Close, but no cigar

Average daily oil production, by month, from various estimates. Click to enlarge. Believed to be all liquids. Graph is not zero-scaled. Source: IEA, and EIA. The IEA raw line is what they initially state each month. The IEA corrected line is calculated from the month-on-month production change quoted the following month.

For those of us amusing ourselves by tracking the monthly production numbers to see if the global oil industry can disprove the near-term peak hypothesis, the latest news is the IEA's current Oil Market Report. Like November before it, December has been downgraded significantly from the initially claimed 85 mbd -- in this case to 84.735 mbd. This is breathtakingly close to May 2005's 84.755 mbd, but doen't quite graze the bulls-eye (pedants are free to note that the difference is certainly much less than the uncertainties in these numbers, but let's just enjoy the game).

(moved up from 2/14)

So May 2005 reins supreme still, and the IEA reports that the forces of entropy and chaos gained ground in January, with even their initial claim coming in at only 84.6 mbd. Since oil stocks are high, one has to assume that demand remains at least as flat as supply, which will not be good news for those looking for better GDP growth in Q1 2006 than the 1.1% we had in Q4 2005 in the US.

The corresponding updated graph for the year-on-year changes looks like this. Overall, the positive December numbers do not look outside the overall trend yet, given that January is likely to be a little poorer.

Year-on-year growth rates in daily oil production, by month, from various estimates. Click to enlarge. Believed to be all liquids. Graph is not zero-scaled. Source: IEA, and EIA. The IEA raw line is what they initially state each month. The IEA corrected line is calculated from the month-on-month production change quoted the following month.

However, I think it would be premature to say with confidence that no month in 2006 could exceed May 2005 - clearly that remains a distinct possibility. However, there seems little possibility of a radical rise. The EIA's projected gradual rise to 86.5 mbd by Q4 2006 looks like rather a stretch to me. That would be a 2.9% increase over the EIA's report of the situation in Q4 2005 (84.1 mbd averaged over the quarter). Certainly it assumes that things will go a lot better in 2006 than they did in 2005, and it's rather hard to see the basis for this optimism.

Of the run-up in supply since January 2002, about half has come from just two countries: Saudi Arabia and Russia. So it's of particular intest to look at their supply, which is shown in this graph (through November):

Saudi and Russian average daily oil production, by month. Click to enlarge. Believed to be all liquids. Graph is not zero-scaled. Source: EIA Table 1.1.

It will be interesting to see if the bringing on stream of the Haradh III development recently announced by Saudi Aramco results in any increase in reported production (HO discussed this the other day). The Saudi's have been claiming to have around 1.4mbpd in spare capacity, but there's no evidence of it in the production statistics (eg they were not the ones increasing production in response to the US hurricanes).

Finally, to keep Halfin off my back, I note that all these graphs concern only the very recent history of oil production: the period in the little yellow box in this graph of production since the beginning of the oil era.

Average annual oil production from various estimates. Click to enlarge. Believed to be all liquids, except for API line which is crude only. EIA line includes refinery gains, others do not. Sources: American Petroleum Institute, ASPO, BP, and EIA.

On the one hand, there's Haradh III, on the other hand, there's Cantarell - and lots of other reports. I think this is exactly what a bumpy plateau looks like.
Dang!  You beat me to the "bumpy plateau" line.

I've been convinced for some time that thanks to above-ground factors, like infrastructure tightness and the way the knowledge of the impending peak will influence oil suppliers, that a bumpy plateau was inevitable (and also very good news).

There is an interesting comment  in Gulf News (with a hat tip to Powerswitch) at
concerning a massive Saudi investment in refining capacity. Now some may see this as an increase in capacity to cope with an increase in production but could I mischeviously suggest that it is to handle the heavy sour oil they are now producing as no one else can? This would perhaps confirm a peak in light sweet "from the horse's mouth"
SA has been increasing their sour refining capacity and want to increase their NG use by making petrochemicals. They also appear to be looking very heavily at the Philippine and China markets.
Just looking at that last graph - It's interesting to note that exponential growth ended under the mask of the 1973 (Israel War) and 1979 (Iranian Revolution) oil shocks, which resulted in actual declines in that last graph. Then as prices reduced, linear (but not exponential) growth resumed.

Then looking at your earlier graphs, we see the last surge of this linear growth coming to an end this year. It seems we are about to enter the flat/no growth zone.

Will Iran & Israel again recreate a crisis to mask the transition to flat/no growth?

If there is a military crisis, will people realize that ultimately we will never produce as much oil in one year ever again?

Stuart's lamentable absence of a week reminded me of another absent Stuart in Julie Andrew's reading of Stuart Little: specifically the part when Stuart has been rolled up in a shade, the family frantically looks for Stuart even calling down the mouse hole: "Stuuuuuuuuuuuuuaaartttt." I, for one, treasure his clear and sensible explication of the data.

It is interesting to put these numbers of the plateau in the context of Deffeye's recent postulation that Peak happened on December 16.  Whether it's December 16 or May 2005 will seem relatively unimportant in short order.

Stuart and Deffeye aren't measuring the same thing for the peak.  Stuart is looking at peak production while Deffeye is defining the peak at 1/2 of the total possible production.
You guys familiar with "fuzzy logic?"

I think the math is all good (and thanks to all who work so hard at it!), but I think we can step back and with a "fuzzy" eye say that the math, the news, and crazy things like the State of the Union address ... are telling us "peak oil" is (fuzzy logic) true, right now.

..which I believe is another way of saying that Stuart is looking at actual production data peak, while Deffeyes is talking about the smooth curve-fitted peak via Hubbert.
Deffeys numbers are on Conventional Oil only, Stuart has been working with 'All Liquids'. Comparing both can be tricky.
Recall at the end of the book that Stuart is undecided as to which direction in which to go. The book tells us clearly that there is more than one good direction.

DUETs, Deep Universal Eternal Truths are more often to be found in the works of great literature than in the works of engineers or scientists. Equally great truths are to be found in CHARLOTTE'S WEB, and THE TRUMPET OF THE SWAN as in STUART LITTLE.

For my macroeconomics class I used to assign "Pride and Prejudice" and have them give me a macroeconomic analysis of England c. 1800 based on their reading. Also, I often would read a poem to begin class.

How can we live without reciting aloud at least one poem a day? (Not very well.)

The four elephants in the room are the four oil fields still capable of producing one mbpd or more.  

Probably all four are entering terminal decline phases, led by Cantarell.  Internal Pemex reports indicate that Cantarell should start declining this year at a rate as high as 44% per year.

The Peak Oil Big Picture

# Oil consumption and extraction/refining have met at 85m bpd - and perhaps extraction/refining rates cannot be increased from here
# In the developed world, GDP is growing in the US, Europe and now even Japan
# In the developing world, India and China are rocketing along
# So, demand for oil continues to rise in the developed world+ and even faster in the developing world
# However, the US is running the largest deficit on external account in its history and the largest in the world++, which
brings with it the threat of a US dollar collapse, imported inflation and a rapid deceleration in the US economy followed by the world economy
# So, on the one hand, there is potential for the demand for oil to collide with an extraction/refining ceiling and for prices to explode
# On the other hand, a significant deterioration in the world economy could cause demand to soften and allow oil supply to comfortably match demand
# If the former happens, then the effects of peak oil are likely to be felt reasonably soon
# If the latter happens, then the effect will be deferred
# Additionally, even with a significant softening in demand, supply side shocks (problems with Nigeria, Venezuala or Iran or the discovery that either Ghawar or Cantarell or both have hit a precipitous rate of backside production decline) could still mean substantially higher push prices in the near future
# Moreover, even if we just assume away the oil problem, we have looming shortages of natural gas and water together with relentlessly increasing soil degredation around the corner...

+ From 1990 to 2003 there is a 99.5% correlation between US GDP (independent variable) and US oil consumption (dependent variable). I think this offers a fair opening point to anyone wanting to argue that increases in GDP simply measure the rate of increase in our usage of fossil fuels...

++ As well as having the largest budget deficit in its history and a property bubble

As Westexas points out, the house is full of elephants but the "real world" is currently focused on swelling oil inventories.

Your thinking largely mirrors mine. Troubling, isn't it?

But look on the bright side: we're probably mad :-))

Question: Can the rest of the world survive a major stumble in the U.S. economy without so serious of a lurch itself?

China obviously is directly connected to our economy and would take a big hit; and, if they redirected some of their dollar holdings to Euros, of course, our hit gets worse.

But that arguably would ease oil prices enough elsewhere that Japan, the Asian tigers, and Europe all might have relatively lesser recessions.

This is why I'm arriving at a most probable longer term scenario of a rocky road to high US interest rates (15-25% for awhile) with inflation (+ hyper???), US bubble pops, USD declines, general world economic decline for awhile including somewhat lower oil demands and a price renormalization in relation to non-USD currency basket price.  Continues with an eventual substitution of the now dominate US consumer market by growing China, India and Oilstan economies.  Then new equilibriums develop with US permanently down 3 or 4 notches, Europe -1 or -2.  Is that the lemming's roadmap?
If I had to write a consistent and likely single scenario for the future, it goes like this:
  1. Recession, stagnation, unemployment, rising real energy prices force
  2. Federal Reserve system to choose between massive inflation through montetization of the debt and unemployment rising into the double digits (approximately a choice between 30% inflation vs. 30% unemployment. Numbers used for illustrative puroses only--not forecasts). Fed opts huge acceleration in the inflation rate as the lesser evil.
  3. Changing perceptions and expectations drive interest rates up to levels found in countries such as Brazil and Argentina in recent decades--in other words, the expected inflation rate plus a huge risk premium for increased uncertainty and expectation of total collapse.
  4. Stock market crashes, with DJIA going down lower than 1,000, NASDAQ maybe around 140.
  5. TSHTF
I realize that the Fed could theoretically monetize the debt, but I'm intrigued as to why you think this would work in practice considering the scale of the debt in question. Personally, I don't believe the Fed has the equivalent of a magic wand. I don't, in fact, think that they have a fraction of the power over the course of events that they, and others, think they do.

The Fed also has a strong anti-inflation bias. There seems to be an overwhelming consensus that it is inflation we should be concerned about. It seems to me that Bernanke mentioned dropping money from helicopters merely as a means of dismissing concerns over deflation out of hand, not because he did in fact have any intention of printing money. I suspect he believes, as you suggest, that deflation can be easily avoided. The implication is that he sees inflation as the real enemy, as did the power-that-be on the eve of the (deflationary) Great Depression.

I agree with you that changing perceptions and expectations would drive up interest rates, but I see this as compounding deflation (and increasing the chances of a liquidity crunch) rather than as a result of inflation. I agree with your forecasts for the the DJIA and the NASDAQ by the way, probably within ten years and likely within five.

For the sake of brevity I left some premises hidden (implied) nor did I attempt an explanation of the Fed's actual powers--which are well-known inside the economics profession and not known or not understood outside it.

Premise: Congress created the Fed and Congress can destroy the Fed or take away its power.
Premise: All Fed members know and fully appreciate the above premise.
Premise: Because of political pressure, the fed will have no choice but to monetize the debt. (Note: This has happened before and will happen again. How else did we get from a 100 cent dollar in 1913 to approximately a 4 cent dollar today?)
Premise: To stave off a rerun of deflation and the Great Depression the Fed will not only use its Open Market Operations magic wand (with which they legally create bank reserves and hence [potentially] money but also its Ultimate Magic Wand (UMW, not to be confused with United Mine Workers;-) of lending however much they feel like to pretty much whomever they feel like. Through the use of these two Magic Wands, the Fed will not have to ask the Treasury to directly print money.

However, under (if I recall correctly) Civil War legislation the U.S. Treasury has the legal authority to print as much currency as it feels like doing. Us oldsters can remember "U.S. Treasury" $5 bills; you youngsters cannot.

Note that it will not only be Congress putting pressure on the Fed to inflate, it will also be the Treasury Department. How else will they be able to finance a deficit of three or four or five trillion dollars per year?

Final observation: The Supreme Court has no power to stop any of this, because the laws giving the Fed and the Treasury its powers have been tested in the courts and have stood up to every challenge.

Note that I make no predictions. I do not know what will happen.

Now here is a query: In the opinion of the readers of this column, does the new Fed chairman have steel balls? Volker did. Most Fed chairman have not had these. Greenspan? Brass balls.

I am familiar with the Fed's magic wands, but I doubt very much if wielding them will work as planned. To use a contemporary (Harry Potter) metaphor, I suspect the spell will backfire and the Bernanke will end up vomiting slugs.

If I had to propose a potential course of events, I would suggest that Bernanke is likely to raise interest rates initially in order to establish his anti-inflationary credibility. With the housing market teetering on the brink, this could be enough to precipitate a housing market crash. Bernanke would already be trying to ride a tiger by this point, which could come relatively early in his tenure.

Bad debt could leave many financial institutions vulnerable, but attempting to bail them out would threaten the role of the dollar as global reserve currency and the continuing influx of foreign capital. International dumping of the dollar could proceed rapidly, although within the US the value of many assets classes could still fall relative to cash in the rush to cash out and cover debts.

I envisage a cascade of bank failures as defaults snowball and savers try, and fail, to reclaim their savings. A liquidity crunch could follow, severely limiting purchasing power and therefore energy consumption, among other things. I very much hope to be wrong, but the power of a positive feedback loop in action can be truly awesome. I have no faith in the ability of one institution to stand in the way of such a chain of events, magic wands notwithstanding.

 If I understand you correctly, you are suggesting that all of the Fed's efforts to inject liquidity into the system in order to prevent deflation and bank failures might be insufficient, or that while nominally sufficient, these measures might backfire by causing panic selling of US Treasury notes and a subsequent crash of the dollar relative to other major currencies. So Bernanke could choose inflation as a monetary tool and yet end up triggering deflation anyway.

One thing you said puzzled me though:

 "I envisage a cascade of bank failures as defaults snowball and savers try, and fail, to reclaim their savings."

So you are saying that the FDIC would not be able to honor its commitments, causing peoples' savings to just be wiped out? I would think that the Fed and Congress would act to prevent that at all costs because that's the type of thing that could result in a revolution. Think about millions of unemployed mortgageholders who then lose their homes because they can't make their mortgage payments using their savings. That situation would be very ugly.

Yes, I am saying that Bernanke could chose inflation and yet end up triggering a financial panic and deflation anyway, in fact that is what I would expect to happen. Panic can withdraw liquidity from the system more quickly than even the Fed can pump it in IMO.

I am also saying, as you point out, that deposit insurance is not likely to be worth the paper it's written on, as it was never designed to actually bail out a systemic banking crisis. It's existence has lulled savers into a false sense of security IMO. I would expect the Fed and Congress to find themselves overwhelmed by the monumental scale of bad debt in the system, and unable to prevent a liquidity crunch. As you say, the social and political consequences would be severe, especially considering that there may also be energy supply disruptions and price volatility simultaneously courtesy of peak oil and natural gas. Needless to say, I don't think we are looking at a slow squeeze here.

Thanks for the followup, Stoneleigh.

That is indeed a grim picture. Considering your disagreement with "conventional" wisdom (specifically the efficability of the Fed) about how such a financial would unfold, how do you think the holders gold and silver bullion would fare?

I had an uncle, since passed away, who was a "gold bug" and believed the U.S. financial system would eventually melt down. It seems to me that although bullion holder would fare better than the hapless depositors jilted by the FDIC (the bugs still have their store of value), the practical aspects of using that bullion might be problematic. In other words, a clerk in a grocery store would not be able to accept anything that wasn't legal tender. So using it in retail stores for necessities doesn't seem feasible. So you have identify people who have what you want and find out if they will accept gold. Hopefully these are people you already know and trust, otherwise you might just end up trading gold or silver for lead, so to speak.

Interesting times indeed.

I think owning gold is likely to prove to be impractical at best and dangerous at worst for most people. It isn't something that can easily be traded for something else one might need, especially if private gold ownership is outlawed again as it was in the Great Depression. Owning it may also make you or your family a target as Don has pointed put. It may make sense as a capital preservation strategy for those favoured few with sufficient resources to deposit a pile of gold in a vault in Switzerland, but not for the vast majority of people. Silver would be a better bet in my view for those who really want to hold something of value (in a concentrated, but not too concentrated form), but even that is likely to pose difficulties. I'd rather have firewood, solar panels, batteries in my basement, a good vegetable garden, knowledge about self-sufficient lifestyles, good friends/neighbours with a similar outlook etc.

Personally, I would look first to getting out of debt, then to hedging your bets with some basic self-sufficiency measures (as economic disruption can lead to inconsistent availability of necessities) and finally to holding some form of liquidity (although this is easier said than done in a liquidity crunch as you might imagine). If you can't afford a house without a mortgage (unless it's a very small one), then I'd rent and let someone else take the house price risk. The equity you extract could serve you well if you can manage to hold on to it. I see money as the lubricant for the economy. Without it, the economy seizes up like a car engine run with the oil light on. That's why a liquidity crunch is so disruptive.

Beware of governments trying to separate you from what wealth you may have managed to preserve. In Russia the government got all the money out from under the beds of the nation by reissuing the currency and then making it very difficult for many people to exchange their old rubles for new ones in time. Many lost their life savings. In Argentina, the government converted dollar savings accounts into Argentine currency then allowed that to devalue drastically as the currency peg fell (debts remained denominated in dollars). They also converted short-term government debt into long-term and then later defaulted on it. There are no risk-free answers.

Personally, I would look first to getting out of debt, then to hedging your bets with some basic self-sufficiency measures (as economic disruption can lead to inconsistent availability of necessities) and finally to holding some form of liquidity (although this is easier said than done in a liquidity crunch as you might imagine). If you can't afford a house without a mortgage (unless it's a very small one), then I'd rent and let someone else take the house price risk. The equity you extract could serve you well if you can manage to hold on to it. I see money as the lubricant for the economy. Without it, the economy seizes up like a car engine run with the oil light on. That's why a liquidity crunch is so disruptive.
I don't know about you but wouldnt having a mortgage held by some faceless corporation far away facing financial collapse easier to deal with than the landlord that is more than likely local? In a complete financial meltdown, who will be doing the evicting. Wouldnt a more prudent strategy be take out a mortgage that is well underwhat you can pay and try and hang on longer than 95% of your fellow mortgage holders?
The Fed SAYS it has an anti-inflation bias, I don't think the evidence of the last 20 years supports that claim. Rather like the 'strong dollar' policy. The only real anti-inflation activity I've noticed in the last decade has been a fiddling down of the official inflation statistics.

There really is no other option than attempt a controlled inflation given the current situation, and that is what the Fed will try to do. I don't honestly know how that will play out, though it will take a decade or more if successful. Unfortunately it may get out of control and often runaway inflationary periods end with a nasty bout of deflation.

Don, what is TEOTWAWKI?
Don't worry Don I just got it. TEOTWAWKI. I'm afraid to say it by I agree
Could the Fed allow hyperinflation?  Wouldn't that immediately preclude further purchases of our debt by foreigners?  Is that even a thinkable option at this point?
At this point hyperinflation is unthinkable--sort of the way gay sex between cowboys was a few months ago;-) After TSHTF, the choice is fairly simple
  1. Another Great Depression, with falling price, bank failures and all the rest or
  2. Hyperinflation to wipe out intolerable debt burdens.

Keynes pointed out the superior political influence of the debtor class.

Politics rules.

Yes, Don, but as a number of folks, including me, have pointed out before, how will the Treasury be able to sell any more bonds once the Fed resorts to inflation to vaporize past debts? Burned bondholders will shun them. Of all the things that are nearly certain in this world, the need for the U.S. government to continue selling bonds is one of them. Or are you assuming that once the Fed inflates all the debt away Congress will have the discipline to balance the federal budget?
One of the things I've been thinking about in the context of a post-peak world which includes a very indebted and fiscally challenged United States: we have a sizeable fraction (over a quarter) of the world's coal reserves, plus most of it's oil shale (if anyone can figure out how to exploit that resource). To the extent that biofuels in fact prove useful, we have a big fraction of the world's agricultural potential, especially relative to population. In a post-peak world, energy is going to be much more valuable and expensive than it has been in the past. Thus I can see us being obliged to develop our remaining energy reserves and export a significant fraction of them in order to bring our debt back in line. It's kind of an amusing prospect - we will be exporting our natural resources in order to continue to get the products we need from the industrialized world (industrial production will almost entirely be in Asia by then).
Exporting raw materials and food is the traditional way for those who cannot compete with the industrialized world.
I can't see the Fed choosing monetizing debt over increasing unemployment. Given the shift of our money to an investor class (see Paul Kennedy, "The Rise and Fall of the Great Powers," for how this undermined the Netherlands way back when, and arguably was one of the things that chewed away at the UK in the 20th century), a GOP with an anti-labor labor policy and a Democratic Party with no labor policy, as long as massive unemployment wrecks investments less than high inflation, the Fed and the government won't care.
Thanks 2 all.
Theory? If the elephants make the theory work, is Hubbert's model likely to account for the higher declines of water injection, given that his model ( I guess) was developed using data on older extraction methods with less declines?       Are the bigger wells water injection?  Thanks.
Do you have a link for the 44% number?  Thanks
Try these: (and hence WSJ article)

The 44% decline rate is the most pessimistic projection. Pemex predict a 6% decline rate 2005->2006, around 15% thereafter, but that equates to the most optimistic scenario.

Adam Porter did an interview with a "senior Pemex engineer" last November, scroll down to Oilcast#28:

Good background info on Cantarell:

Thanks, I'd been following Cantarell but hadn't seen that number.
Good work.  

It may be too early for these graphs to mean anything, but I like seeing them anyway.  :)

Stuart,  Remember the pages that would contain updated images of the hurricane models.

It would be cool if you took this monthly data, and defined a standard URL that could be linked to that would always contain the up-to-date graph.

While maybe not as obviously valuable as the hour to hour tracking of a  hurricane, I do think it would be useful to have a specified page to reference that would be a part of TOD site.


The reason why I like to see the big chart is so that people will remember that there have been ups and downs before. Just because we may have a downturn now doesn't mean that it's the last one.

An important point that Stuart made is that with stockpiles high, if production is dropping a bit into January, that is a sign of decreased demand at these high prices. It's not an indication that we have reached a level where we just can't produce any more, as a simplified Peak Oil analysis might suggest.

Oil prices have dropped modestly over the past few weeks despite continuing international tensions, and most observers attribute it to increased stockpiles, which are a sign of decreased demand. That may well be, as Stuart says, an indication of slower GDP growth. The bond markets, with their yield inversion, at least hint that a slowdown is looming. OTOH much so-called expert opinion is relatively bullish, and as I mentioned before, markets expect the Fed to continue to raise rates at least two more times.

Your crystal ball is as good as mine, but I would not be surprised to see a repeat of the oil production pattern from the 2000-2002 time frame, which unfortunately is not clearly visible on either Stuart's short- or long-term graphs. A softening economy led to flattened and slightly decreased oil consumption during those years, and if we do see a GDP slowdown in 06 it could be the same thing all over again. The difference is that this time we'll be dealing with an oil price of perhaps $40-50/bbl instead of $20/bbl, which will make it that much harder for the economy to get back on its feat.

"...which will make it that much harder for the economy to get back on its feat."

Oops, and I should add that it will be quite a feet when it does so.

Our very mild winter in the Northeast - right after the snow storm temps went right back to the mid 40s - has certainly helped reduce heating oil consumption by about 20%. I heard that on the radio - not sure of the source. I'll have to look over at the EIA later to confirm.

If that's true it means the stockpiling for gasoline can begin earlier.

I highly recommend reading the EIA's Short Term Energy Outlook. Very rosy, but here are some facts they report:

 In the United States, January was 27 percent warmer than normal, pushing prices for natural gas lower than predicted in the previous Outlook.  But cold weather in parts of Asia and Europe combined with uncertainties regarding oil supplies from Nigeria, Iran and Iraq help keep crude oil prices high.  Prices for crude oil and petroleum products are projected to remain high through 2006 before starting to weaken in 2007.  The price of West Texas Intermediate (WTI) crude oil, which averaged $56 per barrel in 2005, is projected to average $65 per barrel in 2006 and $61 in 2007

I'm not putting much stock in their crystal ball, but here's a quote that should give us pause thinking about next winter in case we have a colder than normal year:

The warmer than expected January has provided U.S. households some relief from this year's expected increase in heating fuel expenditures.  However, 2005-2006 winter residential space-heating expenditures are still projected to be higher relative to the winter of 2004-2005 owing to higher energy prices.  On average, households heating primarily with natural gas can expect to spend $178 (24 percent) more for fuel this winter than last winter.  Households heating primarily with heating oil can expect to pay, on average, $195 (16 percent) more this winter than last.  Households heating primarily with propane can expect to pay, on average, $150 (14 percent) more this winter than last.  Households heating primarily with electricity can expect to pay, on average, $36 (5 percent) more than last winter.  Should colder-than-normal weather occur for the remainder of the heating season, expenditures could be significantly higher than currently projected.

So, 27% warmer January, but still paying double digit percentage increases in heating costs...

The warmer weather should help both in freeing up consumer dollars, and also make more oil available for driving with, meaning the short term economic outlook would be easier than it would have been if the weather was very cold.
Well, also the difference is that the 2000-2002 reduction in oil usage clearly had to do with non-oil factors. The tech bubble burst, that had nothing to do with oil. This time, the reduced growth in oil usage seems to have to do with high prices, which seem to have no other explanation than the fact that supply has stopped increasing. The only other possible candidate for an explanation for an economic slowdown is the housing bubble bursting - but there is no evidence for that prior to Q4 2005, whereas the inability to increase oil supply much further started to show up in late 04, and the situation has continued to tighten since. In other words, if there is a slowdown now, I'd argue strongly it's oil-supply led (which I think few would argue of 2000).
Remember, post hoc's not propter hoc. Take a look at

and see how personal savings hit zero right at the end of 2005, the end of a 20 year trend. How much longer was that going to go on, even without an oil shock? Plus, the Fed started raising rates a year and a half ago; that was bound to have an effect eventually. Not everything is about oil.

"Not everything is about oil." Totally correct, Halfin, it is a very complex interplay between a fair nummber of major and minor threads and their timing. Most of them are economic / fiscal. I have been grappling with them for over two years and still have no real confidence in how they will play out - it will take some to crystallise before I can (logically) realistically guess what may happen. But if and when the reality of oil demand henceforth and probably permanently exceeding supply happens and becomes known it will shake the foundations of this economic world more than any event you have previously witnessed.

If I recall correctly the personal savings rate first went negative a few months back, July? US consumers have become adapt at conjuring spending money: borrowings, credit cards, mortgage ATMs, not saving. All these are like buffers in converse and make the risks of magnified change in response to shocks much greater.

Sure, but the point is oil production started flattening some time before anything showed up in the GDP line (which was very healthy until the last quarter, and even now January retail just took a big jump. So the argument that this plateauing could have anything to do with the demand side (a la 2000) doesn't make any sense to me. I can see that Freddy has a colorable argument that maybe demand just jumped so fast that supply is taking a while to get in place the necessary measures for the next jump of production. I don't agree with that position because there's no sign of the required leap in investment, and the growth rates in demand we recently saw are nothing spectacular by historical standards, but it's at least colorable. By contrast, the idea that this is a demand side slowdown in oil usage doesn't make any sense to me.

Also, the Fed's continued rate-raising has a great deal to do with the increase in oil prices, which is the main inflationary threat on the horizon.

The IEA itself, which produced these numbers, thinks the drop in January is due to production factors, not decreased demand.

From the Feb report:
"* Global oil supply in January suffered from weather-related and other outages amounting to 450 kb/d. Offsetting increases, however, held world supply at 84.6 mb/d, only 135 kb/d below December."

We might differ on the goodness or accuracy of our crystal balls, Halfin, but I am in general agreement with your comments above. Would add a few points...

There are temporary supply constraints for GoM (hurricane hangover), Russia (cold weather), Nigeria (local troubles, and valid IMO). Therefore there is scope for production to increase.

I continue to think that Saudi could pump a little more if there was a real excess of demand. However, I think they will not until they deem necessary and I think they will keep Haradh III on low throttle until they need it to mask Ghawar decline.

Barring significant geopolitical / supply disruption I don't expect demand to be supply constrained before mid 2007. Demand does look (so far) worryingly immune to price, though.

A slowdown of the US economy is a 99% given within the next year IMO. The official economic stats won't show it for 6 to 12 months but the odds are it has already begun in a significant way. I mostly disregard the Q4 2005 GDP at 1.1%, it will be revised up to about 2% and Q1 2006 will show over 3% on official stats I guess. It probably won't be until the Q3 2006 GDP data comes out that recession is seriously spoken about in the mainstream.

Anecdotally I've noticed a significant slowdown in UK in the last month: quiet bars, deserted restaurants and the like. If that persists into April it could be indicative of a dip, how's such things looking in US and elsewhere?

The oil price is at a critical juncture just now. It's declined quite fast to $59.57 (March WTI Nymex future tonight close). The April future takes over in a couple of days and that's at about $61. Will it bounce from here or keep going down? I'd bet on a bounce but it's a close call, we should know before the weekend, the reaction to tomorrows stocks data will probably decide. I don't expect to see oil below $50 in 2006 nor probably evermore in this economic reality.

When the slowdown happens it won't be one like before. Even if it starts like previous ones and we even begin to come out of it, the distortions, possible constraints and geopolitical risks make it near certain that some fundamentals break and the whole economic landscape will change for the worse.

On a more positive note, I am becoming more cheery by the day that the probability of silliness erupting in late March has declined, still possible but relatively minimal. Next hurdles feel to be second half of May / 1st week June, then late September / early October, but I haven't felt those out much yet. long as we're talking anecdotal...i've been following condo sales in hawaii....they have come to a screeching halt....last summer was the last time a decent number transpired..very little action now , with inventory building up....this would be a proxy for the california economy...since it is primarily californians who can afford hawaii real estate now...multimillion dollar units are languishing.... this should be the hot season for condos there
The jury is probably still deliberating on the real estate slow down. Latest UK signs indicate a possible slight dip after a slight upturn towards the end of last year but volumes are low in winter, will need to see how the spring bursts for any real trend. Most of the hot US areas seem to have peaked last summer, the big question is: will they flatten or fall and, if so, how much / fast?

Your anecdotal Hawaiian condo sales info could be very relevent for discretionary high end spending especially for west coast USA. US unsold inventory is at about 18 year highs atm, if I recollect correctly, and that built quite quickly from last midsummer.

Many Japanese own property in Hawaii. Having seen the error of their ways in bombing Oahu, they now buy up big hunks of it. Certain stores, e.g. at the Ala Moana shopping center, have Japanese as their primary language.

At a guess (and it is only that, because I do not know how to get the data) more Japanese own property in Hawaii than do Californians.

don...that perception is 10 years out of date...the last boom in hawaii ended in 1990 (with their stock market crash) with the japanese and californians holding the high priced property..during the 90's the japanese painfully divested themselves of much of that...a case in point the waikoloa hilton that was originally the japanese owned hiatt regency was built in early 90'5 for 240 million and sold to hilton ~7 years ago for 60 million, near the bottom ('98). sure, there are signs in japanese, they are a goodly portion of the tourists in honolulu, but it is only recently that they have re-entered the hawaiian real estate market, and in only a small way.
You may be entirely correct. However, I have heard it said that some big Japanese money now uses fronts to conceal its origins. By its nature, it is imossible to verify or refute this "rumor" without a great deal of research.

Japanese tend to buy what they perceive to be cheap. In other words, they conform as closely to the model of "economic man" as anybody. The buying panic of the eighties did fade, as you quite correctly point out. However, given the available data, I am hesitant to come to any strong conclusions.

From my limited knowledge of California real estate, it seems to me that many Californians have been insanely accumulating horrendously overpriced properties--and doing so to the exclusion of much investing in real estate elswhere. This is merely a "horseback empiricism" type of observation, however.

As usual, great work.
1 Commercial stocks would not be so high if crude loans from the SPR were repaid. ANd, gasoline stocks would not be so high if product loans from eurasia were repaid. I suppose they must be repaid before the next hurricane season begins, otherwise from whom would we borrow next time? It would be great to see a thread reviewing the size and due date of these loans.
2 Freddy claims August was the peak.
Really, my favorite part of this post (other than the Saudi Arabia/Russia graph) is the title--which I think says it all.

Close, But No Cigar.

I'm still waiting for that smoke. Maybe it will come from Cuba? Excellent.

thank you for the humor.
I think a turning point was reached this year: I'm not talking peak oil, or even peak awareness. This is the first year that, JUST reading the NYT and the WSJ, which I read every day, one who had NOT read any peak oil books or sites would really start to think something's radically wrong with the oil and energy situation. This is not the same as saying it has become mainstream opinion. It is simply saying that enough was there in these two papers ALONE to cause a moderately attentive reader to start thinking.

But of course the production figures are decisive, unless as some have pointed out, their significance gets blotted out by war, depression, or other complexifying issues. It's a very strong "unless".

I just finished watching Peter Tertzakian, author of A Thousand Barrels a Second: The Coming Oil Break and the Challenges Facing an Energy Dependent World, on The Daily Show.  It was an interesting segment.  Almost like a conversation you'd hear among peak oilers.  Jon seemed quite educated about peak oil (though perhaps it was just good prepping by his staff).

Jon started the interview by asking when we'd be reduced to a Mad Max situation.  (Tertzakian said it might not come to that.  He didn't rule it out, though.)  They talked about possibly invading Canada for their oil.  At the end, Stewart suggested that we continue to use more and more oil and simply prevent China and India from using any. (Tertzakian thought that was a very bad idea.)

Open talk about just grabbing the oil is becoming more and more common now. That's what the loyal opposition is doing -- telling the neocons to talk nice -- and then the Europeans will join us in grabbing it -- we can divvy it up after the grab -- trust us.
This is the first year that, JUST reading the NYT and the WSJ, which I read every day, one who had NOT read any peak oil books or sites would really start to think something's radically wrong with the oil and energy situation.

Excellent point. Totally agree.

Amen. and . . . oy veh.
Economically, bear in mind that the dollar oil price is currently in dramatically overvalued dollars, when looked at from a current account equilibrium standpoint.   This could act as sort of a multiplier effect.  

It would be fully logical for dollar holders such China and Japan, in the face of peaking oil, to shift their purchases from US treasuries to maintain a high dollar, to oil resources.  This would have the double-barreled effect of forcing a high dollar oil price on Americans even in the face of falling demand and recession.  

Oil is still reasonably inelastic.  It's easy to imagine very high dollar oil prices if the dollar is allowed to assume its equilibrium market value.  Given those two facts, and America's inability to compete with labor costs in the developing world, and its lack of savings and debt overhang, it's easy to envision a very,very serious recession in the US.


Quite so. Oil price is HIGHLY supply inelastic and also HIGHLY demand inelastic, at least in the short run of a year or two.

Given a severe recession, what happens next?

Answer: I do not know, and neither does anybody else.

However, were I a betting man I'd put odds of five to three that

  1. the U.S. Federal Government will use massive fiscal stimulus, to the tune of two to five trillion dollar per year deficits to fight the recession and
  2. to finance these deficits (rougly ten times the current deficits) the Fed will be forced to monetize the debt.

N.B. The national debt is not the same as the deficit. It is the accumulation of many years and decades of deficits (less a few wimpy little surpluses).

When our national debt becomes six times greater than our nominal GDP, that is when I dig up my supply of weapons and ammunition.

Speaking of the WSJ, here's this from behind the fee wall. Compare the cheery headline with the more sober reality of the story. PO awareness may be growing with the reporters, but the headline writers are still spinning the news in an agressively positive fashion. Note that on the WSJ site all you see is the headline; you have to click it to get to the story. Many folks just skimming the "What's News" headlines are, IMHO, being misinformed by the editors.

Exxon Bolsters Its Reserves

February 15, 2006 4:50 p.m.

Exxon Mobil Corp. replaced more fossil fuel than it pumped from the ground in 2005, but for the second consecutive year almost all of the additions came from a single natural-gas field in the Persian Gulf country of Qatar, raising questions about the diversification of the company's reserves.

The disclosure from the world's biggest publicly traded oil company marked the latest sign that the energy industry, despite recently announced blockbuster profits, faces a long-term challenge. Oil companies are finding it increasingly difficult to replace the reserves they pump out each year, as big new fields get tougher to access. That means the companies are relying on a small number of fields to hit big, and those fields often are more technically challenging than in the past.

Exxon said it replaced 143% of its 2005 combined oil and natural-gas production, a figure that far exceeded its peers for the year. France's Total SA announced Wednesday, that it replaced about 95% of its 2005 oil production. Analysts want to see companies report annual reserve-replacement ratios of more than 100% as evidence that they are expanding instead of shrinking.

Analysts said Exxon's reserve replacement was impressive, but they expressed concern about its reliance on Qatar natural gas for growth. Exxon typically trades at a premium to other oil stocks largely because it is seen as so globally diversified, a point that the company raised Wednesday. The company said that, on a 10-year average, its reserve replacement ratio is 114%, with no more than 25% of its fossil fuel coming from any single region in the world.

But the Irving, Texas, company said 1.6 billion barrels, or 94%, of the 1.7 billion barrels it added to "proved reserves" in 2005 were from Qatar's North Field. For 2004, the company reported that a similar percentage of its reserve replacement was from the Qatar natural-gas field, or 1.7 billion barrels of 1.8 billion barrels.

Jacques Rousseau, an oil analyst with Friedman, Billings, Ramsey & Co., said Exxon's figures were "exceptional." He took note of the reliance on Qatar, "You don't want to see a company have all their eggs in one basket, and when you see something like that you start to worry about the rest of the business." He said Exxon has a strong record for reserve replacement, and that there isn't enough information to determine whether there is cause for market concern.

Exxon played down concerns about the Qatar natural gas. The company says it has a robust portfolio of oil and gas fields coming on line in the next few years. While Qatar may dominate its reserve replacement for some time, the company says over the long term Exxon's oil and natural gas will continue to be spread over many areas. "We're in a good position. We look at a 10-year or 20-year time frame," said Russ Roberts, a company spokesman.

As with last year, the company highlighted its disagreement with how the U.S. Securities and Exchange Commission wants reserves to be reported. Last year, it reported that, by the SEC formula, it replaced just 83% of its 2004 production, compared with 112% by its own internal-accounting method.

Boy, if Exxon were to break out oil and NG separately, the oil part would look really horrendous, wouldn't it? I guess they are going the way of Shell who are well on the way to being a natural gas company.
Oil is passe, ng is the future... well, for a while. ASPO's graph tells it all.
Is Exxon's play for Quatar gas because it is moving into the LNG side and diversifying out of oil products


is its interest in gas fields because it will want to engage in some large scale GTL action, which would help the overall ALL LIQUIDS chart a teensy tiny bit longer.


Any thoughts?

Both. The alternatives are complementary rather than being mutually exclusive.