Not true. their production declined thru the spring and summer as prices peaked. Prices fell because world output did surge jul/aug,...

You, like many others, are focused on price and ignoring inventories - a very big part of the puzzle. What were inventories doing during that production decline? Not only were they are record levels, but 1). They were increasing; and 2). We were headed into turnaround season. So, as I said, very convenient for them that their production decline occurred just as we didn't need the oil. The cuts started when inventories were very full (as I demonstrated in my response to Jeffrey in our debate) and continued through falling prices. To date, they have made no production moves that didn't make sense in light of the inventory/pricing picture.

THinking sa has not peaked requires a kind of religious faith, believing what you desperately want to believe and ignoring all evidence to the contrary.

Just the opposite in fact. Religious faith sometimes requires one to ignore certain aspects of evidence that may happen to be inconvenient for the faith. You are ignoring certain aspects of evidence. Those who think Saudi has peaked need to point to some production moves that they have made that just didn't make sense given the market. For instance, if you can point me to either 1) Very low and falling inventories; or 2). Average inventories and rising prices; and KSA not increasing production, that would be support in your favor. But that's not what happened.

Oil is a slippery business, and inventory plays a very direct role in production - after you have filled the pipeline, the storage tanks, the tankers, the refinery storage tanks, the local gas station storage tanks, and your own gas tank, what now? Lower production is the only realistic answer.

This winter was as 'unanticipated' as the 2005 hurricane season. There was a lot of demand destruction, simply due to higher temperatures. To give you an idea, January 2007 in this region was 5° C (about 10° F) higher than normal - that is a lot of degree days heating sitting in various storage tanks (Germany is also a major user of heating oil on the world market - though it is attempting to reduce the amount as a matter of policy). Just yesterday, the region's natural gas distributor announced plans to reduce prices by approximately 50 euros over a year for a typical family soon - a lot of planning involving long term amounts/prices/storage has simply been ruined by what is happening outside the window.

And if the weather turns viciously, so that instead of 5° over normal it becomes 8° under normal in March, the system will gyrate again.

One of my reasons to believe we are at peak is how the whipsawing is becoming ever more difficult to explain without an overarching connection. There may be a number of reasons for Saudi Arabia's currently declining production, but none of the publicly available information from various sources seem to provide a coherent reason for various contradictory goals (prop prices up to help Iran? reduce production to help the U.S. economy? promise to flood the market 'soon' while consistently cutting production and actually providing less than contractually agreed to amounts?), unless you tend to believe that oil fields/regions go into a permanent geological decline at some point

And yes, economic demand, in part reflected through inventories, plays a role in production which has nothing much to do with price in terms of futures markets.

Oil production can decline faster than some theoretical maximum rate if the demand doesn't exist - full storage tanks tend to show that demand is not high enough at the moment.

The thing is, peak oil is not an economic game, it is a geological one - as the British seem to be waking up to. Regardless of British fiscal planning, those anticipated oil exports in 2008 are unlikely to happen, unless they reduce internal demand by a significant percentage, and then it do again year after year - geology meets economics, and as always, the economists will come up with a reason why it doesn't matter - substitution? new technologies? fairy fossil mother? Economists simply explaining away reality in a blizzard of terms, technicalities, and statistics is virtually a natural law itself.

Thus a number that might be very very interesting is how many of the spot contracts are actually used to take real delivery of oil ? And how has it changed over time.

Article in this weeks Business Week indicates that banks and hedge funds with storage capacity were this past summer purchasing for inventory and able to immediately sell forward for a 50% gain. If market was close to balance this diversion to inventory would have assisted in driving up the price.


Article is a little light on data but it also suggests that a hedge fund may recently have been in trouble and was liquidating inventory. If accurate this may have contributed to recent price weakness. Note that this form of market intervention (financial institutions purchasing for inventory rather than trading contracts) is relatively recent and would be disruptive to normal pricing mechanisms as the supply chain would not have anticipated such diversions to inventory.


KSA withdrawal of supply is curious and difficult to explain. It may be the case that KSA seeks to create room for alternate supply and avoid a degree of over supply that might collapse current price environment.


It may also be the case that they have become much more sophisticated in seeking ways to maximize revenue from what they know is both a non-renewable resource and their single source of earnings (excluding Hajj income).


I like the old Scots verdict - case not proven. But very interesting to watch.

I think its incorrect to look at OECD supply levels and assume that the market is well supplied if the market is in contango.

The market right now is well supplied. That may change 6 months out, but right now there is sufficient capacity.

I don't understand why anyone would expect supplies to drop ?

I think what would happen is that if KSA had peaked and taken a large amount of supply off market, combined with Mexico's peak, prices would start to climb back up as the supply shortfall was felt (they would scream upward if it was known that KSA had peaked) and at some point, suppliers are going to wonder why they are keeping such high inventories. That's a lot of money tied up in those tanks. Then, they allow inventories to be drawn down to historical levels. Now they are back to making their normal purchases. If supply is short, now is when you will see prices really climb, as the shortfall becomes apparent.

My personal take on inventories is that it is a reflection of the contango in the oil futures. If you have storage capacity, you can currently lock in a 10% annualized return by buying spot and selling forward 9 months. This a pretty good return for basically a large cylinder of steel plates. I predict that inventories will enter a period where they are high by historical standards because easy money can be made.

Related to Simmons "Crossing the Rubicon", my gut feeling is that he is on target this time. I also feel that we have been and will be lucky in that for 2 winters there has been weakened demand that has masked supply shortcomings. We have very likely entered a logistical plateau that will merge into a geological peak. A slow squeeze until 2011-2012 when the bottom falls out....

Nice graph.

But I wonder...isn't hoarding something you'd expect to see at peak? That happened when there was a steel shortage a couple of years ago. Companies started hoarding it, for fear of price jumps or outright shortage.

The U.S. is increasing their SPR, and countries that never had them are creating them. Perhaps they aren't the only ones stocking up while the price is relatively low?

I'd expect to see inventories decline only once we start down the backside. In the run-up to the peak, and at peak itself, I'd expect that everyone who could would be building (or at least maintaining) their inventories in preparation.

What does the graph of inventory/consumption (i.e. days of consumption in storage) look like for the same period? It looks to me like it has been consistently declining for the last 20 years. How would that factor into the discussion?

Something odd here... EIA reported last summer that oecd inventories were at a ten year low, with one day cover less than a year earlier...

Khebab,

Two comments:

(1) We probably want to look at commercial crude oil stocks relative to consumption. Note that crude oil consumption is up by about 8% since just 1997. Also, I think that the graph includes SPR stocks.

On a Days Supply basis, US commercial crude oil stocks have fallen by 19% from January, 1987 to January, 2007 (average of first four weeks in both cases), from 25.9 days to 20.9 days.

(2) We have only seen, through October, a slight (1% more or less) drop in crude + condensate production. Which areas are likely to see forced conservation, areas where per capita income is measured in hundreds of dollars per year, or areas like the OECD countries, where per capita income is much higher?

In other words, OECD stocks are remaining adequate because of forced conservation in poorer countries. However, IMO the forced conservation is moving "up the food chain."

I noted, on the open thread, that since May, 2005 the world has consumed about 44 Gb of crude + condensate, which is equivalent to about four Prudhoe Bay Fields. Based on Deffeyes' HL plot we have consumed more than 4% of our total remaining conventional recoverable crude + condensate reserves, just since May, 2005.

http://www.energybulletin.net/22775.html

Published on 18 Nov 2006 by Wall St Journal. Archived on 23 Nov 2006.
As Fuel Prices Soar, A Country Unravels
by Chip Cummins

Conakry, Guinea

While robust economies like America and China are withstanding the shock, the poorest countries aren't. Increasingly they can't afford to slake their citizens' thirst for petroleum -- breeding another form of energy insecurity. The pressure threatens to undermine economies and sow domestic strife, further unsettling shaky regions and presenting fresh worries for policy makers in the West.

Khebab

What accounts for the difference between these figures by EIA and those tracked by the IEA under "OECD Total Industry Oil Stocks" at 2700 plus million barrels?

AFAIK, there is no "Peak Oil" insurance as such. There are specialty types of coverages, such as "rain insurance" for a big event and coverage relating to someone actually kicking a field goal in a Punt Pass and Kick promotion. Theoretically, some organization like Lloyds of London could sell Peak Oil insurance, that would pay simply if Peak Oil occurred, using some agreed-upon definition. The buyer of the insurance would need to prove that he/it had some type of insurable interest, that is, suffered some loss, if Peak Oil occurred. Because this would be difficult to prove, I don't expect Peak Oil to be an insurance coverage, but it could be an object of a bet.

Regarding life insurance, a person concerned about dying because of peak oil could purchase term life insurance (perhaps five or ten year renewable term, so that the coverage is locked in). The problem I would see with this approach is that if peak oil impacts are serious enough that the insurance purchaser dies as a result, there is a good chance that the insurance company will not be around to pay. Even backup systems, such as guarantee funds, may not continue to work. Alternatively, if the insurance company is around, the dollar may be worth so little that the proceeds are hardly worthwhile.

I have a hard time believing that the current financial system - including insurance - will hold up well under peak oil. There are likely to be way too many defaults on debts.

Except for people who can't afford fuel for cooking.
Or hospitals that can't afford diesel for their generators.
Or towns that get critical food/medicine trucked in.
Or farmers that can't afford fuel for their tractors.

Poor people will be the first ones effected by higher oil prices.

Large portions of inland China as well. The water buffalo is still alive and well on many Chinese farms and cooking is done with coal brickets. Even the trains use coal in their galleys for cooking. A lot of commerce is carried out on tricycles. I've even seen a pay-as-you-go Porta-Potty perched on a trike. Commerce does find a way.

If the lights go out many Chinese are going to miss their satellite TV. That's the one luxury all but the poorest can afford.

Hi Suyog, aren't India's fuel supplies currently heavily subsidized? Being a net importer, I'm wondering how how long India would be able to continue this practice until passing some of it onto the consumer. Do you have a take on the present situation over there?

65 x 10 = 650

Oil was at $65 a barrel at the time of the interview...

Again you miss the point. Every year for the past 3 years, he has come out and announced the end of oil, the peak is here and here are the conditions that will lead to huge price increases for oil. His own hedge fund deals primarily in energy stocks: oil and natural gas.

ITS A COMPLETE CONFLICT OF INTERESTS!!!

Hi all
FWIW;
I paid >300 $/bbl for Gasoline last year and yesterday 252$/bbl at the pump -ignoring the difference between gasoline and oil.
The 252$/bbl is considered a low price here.
Source:
http://www.oil-forum.dk/Priser/Prisudvikling/browser.aspx?path=%2fhome%2fpriser%2fprisudvikling%2fdanmark&layout={D094BB8B-FB79-4673-9130-4F0E62EA110E}

column 4 consumer price in (Kr) DKK/liter; 1US= 5.66 DKK and 1bbl = 159liter

kind regards/And1

You might want to check out www.intrade.com.

They are basically offering a payoff of 5:1 if oil is on or over $80 on Dec 31, 2007. Just takes a credit card to get in on the action in minutes. Whoever bet RR seems like a complete lunatic.

I realize, however, your proposed bet is re production.