Gail:

Good Work!!!

On the NYMEX futures market and inventories:

The NYMEX futures have been in contango now for ost of the time since the end of 2004 when oil prices ran beyond $40/barrel and and seemed unable to fall below that price point in a time of rapid expansion in demand. This constant increase from the front-month to the 3rd/4th month contracts has been unprecedented since the beginning of the NYMEX futures trading back in 1983.

In the post Katrina/Rita era where concerns about JIT approaches to inventory were raised, along with the contango position of the market, the inventory build of oil is not surprising. Unless we run out of storage capacity (creating a sudden decrease in demand) or there is sudden jump in supply that makes the market go back into the more traditional role of backwardation.

While there are people who attempt to gain leverage in the market, it seems the market has largely bought the idea that cheap, easy oil IS NOT the wave of the future (this is what I tell them that the market sees). This is consistent with PO... the idea that as oil becomes progressively more scarce with no easy substitutes areound, the oil prices will continue to climb. At some point, the climbing oil prices eventually "break the bank" but economic theory does not do a very good job of predicting where that occurs.

On EIA assessment of Peak Oil:
the latest one from 2005 is shown here

http://www.eia.doe.gov/neic/speeches/Caruso061305.pdf

The methodology used by the EIA is one disputed by a number of people (including me) where the growth curve is constrained by the amount of recoverable reserves AND a decline rate governed by a R/P ratio of 10. That's too technical for nontechnical types. But I do tell people, to answer their question, that our own government and energy department predicts two things...one, the peak is a long way out and two, when it comes our Energy Department is predicting a global collapse in production. If the ability to support population is tied to the amount of oil available, then the US Government is making some pretty stark predictions. Most people get the happy talk on the left side of the curves not the dire consequences on the right-side.

I point out that these are collapse curves no matter which one you choose. On the otherhand, if PO is now and the decline is rather modest and we get some serious awareness about PO, we might actually have some chance to adapt to a gradual decline (it won't be pretty but which would you prefer?)

Once again, great job.

• Faith in OPEC oil reserves. The Saudi oil company Aramco was taken over by Saudi Arabia in 1980. Shortly thereafter, the amount of oil reserves was doubled, without finding any more oil. Other OPEC countries soon followed suit, since higher reserves meant higher oil production targets under OPEC rules. Current OPEC reserves appear to be seriously overstated, but they are repeated endlessly as fact, in news media and textbooks.

Just to avoid confusion. Saudi Arabia was not the first to raise its reserves estimates. Iraq was first and Saudi Arabia was last, completing its reserves increase in 1990.

It was OPEC which decided to implement the production quota based on reserves system, no doubt with SA's strong influence. I know this may seem to be nitpicking, but on a site that promotes accuracy, I would suggest you clarify your statement.

When prices in the front month are lower than outgoing months this is a signal to buy now and hold instead of later since your dollars get more now. (This has to be offset against inflation, of course, but if the later months are higher than current plus inflation then buying now makes sense.)

In turn, buying now also makes sense in a resource constrained environment, even if the buyers don't know it is resource constrained. It becomes cheaper to "hoard now" than buy later.

This point is often dismissed by those who argue that the inventory surplus must be "explained" by peak oilers. The explanation is in the futures price itself and there is nothing further for a peak oiler to explain. Our problem would be explaining current inventories if futures prices were lower while inventories were building.

In other words, the market itself is arguing for a constrained supply system and if you want to be certain of having yours, you need to get it while you can.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

Actually there is I would suggest a better number than 2% to use as a historical demand predictor....

If you look at global per capita oil consumption since about 1971 to current vs global population you will see it is as close as you get in the real world to a perfect fit:

4.1 bbls /person/ year +/- 0.25 bbls/year with R^2 > 0.91
(consumption from BP review, world population from US Census dept.)

BUT world population is growing at about 1.275% per year exponential, not 2%, so I'd suggest that as a benchmark, unless there is a better explanation for where 2% is being drawn from....

P.S. I can't find an equation that describes the price-production relationship at the level of yearly summary figures in this time period that is anything like a good fit, if someone knows of such a thing do tell...

Hi Kenny, and thanks (as always) for your work, Gail,

re: "My apologies that this doesn't properly convey the toll on the people who are potentially being priced out of the market for modern energy."

1) Yes, well - it does seem like an important concept, i.e., "people who are potentially being priced out of the market for modern energy."

How would you describe this?

How would you quantify it? (Or otherwise bring it in to the discussion.)

These "people" may well be the US middle class, as memmel (I believe) has mentioned.

It seems like such a crucial concept - "being priced out of the market". Because the lives of real people are affected.

So, we have an entire phenomenon with no words to describe it? And it doesn't fit in with the theory?

2) "should not be supply shortages"

Actually, memmel has addressed this point. And made the argument there actually "should be" supply shortages. (I'll try to look it up and edit back in.)

3) I like the idea in your last sentence. I just wonder if it might be re-worded some.

There could also be other explanations. Perhaps people simply don't know what to do.

I agree with Kenny about the graph in section four.

"a rough estimate of future demand for oil (red line), assuming world oil desired usage continues to grow at 2% per year."

I think there is some hand-waving going on here. You need to tighten this somewhat, without going all economist-technical on the reader. How about something like this:

"a rough estimate (red line) of what future demand for oil would be assuming oil prices hold steady and supplies are adequate."

Seems to me you can't talk about demand for a product without saying what the price is.

What's lurking behind this are the classic price-demand and price-supply curves from economics 101... where the curves meet is what sets the price and the amount produced. Seems like TheOilDrum could use a bit more econ 101 type of information to balance all the great geology info. I still have the impression that the economists are right in the following sense: there are so many ways for people to adapt, conserve, substitute that the emergency will indeed be long. The book "1000 barrels a second" by Peter Tertzakian helped turn my personal doom-o-meter down from defcon 4 to defcon 2 (but Westexas' Export Land Model may push me back up to defcon 3).

P.S. Gail, do you want some help with typos and such? I spotted about a half dozen in your excellent piece.