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