoured $100 floor? Are they disorganised and unable to cut output enough or are they trying to crash the price to pick up oil companies cheaply or what?

With Saudi Arabia building a 12 million barrel a day liquids production capacity and cutting back production to perhaps below 8 million barrels a day, and potential increased spare capacity projected for other OPEC nations, it seems a bit retarded to make predictions of 200 dollar oil. The price of oil is closer to 20 dollars than 200 dollars. This past summer's speculative binge is over.

I remember in 1985 a tax break for new drilling was ended and the unemployment rate was increasing in Ector County, Texas. There was an increase in crime as people did not have jobs. The country had just elected Ronald Reagan, one of the great government deficit spenders. Now the place is deeper in debt and the government is trying to spend its way out of a debt default recession. If the borrowers had paid back the loans, we would be in a better position to lend.

Finally the IEA report is out, the link is on the drumbeat, 4 saudi arabias will be needed by 2030 just to maintain production at current levels!

For the United States, Britain and Mexico, depletion rates averaged 10 to 11 per cent a year. The average across the 13 member countries of the Opec cartel, which produces 40 per cent of the world's oil, was lower, at about 2 to 3 per cent.

Can anybody give us here the link to the IEA 2008 EO report released today?

Unfortunately IEA wants money for the PDF file.
108 euros to be exact.

The various links will give you about 25-30 pages of the report.
Interesting charts.

Off topic but I recently heard some rumors that Exxon Mobil was thinking about getting back into the nuclear power business. Can anyone in the "know" confirm this?

I agree on the surface with the 'Buy' recommendation for oil. Simply because what is down now will be higher later. The key is knowing 'When' to buy in. If the price remains where it is now for a month and goes up that's fine, but if the price remains low for two years, then your investment is stuck, especially if you invest a lot and it goes even lower.

Stocks are the same way. You know they'll go up sometime, but 'When' is the key.


Yes, the "when" factor is everything. But I have to admit I am getting tempted. I hate futures speculation, but at the current price of gasoline, I am thinking about going long on some futures. Here's why: Most of us who drive are going to have to buy the gasoline (in some cases Diesel) anyway, so if the price of gasoline goes up, we make back on the futures what we spend in the gasoline. If the price of gasoline goes down, we lose in the futures what we save on the cost of the gasoline. Break even. It's a hedging bet, but if we drive (I do) it is one hell of a way to protect ourselves against rising prices of gasoline! I have said several times on TOD USA that I would be happy to pay $4.00 to $5.00 per gallon for gasoline for the rest of my natural life if that would assure supply stability. In my area it is now $1.83 per gallon and I am in shock, I will admit (and remember I am the one that preached long and hard on TOD that a possibly fast and devastating drop in prices was possible, but I never, NEVER imagined it could drop this far this fast!) I still feel that $4.00 gasoline would be, over the long haul, a blessing, so why wouldn't I be glad to stabilize the price at the current level through the use of hedging futures? Why wouldn't any person or business?

What still amazes me is that everyone talked of hoarding oil and gasoline at over 4 dollars a gallon, but at under 2 dollars, no one wants to hoard it! ASTOUNDING. I can only believe that the hedge funds have not jumped in and run the price back up simply because they have been wrong so often about so much they have broken themselves. Compared to the hedge funds and banks of America and Europe Dan Yergin looks like a prophet!


So what are the best ways to buy oil? Can you do something besides dabble in futures? I have an energy mutual fund which is mostly the majors and the ancillary industries, but not much in it. Is there a more pure play on just the commodity?

Whatever the time frame for peak oil, and the dreaded back (dead?) slope, there is one main impediment to breaking our addiction and dependence on oil. This is what I call cultural inertia. As long as the built capital, and associated services keep functioning at a reasonable level, there will be no significant shift to alternative energies.

A recent case in point was the recent financial crisis. The fervent, almost hysterical desire, and effort used, of those in power (I will refrain from calling them leaders, as they are leading us nowhere) to cling to the current oil economy paradigm based on unlimited consumption was clearly evident. Thus, the choice was made to delay the inevitable at the cost of more social and environmental capital.

A great opportunity was lost Instead of seizing the opportunity to reinvent the economic system in line with sustainable social and environmental practices, trillions of dollars (money that, as one credible source reported, was more financial resources that was required to repair the Earth's damaged and degraded ecosystems)was used to prop up a financial system that is clearly starting to come up against the finite resources of our planet.

Now that we have plundered the people's money of the Western World, rescuing the imaginary wealth of a few, and an outdated financial system, the next fall will be harder.

Whatever the time frame for peak oil, and the dreaded back (dead?) slope, there is one main impediment to breaking our addiction and dependence on oil. This is what I call cultural inertia. As long as the built capital, and associated services keep functioning at a reasonable level, there will be no significant shift to alternative energies.

A recent case in point was the recent financial crisis. The fervent, almost hysterical desire, and effort used, of those in power (I will refrain from calling them leaders, as they are leading us nowhere) to cling to the current oil economy paradigm based on unlimited consumption was clearly evident. Thus, the choice was made to delay the inevitable at the cost of more social and environmental capital.

A great opportunity was lost Instead of seizing the opportunity to reinvent the economic system in line with sustainable social and environmental practices, trillions of dollars (money that, as one credible source reported, was more financial resources that was required to repair the Earth's damaged and degraded ecosystems)was used to prop up a financial system that is clearly starting to come up against the finite resources of our planet.

Now that we have plundered the people's money of the Western World, rescuing the imaginary wealth of a few, and an outdated financial system, the next fall will be harder.

I wouldn't bet too much on Yergin. Assuming he is wrong, one of two things will happen, either the price will collapse further, or the price will rise. Maybe you could buy options at 50% in each direction or something, but that is probably a good investment regardless of what Yergin says. But he might be right this time. Even a broken clock is right twice a day.

Well people may call me crazy but I still say we have a chance of seeing 160 a barrel oil in December.

I could be wrong on the timing however the underlying cause is pretty simple.

I don't believe the reasons for the current drop where based on real fundamentals in the supply and
demand for oil. I do believe that real oil shipments played a big role in the drop and its not just a financial issue.

Non OPEC producers are still producing flat out at least from any sources that are still viable at this price.

OPEC has announced some fairly serious cuts I fully expect Saudi Arabia to surprise everyone with the depth they
will cut. They have before and will again.

This time around however the cuts will sting since they probably are not needed anyway i.e without the Saudi cuts
prices would begin to rise naturally once it was clear that supply and demand where not balanced.
Also Russia is said to be cutting exports.

The only question is obviously how fast and how deep will the Saudi cuts be and if I'm right and we actually
don't have adequate oil supply even with the economy slowdown.

Whats interesting is that people are claiming that oil demand has dropped dramatically thus oil is cheap yet
US demand has been naturally rebounding since the hurricanes and if you wish since cheaper prices lowered cost.
I was unable to find a link.
Its not published here

We have a lot of assumptions about the current level of oil demand and very few facts to indicate a dramatic decrease
in demand in line with the recent price changes.

In fact US oil production is still well off from the hurricane damage and Mexican production continues to decline these
two factors alone may offset the recent VMT declines. China is still growing and increasing demand.

To finish I don't think anyone knows for sure what the current situation is but as far as I can tell from looking at known data for oil demand and considering the current supply I don't see that its changed dramatically.

Any excess supply if it does actually exist is fairly small and if we actually see production cuts esp deep ones
we probably will overshoot the supply demand balance by quite a bit.

And finally if we really had a serious excess in oil why does the price not continue to fall I'd expect it to fall down into the thirties fairly quickly if the supply excess was actually large.

At the minimum we should see oil continue to fall to at least 50 if we are in a true oversupply situation.

Even the IEA now sees major shortfalls in oil supply down the road, with its prediction that the world will need to find four new Saudi Arabias of oil by 2030 to make up for falling production at existing fields and continued minimal global growth in demand. We are going to see $150 per barrel again, but not until the economy recovers in several years time.

Like I said I see no intrinsic reason it could not happen within a few months. Despite the hype and uncertainty we don't yet have evidence for a massive drop in demand. Most of the economic contraction is happing in the financial world which is not a big consumer of oil. We have evidence that the US economy is no longer growing and has started to shrink. We have evidence that China and India are not growing as rapidly. We have evidence that Non-OPEC supply has declined.

What we don't have is any evidence that overall demand has actually shrunk certainly the rate of growth has slowed but thats not the same as and overall global drop in demand.

Obviously a lot of people believe its shrunk and also short term i.e for the next several weeks the US is well supplied but this says nothing about even 30 days into the future.

Put it this way the current price is indicative of a 2-4 mbd drop in demand 4mbd is about the amount of oil imported by China to give you and example of the scale of change you would need to justify the price drop.

For example the sharp drop in imports has a ready explanation. Commercial Real Estate esp shopping malls are massively over built I'm sure a lot of retailers are planning on closing a large number of stores after Christmas. Thus even though they do JIT inventories they are now massively overstocked because of the stock in warehouses and stores that will be soon closed.
If you where in their shoes you would not stock up for Christmas but let your stores run out and probably move inventory around inside the country as the Christmas season progresses. Think of it as a stealth going out of business campaign. In this case its not going out of business but closing the massive over expansion that already exists that was built up in expectation of a continued growth in housing.

Consumer purchases are actually down only a small percentage like 0.3%.

On top of this you also have companies having problem securing loans and letters of credit from the on going credit crunch this would be demand thats simply not being filled for credit reasons not actual drops.

Understand I'm not saying that growth has not stopped or slowed to a crawl in the US and also I'm not saying that the rate of growth in China is not decreasing but what I am saying is slowing growth globally is not the same as and actual overall decline in oil demand. Its one thing to slow the growth in demand for oil and quite another to reverse it significantly.

Right now overall the world economy is probably still growing not shrinking.

An economic forecast issued by the commission last week indicated a bleak outlook for the European economy. Economic growth this year would be 1.4 percent in the EU and 1.2 percent in the euro zone, half what it was in 2007. In 2009 the EU and eurozone economy is expected to grind to a stand-still at 0.2 percent and 0.1 percent respectively.

"The outlook is not only bleak, it is also highly uncertain," Almunia said. "There is a real risk that if the financial stress intensifies or lasts longer, it may have a greater effect on the economy and could fuel the negative feedback loop between the economy and the financial sector."

In fact, the IMF predicted last Friday the eurozone economy will contract by 0.5 percent next year.

Exports grew 19.2% in October from a year earlier to $128.3 billion, decelerating from a 21.5% increase in September, the General Administration of Customs said Monday. Imports grew 15.6%, slower than economists' expectations of 18% and down from the 21.3% rise in September.
The trade surplus swelled to a record $35.2 billion, eclipsing the previous monthly record of $29.3 billion set in September. Analysts had forecast the trade surplus would reach $32 billion.

The US economy shrank at an annual rate of 0.3% in the three months to September as anxious consumers cut their spending at the sharpest rate in almost 30 years.

The world has come to and end oils cheap demands down !!!

No the only thing thats happened is the US economy has shrunk by all of 0.3%.

In fact looking back

The bruised U.S. economy limped through the first quarter, growing by an annualized rate of only 0.6 per cent as housing and credit problems forced people and businesses alike to hunker down.

This is when oil was approach 140 a barrel.

So we have a change in the US economy from +0.6% growth to -0.3% or about 1% and oil drops to 60 bucks a barrel.
Even as the rest of the world continues to grow.

I'm sorry if you look at the facts then the current oil price does not look like its in balance with demand.
I'm not saying 140 was in balance either but neither is 60. Again I'm surprised that people are willing to assume the market can overprice oil and I think everyone feels 140 was to high any yet few are willing to say wait a minute 60 is probably way to low.

The balanced price of oil this year ?
Probably should have traded in the range of 110-130 with a average of 115-120.

The low right now based on fundamentals should probably be 110.

Thus the market has probably significantly underpriced oil for a variety of reasons that has nothing to do with fundamental changes in supply in demand.

This is alarming since now OPEC is planning cuts and I fully expect them to implement at least what they have said if not more.
Also as I mentioned Russia is pulling back. So if a balanced market right now with resonable supply should have a price point at say 110 one in short supply could easily jump a lot higher.

Unfortunately I fear that whats going to happen is we are going to keep a low price until we have serious supply issues but at this point it will be clear that OPEC is more than capable of pushing the price as high as they wish.

Thats not a good position for the world to be in.

The pattern is pretty clear by now. Maybe I just live in a very sensitive area (lots of shops and businesses that were marginal before this all started) but there are so many bankruptcies and closed shops around me that in some places you wouldn't be able to buy any food or anything else, there is just cement and empty shuttered shops, parking lots with ropes around them, that I see the future as quite frightening. I mean supply issues are HERE and NOW. You can't buy gasoline as easily as you could before and you certainly can't get a meal as easily as you could before. I live near a very working class area with people who have no education and they are getting the fuzzy end of the lollipop!! Miles and miles of abandoned cement and the amount increases everyday. I live halfway between the poor folks but on the other side of my neighborhood are the better off educated ones. So far their shops are open, but with lots of "sale" signs. But the economic devastation increases little by little and the future is clear, the better off ones will also get the same treatment.

That is when everyone will sadly try to scrape the asphalt off the parking lots and get goats to turn it back into something that harvests the energy directly from the sun not FF. But not until they (the people, not the goats that is) are really hungry. That's quite a way off yet. All you see now are the prices for spaces in monthly parking lots "down" "down" "down".........the parking lots will then one by one shut down (it's not cheap to manage one )and the supply goes down to the point where you can't find one that's convenient even if you still have a car........What I mean to say is that I believe that the same thing will happen with gasoline. The supply is going to be a problem before the price. It's happening with food here a bit and I see this continuing. It is extremely scary. It's too complicated for most people to understand so warnings are no use. It's unclear that even local governments understand it.

The underlying energy is being withdrawn from a system and activity is being reduced, halted, and slowing down, in the case of my surrounding neighborhood it's drastic. Oh well, we're just people, right??? Easy come, easy go........

For the 4 week period, USA oil imports are UP 4.8% YOY (in the midst of a burgeoning depression), so I tend to agree with you to a certain extent. China's stimulus program is based around infrastructure and it is expected that the Dems will try to implement a similar program once Obama takes over-these programs are quite energy intensive compared to lost financial sector jobs. Re the oil price, the USA dollar is incredibly strong right now and it would be accurate to characterize it as being in an irrational bubble that could burst without warning, so your forecast is not as far out as it seems at first glance IMO.

Thank you. Hopefully if people look at the supply and demand situation they will draw the same conclusions.

Also understand that our economy has a number of components the financial part is large but not a huge consumer of oil.
I've extensively discussed the decline of housing in the US and its role in our current drop in VMT and oil usage.
The verdict I reached that almost all of the current situation in the US can be ascribed to the end of the housing bubble
and we cannot expect a similar drop as we go forward. Even if these retail companies close a number of stores I suspect they
may add staff to the remaining stores to be competitive. Right now in the US most retail shops have been understaffed for years.
As individual stores get more important and the eliminate redundant stores it makes sense they will actually add a few floor
clerks to actually help customers for the first time in decades.

Certainly we will see salaries decrease and the unemployment rate increase but underneath this we will see far more people accept jobs that pay less than their current employer and Americans will begin to compete with illegal immigrants. For most people as they take on lower paying jobs they will lower their housing standards. I.e rent a room instead of a one bedroom apt take on roomates etc. The amount of driving or change in driving is a wash you have no consistent direction. Some will uses less some more. A person thats unemployed and aggressively looking for work could actually drive more than if they were working.

This fits well with the Rust Belt states which have had stagnant economies for decades showing flat VMT statistics.

From the drumbeat

LONDON -- Oil fell almost 4% to nearly US$57 a barrel on Wednesday, its lowest for 20 months, on expectations of weaker energy demand and as global stock markets headed downwards.

The fall in oil prices prompted OPEC officials to say they might decide to cut oil production further in an attempt to adjust the balance between oil output and demand.

The key word is is expectations. Right now everyone is expecting certain things to happen while if you dig into the details what you see is in general oil demand becomes flat to at best slightly falling as long as you don't have and entire industry completely shutdown.

You mention the various government efforts we can expect these to at least slow the decline of the worlds economies over the short term keeping them artificially inflated. I've said that the next bubble is what I call a flat bubble just not collapsing is a bubble.

And of course you have the obvious and probably short term strength of the dollar I'd argue the US economy is one of the weakest since it can no longer function based on internally produced goods and services. So we can expect that at some point the US dollar can and will weaken. This will have a impact on oil prices.

Before the recent drop in prices we did a lot of work looking at the inelasticy of demand to oil prices and overall it seemed very inelastic to price. What was not considered was the loss of a major industry. Well it stands to reason that we where probably correct in the premise but missed and obvious that industries based on growth will decline.

This means we will see the housing industry die which has happened.
The auto industry will decline dramatically also happening.
Retail will pull back to match lowered demand for goods happening.
Financial services will shrink dramatically and money begins to be used for simple standard economic transactions. Happening.
Insurance will probably shrink as people pull back. Happening
Health industry will shrink as people lose health care. ( Don't know)

Whats funny on the last one is that as times get tougher we probably will have the health care industry lobby for and get
universal medical care the moment its obvious that Americans are losing health coverage as the become under employed.

Take this example three people making 100k 50k and 25k we know that driving is pretty much the same for all groups it just depends on where these people live and work not on their salary. If we cut them in half 50k 25k 12.5k then the guy at the bottom hits the minimum wage safety net and also becomes very sensitive to oil prices the other two still make enough to pay for gasoline. This is a huge change in income 50% but in resulted in only 33% of demand becoming a candidate for potentially not driving. Given the intrinsic need for people to drive in the US we can expect that say only 50% of those pushed to the bottom actually give up on driving so say 15% demand reduction. Lets further say the two higher level wage earners cut say 10% off of driving. It makes a lot of sense to equate oil usage with a low wage threshold and expect it to be fairly inelastic above this threshold. What I just described above is a incredible depression and yet we see only a 25% reduction in demand. Lesser cuts such as 5% drop off exponentially in their effect on demand since its really a hard limit.

This the only modification needed to the demand side of the equation is to include the death of the growth industries and a higher unemployment rate as people move to lower wage jobs. I claim that housing was unique in its ability to shut down since it used short term construction loans to operate and was fairly easy to wind down. Also it used and extensive amount of migrant labor that left the country enhancing the demand decline. As we continue forward with a stagnant economy held up by ever larger stimulus packages we should see demand only slowly weaken. Thus going forward we can expect demand to decline slowly and probably not result in significant price changes assuming we see depletion.

The current situation is a simple overreaction to the collapse of the housing industry that won't be repeated.

Yergin is a fox, not a hedgehog. Multiple scenarios, changes his mind when world changes and conveniently forgets about his past mistakes. While it is intellectually dishonest, it appears to be good salesmanship :)

IEA's WEO2008 is out today. Fatih Birol gave comments in today's Times:

In Russia and the North Sea we are seeing significant declines,” Dr Birol said, adding that the supergiants were still showing low rates of decline.

Dr Birol said he believed that there was enough oil in the ground to meet increased demand but that it would be “a huge challenge” because of the scale of the investment required.

He said that the challenge was particularly acute because, in addition to the replacement 45million daily barrels needed simply to stand still, an additional 20million would be needed to keep pace with surging demand, mainly from developing countries. “It is possible, but it [will require] a major structural change,” Dr Birol said.

Getting back to topic, I can't understand how they are able to model $100 oil price, but only $200 by 2030.

Also, their "4 New Saudi-Arabias by 2030" smells distinctly of demand-modeling based R/P models, and not production flow based models, which would imply c. four new Saudi Arabias by 2020 by my own quick back of the envelope calculations.

I think the full WEO2008 will be very telling, not only due to what it says, but due to what it does NOT say.

I don't think the financial crisis and crash in the price of oil could have come at a worse time, in regards to future oil investments.

Here's sincerely hoping we sober up well before we come out of the current deflation/recession.

Dear Jerome,
didn't you yourself predict oil at 200 hot, wet, stinky dollars by the end of 2008 last year or so?
Can you please post the link to that prediction: I wasn't able to find it yet.
Thanks in advance,

Yergin and Charles Maxwell on the Charlie Rose Show on Thursday.
Maxwell said that the oil companies changed their minds about becoming energy companies.
Yergin is full of shit but the TV just loves him(Charlie Rose does too).
Check out his EARS.
He looks like Dumbo.

In all seriousness, even with the price of crude depressed this fall. We have gotten a lot of people's attention with the relatively small hurricane Ike disrupting distribution in large cities like Nashville and Atlanta. It gave us a sample of, less crude....less food....more violence. Mainstream media won't focus on that, all they'll report is..."you will drive an electric car".....over and over. I have a step daughter that lives in Los Angeles, and she will tell you to keep your electric car away from L.A.! They can barely keep the electricity on as it is. The increase in crime during the "brown outs" were enough to get her attention.

Great discussion!