More "peak oil navel gazing..." (or, let's just publicly ignore the lessons of the last few months)

Hold on to your gas guzzlers: Cheap oil may once again be just around the corner. Even as consumers worry about high gasoline prices and rising heating bills, oil executives in London, Texas and Saudi Arabia seem to be concerned about a prospect of falling oil prices. Discuss.
Re: "For oil executives, the experiences of the 1985 and 1998 price collapses remain a stronger influence than their belief that the world has entered a period of more expensive energy".
Lee Raymond, the chairman of Exxon Mobil, said in his recent Senate testimony. "In the energy industry," he said, "time is measured in decades."

Raymond said that Exxon Mobil was involved in a $13 billion project in eastern Siberia that began 10 years ago and is expected to produce for 40 years.

"All told, that's more than 50 years for one project," he said, adding, "Fifty years ago, Dwight Eisenhower was president." He might have added that this was before the U.S. interstate highway system was built and sport utility vehicles became the vehicle of choice.
Ah, Lee, this is the problem--aside from the fact that you are a reactionary asshole who has funded the climate change "skeptics" industry for about 10 years now.
At least one part of Shell is beginning to see that throwing all that technology can provide at a declining oil field  usually does nothing to increase total recovery and just delays the decline and steepens it when it comes. A report here says they are expecting their production in Oman to decline again this year and have decided not to increase drilling activities.

That's another 45,000 bpd to be found from expansion elsewhere.

So, I just don't get it. As far as we can tell, the oil majors have 8%-10% annual decline rates on existing production, their total production is dropping in the last few years in most cases, they have been having difficulty replacing reserves causing some (Shell) to cheat. How can they possibly be so sanguine? Bubba - help us out here...
They are worried about a worldwide economic slowdown.
They probably see that "good ole" cunsuming keeping the money in their pockets for a month or 12.
Looking at some of the economic data it's tough for me to disagree with them.
consumer...spellcheck is my buddy..
Well I think I may have a handle on it, Stuart, which is to say that Lee Raymond hasn't been in touch with certain realities--even his own company's production numbers--for some time now. But right now their quarterly profits are huge and Lee's a bottom line kind of guy who has no vision of what the longer term energy future looks like or the implications for climate change--none--and he doesn't care either. He is a dinosaur though I say this without any attempt to disparage our long lost friends from the Cretaceous.
Remember Enron? WorldCom? CEOs will blame their accountants for manipulating the numbers! denial is more profitable in the short term.
Management Blindness: See below. It simply doesn't fit their corporate bureaucracy hence it doesn't exist.

"Sorry sir, you problem doesn't fit our templates"

  1. They are going to keep doing what they are used to until they are forced otherwise.

  2. They really only deeply care about the short term, and that looks rosy to them right now.

  3. If three years from now their profits plunge, they are counting on their Republican friends to save them.  It is much cheaper for them to invest in Congressmen and Senators than actual projects.
"They really only deeply care about the short term, and that looks rosy to them right now."

But TJ, the point he was making was precisely the opposite, that the oil business is a long term business. By its very nature, every decision they make has to look ahead decades. An oil company which only cared about the short term would not invest in oil development and would not be in business.

The company is in the business for the long term, the CEO is going to retire in four years.
Hi everyone.

This being my first post, i'd like to express gratitude admiration to those individuals - the community - doing an serious effort to raise the debate on oil and gas production.

Well, there is an explanation that i've would like to have comments on. The exec are mostly sanguine, which they wouldn't be if they "knew" about any kind of shortages, bad news et cetera the next couple of months. That is, bad news on the western hemisphere.

Clearly, one could argue that demand destruction at prices in the range of 50-80 $/B would "free" a lot of oil resources for the benefit of those who can afford it. That could explain their attitude. Perhaps the obligatory optimism among execs, combined with some distorted pragmatic view on handling the coming challenges (relying on demand to materialize solutions), could serve to be some sort of an explanation.  

From my superficios knowledge, there has been reports on problems relating petroleum supply in africa and countryside china, which i suspect could persist and evolve without major persistent attention in europe and us.

Beeing a person who know very little about the oil business, my questions is: The oil bourses are in NY and London, soon also in Teheran. How much of the oil&gas produced worldwide are made availeble on the bourses? Are there some global trade regulations making all oil flow trough a bourse? Are there a lot of oil beeing traded in national unilateral argreements?

My point: an effective global marked on oil will mitigate effects of depletion for a period. In the meantime, those who are wealthy and informed will enter a potential time of crisis financally well prepared.

Greetings from Norway.

I guess there are four possibilities. One, they are powerfully ignorant. Two, they are hopeless optimists. Three, we are nowhere near peak. Four, they are lying criminals who could very well cause a major panic by not preparing the public for the imminent price spike that they know will happen this winter.  Are there any other possibilities?
The other possibility is a real slow down in consumption - could really happen.  There are still plenty of businesses running on hedged $40 oil, over the next year the full effect of $60 should be seen.  Global recession could drop demand far faster than geological limitations resulting in a surplus and low prices.
The problem with world recession is that the only thing that mantain the US's economy "ship" afloat now is the chinese, japanese, middle east and  russian money. China Central Bank will not continue to buy US treasure bonds for ever and a world recession can make the oil producers (middle east countries and Russia) have less money to buy dollars.

I think that the Dollar Crunsch that is coming will be so fun as the Fall of the Roman Empire...

I will buy gold...

This sort of deflationary scenario is exactly what I would expect to happen. The US is very close to the collapse of the real estate bubble and the implosion of an unprecedented debt mountain (the real elephant in the room). The stock market is also setting itself up for a crash. US consumers will have far, far less spending power than they have now in the relatively near future. If demand falls off a cliff because consumers are broke, companies are going out of business and there are far fewer jobs to drive to, energy prices would fall in the short term. Energy may not be any more affordable for ordinary people though, as prices may fall less quickly than their purchasing power.

If the US dollar plummets, as the great conveyor belt carrying wealth to the US from Asia (primarily) breaks down, oil (and LNG) producers are likely to choose to sell their product in euros. That would signal the beginning of serious price increases for US consumers. An apparent surplus as a consequence of sharply reduced demand freeing up some spare capacity would be unlikely to last for that long, given how close we are now to peak production. Once oil prices (denominated in euros) started to increase again, American consumers paying for oil with dollars falling in value at the same time would really be caught between a rock and a hard place. I suspect the US would decide not to take it lying down and would embark on another foolish military adventure, thereby making everything worse.

You certainly don't want to own gold in a deflation scenario. The gold bugs don't want you to know that, but it's true.

In deflation, cash is king. You want to hold the safest, interest-bearing cash investments. That means insured bank accounts and U.S. government bonds. Yes, the U.S. government is a safe investment. Any scenario where that comes into question is one where slavering mutant hordes are coming to eat your brains, so you'll have worse things to worry about than a bank or bond default.

Halfin wrote:
"Yes, the U.S. government is a safe investment. Any scenario where that comes into question is one where slavering mutant hordes are coming to eat your brains, so you'll have worse things to worry about than a bank or bond default."

US treasure bonds will be not a safe investment if China drop all its US Treasure bonds and if the countires that have petrodollars don't have power to buy these US TB. By the way, next year we problably will see an inverted yeld curve for the US Treasure Bonds, be warned that it is not a good thing.

The thing is that we will not see dollar deflation. The federal governemnt will continue to have a huge deficit while there are the tax cuts, so if no one buy US Treasure Bonds they will need print money. The consequence is that we can have a recession with inflation, not the better of worlds. while that, GM and Ford aren't at good health now and who know how recession and inflation will affect other US big companies. That can be disastrous to US economy (think Katrina hiting US economy ...)

Hmmmmm.... "slavering mutant hordes" coming to eat our brains can be better than what we will see when the Dollar Crunsh come.

I agree. Cash is king in a deflation and everything else should fall in value in relation to cash - gold included - for a while. Gold may fall to a lesser extent than other assets, but it should still fall. It should therefore be possible to buy gold more cheaply later if you ride out the deflationary impulse by staying liquid, IF you hold your liquid investment in a safe form.

I would say that short term treasuries should be safe for the forseeable future, but I certainly wouldn't bet on an insured bank account. IMO there's too high a risk of a run on the banking system during the kind of financial crisis I envisage, and insurance wouldn't be worth the paper it was written on under those circumstances. Remember what happened to bank accounts in Argentina during their financial meltdown?

The only reason I can think of for buying precious metals now would be as a hedge against that sort of collapse (in which case I'd choose silver, not gold), but that raises many other issues. What do you do with it? How do you trade it in if you need to at a later date (especially if you live in a rural area and are fuel constrained)? Would there be a confiscation order (as there was during the Great Depression)? If so that makes the first two questions even more pertinent.

Personally, I don't think there's much point for ordinary people (myself included) in owning precious metals. The money I could afford to spend has been sunk into a small farm with solar panels, generators and deep-cycle batteries instead (even though I expect the price of all those things to fall in the future - I had a learning curve to deal with and that takes time).

After all, you can't eat gold, and if you live on a farm you can't easily use it for anything you might need. I reckon providing for the necessities of your own existence at a practical level is a far better hedge against social upheaval caused by deflation than metals would be. As far as I'm concerned, a strategy of combining provision for the basic necessities with holding adequate liquidity makes the most sense.

Debt, by the way, is a no-no. Inflation eats away at savings and debts, but deflation increases both as the real rate of interest (the nominal rate minus a negative inflation rate) is potentially quite high even if the nominal rate is low. Today's low nominal interest rates are a trap.

Personally, I've never understood why gold was so popular, but that fellow from Argentina (on that link to another PO site) said that when things got tough, gold jewelry was the best thing to offer merchants.  Cash was worthless and they couldn't or wouldn't verify gold bars or pieces, but they felt OK about cheaper gold.
I am really on the fence on the whole hyper-inflation vs. rapid deflation. Personally I think the US will not weather the storm as well as Europe, Canada, etc since they don't have the same trade/fiscal deficit. So how about this scenario: stagnant economic growth or slightly negative real growth, energy cost driven inflation, asset deflation (stocks, housing), high (15%) unemployment. Basically like the 1970s, but worse. I think gold is a good currency hedge in case the dollar plunges in value.
Perhaps it is a thing which I will call "management blindness", which would be the inability to see things which are not reported to higher management through the trusted channels of reporting tooling, hired advice and friendly accountants. Let's call it option five: They are too bureaucratic to see it.

I see "management blindness" all around me on an everey day basis.

You missed the obvious one. These guys would
lose their jobs if they spoke the factual
True. Just happened to be skimming through Stiglitz book on globalization. He talks about how the Asian Currency Crisis came before the dramatic 40% drop in prices in the late 90s. This could happen again.  
only a US financial meltdown, triggered by a housing bubble collapse and fannie mae insolvency, would be enough to decapitate the demand side of the equation and avert a massive price spike.

so which will it be, the end of dollar hegemony via housng bubble or peak oil?

I don't really care about the oil companies behavior.  I agree they do what seems to make them the most profit.

In my opinion it is almost criminal the way our policy makers in the U.S. are allowing the average consumer to think supply AND prices are going be in their favor.  As I have said before at this site.  You can tell people that energy is going to get scarce and expensive and they will grumble but make changes to their habits.

If how ever you let them (or activly encourage?) that supply will be very robust, in fact so robust that prices are going to come way down than people will change behaivor in that direction.  Which is where we are now in early December with everyone assuming the worst is behind us.  Most people I talk to are not aware what problems we will face if we have 3 months of sustained cold weather.  We will consume a lot more gasoiline, heating oil and NG than we have over the past 3 months.  

The heating bills are just starting to come in and they are 2x to 3x what they were last year BEFORE it got cold.  We are subzero now and expected to be there for weeks.  Bad things are about to happen.

The housing bubble is bursting now.  An actual popping sound may not be audible but the impacts of high energy prices as well as old news shortages are hitting everything that goes into houses.  In Edmonton, Alberta, gateway to the supposed saviour of the single driver assault vehicle culture, single family house construction costs have leaped upwards very fast. So fast in fact that many homebuilders have not been able to raise prices fast enough, forcing them to build the last two months worth of sales for much lower profit margins.  Concrete, steel, wood transportation and so on are all on the inflation list and further cost increases appear imminent.  A popular home model from one of Edmonton's largest builders went from about $168000 to $188000 overnight - and the profit margin stayed the same.

Much of this inflation data will not be reported publicly for months - I only know because of family links in the business...

Toll Brothers has recently announced a notable slowdown in sales, implying that at least the US market is pretty much sated, overstretched or both.  Edmonton builders compete continent wide for materials and Canada suplies the US with much of it construction material.  The indicator link is incontrovertible.

Is it completely clear that a housing price/currency collapse lead to a significant collapse in oil prices?  While it is a sure thing that discretionary energy usage will decrease as the economy slows it is not completely evident that this will lower prices to their 90s levels.  As any Kunstlerite will tell you, demand destruction potential will be tempered by the housing boom driven expansion of the average urban "wasteline".  

Also, "past performance does not necessarily indicate future performance."  The "post oil shock" price drops were definitely related to massive demand destruction but this combined with significant growth in daily production.  A scenario combining demand destruction with only marginal and short lived production increases, or declining production, is completely unprecendented (correct me if I'm wrong on this one).   China and India seem content to grow consumption of oil at todays prices - will 20% more expensive prices make a big difference?  Is it not possible that demand destruction in the West (US) will be rather quickly offset by demand growth in Asia.  Would this not play perfectly for the Chinese national strategy of securing a bigger piece of the world's resource pie?

China and India have consumption but much of their economic boom comes from exporting to the US. If the US economy collapses and US consumers stop debt spending themselves into the 23rd century, the Chinese and Indian economies will experience significant slowdowns unless or until they can replace the lost US customers with someone else (maybe each other?). In any event, such slowdowns are usually measured in years plus the US economy would tank and bring consumption here to a standstill, or worse, result in actual contraction.

At the current time, even in a severe recession or depression, we are still structurally dependent on the car and semi-truck for our way of life so even if the government has to declare martial law and take control of various industries in order to ensure movement and distribution of basic goods and services (to avoid riots and total meltdown), we'll still continue consuming a large percentage of oil relative to what we consume today. It would take a near total US social collapse to eliminate the US as an oil consumer and I don't think that's likely to occur, at least yet.

Just because housing prices are leveling off doesn't mean a "housing bubble" is "bursting". An alternative model is that the rise in housing prices was a perfectly rational response to interest rates lower than we have seen in generations, which made housing much more affordable. Now that interest rates are rising it is natural that the situation will change.

Unlike tulips, houses have real intrinsic value. While some localized areas may see price corrections, on the whole people buy houses to live in them, and if their prices stop going up, they'll do just that. They'll hold onto them and live in them, and find some other way to make a quick buck than flipping houses.

I have thought about this too and the trouble with the scenario you just gave is that newcomers will simply not be able to afford buying a house once interest rise again. Newcomers already can not afford a house on one income, which has its implications on traditional families since it is currently almost impossible for women not to have a job. And that is while interest rates are worldwide lower than we have seen in generations. How are newcomers going to afford buying a house when we have, say, 8% interest rates?