The Oil Drum | DrumBeat: January 12, 2007

285 comments on DrumBeat: January 12, 2007

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QuiJohn on January 12, 2007 - 11:16am

Long time lurker, first time caller.

Thanks for the info on the inventory status, Ron. I have a question that I'm having a hard time wrapping my admittedly non-technical mind around, and I was wondering if you could help conceptualize it for me (anyone else is welcome to do so, as well!): why, in the face of this kind of news, has the average gasoline price in my area (mid-central Indiana) dropped to $1.99/gal for the first time in a long, long time?

I do not ask this with any facetious sense at all; I'm trying to understand the relationship between the global oil status and what it means to the average consumer (ie. me). Where is the market response to the observable plateau in production upon which we are currently sitting?

Anticipatory thanks, by the way...!

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oilmanbob on January 12, 2007 - 11:29am

Quijohn, welcome to the Oil Drum!
The answer to your question-who knows? If oil prices followed some type of logic that I could discern, I'd be very rich.

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Robert Rapier on January 12, 2007 - 11:31am

why, in the face of this kind of news, has the average gasoline price in my area (mid-central Indiana) dropped to $1.99/gal for the first time in a long, long time?

Product inventories are high and have been climbing. If the trend continues, the price will keep falling. Margins have been eroding, so I expect to see some of the excess removed by refiners slowing down a bit. But gasoline inventories are near the top of the range for this time of year, and have been climbing steadily. That indicates that lower prices and/or reduced refinery runs are on the way.

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Valuethinker on January 12, 2007 - 12:05pm

You've also hit on a point that isn't always clear in TOD.

1. we have (a pretty) good idea of world demand

2. we have a (somewhat good) idea of world inventories

3. world supply we have a poor fix on (because there are incentives out there to lie eg Iraq exports a lot of oil as 'smuggling' which is not recorded and also OPEC countries cheat on their quotas etc)

4. we have no good picture of reserves for at least half the world (see Twilight in the Desert by Matt Simmons re Saudi Reserve data, or any of the powerpoints on the Simmons & Co. website)

Demand +/- changes in inventory = Supply

So supply always equals demand. The way the 2 are made to come together at one point is *price*.

If we were at peak oil *now*, then given that demand is still rising, price would be shooting through the roof. It will do that because demand for oil is quite inelastic to price (2/3rds of oil use is in transportation, and it's not easy for the global economy to give up transporting things and people) and supply of oil is also quite inelastic to price (you have to find oil to produce more of it, and that takes time).

Now (4) tells us we don't know when Peak Oil will come. It could be tomorrow morning.

We can observe price, and price is not shooting up. Given that oil demand is apparently still rising, oil inventories are not plunging, we are not at peak oil.

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Darwinian on January 12, 2007 - 12:21pm

If we were at peak oil *now*, then given that demand is still rising, price would be shooting through the roof. It will do that because demand for oil is quite inelastic to price (2/3rds of oil use is in transportation, and it's not easy for the global economy to give up transporting things and people) and supply of oil is also quite inelastic to price (you have to find oil to produce more of it, and that takes time).

Value, oil demand is not nearley as inelastic as you seem to think. Methinks you are comparing the US with the rest of the world and assuming they are very much alike. That is far from the truth. Many small countries that use crude or diesel for power generation is cutting back drastically. Blackouts are increasing dramatically in all third world countries. Everywhere lower income people are consuming less and less.

Bottom line, with the recent OPEC cuts the world is producing about one million barrels per day less than it was in the summer of 2005. And of course we are consuming about one million barrels per day less. Though consumption was not dramatically affected by the rise in the price of oil in 05, the high cost of oil has finally started to squeeze the consuming public, especially in the undeveloped world.

Theories count for nothing Value, if the the data tells a different story. As Matt Simmons is fond of saying; "Data trumps all theories." And so far the data tells us that we are at peak right now. We have been on the plateau for about two years. You just cannot argue with the data, though some people foolishly try to do that.

Ron Patterson

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Robert Rapier on January 12, 2007 - 12:29pm

And so far the data tells us that we are at peak right now.

Of course used in that way, the data would have told us several times in the past we were at peak.

Data is subject to interpretation. Oil production goes flat or declines for other reasons than a production peak, as has been witnessed multiple times in the past.

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Darwinian on January 12, 2007 - 12:57pm

Robert, with all due respect, I did say so far!

Now having said that, I think it is extremely foolish to declare, as Value did, that we are definitely not at peak because of the price of oil. The world has, without a doubt, produced less oil in 2006 than in 2005. Looking at that fact alone I think it is extremly foolish to say that we cannot be at peak because of the price of oil.

And just one more very important point! Before the OPEC cuts went into effect on October 1st, we were already below 2005 levels of production. A plateau of two years along with a slight drop in production, has never before in the history of the world happened except in the case of OPEC deliberately cutting production, Iran-Iraq war and the following tanker wars, or the collapse of the Soviet Union causing a cut in production.

I get so damn tired of people pointing to past drops in world oil production without giving us the cause of these drops! This time, before November 1st of 2006, that a plateau of two years and a drop happened while all the world was producing flat out. This has never happened before and that fact should simply should not be overlooked.

Ron Patterson

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Robert Rapier on January 12, 2007 - 1:37pm

This time, before November 1st of 2006, that a plateau of two years and a drop happened while all the world was producing flat out.

That last portion, though, is not a fact. It is your opinion. In fact, "all the world" certainly wasn't producing flat out, as I have argued before. Canada was not producing flat out. But even in the Middle East, Saudi had already made the statement that they were having trouble finding buyers. They had already made cuts. You simply choose to believe that they were lying about the statement they made.

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Papirus on January 12, 2007 - 8:04pm

Ad the Saudis not having buyers for their oil in June 2006, when NYMEX light sweet was 70 $/b plus.

In 2006 if Aramco - like CERA and others - believed that the price of oil soon (within a year or two) would fall, then how come they didn't lower the price a little?

It has been argued (Robert) that an eventual bluff easily could be nuked by someone simply buying oil from the Saudis. IMO, this is not an evidence for spare production capacity. We all believe the Saudis have tank farms, don't we?

An explanation to my question could be ECONish, that maximizing the profit means producing less than 100%. Personally i don't think the Saudis are free to produce less. Such behaviour would not be tolerated by Uncle Sam, which i think has lot of tools to utilize when exercising power. But this of course, is just an opinion. I'm sure there are knowledgeable generalists, like Sailorman and others, that has a more qualified say on this than I.

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Don Sailorman on January 12, 2007 - 10:09pm

I just watched "Lawrence of Arabia" again. Anybody who thinks Arabs are likely to act in their long-term best interests should watch that movie.

Can the Saudis restrict output to boost prices and hence revenues? Heck yes they can; Uncle Sam does not get to peek at their books (which assumes, BTW, that the Saudis know how much they are producing--highly questionable IMO).

So what are the Saudis doing?
1. Nobody knows.
2. That probably includes the Saudis. Why assume that they know what their production capacity is--not to mention their reserves?

It is always a great mistake in human affairs to assume that the other guy knows what he is doing.

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Papirus on January 13, 2007 - 1:24am

Am I missing something here? You are being ironic?

I assume that Aramco has a functional hierarchy, reporting oil output to the top dogs, wouldn't you?

US knowledge of KSA internal affairs?
There is quite a few Saudis with cultural links to US; education, business et cetera. I can easily imagine Uncle Sam having many informants in KSA. But of course, it's just unqualified speculations. I know very little about KSA.

Here in Norway, US knowledge of internal affairs caused big headlines recently. Prior to the invasion of Iraq, the inner circle of the cabinet had secret discussions. The former prime minister, Kjell Magne Bondevik, revealed in his biography that the ambassador in Washington, Mr. Vollebæk, got those discussions referred in a meeting with the state department. It was the state department who initiated the meeting.

The secret discussion was limited to a group of five ministers (prime, finance, foreign, defence and justice) and their apparatus.

So, either the US is exercising technical surveillance on Norway's "white house", or they had a mold inside the apparatus of the inner cabinet. At least, that is my interpretation of that event.

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Don Sailorman on January 13, 2007 - 9:48am

I was not being ironic. Norway is not KSA. Norwegians have been counting accurately every single herring they have caught for the past thousand years.

The people I have reason to believe who know the most about KSA oil production claim to know the least. (Those with claims of knowledge about Saudi production and reserves have no consensus nor any strong claim to such knowledge.)

My position on KSA is based almost entirely on Matt Simmons, "Twighlight in the Desert."

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James Bond on January 14, 2007 - 1:59am

The people I have reason to believe who know the most about KSA oil production claim to know the least.

Well said. You seem to have a talent for summing it all up in one sentence. You should write books. We should all spend less time reading Westexas and more time letting you shake the fuzzy dice.

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QuiJohn on January 12, 2007 - 2:17pm

First of all, thanks to all of the thoughtful responses.

Now, as to this:

...oil demand is not nearley as inelastic as you seem to think. Methinks you are comparing the US with the rest of the world and assuming they are very much alike. That is far from the truth. Many small countries that use crude or diesel for power generation is cutting back drastically. Blackouts are increasing dramatically in all third world countries. Everywhere lower income people are consuming less and less.

Regarding our current inventory level, which as Robert pointed out:

Product inventories are high and have been climbing. If the trend continues, the price will keep falling. Margins have been eroding, so I expect to see some of the excess removed by refiners slowing down a bit. But gasoline inventories are near the top of the range for this time of year, and have been climbing steadily. That indicates that lower prices and/or reduced refinery runs are on the way.

...is it that our inventories are filling up at the expense of these Third World countries? Is there any data to support decreased consumption/demand in these countries? It makes a modicum of sense that if these countries have indeed "bowed out" of the oil bidding for the time being, the increase in supply would result in a lower cost, which (if I understand you all correctly) could very well explain why the inventories have been climbing (ie. "buy it while it's down and store it for when it isn't").

But if that isn't the explanation, what other things could be responsible for the current mix of low price points & high inventories, again, when viewed in light of the plateau that I see time and again by the many impressive graphs around here? :)

Again, I apologize if any of this seems pedantic or redundant. I'm just trying to research this and come up with responses to potential questions about PO - it's hard to convince somebody to that PO should be a concern when the gas pumps don't reflect it. It's the old "Who do you believe? Me or your lying eyes?" issue.

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Darwinian on January 12, 2007 - 4:22pm

...is it that our inventories are filling up at the expense of these Third World countries? Is there any data to support decreased consumption/demand in these countries?

Well, for starters our inventories are not filling up. While it is true that gasoline and distillate inventories are up, crude inventories are down by a greater amount. All in all, inventories are down.

The power and gasoline problems in developing countries has been in the news frequently lately. And they always give the high price of oil as the problem. That being said however, developed countries are cutting their consumption also.

OECD demand for 2005 49,601,000 barrels per day.
OECD demand for 2006 48,923,000 barrels per day. (First 9 months avg.)
http://www.eia.doe.gov/emeu/ipsr/t17.xls

There is all the proof you need. High prices are pushing demand down everywhere. And inventories are decreasing, not increasing. Inventory days of supply for OECD nations were at the top of their range during the third quarter of 2006, dropped to near the middle of the range at the end of the fourth quarter and are expected to drop to the bottom of the range in 2007.

On a days-of-supply basis, OECD inventories are projected to decline from close to the top of the normal range during the third quarter of 2006 to near the bottom of the normal range by the end of 2007.

http://www.eia.doe.gov/emeu/steo/pub/contents.html

Ron Patterson

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Freddy Hutter on January 12, 2007 - 4:59pm

North American demand dropped 0.064-mbd in 2006, while Asian demand grew 0.339-mbd. And non-oecd natins were just part of it. Latin American grew demand by 0.109-mbd. In all, global demand grew by 0.91-mbd in 2006, almost all that coming from non-OPEC producting nations. There is much disinformation at TOD.

Have prices since my inventory warning last year reflected my reporting of events and facts or that of the Peaksters?

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ET on January 12, 2007 - 1:19pm

There are also many reasons why consumption of oil might drop besides the price of oil, i.e. general economic slowdown because of multiple reasons, some probably energy-related, many more strictly economy related (falling housing market, etc).

It seems to me that the global crude oil market is so huge that a few fractions of percent of drop in consumption over a critical mass of consuming economies can cause high volatility in prices. In other words, there is a huge amount of 'slop' in the markets in terms of trading prices and anticipations of supply/demand, even while there may not be this 'slop' in terms of actual supply. IMO we could go several years beyond peak before the 'noise' in the economy, including possibility of deep recession, will give away to clear trendlines indicating economic realization of the peak.

This is why (if it wasn't clear already :) I think WT and RR could be both essentially correct, just looking at the situation in different lights.

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Dragonfly41 on January 12, 2007 - 2:14pm

I believe "price" in an open/free marketplace would be a good indicator in this situation. I am not convinced crude oil prices are set in an open/free marketplace. If there is any manipulation going on, then the price will never be a good indicator.

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Freddy Hutter on January 12, 2007 - 4:44pm

The Global Distribution Map i posted this week (http://trendlines.ca/energy.htm#misc) shows that every barrel not taken up by usa & europe went to non-oecd nations. There are a few TOD dieoff fans like Ron et al that want us to believe there was extreme hardship around the world last year due to high prices. Anecdotal and out of proportion.

We now know that the price spike in 2006 was artificial. The 1.7-mbd in surplus supply went to inventories. The demand destruction in the West went to asia. This is not rocket science.

Exports compared to a year ago are bunk. The global export/import patterns were skewed by the Gulf Hurricanes. Tankers were diverted. Now all is back to normal. In 2006, the usa produced within 40-kbd of 2005 volume. In 2006, usa nat'l gas production exceeded 2005 by 2.9% and TEOTWAWKI did not happen despite all the forecasts by some of the TOD pundits from the lunatic fringe.

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Papirus on January 12, 2007 - 8:24pm

Please mister Hutter, be more polite.

Tell me, why do you bother to read and post at TOD, which obviously is a peak oil freak show?

Is "debunking" Ron and others your idea of public service, being useful for the community? It would be better if you spent your energy on expanding on the ideas here, and of course exercise your intellect to criticise. IMO most of your posts are not honest criticism. It's mainly rhetorics and a strong bias without acknowledging others views, certainly not a quest for reality and truth.

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Darwinian on January 12, 2007 - 8:43pm

Exports compared to a year ago are bunk. The global export/import patterns were skewed by the Gulf Hurricanes. Tankers were diverted. Now all is back to normal. In 2006, the usa produced within 40-kbd of 2005 volume. In 2006, usa nat'l gas production exceeded 2005 by 2.9% and TEOTWAWKI did not happen despite all the forecasts by some of the TOD pundits from the lunatic fringe.

Freddy is usually full of it, but in this case he is even more full of crap. No one is comparing the entire year Freddy, I was using a 10 week moving average. What about the eight months before the hurricanes?

What about the first 9 months of 2006? Why are total imports, using a 10 week moving average, lower now than any time in the last 31 months? Did hurricanes skew the production for two and one half years, when about half those months were before the hurricanes?
I was using a 10 week moving average and comparing it with every other 10 week average over two and one half years.

Sometimes Freddy, you just open your mouth and stick your foot all the way down your throat.

Ron Patterson

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Freddy Hutter on January 13, 2007 - 12:13am

Nobody really cares about your ten-week avg, ronny. I sure don't. It indicates dick all. And i have never commented about your academic exercise; so i don't know why u are on a tirade.

Jeffrey is the Poster claiming that Exports today compared to a year ago (hurricane episode) is relevant. And i addressed that ridiculous comparison. That's all.

He is clearly wrong. And u are lost in space.

But don't let me stop u from taking a moment to explain to us why we should care that exports in Q4 down from 2004 should concern us...

Over the last nine months there have been several issues wrt inventory, non-OPEC supply growth, OPEC quota reductions & usa Demand destruction that i have addressed since October. All my statements and suppositions are backed by posted graphs and stats (some of which are still posted at http://www.trendlines.ca/energy.htm#misc

OTOH, u and Jeffrey are involved in alotta hokus pokus rhetoric mixed with baseless claims of decay in KSA, Russia, etc etc.

My explanations follow the price movement and geopolitical action impecably. Yours takes a leap of faith worthy of a fundamentalist religious zealot.

I am content to watch the world and event unfold as they should. U and westexas are eating up our bandwidth with your daily repetitive bund as if saying it a hundred times will finally convince us via some sort of fatigue factor.

Oil futures fell another five bucks this week. WT and u lost much more than that in credibility...

Peaksters defended the post Iraq2 price hikes as proof of Peak. Now that they recede, it's supposedly just a correction. Yup.

I have defended $50 contract prices as the equilibrium price for 18 months. I warned that there was a fear component and surplus capacity issues and thus prices could not sustain their recessionary heights.

Folks can believe your off-the-wall rants or my data supported outlines. Since 2003, your luv affair with EIA stats has made u look foolish in your retractions and false accusations. My IEA figures have been consistent in both forecasting upcoming events that i have posted and explaining past trends.

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smekhovo on January 13, 2007 - 2:47am

Do you have no shame, Fraudy, to be back here lying when I just showed that you can't even report accurately the weather in your own town?

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Freddy Hutter on January 13, 2007 - 5:05pm

today we learn that the lunatic fringe no longer takes the weekend off...

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practical on January 12, 2007 - 12:08pm

If oil is like other markets, the price is determined at the margin. If there is one extra barrel of oil with no buyers the price will fall to find a buyer. Likewise if there is a buyer for one barrel of oil and no sellers, the price will rise to find a seller. This is why commodities are so volatile. The actual physical amount available is irrelevant in the futures market since it is all paper barrels. In the corn market, with which I am more familiar, the bins can be nearly empty of corn just before harvest and yet the price of corn will fall. The futures market which determines the cash price is anticipating the harvest and lowering the price (normally). Likewise after the harvest, normally, the bins on the farm are full of grain, but the price of corn normally rises. I know these seems counter intuitive, but that is the way it normally works. This past harvest was unusual in that prices rose at harvest, a rare event. In the case of oil, I would suspect that the market is anticipating an over supply in the future. The declining inventories now are irrelevant. It is a futures market of paper barrels. Possibly the rapid expansion of ethanol is lessoning the need for crude oil as there will be ample supply of motor fuel at the margin. Add in the global warming effect and you get an over supply at the margin, which is turn decides the price for all the crude. The physical inventory numbers are irrelevant to price. However they could still indicate that peak oil is near or here already, it's just that ethanol and global warming are mitigating the effects at the moment. This can all change overnight.

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peakearl on January 12, 2007 - 12:51pm

Briefly, it is clear that world oil traders/companies do not believe we are peak right now (whether we are or aren't, people's behavior reflects primarily what they believe), crude prices have fallen from their high, no new obvious threats to oil supply have emerged (I think the concerns with Nigeria and Iraq have gone somewhat stale) and there is no shortage of supply - at least for the developed world. The question is given these factors, why wouldn't prices be dropping? Supply/demand imbalance will have to become much more evident for prices to really climb again in the absence of another new major supply threat (such as terrorism in SA).

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Slarkki on January 13, 2007 - 6:32am

There exists a certain knock-out effect too. I don't know how common it is, but if somebody is forced out of oil because of too high prices, he/she/it might just not rely on oil ever again even if the price falls back down. This is a bit more permanent type of demand destruction. This sort of behavior might also prevent the price of oil from ever rising into astronomical levels. It's a slow squeeze and financial entities (people, firms, countries..) are dropping out of the game one by one. A small player drops and the price growth slows down a bit. A large player drops and the price drops a bit. A very large player (or lots of smaller ones) drop out and the price just falls like a rock. Ofcourse the supply still keeps shrinking so the prices start to go up again.

Yes, I know this is quite obvious to many and the rest just probably disagree but this is my point of view.

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Freddy Hutter on January 13, 2007 - 5:49pm

U have described the process wonderfully. In 1998/99, many new users were drawn to petroleum use, both domestically and commercially. At that time, if anyone suggested crude cost would rise from $15 to $69 within ten years, they would be considered insane.

And so they became part of demand. As the baseline Price rises, those fringe users get knocked out of the game. At present, many are hoping that the baseline is still about $40 i.e. the contract price will still see $40 in the price troughs. Today it is $51. And as the fear premium and geopolitical premiums as price components extinquish, we are finding out this month where that bottom is.

IEA is advising that non-OPEC supply will increase 1.7-mbd in 2007. This plus their 0.65-mbd increase in 2006 will far surpass announced OPEC quota cuts to date. OPEC's next scheduled talks are in March.

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Sangiovese on January 13, 2007 - 8:23am

It appears to me that in a 'just in time' world the the price of oil is only linked with fulfilling current physical trades. With remarkably warm weather in the northern hemisphere and low heating demand, no hurricane outages this year and no geopolitical issues stopping any major production there is no shortage at the current prices.

The situation with North American gas should however serve as a warning, (Perhaps also the major daily shifts in UK prices that frequently now happen.) post Katrina over $15.00 currently $6.60 with lots of price volatility. From the posts here we know that ongoing North American gas suppy is going to be critical in a short space of time with production in steep decline. However the JIT culture only 'sees' the immediate requirement and the price swings to enable current delivery. The futures market also seems to be deeply anchored in the 'now' with no consideration of potential production shortfalls that will result from resource depletion.

Its this kind of 'now' culture that I am sure is the prime driver of the oil price.

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