<DrumBeat: December 9, 2006 The Oil Drum Fuel duty and the effect of oil prices on the UK economy>

179 comments on Scarcity Rents and Oil Prices, Again

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westexas on December 8, 2006 - 3:44pm Permalink | Subthread | Comments top
Using the EIA spot oil prices, WTI was at $15 in March 1999.

It took about 51 months to double in price from $15  to $30 in June, 2003.

It took about 25 months to then double from $30 to $60 in July, 2005.

12 months later, in July, 2006, the price was 30% higher, before we saw the break back to the recent trading range.

IMO, oil supplies--especially net oil exports--have been growing more slowly than demand, which has caused two doublings in oil prices, from $15 to $30 and then from $30 to $60, with the second doubling coming in half the time of the first doubling.  

The most recent spike, in July, 2006, was half of the time of the second doubling.

I think that the price went up enough in the first half of 2006 to kill off enough demand that the price fell back slightly (plus the fact that hurricanes were not appearing).

However, this is not a static situation.  IMO, 1/1/06 marked a transition from an exponential increase in world oil production and world oil exports to an exponential decline in world oil production and world exports.  This means, IMO, a return to the price "doublings" pattern, until we again reduce demand enough to bring consumption and supply back in balance, and then supplies drop again. . .

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oilmanbob on December 8, 2006 - 4:37pm Permalink | Subthread | Parent | Comments top
Thanks Dave for another great Post!

I have two observations, probably unsettleable until history gives a perfect 20/20 hindsight;
1.Currency problems. Now that Iran is denominating its sales in Euros, and the US dollar weakens, we may end up paying a premium for oil in the US. I'm woried that we will see a flight away from the Petrodollar in foreign markets because of the Republicrat and Demican fiscal irresponsibility combined with Moslem repugnance for our foreign policy.
2. Economic theory gives very little weighting to the psychology of speculation. The most recent highs of $78/bbl were combined with the Hedge Funds trading oil to irrational heights. I'm pretty sure the Hedge Fund 30 something cowboys have been reined in by their bosses because of the collapse of Amarynth and the beginning of what may be a huge housing sparked recession. I'd bet money the pension funds who use the Hedge Funds are telling the boys to chill out. I'm assuming the Pension funds are smart though, and thats not a proveable assumption, and quite possibly dangerous.

At any rate, my guts tell me WestTexas is right. Things are just too unstable for energy prices not to double again in the near term.

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Yosemite Sam on December 8, 2006 - 5:43pm Permalink | Subthread | Parent | Comments top
My understanding is that the Euro is not robust enough currency to handle the all the capital that is now is petrodollars.  The dollar is like the failing bank that is too big too fail in it is too big to ignore.
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memmel on December 8, 2006 - 8:01pm Permalink | Subthread | Parent | Comments top

General Motors is too big to fail.

I think the USSR is too big to fail also.

Oh wait...

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Yosemite Sam on December 8, 2006 - 9:05pm Permalink | Subthread | Parent | Comments top
OK, bad example.  The Euro cannot "physically" handle the job.  The stock and bond markets denominated in Euros do not have the necessary capacity.
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Nagorak on December 8, 2006 - 10:08pm Permalink | Subthread | Parent | Comments top
I believe the Euro bond market might be larger than the U.S.'s.  I've heard that anyway, although I can't provide a link to any substantial source.  If so, it's kind of silly to say the Euro can't handle the job.  

The dollar is not all that important.  Everything could easily switch over to Euros or other currencies.  It will happen, but it will no doubt take many years time.  

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Paul in Nevada on December 9, 2006 - 12:42am Permalink | Subthread | Parent | Comments top
The euro float is certainly large enough to handle the oil trade. If money is purchasing power, the financial institutions of this world can provide plenty of Euros.

The weakness of the Euro is political. Not all countries in the Euro market are happy with membership. See Italy for one example. It would prefer a currency it could more easily inflate (devalue or debase).

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Dragonfly41 on December 9, 2006 - 10:01am Permalink | Subthread | Parent | Comments top
Hey...a petrocurrency has to start somewhere.  The Euro already acts as a defacto "basket" currency.  Makes it easier to add additional countries/currencies.  I think it would be quite easy to switch over, if/when countries decide to give it value.  All it takes is "agreed upon" confidence.
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westexas on December 8, 2006 - 5:01pm Permalink | Subthread | Parent | Comments top
ERE

Expectations of exponential production increases +

Reality of exponential production declines =

Explosive increases in oil prices

IMO, the only logical response to ERE is ELP:

Economize; Localize; Produce

(Richard Rainwater seems to think it's a good idea)

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MicroHydro on December 8, 2006 - 9:46pm Permalink | Subthread | Parent | Comments top
Agree.

Despite stubbornly sticking to my long position in oil during the September-October energy massacre this year (despite a timely warning from SAT on TOD), I am still a successful commodities trader. My 2006 performance is looking to finish around +140%.  So, I will let it all hang out and make a bold prediction:

NYMEX WTI will exceed US$120 (nominal) before January 20, 2009.  

This will be due to a combination of a bear market in the US$ and a the next leg of the bull market in crude oil.  (I would term the entire period from August 2005 to the present as a long irregular correction/consolidation pause in the secular oil bull market.  Considering the double digit growth in M3, the $78 of summer 2006 was not a higher real price than the $70 of summer 2005)  As westexas has noted, a price doubling in 25 months has happened earlier in the bull market for oil, and bull markets get wilder in their latter stages.

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oilaholic on December 8, 2006 - 9:56pm Permalink | Subthread | Parent | Comments top
If you have the courage of your conviction you could make an enormous return on an investment in crude futures or options.  Is your money where your mouth is?
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179 comments on Scarcity Rents and Oil Prices, Again

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