Whither Oil Prices?

[editor's note, by Dave Cohen] The closing NYMEX price for the crude oil October 6th contract was $63.33, up 11 cents on the day.

Since early August, oil prices have fallen considerably. From the EIA's latest This Week in Petroleum.

Oil Prices Continue to Drop

In the last 5 weeks, since August 7, oil prices, both for crude oil and petroleum products, have dropped substantially. The price of West Texas Intermediate (WTI) crude oil has fallen from $77 per barrel to below $64 per barrel. Retail gasoline prices have dropped 42 cents per gallon to $2.62 as of September 11, while retail diesel fuel prices, at $2.86 per gallon, are now about 20 cents per gallon lower than they were 5 weeks ago. Will the declines continue, or will they begin to level off and possibly increase later this year?

Let's examine the EIA's timely question. Combined with the Jack-2 Test Well, the dropping prices have served as fodder for those debunking peak oil claims.
In June of 2006 Stuart Staniford argued convincingly that oil prices were not in a bubble. His article is recommended background reading and includes an excellent description by John Kenneth Galbraith of speculation in the markets. Here's the last part of Stuart's analysis.

Log (base 2) of West Texas Intermediate spot price in nominal US dollars Jan 2000-Jun 20th, 2006, together with linear and quadratic fits to the data from Nov 15th, 2001 onwards (the low before the recent price run-up). On this scale, 4 is $16, 5 is $32, and 6 is $64. Graph is not zero-scaled.
Figure 1 -- Click to Enlarge
I have taken the start of the price rise as November 15th 2001 which is when prices bottomed out after the tech crash and the events of 9/11. To that price rise I fit both a linear trend, and a quadratic. To the extent the price was curving up in a bubblicious manner, we would expect the quadratic to depart markedly from the straight line. It elects not to do so - the two are very close. Thus we see that although there is considerable volatility in the price (and the pattern of that is worth further analysis in the future) the price rise is very much exponential in nature. So I take this as further evidence that we do not have a self-reinforcing bubble.

At least not yet.

It is natural to ask whether we are witnessing the bursting of an oil price bubble. Was Stuart wrong?

[editor's note, by Dave Cohen] I should add that if Stuart was wrong, so was I.

On the other hand, prices have been subject to "considerable volatility" in recent years so the current bearish oil market may simply be an exaggerated extension of that trend. James Hamilton of Econbrowser has an interesting analysis of what's happening now. Here's his take on things in Gasoline prices will fall even more published on September 13th.

So what is going on? I've argued that speculation in oil has in part been driven by the asymmetric payoff structure in a tight market. With limited excess capacity, any supply disruption had the potential to produce quite a spike up in prices, and that possibility may have been regarded as sufficient compensation to speculators for the risk of a price decline that would be expected to occur if none of those events took place. But we're now operating on the flip side of that same calculation-- hurricanes have so far failed to disrupt this season's production of oil from the Gulf of Mexico and the conflict with Iran seems to be playing out as an awkward standoff. The absence of bad news means prices had to drop.

Furthermore, there is some evidence that petroleum demand is finally starting to be tamed, which is of course one way to create more excess production capacity in the world oil market. My concern here is that the incipient economic slowdown may be the most important factor responsible for declining petroleum demand. And to the extent that's the story, the oil price declines are not exclusively a harbinger of good economic news.

Indeed, the optimists are out in force because of the "absence of bad news".
"Prices have just begun to drop," said Michael C. Lynch, of Amherst, an oil-industry analyst who heads Strategic Energy & Economic Research Inc. with clients ranging from the U.S. Department of Energy to Aramco, Saudi Arabia's national oil company.

Growing supplies of oil and oil products, coupled with weak demand, which is the response to the past year's high prices, have been reducing the price of crude oil, he said. From its current price of about $67 a barrel, Lynch said he thinks "it will stabilize in the low 40s within the next year."

Hamilton's remarks bring together many of the factors said to be affecting current prices.

No doubt analysts like Lynch would argue that we are arriving at the end of a speculative bubble. Hamilton's view sees continued volatility based on "the asymmetric payoff structure in a tight market." As he points out, there has been no new supply easing spare capacity concerns, a point reinforced by continuing bad news out of Iraq and Nigeria. Instead, decreased demand is "one way to create more excess production capacity in the world oil market."

Three other considerations must be added to these analyses. First, OPEC decided not to cut production quotas at their recent meeting. Second, inventories have been higher than normal this year although there was an unexpected drop in crude stocks just last week. Last but not least, oil prices are undergoing a seasonal adjustment—though the change seems to have arrived a bit early this year.

Figure 2 -- Click to Enlarge

Prices have fallen from their risk-induced high of $78/barrel (Israeli/Hezbollah war) to just above $63/barrel as of this writing. A quick glimpse at Figure 2 reveals that after the risk-induced high (hurricanes) of $70/barrel in 2005, prices subsequently fell to about $57/barrel. In 2004, prices reached $55/barrel in late summer before falling to about $42/barrel in October. However, the current drop of about $15/barrel exceeds both prior years by $2/barrel—and October isn't here yet.

Getting back to the original question, it is apparent that the answer is not straightforward; predicting future oil prices never is! In the shorter term, prices could easily fall precipitously down to the $50s or even the $40s before the late year seasonal rise kicks in. There seems little reason to expect the great volatility of past years to end any time soon. While things are quiet now on the risk premium front, underlying conditions defining the uncertain geopolitical situation have not changed. However, if global demand continues to ease, prices may not bounce back to expected levels in the high $60s or $70s.

The optimistic Michael Lynch sees prices stabilizing in the low $40s within the next year. That's not even the lowball estimate. In Business Week's story Oil: A Bubble, Not a Spike?, analyst Tim Evans believes "the crude rally isn't justified by fundamentals and expects prices to 'fall hard' soon to $26 to $30 a barrel", thus reflecting the bubble view of reality.

Evans, a senior analyst at IFR Energy Services, a division of Thomson Financial, thinks that the current run-up in oil prices is much like the Internet bubble of the late '90s. While other analysts are calling for crude to hit upward of $100 per barrel in the next few years, he believes the bubble will burst in the next several months, bringing prices back down into the upper-$20s range.

[Recently, Evans said], we saw the highest level of commercial crude oil inventory in the U.S. since June, 2002. Then, we were trading in the range of $26 to $30 per barrel. The current physical fundamentals, not even projecting to a greater surplus down the road, are consistent with a $26 to $30 price.

But were this to happen, is it good news? Since there is no supply-side relief, stable prices (which would be an anomaly given recent trends) in the low $40s or below that would necessarily reflect steep declines in demand—perhaps even recession in some OECD nations. Otherwise, market supply & demand fundamentals do not appear to support such a pricing prediction. Furthermore, OPEC regards $60/barrel as a new baseline. From Oil Gains on Foiled U.S. Embassy Attack, OPEC Price Vigilance:

Members of the Organization of Petroleum Exporting Countries, which pumps 40 percent of the world's oil, decided yesterday to keep production quotas unchanged. The group wants prices to stay above $60 a barrel, Iranian Oil Minister Kazem Vaziri-Hamaneh told reporters today in Vienna, speaking through a translator,

``The price we favor is not below $60'' a barrel, for OPEC's basket oil price, Vaziri-Hamaneh said. ``Supply is more than demand and stocks are at a very high level, and because of these two factors, prices are very fragile.''

Oil pared early gains today as the International Energy Agency cut global oil demand estimates for 2006 and 2007, spurred by a slowdown in the U.S., the world's largest energy consumer.

OPEC will probably implement production cuts if prices fall much below $60/barrel in an already tight market. Earlier this year, Venezuela was calling for such cuts.

Finally, should oil prices fall precipitously from recent levels, the effect on new investment to increase global production could be disastrous. Marginal per barrel costs for new E&P is increasing into the $25 to mid $30s range. Prices in the low $40s leave little room for desired large returns on investment. Low prices discourage exploitation of the higher risk, high cost projects that now dominate the oil production scene. The position of analysts like Lynch seems to carry with it an inherent contradiction: low prices and increasing supply. In addition, high price volatility also discourages investment. No one on the upstream supply side wants to see great fluctuations in price.

Whither oil prices? There is still no convincing evidence that oil prices have been bubbly over the last few years but there is no fully convincing explanation for the steepness of the current price decline either—lack of bad news doesn't seem to be the whole story. The short-term group psychology of the current market must be playing some role. Here's an interesting story for all to read as we conclude this essay—Oil and XOI Corrections, written September 15th.

Fundamentals take years to change at best. It is inconceivable that the world oil market changed fundamentally since the latest 17% slump in oil started a little over a month ago. If fundamentals cannot change that fast then they still remain very bullish. So the recent correction based on speculators getting worried about a geopolitical/hurricane lull is a psychology-driven technical event. And such countertrend moves rarely last for long since sentiment changes so rapidly.
This view is not inconsistent with Hamilton's but merely adds another dimension to it.

The future oil price can not be known but all of the considerations discussed here will play some role going forward.

My issue with all of these price discussion is the units used.  Price is expressed as US dollars per barrel.  The barrel of oil denominator is a real physical entity present in large but finite quantity.  Except for those abiotic oil people who believe that abiotic oil production exceeds a thousand barrels per second, most of us agree that the physical oil reserves in the earth have been depleting since production began.  We would also agree that the EROEI of oil production has begun to decline as production has moved to heavier grades, polar oil, and deep water oil.  All of these factors make it inevitable that oil will be more highly valued in the next decade.  A growing fraction of the goods and services of our civilization will be devoted to oil production.

However, the numerator of the price ratio, the mythical US dollar, has an entirely different nature than a barrel of oil.  US dollars are an imaginary invention that largely exist as data bits on computers.  Banks have mechanisms for creating dollars at will with essentially infinite $RO$I.  JP Morgan just reported a growth of $5.5 trillion in their derivatives in the last quarter.  This represents roughly half the GDP of the whole US.  The exact value of the derivatives market is unknown, but certainly exceeds hundreds of trillions of dollars.  Of note, these electronic dollars can be destroyed as fast as they were created.  Likewise last year the Economist reported the OECD homeowners had accrued $30 trillion in home equity gains during the current housing bubble.  This is equal to the aggregate GDP of all the OECD nations.  This virtual money is also subject to vanishing into thin air.

So looking to predict a future oil price ratio, one must divide an imaginary and highly volatile dollar unit by a physical entity.  Good luck with that.  However, I agree with the Austrians that central banks exist to inflate the money supply, and they do that more often than not.

Excellent, excellent point !

"Dollars" are just a noise that we humans make and that Mother Nature pays no heed to. We can crunch the dollar numbers to any unbounded value we choose. It is not absurd to talk about a googleplex of dollars as reported within the depths of some bank's computer whereas one could not rationally do the same thing for barrels of sweet crude. The physical world is bounded. Human hubris is not.

My favorite point is: Energy is real, money is fictional.

If printing more money really works, then let's just do this:  we'll design a nice, new $1 billion bill.  Then we'll print up 6.5 billion of them and give one to every person on the planet.  Then everyone will be rich!!

the real thing

It is meaningless to say that money is fictional. Are numbers not real?

It would be more accurate to say that that money and energy represent different dimensions, one physical (the world of things, processes and 3 dimensional space), one  mental (the world where things and 3d space is represented). These distinct dimensions are not seperate - but they intersect in known and mysterious ways.

Money represents a promise.

But then again, humans lie. :-)

Ok... how about a chart of Oil in terms of real value... Gold. It presents an alternative view. Check out a 10 year chart here: Chart of Oil priced in Gold
One of the points being, since gold has recently sold off more than oil, oil in terms of gold bottomed 10 days ago and is not far from all time highs. Double barreled bad news for those who are long gold and oil. Im still uncertain what peak oil will mean for gold prices - I can see both sides of the argument. Now, chicken prices, that I am sure of.
Here's one that goes back to 1971:

It's from the Forbes article on Michael Lynch:


Although this discussion about near-term pricing is a fun distraction, it has very little to do with Peak Oil.   The fact of the matter is that oil production has ceased increasing for over a year now (which Stuart regularly reminds us of), regardless of a continuous and huge run up in prices over the last five years.  Prices are going down presently, not because there is more supply, but because demand growth has ceased, and demand for the marginal barrel cannot, at the current point in time, stand a $77 price.  

Peak oil is about production capacity, and production capacity is extremely insensitive to short term pricing.  The Gulf of Mexico Lower Tertiary Play will not start producing oil before 2009 if oil is $35/bbl or $135/bbl.  The same is true for almost all of the projects on Chris Skrebowski's Mega-projects list.  Most of those projects were justified on oil forecasts considerably less than $40/bbl and they will go forward in all cases, absent a worldwide economic contraction.

To be honest, most of the major oil companies would be happy for oil to move back to $50/bbl (or even $40/bbl) and stay there.  Such a scenario takes them out of the political spotlight, it puts downward pressure on the cost of services and supplies, and it takes power and money out of the holders of the resources (governments of nation states) and puts it back in the hands of those who have the capability to extract the resource.

Sometimes it seems that we are watching the daily fluctuations of temperature in NYC and trying to make statements about global warming.

Oil production and oil consumption are inherently equal, to within a couple percent. So when you say oil production has not increased, you can just as easily interpret that as that oil consumption has not increased. And that's not so hard to understand, in view of what you describe, "a continuous and huge run up in prices over the last five years".
An interesting note regarding consumption


BEIJING (XFN-ASIA) - China imported 95.8 mln tons of crude oil in the first eight months, up 15.3 pct year-on-year, with 11.82 mln tons in August alone, the General Administration of Customs said in a statement.

The imports of oil products rose 25.7 pct year-on-year to 25.75 mln tons from January to August, with 3.78 mln tons in August.

Excellant point about the marginal barrel unable to command  $77 at the moment.  In this post, we are discussing current oil trading prices, not Peak Oil.  Prices today reflect the desire of market particpants - not environmentalists, doomsters, politicians...

I have worked on Wall Street for nearly 20 years.  A former boss once said:
"a - fill in the blank with stock, bond, commodity - will keep going up till it stops going up, and it will keep going down until it stops going down".  And "they always go up farther than you thought possible, and down farther than you thought possible".  If do not trade for a living, this statements might seem simplistically obvious.  When you have a great deal of money on the line... they can eat a hole in your stomach.

At the moment the short term trend is down, even though we had a couple of days of pause.  As a trader, I would not reach for the falling knife, so i must believe that prices are headed lower.  Prognosticating a price point of the bottom?  Ha! These are always made by economists who do not a penny of their own money in the game.  

I don't know how you guys do this kind of thing for a living. It's insane.

All these people who put their life saving into speculative houses over the last couple of years. Reading the headlines today must be a nightmare for them.

Can anyone tell me why I keep reading posts that Oil prices are down becasue of
"massive imports"?  I reviewed the import data (for the U.S.) at the EIA website and the "massive imports" are actually down, year oover year for the first 6 months of 2006 from 2005.  If I am missing something please let me know. Any help would be appreciated
Where are you reading that? Oil prices can't, even in theory, be down because of massive imports. Gasoline prices could, in theory, be down because of massive imports of oil, but as you noted that is not the case. Oil prices could be down because of massive exports, but that is not the case either.

My feeling is that oil prices are down on a combination of expectations of lower demand (partially because of lower economic growth expectations) and reduction in the role of financial intermediaries/risk premium. Could all change soon, who knows.

Thanks for the reply.

Of course world Oil prices should not be down because of US imorts, unless of course, the tanker inventory world wide can't find a home... but that is the line coming from a number of Oil market analysts and advisors... US inventories have only 3 components (when you lump crude, distillate, and gasoline together) domestic production, imports, and consumption.  Production is down, imorts are down, consumption is... down?  Must be if inventories are up year over year

Some of those trillions of derivatives have been built up by JP Morgan entering the natural gas market in late 2005. They were never a player before, but the day after they started trading the market, natural gas entered a steep decline from $17 to it's current price around $6.00.  

It is my contention that in the same way, the other primary trading banks (Goldman Sachs, etc),are holding similarly massive derivative positions in the gold and oil markets on behalf of the Federal Reserve System, and can move the daily price at will by buying / selling these instruments. The idea that the oil markets are too big to be controlled in this way does not hold if you look at the size of these derivative positions (Trillions!!).

Remember that these markets are decoupled from the physical commodities, since for the most part the traders dont actually take possession of the physical - they just take their profit and move on to the next trade. There is a lot more oil trading in derivatives than there is actual oil existing in the world. The same with gold. Once the paper trades outweigh the physical trades 10 to 1, the price decouples from the actual physical demand / supply, and voila.

I completely agree that Fed proxies using free Fed virtual money are holding manipulative positions in stocks, commodities and their derivatives. And rather well they seem to be doing their job so far. There were signs they intervened on Nymex oil in the immediate wake of Katrina, possibly to get some friends out of nasty short holes.

Also agree that the markets are decoupled from reality (there is a case for saying that many derivative markets are decoupled from fiction, too).

I have a complaint about $ bills: they are too small and not sufficiently absorbent for the role they are being prepared for: toilet paper.

At least you folks still have a $1 bill, up here in Canada we are going to be stick trying to use the $1 coin,a.k.a. the loonie, now thats impractical!
what is the loonie made from ?   what metal ?   if the loonie were made of silver for example they would hold their value  against worldwide fiat currency
The loonie is a Nickel base with bronze plating
Nah - you just use 'em like you use the shells.  That does mean you need three, though.

(Don't tell me you don't know how to use the shells?...)

Francois - agree, in fact the strategic manipulation is in plain site:
  1. stop reporting M3
  2. declare that companies working in partnership with the government can keep secret books
  3. put a Goldman Sachs guy in charge of the treasury
  4. stop reporting committment of traders

VOILA!  The US government can print money and give it to their strategic trading partners to be used in manipulating the market.  NOW PERFECTLY LEGAL!  If the traders lose several billion, no problem, just print more money.  Market manipulation for political purposes is the goal, not trading profits.  It works until a foreign power declares the practice to be bullshit.  Then the US dollar becomes nonconvertible, like the Zimbabwe dollar.
One little thing: in the real world usually there's some middle ground between "everything's fine" and total collapse.  The dollar will weaken if we keep printing too many dollars, but it's unlikely we'd go straight from business as usual to a total collapse.  It could happen if China and Japan suddenly decided to dump all their dollar holdings, but it's pretty unlikely.  
You couldn't be suggesting that the decline of the price of oil might be coupled with the impending US elections?  I shocked! Shocked!!

Serioiusly, I have wondered and after reading your post, I am really wondering now.

"3 put a Goldman Sachs guy in charge of the treasury


3 put a Goldman Sachs guy in charge of the treasury AGAIN.

Financial markets cannot be completely separated from physical markets. In the case of oil futures, the front month oil price must converge to the spot price. And the spot price is set by supply and demand that month. Other months can't diverge too much from the front month. So even though only a small percentage of contracts end up being delivered, they set the prices for the whole system.

Put another way, a futures contract obligates the holder to buy or sell the commodity at that price at a particular future time. Big financial interests may be able to temporarily shift the futures price away from what the spot price will be, but that just puts them on the hook to pay the difference when the contract closes.

This means that any such manipulation is basically an offer to give money away. If you're convinced that futures prices are artificially being held down, here's your chance to get rich. You can invest a few thousand in an options contract and make many times your investment. Reinvest your winnings and in a few years, you can be sitting on millions.

Basically what you're saying, when you adopt this conspiracy theory, is that these companies are willing to give away their wealth to anyone who sees the truth of what they are doing. If whatever secret, hidden information gets out that clued you into the true situation, then everybody would want a cut of this money fountain. So this kind of manipulation can only work as long as most people are not aware that it is happening. It must be well hidden and well disguised. But then, how did you find out about it?

Generally I agree with you Halfin: it is difficult to manipulate large, freely traded, commodity markets without it being obvious. However, the gold and silver markets have been manipulated for years - they are small enough to make it feasible. There were also hints that in the immediate wake of Katerina, in the first hours and days after oil peaked above $70, there was purposeful action to bid down the price, possibly partly to protect a major player or two who held expensively large short positions. Job done on that occasion, I'd say, but normally the oil and energy markets are too big for more than an attempted nudge in the 'right' direction to work, and there are plenty of media pundits that get wheeled out to do the job much cheaper.

Just the awareness that virtually unlimited pockets could be used to 'protect' certain markets from too sudden moves in the 'wrong' direction skews the ways traders bet on markets. That's the beauty of the PPT (plunge protection team) 99% of the time just the knowledge of its very existence is all that is needed, only very rarely is real intervention required.

I don't believe there's a plunge protection team for stocks -- that market is just too big.  However, if you had, say, about $7 billion to $8 billion to play with, you could push the oil markets around if you wanted to. The questions we must ponder include:  Are there funds that have that kind of money?  Certainly, especially if it was a coordinated move.  The next question is:  What would they hope to gain?

You could posit that funds that see it in their best interests to push oil prices higher most of the time (because that raises the value of the much-larger positions they hold in oil company shares, by increasing the value of those companies' oil reserves), could choose to push prices lower right before the November elections, hoping it will help out the Republicans.  Republicans tend to be more eager to pass the sort of corporate welfare that can make fund managers rich beyond the dreams of avarice.

This theory can't be proven of course, unless one of the big funds goes bankrupt and we suddenly get access to their emails, as happened with Enron so it can only remain a theory.  It may be paranoid, but it's not tin-foil hat territory, not when you have a long history including ...

  • During Calfornia's energy crisis, allegations that Enron was gaming the market were scoffed at.  Those charges, as we all well know, later turned out to be true.  The Federal Energy Commission went on to hire Enron's lawyer, a woman who scribbled this note to her client: "Answer questions, say nothing. Answer questions, finger others."  Enron invested a few million in George W. Bush and reaped billions in return. Nice business!

  • Senator Ted Stevens, the Republican head of the Senate Energy and Commerce Committee refused to require energy company CEOs to testify under oath last year -- thus freeing them up to lie.  Why did they want to lie about Dick Cheney's Energy task force, do you think?

  • The Department of Energy asking the National Petroleum Council to investigate Peak Oil claims, and NPC is headed up by former ExxonMobil CEO "Don't Rock the Boat" Lee Raymond to run the investigation.  You know -- that same Exxon that says Peak Oil is not a problem.  And yes, Lee Raymond was one of the oil CEOs who lied to the Senate.

I could go on, but there's only so much time.  All this doesn't mean there aren't real economic reasons for oil prices to go up and down -- but there could be other forces at work as well.  I don't know that the oil markets are being manipulated ... I just suspect it.  
The PPT exists, the question is: Does it intervene?

I think this 41 page PDF from Sprott Asset Management answers that question:

"Given the available information, we do not believe there can be any doubt that the U.S. government has intervened to support the stock market. Too much credible information
exists to deny this. ... These markets have been interfered with on numerous occasions."

Halfin, I absolutely agree with this. The markets are much harder to manipulate than most people imagine.  If markets were so easy to control, how come so many governments have had to be bailed out by the IMF over the years?

Generally it's much easier to influence a market by massaging information, so as to influence others to take a position. And even then it has to be done infrequently. Like in poker. If you always bluff then people learn to expect it.

And the other thing is how often the market successfuly anticipates the actions of the Fed. As revealed in the futures markets.

This shows that they are both reacting to the same publicly available information. And in reality the Fed often does exactly what the market expects it to do, either because it agrees with the market, or because it isn't willing to risk defying the market.

I'm not going to comment on fiat currency or the illusionary nature of our money. Suffice it to say that it is the system we have today, and today's rules and limitations are built around that system.

However, the system is not without some usefulness in the here and now. The price of oil, or any widely traded, highly visible commodity or financial instrument, is in part a reflection of the average emotion and broad understanding among a world of players. Clearly some players have more input (bigger pockets) than others, in this group-think we call market pricing, for all that, the price is a useful reflection of what the world thinks.

Speaking about the price of oil, the intraday chart on Friday is a possible reversal day; doesn't mean oil is headed right back up, but it may try to stage an attempt at a rally. Whether that holds and a series of higher highs and higher lows is established (a change in trend from down to up) is for the future to determine.

Completely disagree. It would show up in the COT report. The amount you talk off would be really really large. Currently the net position of all comercials in the market is a short position of about 20,000 contracts. Thats 20 million barrels total. If you think contracts from now till 2012 total ( yes that position is the total for all contracts) can be doctored with 20 million barrels or less than 1/4th of one days use than all of you are crazy.
Come on guys... JFK is not shacked up with Marylyn being entertained by Elvis...  Do you really think guys competing on Wall Street cooperate with each other?  It has been my experience that they would be just as willing to eat each other, medium rare, over a fire in a garbage can on 10th Ave...

It is true that derivitive securities whip the underlying commodity in one of the few true cases of the tail wagging the dog... but this is not down in concert.  Goldman is at war with Morgan, who is under attack from Bear Stearns, etc ...   for every buyer of ANY security, there is a seller... only one of them gets to be right.  There is no altruism in ths industry... no self respecting Wall streeter would take a bullet for another!

MicroHydro do you realize if most Amurrikans were required to sit down and read your post until they understood it, their heads would explode?
playing eddie arnorld's lonesome cattle call achieved the same result in "mars attack"
They cannot...read I mean, and so what? Who needs reading, after all.


My God, it's "only neccessary that the leaders know how to read"?  In his wildest dreams Hitler would not have tried to run something that offensive on the German people.  This guy is finally telling us what Bush has always meant by "democracy" - the masses are not supposed to have the tools to govern themselves unless they're "entrepreneurial" enough to actually run a business.
Of note, these electronic dollars can be destroyed as fast as they were created.

Isn't there some quantum currency theory in which virtual dollars and virtual antidollars are continuously created and destroyed at a furious pace as part of the fabric of the economic universe?

You are thinking of the Standard Model of Marketonics.  The marketon is the particle that carries "market forces".
I have been one of those people who felt that there was an excessive risk premium built into recent spikes in oil.  Having said that, I still do not think that we are in a bubble - I think we're into something entirely new here.

The risk that we face going forward is that which is stated and implied in the article: as prices plummet, and they may go very low if and when current projects come online, the incentive to increase investment in infrastructure and research and development of new fields will fall off significantly.

Major projects like the new Gulf of Mexico exploration will immediately become unprofitable, along with many of the tar sands programs. This doesn't even touch on the need for basic infrastructure improvements that will go unfinished.

Herein is the big rub: if prices begin to fall significantly below $55 - $60 per barrel, we're going to continue to sell ourselves short in the long-run.  The 'spike' we've seen this past year will rear its ugly head sometime in the near future and most likely be far worse (assuming investment slows and/or stops).

If current exploration projects are put on hold or cancelled - what does this mean as the 'slack' in the system evaporates and the infrastructure continues to deteriorate?

interesting  ........   i read somewhere that exxon uses $ 35 /bbl in their project decisions
whither i think oil prices are headed ?  probably down for the short term  say 2-3 months   up  up and away over the long term    the us consumes 1/4 of the world wide supply and i am assuming demand will decline  until along comes a supply disruption or even a crisis with a potential disruption         re: the jacks 2 discovery    well at this point it remains an oil deposit  
If peak oil is happening, we should witness high oil prices but also extreme volatitlity. Look at caviar for example:

or whale bone:

whale bone experienced a peak in 1850 ?
I love this stuff!

You're great

I'll second that.
The volatility is whats going to hamstring policymakers - just when alternative fuels look like good investments - a mild winter and no hurricanes combine with slowing economy to cause oil and natural gas prices to drop precipitously in the near term.  This sends an erroneous (in my opinion) long term signal to the market that everything is OK - utilities breather easier because they are practically having to flare natural gas to get rid of it. Everything about the current system is cheap and now seems cheaper - what incentive is there to change?

The government, who at high levels are aware that oil is finite, should put a floor on fossil fuel prices, to mitigate the volatility ahead - look at the price graphs that Khebab posted - at any point in time during those roller coasters, could someone from either camp (the whale bone doomers and cornucopians) argued that they were right?

It may cause a problem in the U.S. but in Europe and Japan, as well as possibly other Asian countries (?), alternatives will still make serious gains.  The reason is the market for alternatives are not just as a replacement for dwindling energy reserves, but also as a replacement for global warming causing C02 belching power plants.  Everyone besides the U.S. takes global warming seriously.  Fortuitously, concern for C02 emissions points to the same solutions as concern for the availability of oil.

Europe has been on a path toward a better, sustainable energy mix for many years now.  The U.S. has just guzzled oil.  I don't know what will happen to the world economy as oil becomes more pricey, but the U.S. is going to be in big trouble for certain.  (I'm disregarding the assertion of doomers that everything is going to completely collapse)

Besides the mild hurricane season and a slowing economy to drive down oil prices, financial gurus like Jim Puplava cite that we pay a oil premium for Mideast turmoil. Since the Israeli-Hezbollah war ended it has been calm and Iranian shenanigans are in a stalemate. If one little terrorist attack hits somewhere watch the group think change and oil prices go back up.
In the finance world Jim Puplava is certainly not a guru. In fact, in an industry that worships those that have been successful, he is unheard of.

In the Goldbug world he is a guru. Look him up in google and you will see most references are within a small circle of gold bug outfits, such as Financial Sense.

I'm not saying this is good or bad. Just letting you know.

Someone should write a story on Gold Bugs and Peak Oil. It would be fun and informative.

Well, I always look forward to the FSO weekly mp3s and I've just started listening to this week's as I'm typing. I get more useful sense from them than I do from sites like Marketwatch. Before I started listening (3+ years ago) I would have suspected the content to be goldbug biased, but it isn't - gold and precious metals typically get about 5 minutes of their weekly 3+ hours of audio.

Jim Puplava has been well ahead of most financial folks in his awareness of peak oil and regularly has long interviews with the likes of Matt Simmons (who's due back for another in a couple of weeks), Richard Heinberg, Matt Savinar. It's a very good site for some interesting perspectives and analysis of peak oil and related issues. I'd say that oil and energy gets probably 5x as much coverage as gold in their broadcasts. Well worth listening IMO. For those who don't know the place:  http://www.financialsense.com/index.html

No arguments from me. I was just explaining that the guy is not really a financial guru.

I agree that Goldbugs and doomers were first to point out peak oil, but am not sure how mucg credit to give for it. I'd say about half points because much was luck. A broken clock is right twice a day. A doomer is likely to spot problems ahead of an optimist.

Gold bugs and sellers of gold are always saying the world is coming to an end, so that people will but their safe haven (www.safehaven.com). If we survive peak oil, it is safe to guess that the gold bugs may be the first to spot the next potential crisis. However they may also spot and promote 3-4 other non-crisises first.

Puplava is as good a "financial guru" as anyone else you could find in the media or on the net. What Jack means is Puplava is not an "insider" (i.e. Paulson).
OK. I'm not going to tangle with his fan club or split hairs over what a guru is. I have no reason to think that Puplava is any worse than what you find in the media or on the net. I have nothing against the guy.

You can say that I mean he is not an "insider". I can say I am merely holding him to the standard of other who have public, transparent record of their investment results.

Correction, Matt Simmons is on next Saturday, 23rd September. The mp3s are posted by 07:00 GMT.

If you'd like to listen to their previous interview etc mp3s you'll find the 2006 ones and links to prior years, here:

There's lots of oil and energy related interviews (virtually all the well known gloomier ones and the occasional near cornucopian too!) from mid 2003 onwards.

oil bugs have a lot in common with peak oilers  they seem to have an abilty to see through the ca ca of government statistics for one thing
I actually have one half-written.  Some of its parts I used in previous posts and reproduce below.  I even had a pompous title for it: "Monetary issues viewed from Hubbert's Peak".  But here's a better one: "In a flat earth, gold bugs should be outlawed and prosecuted."  (See that they actually were outlawed and prosecuted in the US from 1933 to 1975, when the earth was deemed to be flat, i.e. when physical limits to growth were in nobody's mind.)

Simply put, if there were no physical limits to growth, the gold bugs' cause would be harmful to prosperity.

Hardcore goldbugs (www.gata.org) denounce that the financial establishment have been carrying on a covert manipulation of the price of gold for some time.  Sure they have! And it had the same objective as the 1933 gold confiscation and the London Gold Pool of the 60's: keeping the public away from using precious metals as monetary stores of value, so as to ensure the effectiveness of central banks' monetary policies to stimulate aggregate demand (consumption plus investment) and thus "foster maximum sustainable growth in output and employment" Bernanke, February 07, 2006, as quoted in.

Basically, during the upward way to Hubbert's Peak recessions (including the Depression) were caused by lack of demand (the exception being the 70's after the oil shocks, which can be viewed as a drill of Hubbert's Peak) for which the fast cure was printing money. As Krugman more or less says in "The return of depression economics": "Recessions are caused by people chasing too little scrip.  The solution is to print more scrip."  It follows that, if people are chasing a currency that cannot be printed, there is no solution.  (Actually there is no fast solution.  Even without any stimulus the US would have gotten out of the Great Depression in the long run.  The problem was that for FDR any run longer than 4 years was just too long.)  

To explain in a more technical way why it is necessary to keep the public away from precious metals in order to ensure the effectiveness of monetary policy to stimulate demand, we have to touch the concept of "dollarization": the substitution of a country's currency by that of another country (usually the US dollar, more recently also the Euro) for one or more of the functions of money (first for store of value, then also for medium of exchange).  Basically, as a Latin American (or Balkan, or FSU) government started to irresponsibly print pesos (or whatever), the public started to shift their savings to dollars (or Marks, in the case of Croatia e.g.), kept mostly outside the financial system ("under the mattress"). Then they started using dollars for big transactions (like buying houses or cars).  That process advanced to different degrees in different countries, and exhibits hysteresis.  With a high degree of dollarization, monetary policy loses all effectiveness in stimulating demand: additional injected liquidity just serves to raise the exchange rate.  In other words, any excess peso people have in their pocket is used to buy dollars (or euros).  In a very dollarized economy, Fisher's Velocity of circulation depends not only on the interest rate, but also, and mainly, on the expected devaluation, the degree of dollarization of the economy, and the elasticity of substitution between currencies.  It can become a very volatile variable.

Now, the key concept is: precious metals are to the dollar (and euro, etc.) what the dollar (and euro, etc.) is to the peso.  If OECD citizens started shifting their savings to gold, the Central Banks would no longer be able to stimulate demand by monetary policy. So "metallization" (coining that word for the shifting of savings to metal-denominated assets, metallization being to OECD fiat currencies what dollarization is to pesos) was unacceptable, because it meant monetary policy would be useless to fight recessions, which up to now were always caused by lack of demand.  So, if governments and central bankers did not try to keep the public away from gold, they were not Keynesians (loosely defining Keynesian policies as those actively seeking to achieve economic growth rates close to sustainable potential, particularly - and at the very least - trying to minimize the depth and length of recessions).  And, after the miserable failure of the London Gold Pool, if they did not do it in a covert way, they were incompetent.  So GATA has been right all the way in that there was a manipulation, and anyone with a basic understanding of monetary theory could have deduced there must have been one.

Therefore, if there were no Hubbert's Peak (or more generally no physical "limits to growth"), the need to keep the public away from precious metals as monetary stores of value would persist for ever, and gold bugs could fairly be regarded as the foremost enemies of prosperity.

But after PO the "limits to growth" (actually the "enforcement of negative growth rates") in economic output will not be the consequence of insufficient demand but of a relentless physical constraint from Nature, namely the decline in the production rate of fossil fuels.  Stimulating aggregate demand with monetary policy will not be able to increase output at all, as no monetary stimulus can reverse the decline of an oil field, and no monetary stimulus will be necessary to increase exploration efforts since the price of fossil fuels will be high enough to do the job by itself.  Therefore, there will be no harm to the system in allowing the investing public to escape from fiat currencies and park their savings in gold or silver, since there will be no benefit to the system in stimulating their consumption of goods (and there could possibly be some harm in that: when a pub is running short of beer, they wouldn't turn on the heater to make people more thirsty).

An excerpt of the aborted essay:

Incompatibility between a PM-based monetary system and the (unsustainable) growth potential of the XX century.

Taking from DeLong (1998) the figures for world GDP in constant dollars for a select set of years (in index numbers relative to 1500 A.D.), and from Butler, M. (2000) the cumulative gold and silver production figures (explained in detail for silver in Butler, M. (1999)) up to those same years (in billions of ounces, with those for silver divided by 15 to normalize its value to gold), we have:

Date   World  Cumul.  Cumul.  Cum.Ag  Cumul.  Cum.PM  IAAIR
        GDP     Au      Ag      /15     PM     /GDP     %
1500    100    0.30    4.1     0.27    0.57    5.70  
1800    299    0.45    7.4     0.49    0.94    3.14   -0.2
1900    943    0.81   13.2     0.88    1.69    1.79   -0.56
1950   2472    1.99   23.2     1.55    3.54    1.43   -0.45
1975   7720    2.97   30  *    2   *   4.97*   0.64*  -3.16
2000  17590    4.34   40.9*    2.73*   7.07*   0.4 *  -1.86

The cumulative figures above refer to mined amounts. To assess the amount of metal that could be effectively available for monetary use one should substract the fraction lost or used in dissipative industrial uses.  For gold, that fraction is fairly constant and around 10%.  For silver, that fraction became greater and greater after ever-increasing industrial uses started to be found for the white metal around 1942, the year when the supply/demand deficit started, as documented in Zurbuchen (2006).  Consequently, the effectively available amounts for silver and overall PM for 1975 and 2000 were much lower than those in the table (marked with ""), as was the effective PM/GDP ratio.

It should also be noted that the GDP figures above are not adjusted to take into account the "new kinds of goods" after 1800, and thus, in the view of some authors (including DeLong) could grossly understate the rate of economic growth over the past two centuries.

Having thus made clear that the case depicted by the above table is extremely conservative, we can now calculate the Implied Average Anual Inflation Rate (IAAIR) for the periods considered, assumming a PM-based monetary system without fractional reserve banking (i.e. with M1 = M0 = total amount of monetary gold and silver).  The method is:

IAAIR(1950-1975) =  [(0.64 / 1.43) * (1/25)] - 1 = -0,0316  = -3.16%

If only gold had been used as monetary metal, the case would have been:

IAAIR(1950-1975) = [(0.385 / 0.805) ** (1/25)] - 1 = -0,0291 = -2.91%

It is clear that an average annual deflation rate of 3% would have been incompatible with the unprecedented economic growth rates the world (particularly the OECD countries) experienced between 1950 and 1973.   And trying to alleviate the monetary constraint resorting to fractional reserve banking to expand M1 versus M0 would have led to an extremely unstable financial and economic system, as explained in section I.I.  Consequently, the only way that mankind was able to achieve such unheard-of economic growth rates was by implementing a fiat monetary system. (What was required was a fiat monetary system, not necessarily one using fractional reserve banking.)

As a final purely speculative question: was that good in the end?  In other words, wouldn't have been better for the world to have kept the gold standard and experienced much lower economic growth rates?  Perhaps an answer to this question is implied in the words of Matthew Simmons in an interview with Jim Puplava at

"we've effectively built a world economy on the illusion that Middle East oil would last forever at inexpensive cost."

Great post, Beach Boy.  Thanks.  Very helpful.
The government will do nothing,not just because it is ideologically disposed to rely on the so called free market, but because it is occupied elsewhere spinning the war in Iraq and focusing on the next election.
$10/pound for whale bone in the 1850's at the peak.  That's seems like a lot.  What does one do with whale bone ?  
Possibly referring to baleen used for womens corsets?
I am an information junkie and you are just endulging my habit!

From wikipedia:

Baleen plates were formerly used in buggy whips and parasol ribs, and to stiffen parts of women's stays and dresses, like corsets. Baleen was commonly used to crease paper; its flexibility keeps it from damaging the paper. Its function now has been replaced by plastic. It was also formerly believed that baleen plates could be obtained from whale fins.

Those plastic buggy whips are just not the same though.

tgrundke, Your thoughts are in a similar vein to what I posted yesterday. As the percentage of crude production from expensive sources ( Tar sands, Heavy sour, ultra deep water) rises, the floor for crude prices rises. Get the price down to where the production from these sources is not economic and you quickly get into supply problems. Add to that the uncertainty of a declining economic vitality, and you get a very complex and far different picture than we have seen for the last five years. Peak is hidden. May be there, may not. Factors other than geology could be driving price, although it might have been geology that got the prices high enough to cause these complex situations. Clear as mud? It is going to take some time for this entire picture to unfold. We do live in interesting times.
I agree with your comments. The world is used to 85 million bpd production - if we drop to $50 - how many of those barrels will be uneconomic?  The decreasing net energy (which ultimately can be translated to dollars) is putting a rising floor on the price of crude needed to maintain full production. Your point is spot on - its possible that the actual geologic peak might be met with lower overall prices. but not for long. That marginal barrel, she's a bitch.
I agree that there is no bubble in Oil or for that matter any commodities. But that doesn't mean that current prices will be sustained in case of a serious economic reversal.


Oil storage has been at or near record highs as the price has run up.  Now, with the fundamentals essentially unchanged, I think one or two things are happening: first, all that oil put in storage might have been in anticipation of another awful hurricane seasone--and now the speculators are getting nervous because there hasn't been a hurricane season so far;  second, lots of the players in the market are Repubicans, and the Congressional elections are coming up in less than two months--sort of a backdoor campaign contribution, maybe.

Mark Folsom

The price of oil was climbing on fears of trouble in the middle east. It peaked shortly after the conflict in Lebanon started. A similar thing happened last year. As prices kept rising, fears of hurricanes were often mentioned. Then one hit and the price peaked and fell afterward. There is a phrase I've heard regarding stocks I believe applies here "buy the rumor, sell the news"
Sell the news often works in my experience.
The price of oil has a strong political component. I believe TPTB have a very strong influence on short term prices. They also have a very strong influence on our proconsumption energy policies. It's possible that a recession could mask the impact of declining production for a few years.
The dialectics of oil pricing are just getting started I believe.  I use the term dialectic to indicate a thesis which spawns an anti-thesis and a resulting synthesis.

One example is inventory build.  As oil price rises, users quite naturally hedge their future needs by building inventory, the thesis.  Eventually the market notices the inventory build and sells oil in response - the antithesis.  Eventually, however, after a number of cycles of this movement the market begins to understand that higher inventory levels are an integral part of rising oil prices and that selling against an inventory build is a losing proposition, since the price continually recovers.  Thus the market begins to accept the fact that inventory builds are consistent with tighting supplies and rising prices.  

Of course this synthesis may become a thesis which spawns its own antithesis: namely an increase in speculative inventory builds (as contrasted with strategic inventory builds such as the US SPR) as speculators become convinced that inventory buildups do not cause price declines.  After some period of speculative build, a synthisis occurs: that the market re-learns the need to correct the price in the face of speculative builds.

The inventory issues are in the early stage of working themselves out I believe.

Another dialectic relates to hoarding by exporting countries.  The old thesis was that prices alway revert to the mean, so there is no reason not to sell as much oil as you can produce to convert it to investible cash ASAP.  The antithesis, which has begun to evolve, is that oil will generally become pricier with time, so it is optimal to withhold production and reduce exports to maximize cash flow by selling oil later at higher prices.  The synthesis is that rapid increases in oil prices yield economic recessions,  substantial efforts by oil importers to develop alternative energy sources and new conservation technologies - all of which reduce oil demand sufficiently to lower prices.   Recognition of this should moderate the hoarding behavior of exporters.

These new dialectics - and others - are all spawned by the background understanding of Peak Oil phenomenon, whether the peak has occured or not at this time.  They are part of the reasons for surges and pullbacks in oil prices around a rising trend line.

Anyway, that's how I see it.

Very nice ideas. I've often wondered about the collective "intelligence" of markets since they so obviously get things wrong. I think "SelfAgrandizedTrader" has a pretty good understanding of how markets work.

It's almost a given that as soon as a Newspaper reports a stock or commodity as doing well it's time to short it.

Good analysis, well explained.

I agree that higher inventory holdings are a logical response to higher prices and volatility, and to potential supply disruptions. And that the markets are in the early stages of adjusting to accommodate that recognition. I wonder when China will be buying to fill its new SPR facilities?

Commodities and oil in particular remain in a long term bull market which will outlast the existence of Ford and GM by some years, this is a typical correction and unsurprising.

In part the significant retracement in commodities (15% in the CRB index over the last few months) is more an indicator of future reduction in demand due to an impending global slowdown and imminent US recession. The Fed cohorts are doing their bit to keep stocks up, the big (political) question is whether they will succeed in that until after the mid term elections, it's looking 50 / 50 to me ATM. When they cease or fail expect a similar 15% initial correction in stock prices. The significant difference between stocks and commodities is that commodity prices will recover but stocks will continue going down as the Fed liquidity sluice-gates open in the futile attempt to avert this recession. They virtually succeeded in flooding their way through the 2001 attempted recession, that very success stored up more pain for this coming one.

Sorry for that digression, back to oil...

We are at an interesting price point. Round the turn of 2005/6 there was quite a struggle around the $62 to $65 level, eventually resolved conclusively to the upside at the end of March 2006, this area may well provide resistance to further declines. The lower bound of the trendline is currently just above $65 so has been broken conclusively to the downside, unless the price corrects up pretty smart-ish (roughly by end of Wednesday next once we have next US reserves data) further declines in oil price should be expected.

This commentary posted yesterday is worth a read, the following quote is taken from it:

Since the multi-year high of $39.99 was reached in 2003, crude oil has made three major declines off of the highs before recovering and rocketing up to a new all-time high.

a)   In 2003, crude oil peaked at $39.99 in February (the high for the year) and then bottomed at a low of $25.04 nine weeks later on the weekly continuous chart...a decline of $14.95.

b) In 2004, crude oil peaked at an all-time high of $55.67 in October (the high for the year) and then bottomed at a low of $40.25 seven weeks later on the weekly continuous chart...a decline of $15.42.

c)  In 2005, crude oil peaked at an all-time high of $70.85 in August (the high for the year) and then bottomed at a low of $55.40 eleven weeks later on the weekly continuous chart...a decline of $15.45.

The current posturing of this market is extremely similar to that of the previous three years. So far in 2006, crude oil has peaked at an all-time high of $78.40 in July (the current high for the year). As of Thursday crude oil has made a low is $63.47 on the weekly continuous chart. This has been a decline of 14.93 off of the all-time high. It has been nine weeks since that high. The current market correction is right in line with the corrections off of the yearly highs for the last three years both in price and in time.

All the hyped news has been negative for the oil price in the last few weeks, the less hyped news less so. None of the basics have changed apart from the Israel / Lebanon situation being more stable, that was never worth more than a +$10 premium so the price probably overshot on the upside by a $couple and has possibly overshot similarly on the downside.

This hurricane season has thankfully conspired to turn all but one Atlantic hurricane out to sea and that pattern looks set to continue for the next week at least. I think a fair part of the hurricane premium has been taken out of prices.

There is an important resistence at about $56, if that breaks then $50-ish is possible. I personally expect the price to bounce back up, probably from current level (50%), else from $60 (20%) or $56 (20%), with a 10% chance for it falling through to $50-$52. If it is going to continue down then that should happen soon, pauses of a couple of days would be a buy signal for me.

There is still a fair chance of oil touching $83 to $85 in 2006 but the probability has reduced to about 35%. Note that is a 3.5x higher probability than oil dropping below $56 IMO.

The predictions from likes of Michael Lynch give me great confidence in mine ;-))  $40 oil won't happen without 10% (official stats) US unemployment. OPEC will take oil off the market if oversupply looks to push oil below about $55.

Yes, there is a contradiction between positions like Evans' and Lynch's and reality: once much of the cheap oil is gone, cheap oil prices cannot be maintained for more than brief periods. For now I would say cheap is below $65 (non-US-recession mode) and $55 (US recession mode).

For the next 5 years' prices I'll refer you to an answer I gave earlier today:

That's an interesting pattern: from $40 down to $25 one year; then from $55 down to $40 the next year; then from $70 down to $55 last year. Note that each bottom matches the previous year's top.

But now we've broken it. We went from $78 down to $63 so far. If we'd followed the pattern we would have done more like $85 down to $70, to match the previous year's high.

So my guess is that this pattern was just a coincidence and doesn't offer much predictive value for what will happen over the next few months.

unless you convert it to % terms
Outside of poker and quantum physics, I am always intrigued as to how people assign probabilities to such events as future oil prices.

And how do you check if you are right?--this kind of history is non-repeatable.  I mean, whatever the result, you come up smiling like a rose.

Thirty-five percent chance of oil be at $85 by the end of 2006?  How can you be wrong? Or right, for that matter?

Fair comment. I look at the trends in data, associated supply, consumption, economic, geopolitical etc events and how they have affected behavior in past and might in future. A probablistic answer is my way of doing things and thence making derived black / white decisions.

How I check if I am right? I keep a record of my guesses and decisions. I've taken to posting some online as a discipline, here and there, and sometimes on a blog. I gave myself a 'score' of 30% for my 2005 predictions here:

I can give you some black / white predictions that I would bet on by end of 2006:
Oil to make a new high in 2006: currently no but significant probability of that being wrong
Oil to drop below $55.50: no, I would currently offer odds of 5:1 on this
DJIA to make a new high in 2006: yes, very briefly in the next 2 weeks, but...
DJIA to close 2006 below 10,500: yes
Gold (spot) to drop below $520: no
Gold to make new high (>$720): no, not until late Q1 2007 barring significantly bad geopolitical events
You may have others, I'd give an answer and quote my estimated probability of that being correct.

My guess yearend prices...
WTIC next month oil: $69 (note, this will be up 10% on yearend 2005)
DJIA: 10,280 (close to flat yoy)
Gold, spot: $640 (up over 20% yoy)
Fed funds rate: 5.25%, with a 30% probability of 5.0% or lower, 5% probability of 5.50% or higher

You'd like Fooled by Randomness, if you haven't already read it.

I'd say there are three broad ways to think about a past prediction:

(1) assume that you've learned that it was right or wrong
(2) forget about it, and make a new prediction
(3) realize you'll never know

The old saw that the market rewards you when you are right, but doesn't care if you are right for the right reason, can be extended.  That's the way the whole world works.  We don't want to be sucked in, and mis-trained, by thinking we were necessarily right for the right reason.

And of course sometimes we make the odds allocation correctly, but suffer from the long odds rolling in that day.  Just because you are right, that doesn't mean you are going to win.

And how do you check if you are right?--

You work your prediction until it is something meaningful - i.e. the sum of all probablities equals one, then bet on it. For oil it could work like this:

One year prediction

$85 = 35%
$75 = 40%
65$ = 25%


Your expected value for oil is $75. If the current future price is $65, you buy one year forwards. If you make money, you are right.

Gary Dorsch, Editor Global Money Trends magazine, on September 8 reported that Russia produced 9.8 mb/d in August, but lowered exports by 350,000 b to 4.45 mb/d. Combined with the report of 9 mb/d production by KSA in August makes Russia the new swing producer. Another report in the Peal Oil message blog stated that OPEC has ditched the quota system. What this means for the future is unclear. The OPEC statement may be window dressing for the decline in KSA and rumoured decline in Kuwait of 300,000 b/d. The removal of OPEC as a swing producer may allow more flexibility for nationalistic conservation of oil resources. Russia and Putin would relish the opportunity to reassert Russian influence in the world, build his political stature and entice Europe closer, using the reliability of resources as the carrot.
The history books tell us that the denial of 95% of Japan's source of oil lead, in part, to WWII. Germany lost, in part, from a lack of resources, including oil. The play for hegemony over Iraq is a failure. It would be unwise to compound this error with further military threats or actions. If the aforementioned published facts get confirmed by other sources and are "in the news" oil should go up sooner than otherwise
The chart that Dave posted above is a FRONT month futures contract. The CURRENT futures contract - October closed up 11 cents today to $63.45. This contract had a high back in June at $80.37 (the $78 high was the current contract at that time).

Most interestingly, this $17 drop from the high is nowhere near replicated in the long dated contracts. The Dec 2009 contract peaked at $75 in July and has dropped to $68 - a decline of only $7.

If market participants were really unworried about Peak Oil and supplies going forward, a sell off would have been accentuated in the back months, which it has not been.

Good point.  
I saw an article at reuters.com about that point earlier in the week:

Oil correction looks overdone

Consider the nearest futures expiration, the October 2006 contract. Although the magnitude of price decline was steep -- nearly 15 percent in a little less than three months -- it's really hard to argue that oil has shifted into a bear market. The Sept. 13 closing price is about where it was in late-2005.

Looking further out along the "curve," we see a different picture. The December '06 contract, one that's so close at hand you can almost touch it, was still up since late last year. The December '07 contract closed yesterday 10.4 percent above where it was nearly a year ago. That hardly seems like a bear market.

If the selloff continues, however, I believe that the long-dated contracts will start to come down as well. The long-dated contracts seem to be filtered versions of the front-month contract, i.e. they eventually follow it, but much more sluggishly.

"Gary Dorsch, Editor Global Money Trends magazine, on September 8 reported that Russia produced 9.8 mb/d in August, but lowered exports by 350,000 b to 4.45 mb/d."

Ask me a question about the weather, and I talk about oil exports.

In July, the Russian government did the largest IPO in Russian history, for Rosneft.  

Does that give them a financial incentive to pump up oil production reports, so that they can do a "Pump and dump?"

Which is easier to fudge--oil production reports or oil export numbers?

SelfAggrandizedTrader on Friday August 11, 2006 at 10:25 AM EST
"I'm going with $57 a barrel by mid-November."

Where is the line forming to kiss SelfAggrandizedTrader's feet?  He made the call...


My calendar isn't reading mid November yet.  A lot can happen in two months.  To reach $57 MEND, Venezuela, Israel, Iran, Syria, Hezbullah, Russia, China, and the good old USA would have to all behave themselves.  You would also have to have a nasty recession not followed by a Bernancke helicopter money drop.  I haven't bought all that yet.
Being at or near peak does not eliminate ups and downs, and there will still be ups and downs even post peak. The items enumerated help explain the current down, just as Katrina, Iran war threat, etc undoubtedly pushed things above fundamentals. Well, in one sense that's not right -- realistic, i.e. forward-looking pricing would put oil far higher than it is. But you get my drift.

The other part is that November is coming up. I don't know what levers are available to the administration -- is it possible to draw down reserves (SPR is it?) quietly? Is it possible for the large oil companies to do some of this? This is something that could be done for more than just political reasons: it could also be a play to allow re-entry into the market for some at a lower price. Sheer speculation on my part.

What will be interesting to see is what happens will the economy really does cool. It's only just started in my opinion. I see no pleasant way out of the housing bubble. If demand drops more quickly that production declines, how much drop in price will there be? It might be cheaper to work off inventories than produce more, keeping prices level or even increasing them -- especially when it is clear to everyone that peak has passed. At that point it might be that the ups and downs are only in the rate of increase, not in the levels themselves. We'll see.

And now for something completely different:

Really, Really Cheap Oil - Gasoline for $2? Michael Lynch says those good old days are just around the corner (free forbes.com registration required)

Don't sell that SUV just yet. Oil, at a recent $66.50 a barrel, will fall to $45 by mid-2007 and could dip briefly into the 20s in 2008. Sometime next year you are going to see a $1.95 price on a gas pump.

So says Michael C. Lynch, 51, president of Strategic Energy & Economic Research in Amherst, Mass. He swears he hasn't been inhaling fumes. His reasoning: New supply, coming online from all corners of the world, is more than ample to satisfy growth in demand and sufficient even to withstand an embargo against Iran, which produces 3.75 million barrels of oil a day. Lynch argues that the threat of disruptions--nuclear brinkmanship, war, terrorism, hurricanes, pipeline corrosion--has larded oil prices with a $20-a-barrel risk premium. As these perils recede, oil prices will fall.

A refreshing but distinctly minority view. Over the last two years, as prices have soared, proponents of the Peak Oil theory--which argues that we will soon pass the point of being able to replace reserves as fast as they are consumed--have resurfaced in force. Of course, folks have been predicting the end for 50 years. In fact, there's still plenty of fuel to be sucked out. Consider that over the past 100 years the U.S. has drilled 3.5 million wells into most of its oil basins yet still produces 5 million barrels a day. In the Middle East only 50,000 wells have been drilled into far more prolific basins, yielding 15 million bpd. While the world has consumed maybe 1 trillion barrels of oil in the last century, there are at least 1 trillion barrels waiting to be exploited, reports the U.S. Geological Survey. Add to that an estimated 1 trillion barrels of oil sands resources and another 2.8 trillion barrels of oil shale, and we can all afford to put down our "End Is Nigh" placards. "The oil price spike was caused by geopolitical issues that can be fixed or overcome," says Lynch. The real issue is geology. Recent discoveries--and the prospect of new ones--sketch a bright future.

This is a relatively long article in the latest issue of Forbes. Looks like the author got the definition of peak oil just a tad wrong. I recommend signing up for forbes.com and reading the article in its entirety. It's the most I've ever read about Michael Lynch.

Go to the Lynch thread over at Peakoil.com. He often shows up with the handle Spike and is willing to go at it toe-to-toe.
Yet he still has got it completely wrong.

Here is what I figure the addition of the Gulf of Mexico find does for future production. (from)

I'd like to bludgeon Lynch over the head with this graph.

Great graph!

Well, actually scary graph ...

Actually, not so scary....take your little hand, lay it over about 1987 to covering the years out from there leaving 1987 and earlier visible....and you can see the backside of hell!

It was all over right there folks, but....well....actually, it wasn't...if you were a young whipprsnapper snorting coke down at Studio 54, you didn't care, and it payed not to, because it was a temporary mirage....and now your an aging geezer, and how many barrels above the big collapse?

It just tells you to BE CAREFUL, looks can be decieving, depending on which part of the chart you choose to use....(by the way, those are hstorical numbers, not "projections", and they still create one helll of an optical illusion don't they?  :-)

Roger Conner  known to you as ThatsItImout

How much would production have to drop before you were persuaded it was a permanent decline, and not just a temporary  glitch? Production dropped by about 25% in 1987, so presumably it would have to be more than that?
Why doesn't Lynch post on this site?  Is he afraid of the ferocious and nasty TOD crowd or something?
I too have wondered why there is not more ferocious debate with the optimists.  Maybe I've not been around long enough.
I've certainly baited them enough  

Dave, you should invite them along for a debate.  But first we need to decide on the nick names of the main players.
Spike (i.e Michael Lynch) seems to post over at PeakOil.com when he's not busy elsewhere, and he seems to be busy right now, putting his spin on dropping prices.
I too have wondered why there is not more ferocious debate with the optimists.

Because they won't respond to baits (re Dave), they don't need to, you are not their intended audience.
And their intended audience doesn't give a hoot about you Peak Oil pranksters!  

lynch is just whistling past the graveyard
this would make a great scene in the tower of isengard (the white house):

So says Grima Wormtongue (Michael C. Lynch):

"New supply, coming online from all corners of the world, is more than ample to satisfy growth in demand and sufficient even to withstand an embargo against Iran."

replies Saruman (President Bush):


there will be no dawn for men...

For anyone interested in the Dallas/Fort Worth area, the PBS peak oil debate will be shown at in two parts, at 10:00 A.M. on KERA, Channel 13, on 9/24 and 10/01.    Regarding Peak Oil, it was basically yours truly against Michael Lynch and ExxonMobil.  The producers are supposed to let me know when it will be shown nationally.
Regular unleaded @ 2.10/gal in SW Va right now ..

Triff ..

Let's have another poll on "whither" way oil prices are going! Will we touch $53 or $73 before the end of the year? The one two months ago turned out pretty surprisingly.
All that crowing after just barely reaching your target! Act like you've been there before, would you?
I'm not bragging - I was just as wrong as everybody else:


Unless we have a supply disruption due to hurricanes or political events, I don't think we'll get anywhere close to either 63 or 83 in the next two months. More like 69-77 or so. However I think the upside risk is a lot greater than downside, i.e. it's much more likely that we'll see 83 in the next two months than 63.

My meta-point is twofold: that the future is hard to predict (duh!); and (more importantly) that people tend to be over-confident in their predictions. It is that second point which our overall failure on this poll drives home.

Don't feel bad, Halfin, reality took a lower probability route. The odds were higher (IMO at least) that 83 would be hit than 63.

The oil price has now almost completely discounted any hurricane related disruption this season; about 90% discounted any serious Iran conflict or Iran oil supply disruption.

Will the 2006 yearend price be higher or lower than the current $63? Higher, with a 90% probability.

I don't think the probability is that high.  I think the odds may favor a bit higher, but not nearly 90% probability.  I also think a bit lower is possible.  I don't see oil dropping below $50 as an absolute floor, with below $55 being remote, but possible, and I don't think it will even stay in the $55-60 range for very long for that matter.  But it can come down a little from where we are today and might even end the year at ~$60.  The trend is up and five years from now, I would not be surprised to see oil at $100+ (even with consumption declines), but in the shorter term I can accept the possibility of a pullback.  
still...Halfin's been right about this.  let him have his due.

and I'll be doing just such a poll tomorrow.  :)

"I think there's a lot of misconceptions of what peak oil is," Mr. Raymond said in an interview last week. "The resource base is continually changing, driven by economics and technology."

I learned recently that Lee Raymond happened to graduate with a PhD from what is now one of the top Chemical Engineering programs at the University of Minnesota. They should revoke his diploma with statements like that.

Mike Lynch nailed it

Web hubble...what you are missing is an ability to multiply. Multiply that new Jack 2 well by about  10,000.  Maybe 100,000...worldwide.  

When have the pessimists ever been right about energy?

A few years ago some pessimist predicted oil would cost more than $50 a barrel by the end of the year.

And he was right.

Matt Simmons was right about North Sea and natural gas prices in2000
King Hubbert was right about US peaking in 1970.
Gusher: I think you're right.There are probably about 100,000 huge oil fields located 3 miles under the bottom of mile-deep ocean. What's really exciting is we feel that we can sell that crude for about $26 a barrel and still make a great profit for our shareholders (along with cushy retirement packages for the grand poobahs). Break out the Cristal-party time is here.
The other thing missing at the moment is consideration of what the lower oil price does to the economics of new projects. I was at my son's cricket training session this morning here in West Australia, and another parent works for Chevron here in WA. They apparently are really worried because the estimated cost of the Gorgon LNG project on the NW Shelf has blown out from A$11 billion to A$16 million over the past 2 years. I would expect there are other projects (oil & gas) that might be put in moth balls while oil price drops, and thus put greater pressure on world supply/demand schedules?
Also, see here our Transport Minister's speech this week linking peak oil and climate change as greater challenges than muslim threat(PDF warning 4MB):
"Today our civilisation is facing two extreme and
paradoxically interrelated challenges: neither of which
has received the focus from world leaders that the
other challenge - global terrorism - has; although the
consequences of these are at least as threatening and
probably much greater."
Note the drop in our Perth river streamflows over winter by 60% over the past 5 years, from the long-term averages- we are going to be stuffed if climate change keeps going in this direction in the SW corner of Australia.
Good point about the increasing expenses of oil/energy related projects. The tar-sands cost overruns are another example, I'm sure there are more. Seems that inflation (real inflation, not govt. CPI figures) will be a part of what puts a floor on oil price drop. I realize that a part of inflation is related to oil price, but what a time lag. Overall, like a boss I had used to say, too many knobs to turn. Too many non-linear functions interacting to draw linear type conclusions.

As Jean Laherrere would probably opine, oil price in 2007 will be somewhere between $10/bbl and $200/bbl. Bets anyone?

They mighthave been thinking of sending lng to the us... looked good last winter at 14/mcf, not so good at today's spot of 5/mcf. lng terminal plans will be dropped for now, partly because we have begun to replace fertilizer and plastics precursors with cheaper imports, thus potentially reducing us demand by 20%.
This is an excellent opportunity for intelligence gathering.

Take names, make notes

The voices that are saying that oil will be $20 next year are probably close to the political forces that are holding prices down for political gain (November election).   When this price control is lifted, we will better know who we can trust with honest reporting.

QUESTION:  Did Oil Prices Stay Too High Too Long This Time?

There is now a creeping suspicion entering the minds of some astute observers:

Did Oil Prices Stay Too High Too Long This Time?  And did they do so at just the wrong time?

What does that mean?

Well, think of it this way:  As of 1999, no one even looked at the fuel mileage sticker on new cars when they bought.  The fuel was givaway, so who cared?
Polls during that period showed fuel economy 12th or 13th on th list of priorities behind such things as style, orignality and performance, and "interior comforts".  

The Toyota Hybrid was considered as odd as a vintage Hudson Hornet.

Cars with 10 and 12 cyliner engines (even 10 cylinder Diesels!) were coming out the factory doors, being sold new and used to even upper middle class folks, and no one payed attention to the possibility of overkill.  There were 16  and 24 cylinder cars on drawing boards.

SUV's were the bread and butter of the auto trade, and trucks were getting as big as locomotives, and in fact, were sold on that basis.

Now, a half decade later, things have changed.  The question is, have they changed long enough.  The auto and energy production/consumption business are long lead time industries in both cases, and now, turning back the clock may be impossible.  The advent of new technology and communication makes this even more of a fast moving, irreversable situation.

Recall, that this is the first real long duration fuel crisis we have had in the internet era.  In the 1970's, there were alternatives, but almost no one except for the technical reader understood them, and even then, cross information between industries was almost unknown.  The Briggs&Stratton Hybrid Car is an example.  This was a full gas electric plug in hybrid car, built in 1981, that was seen by almost NO ONE.  Technicians in other industries never got the chance to "tweak" it in their imagination, and on their Texas Instrument scientific calculator (the biggest computer tool they had then), so there could be no cross polination of ideas.  Today, it's different.

Likewise, the demise of the SUV has been fast and furious.  Ford Motor Company is racing GM to bankruptcy, as Fords golden cow SUV and truck line are being bled out of existance, along with most of the company.  Even if Ford now survives, they will be a shodow of their former self for many years, maybe forever.  Turning something like this around is so rare it is called a business miracle.  The fuel price is not all that is working against them.  The boomers are getting old, and even their kids are getting older.  The needed SUV to carry the kids on vacations and outings is no more.  The old folks don't like climbing several feet to get into and out of their truck.  Older folks are now looking at something low, safe and comfortable.  A luxury hybrid perhaps?  Security, they realize, is not looking like a military truck, but may be in fuel efficiency and flexibility.  Even if gas had stayed cheap, the sales of SUV's would already be dropping like a stone.

But the BIG news is this:  The cat was allowed to get out of the bag.
With the internet, every new development in plug hybrid, hydraulic hybrid drive, advanced lithium ion batteries, thin film solar panels collapsing in price  as oil and gas stayed high in price, every development was traded among the technicians, the venture capitalists and the prospective customers.

Now, even if gasoline prices drop, people know something they did not know before:  Much of the new technology is market ready, cleaner, quieter and more secure and simple than the current bootstrapped overcomplex thing we call the internal combustion automobile.  Sure, a fossil fuel engine (and it doesn't have to be gasoline, they now know that, it can be a wild combination of fuels, gasoline, Diesel, natural gas, LPG, ethanol, bio-fuel, recycled methane, on and on), but back to point, a fossil fuel engine may be needed, or wanted, as range extender, climate control prime mover, or performance enhancer, but it will not have to be the primary power.

The public knows that if power density to weight and life cycle charges have tripled and mulitply by that again by triple in battery cordless power tools, then it is purely the market forces and the effort that will put them in cars, boats, motercycles, and lawn mowers.  The power source?  The grid, and distributed generation are now beginnning to finally make their move.

The paradigm has shifted.  The "trajectory" has changed.  The big "Mo" is slipping away from the oil industry.  It is easy to say, "solar panels are too high...", but what about when they are not?  What OTHER charge can you bring against them, that cannot be brought against crude oil in spade fulls?
Likewise, batteries, windmills, geo-thermal heat pumps, LPG and nat gas micro plants, and on and on.

The oil industry and suppliers, both independent and nationally owned, have always known when to hold um', and known when to fold um'.

This time, they may have miscalled their hand.  This time, they may have waited too long to fold.  This time, the cat is out of the bag, and given the communications now available (it really is a new age) may be able to stay out.

The "peakers" and the new agers may be right, but for reasons completely different than what they expected.

By choice and by popular demand, the oil age may be nearing the end.

Roger Conner  ThatsItImout

A couple of small comments (not necessarily related to the above post!):

  1.  Econbrowser et al. have stated that price has finally gotten to demand.  Looking at the EIA figures, virtually all the the demand reduction is in the form of residual fuel oil, which is driven primarily by price comparison with natural gas.  Insofar as the natural gas market will eventually come back, the roughly 400 thousand bbl/d in lost demand in residual fuel oil will eventually reappear.  Were residual fuel demand at the same level as last year, US demand (total oil and products) the past 4 weeks would have been up an eye-popping 3% over the last year period.

  2.  The problems with hybrids is that they just don't make sense financially, and until they do, people won't buy them.  For example, take the Honda Civic Hybrid (MSRP $22,150, 50 mpg) versus a regular Civic LX (MSRP $17,760, 35 mpg).  That price difference of $4,390 makes the payoff for going hybrid somewhere north of 100,000 miles.  Sounds like a job for technology!
Trouble is, buying any new car makes no economic sense: the moment you drive it off the dealer's lot, bingo, the value depreciates on average by about 30% ...unless you plan to keep the auto for 15+ years or till it returns to dust.
I assume by "residual" you meant "residential"?  Or perhaps not?  I didn't think that the dual-fuel (oil/NG) electrical power plants in the US have used much oil in quite a while (since 2004?).  Residential customers can switch from an oil boiler/furnace to a NG boiler/furnace but not quickly and back and forth, it's an expensive decision.  Perhaps heating-oil customers in recent weeks are simply waiting for further price drops before tanking up for the winter?

People are so not buying Civic Hybrids that in Los Angeles you can't get them for MSRP; almost all dealers are $500-$2000 above.

Regular Civics are selling for their usual price of a bit under their (significantly lower) MSRP.  And they're selling quite well.

I think the reality is that at least some people are actually quite foresighted individually about the future.

Consider also that a non-hybrid Civic is one of the most fuel efficient cars that people ordinarily buy anyway.   And that a computation of "fuel cost saved by hybrid" always has in it a component of fuel price.  Only if you assume that the fuel price stays the same over that life is it valid.  If you have a very efficient vehicle, it's like owning a "call option" on the price of fuel over the long run; you have less sensitivity to upside shocks and that's worth something.

Consider also that many hybrid buyers probably have to drive many miles, and 100k miles on a Civic is not at all the lifetime of such a car (more like 200k).

I bet many HC Hybrid drivers previously weren't coming from old Honda Civics, but perhaps SUVs and less efficient cars.

It's sick watching commenters - invariably pro-business conservatives - bash hybrid-buying as "irrational".
Folks, Detroit has been selling "irrational" ever since Alfred P. Sloan developed the idea of a staircase of nameplates for social climbers from Chevy to Cadillac.  General Motors most of all has spent 80 years culturally manipulating Americans into wanting the kinds of cars it can best mass-produce, until those Americans in turn allowed their country to be rebuilt into a place that fit the cars.  The rise & fall of the tail fin is a classic case of nurturing an irrational taste into an absolute necessity through media brainwashing, until everyone gets sick of it and Detroit comes up with a new fad.
God save Detroit if everyone out there got rational enough to realize that a car is a tool, not a lifestyle, and a 4-cylinder Hyundai with a 10/100,000 warranty is the perfect tool.  If we want entertainment we can wait 'til we get home to our Grand Theft Auto games.
If fuel prices continue dropping, I wonder if all those new ethanol plants out in farmland will begin going belly up?

How do you invest for the future when energy markets are this crazy? A lot of farmers who invested in ethanol co-ops might be facing bankruptcy.

That bleat is a mite hasty: current oil prices are over 10% higher than the average 2005 price. When they drop 10% below the 2 years ago average price (2004: $42, -10% = $38) I would consider a bleat acceptable. Major oil companies currently seem to be using $30 to $40 / bbl as their return on investment criterion. Any company / project that is dependent on oil at $60+ is taking a gamble, probably about a 95% safe gamble but a 5% chance of being painfully wrong.

Subsidised corn ethanol production is medium term iffy IMO, any calculations beyond the current year are speculation. But most currently existing plants are economic at below $40 oil plus subsidies.

Why would fuel prices keep dropping? Have you not heard of 'peak oil'? ;)  

Yeah, yeah, I agree. But I also remember what happened to all the people who invested heavily in the great oil-shale boom of 1980.

Pretty ugly ...

The ethanol producers have a another problem, and it's big...natural gas.

Ahhh, but natural gas has come down you say, and your right, but has it come down enough....recalll that it raced upward even higher than crude oil so compared to history, (when many of the ethanol projections were laid out) natural gas is still high.  I have sen some projections from as late as 2001 projecting overal nat gas averages of $2.50 to $3.50 per mm/btu to make these projects make sense, and even then, it was thin margin all the way.

Either way, we know this:  The corn growers have went to Washington themselves on several occasions making the ironic argument that the ehtannol industry cannot survive without cheap and reliabel natural gas (!!!), think of that logic!  In other words, as long as a non-renewable, clean, petroleum/fossil fuel that we will soon be trying to import by way of LNG we are in such dire straights for it stay cheap, we can make a non-petroleum, "renewable" "homegrown" fuel from it!, that is well....not really so cheap! ;-O

Trying to extract moonbeams from cucumbers would seem a short order compared to this logic!  :-)

Roger Conner  known to you as ThatsItImout

I noted up the thread that Chinese oil imports are up 15% year over year.   With world oil production down, someone--most likely the poorer countries--has to be reducing consumption.  

However, IMO, soon it will be China, Europe and the US bidding against each other instead bidding against areas like Africa.

It looks like Chinese imoprts are up by about 440,000 bpd over a comparable period last yeat.
What a coincidence (or not)!?

A month ago I came across this article.
It says, "Consumption of gasoline in Belgium dropped 15% in the first 4 months of 2006 compared to same period  2005".

Since Belgium cannot be considered as a poor country, you need to adjust your theory (most likely poorer countries reducing their consumption).

It seems like perhaps a more accurate theory would be that certain foresighted wealthy countries will move to wean themselves off of oil.  Meanwhile the U.S. and China will continue to import more and more oil.  We could end up with a situation where the last die-hard guzzling countries end up struggling the most and oil dwindles, while others have already moved on to greener pastures.  I sort of think China may be in a better position since they are just now building infrastructure, so they can adjust to the realities of expensive oil, whereas the U.S. has 50 year old (and oftentimes crumbling) infrastructure.  For all our supposed "innovation" we also seem woefully unwilling to accept a different, more energy efficient model of transportation.  
Ford, et al may have woken up to the shift, but what if they get caught with plunging gas prices?  I believe it was some time last year that the Ford CEO said that the government needed to do something to provide long term incentives to produce more fuel efficient cars, including hybrids. After all is said and done, and even assuming peak oil, it is clear that prices have gone down and cut go down a lot further. If Ford and others are going to make a dramatic shift to more fuel efficient vehicles, they need long term protection. They should be screaming at both Bush and the congress to do something and do it quickly.
Surely you can't be sickly dreaming of $2 (regular) gasoline? What kind of protection are you thinking of? Oil ain't gonna drop below $50 / bbl barring a massive US recession. Ford and GM are soon to be history, they missed their chance to change, and badly, they will die soon. Dieing screams are mostly not heard / not listened to.
An interesting graph and analysis. Clicking on the graph will take you to the source page.

Durango Bill's concluding remark:

"The era of easy, cheap oil appears to be drawing to a close. As chronic oil shortages become more widespread, the historic relationship between oil futures and short-term price moves may end as the price of oil begins a relentless march higher - especially as measured in U. S. dollars."

Ah, I see now that Durango Bill's comment was written in Dec. 03 - so he was right.
Odd - the analysis on that page was apparently written in 2002-2003, yet the graph has been updated to the present day. Back in 02 there did indeed seem to be a correlation between the blue line, the fraction of large investors betting that prices would fall, and price movements. But since 03 the correlation seems to have vanished. And the blue curve itself has moderated, with much smaller excursions from the 50% level. It just bumps along near 0.50, while oil sweeps upward. I don't see much correlation at all in recent years between the blue line and oil prices, which is what that graph was originally supposed to be about.
Halfin, thanks for that.  I stared at this for ages and decided I was stupid.  Easy now to see the negative correlation between red and blue during 02 and 03.  The relationshp just disappears during 04 and 05.  Does this not have some bearing on analysis of COT - which I don't fully understand.  Anyone like to explain.
Possibly... Derivative positions are maybe becoming more significant than COT when COT is non-extreme, derivatives are a cheaper way of expressing one's bets or influence. I would hesitate reading anything further into these things for fear of being labelled conspiratorial. One's analysis of COT is mostly determined by whether one is contrarian or not, with divergent conclusions ;)

The best areas to look for elucidation of COT data are the currency and precious metals markets, they are the ones with the most debate and analysis, sniff around and you will find.

Dammit, that could be the most equivocal post I have ever made, sorry.

Agric, thanks for that - I'm not a lot wiser though.

One thing that occurred to me while I was asleep was that many of the UK based small to medium cap oil cos (20 to 70,000 bopd) stopped hedging a couple of years ago.  Prior to that they would hedge up to half of their production, now they have been running un-hedged.  Does the reduction in spread on the large trader short ratio (LTSR) then mean greater market certainty - back in Dec 03 many of the commercials were sure that price would rise?

I wonder if this shows in the volume of hedge / future contracts pre and post Dec 03?  Is volatility on the LTSR  a pointer to uncertainty among the commercials? If so, do you know where we find that info?

Another thing that just occurred to me is the recent change in Accountancy Practice whereby the profit / loss on any hedge / derivatives contract has to be booked immediately for the duration of the contract.  This resulted in some small cap UK companies which I expected to produce bumber profits showing up with losses.  These are unrealised losses that then get unwound as the contract unwinds.

This is supposedy introduced in the interest of transparency but to my mind makes reading accounts much more opaque.  Why would they do that?

Low fuel prices = low interest rates.  They spawn tremendous acceleration.  What effect will this have on India and China?  

I think Treeman has hit the nail on the head: "As the percentage of crude production from expensive sources ( Tar sands, Heavy sour, ultra deep water) rises, the floor for crude prices rises. Get the price down to where the production from these sources is not economic and you quickly get into supply problems."

A lively discussion. Thanks to all.

Which means the oil companies have to become believers in peak oil since they must weather the gyrations in the market and keep on working on non-conventional sources assured that depletion will inorexably cause prices to rise.

Whats funny is most people figured the price floor was around sixty and prices could drop but now that the market moves as normal everyone proclaims the end of peak oil.
Not to mention a whole not of Americans are out of money.

Watch what they do not what they say.

The claims that high prices will make production from more difficult places "economical" are correct in a sense, but miss the point that they will come at a high price.  In some absolute sense.  Here we know it's because of EROI.  But even economists might be able to grasp that expensive energy will have an impact on the economy even if (for now) supply will meet the (slowing) demand.
Don...So someone predicted $50 oil several years before it happened?  Tell me, did that same guy predict that his house would rise in value 50% in the same period?

Oil was undervalued for years. $50 oil is just catching up to inflation.  Measure the oil price in something other than paper dollars, and $50 oil is a very reasonable price. The loss of purchasing power of the dollar in the past 10 years is staggering. What Walmart sells being the exception.

My comment above about "10,000" and "100,000" was refering to oil wells. Not oil fields. I Believe I have read that the Jack 2 field is 250 miles long.  Not being an oil expert, I can't guesstimate on how many wells will be used to tap it. Let's just say many.


I remember stumbling across peakoil.com or some such site in early 2004 where a poster made the outlandish statement that oil could be $50 by the end of the year.

I was shocked, because I was already concerned with the current $30-something oil, and had been assured by the media that oil would soon return to $10-$15 a barrel after the deadenders in Iraq were cleaned up.

We have a small ranch. It's very difficult to make ends meet, and the prospect of $50 oil was not a good thing to contemplate. Now we pay an extra $4,000 a year for increased fuel costs, which is a lot for us.

Sure, the value of the ranch has skyrocketed (for now) but this is a homestead ranch that will never be sold. And we never, ever, EVER, borrow money from the bank. It's an old family policy left over from The Great Depression.

What's absolutely killing farmers and ranchers right now is not so much the price of fuel, but the cost of parts for machinery. It's outrageous! If this kind of inflation in parts continues, farmers are definitely going back to draft horses.

Quite a few predicted oil at $50+ well before it happened. However, they generally thought that real estate, stocks and $ would fall concommitantly.

There are signs that US real estate is turning down and will impact the US economy. I wonder what the US would be like now had it not been for the recent cheapness of globalisation and chinese production?

It's kind of irrelevant trying to figure out how the U.S. would be without cheap goods and globalisation, because things would be so different that there is no basis for comparison.  For example, we wouldn't have cheap goods, but maybe we'd have higher paying jobs since there would be less competition from overseas labor.  A non-globalized world would probably be less developed, resulting in less demand for oil.  Also transportation costs of goods would be lower because they would be made closer to home.  We also probably wouldn't be running such a massive trade deficit.  In short, everything would be so different that who can even say how things would be.  I just layed out some possible ways things would be different, but I admit to having no idea how they would all come together into a whole.  I will say that I imagine the era of SUVs would be far from over in that world.  
Don...I feel your pain...but you want to have your cake and eat it too.  

Small farm economics is constantly changing. If you can't stand the heat, get out of the kitchen...and out of farming.

Well, we've been successful for 146 years. We used to have draft horses, and we can always go back to them.

But I doubt if we'll continue to grow a big surplus of food for the suburban population. I guess they'll just have to start backyard gardens and can their own vegetables.

Hi, I have a pretty basic question but I'd be much obliged if someone could give me an answer for it. I know that someday someone is going to ask me this one and since we're discussing oil prices anyway....here's the question: given that it costs $x to produce a barrel of oil at the rig, what are the other costs that are added on to get the $63 we see on the exchanges? i.e. what makes up the the $(63-x) - how much for shipping, insurance, etc. i.e. how much of it is actual cost and how much is financial market skullduggery?


It's called "profit".
People don't drill just to break even.
Good question, but not at all basic. I hope someone can give you a more complete answer than I can. Here's what I know.

The $63 barrel of oil you are talking about is WTI or similar. It is the best and most expensive oil around (with a few exceptions). Heavier oils are trading much (20%) cheaper.

The most expensive and confusing step in the process of bring the crude to market is refining. It is confusing in part because it costs more to refine cheap oil then expensive oil. So your $63 a barrel WTI may have a refining margin that is much lower than a heavy, sour crude. Also, you can't (practically) convert a barrel of oil to gasoline alone. Different crudes slates in different refining configurations can produce a fairly broad assortment of products (gas, diesel, kerosene, fuel oil, etc.)

I believe global complex refining margins have been running in the range of $9 per barrel, although this is an average figure.

Financial market skullduggery is undefined and hence unanswerable. Are you refering to an additional premium people are willing to pay to make sure they get the oil they need at a predictable price?  Or is it people who hold futures contracts but don't take delivery (like may TOD readers).

If you think people should be compensated for bearing risk, then there may not actually be very much skullduggery at all.

There is no right, or known answer for how much of the price of oil is financial in nature and how much of that is good/bad or producer profits versus intermediary profits.


The Foundation for Taxpayer and Consumer Rights recently put out a good study on gas pricing that makes a strong case for price gouging, particularly by refiners in the West.  Access the full report here:

Here are the main findings:

  • The oil companies have used "just-in-time" inventory practices to artificially drive up pump prices in the U.S. and especially in Western states. Gasoline prices are sensitive to local inventory, so keeping supplies at levels just above what would trigger shortages on the street results in dramatic price spikes, most of it profit;
  • Western regional inventory is too low to prevent severe shortages in the event of a major refinery outage. Mid-May gasoline inventory for the Gulf Coast was 49 days' supply, up from previous years despite Katrina. The West was at 17 days, down from previous years and not enough to get outside supplies into the West if there is a major refinery fire. Small disruptions could mean $4 gasoline, and major ones could drive prices, especially in California, to $5;
  • Increases in the "spot" market price of crude oil accounted for a maximum of 17 cents per gallon. Even accounting for local tax increases, most of the price increases went to refinery and marketing profit margins for the oil companies;
  • Neither the MTBE phase out nor the substitution of ethanol is a serious part of the increase. Washington State uses only conventional gasoline and Puget Sound contains the largest refining capacity in the West outside California, yet the rise in its pump prices nearly mirrored that in California, which uses an ethanol blend; and
  • States and the federal government should update antitrust laws and require the oil industry to maintain adequate levels of motor fuel. States like California also need to encourage the construction of locally owned and operated ethanol production facilities; a pending November ballot measure to create a state fund for alternative fuels could significantly decrease gasoline prices by increasing production of ethanol and other gasoline alternatives outside oil company control.
In one major sector of fuel use, transportation, it appears that the high price of fuels has in fact started to damp demand. Data from the U.S. DOT Federal Highway Traffic Safety Administration shows U.S. vehicle miles traveled barely increased from 2004 to 2005, growing from 2963 billion miles traveled to 2965 billion miles traveled.  This is a striking change from what had been a consistent yearly increase of about 60 billion miles traveled.
The EIA fules data tends to confirm this with gasoline consumption increasing only by 0.21% and distillates up by 1.21%.  

The data from 2006 is off tho a slow start compared to 2005 but recent weekly comparisons between "now" and a year ago have shown strong recent increases.  What that looks like for the year is still till early to tell.  

Obviousily the real question is how much is just arbitrage, in which case the price could happily shoot up again in a flash, and how much is underlying fundamentals. If demand is actually dropping as some say, that portends an economic slow down, in which case the short-term price could go very low indeed. How low? Place your bets!
"Second, inventories have been higher than normal this year "

This premise is not true.
First, OECD inventories, which includes the US, are at a ten-year low even though consumption is at a ten-year high.  In addition, OECD inventories are down one day's cover per the EIA, my guess is 50-60mmb.
SEcond, even looking at just US inventories, which is all the market does look at, inventories are only even with last year, not up, because 12mmb loaned from the SPR has not been repaid, and will not be at least until after the election.

There is no demand destruction in sight. Chinese imports of crude and products are up 17% yoy, probably in part because price controls have been partially lifted, raising prices but allowing consumers to fill their new cars... and, speaking of which, sales are up 50% yoy (now there's a boom, and one foretelling a future boom in crude demand).  Meanwhile, US consumption is up, if only 1%.  So far, current prices are not high enough to depress demand. Has anybody been out on the freeways lately?

IMO buyers will return, hedgies will reverse, the golden fifties will not return, and we will soon march smartly back to the top of the three-year trend, 80+, before year end.  Actually, 80 is a bargain - just ask Simmons.