The Oil Drum | DrumBeat: August 4, 2007

245 comments on DrumBeat: August 4, 2007

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Nate Hagens on August 4, 2007 - 10:32am

Ron- the market was down 2% this week, hardly a plunge. The plunge is likely coming though, at some point in next few months. The financial sector is seeing its worst credit market ever - even including 1987 -according to Bear Stearns CFO on conference call yesterday.

Yes its the start of something big, in my opinion, because firms will have to pay more to borrow money going forward, or potentially not be able to borrow. Its bad news for peak oil awareness as well - if economy cracks, demand destruction sets in with a vengeance and we go south on oil prices, giving policymakers no incentive to rock the boat that needs rocking. The marginal barrel - she's a bitch.

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RickD on August 4, 2007 - 10:40am

Please correct me if I am wrong:

High on 7/19 was 14,121
Close on 8/3 was 13,182

Down 6.65%

The Dow went down 33% between Sept 1929 and Nov 1929. By the way, I was surprised that it was not larger than this.

Rick

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Nate Hagens on August 4, 2007 - 11:08am

It was alot larger than this, in 1930-1932.

And 7/19 was 2.5 weeks ago - "For the week, the S&P fell 1.77 percent, while the Nasdaq fell 1.99 percent."

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RickD on August 4, 2007 - 11:22am

I somehow thought my Great Depression numbers were small. I'll look into the following years.

Thanks,
Rick

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Gilgamesh on August 4, 2007 - 12:13pm

Just an FYI but if the DJIA was to have "kept" growth pace according how the economy was "growing" then it would have had to have been at 14,000 to break even with the year 2000.

It hasn't, so the economy is somewhere like 95-96 right now i would guess.

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Dave Cohen on August 4, 2007 - 10:46am

That would have to be a pretty big crash for oil prices to plunge to the levels you seem to imply.

If it did happen, that would delay many new oil projects.

Let's say a severe global recession happens, and demand goes down a couple million barrels per day world-wide, with prices falling back to the lower $50's, or high $40's. I'll go out on a limb and say that this outcome would seal our fate — we would never again see production levels higher than they are today. I think this for a multitude of reasons, which I won't detail here.

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Nate Hagens on August 4, 2007 - 11:21am

Dave, for reasons you well know, I am a huge oil bull, meaning i think oil prices will be much higher than they are now going forward. I am also a trader and a student of the markets, and more and more I see that societies excesses are going to catch up to them at the worst possible time, when we need proper market signals to move away from oil. We are going to move away from oil, and from everything else that is a luxury, if we go into a steep recession or worse (I never really understood the difference between recession and depresssion, other than medication). On the one hand oil and high quality resource depletion are very inflationary. On the other hand, the worlds largest consumer is running on fumes, borrowing against this and that, highly leveraged, etc. In my experience, when leverage unwinds, as it ALWAYS does, it infiltrates farther than one can imagine, like a typhoon. If Sam Molinaro says this is the worst credit debacle hes seen in his career, then there is a lot more pain to come. In effect, the credit markets have tightened interest rates 250 basis points plus, in less than 6 weeks - the fed has never done more than 50 in this short of time period.

If you need an example of how low near term prices can go in the face of long term scarcity, look no further than natural gas - front month slipped below $6 this week and many traders are calling for so much gas in surplus that we'll have to let it go (i.e. flare it) because storage will be full. Colorado basis gas has been $3 or lower for much of last year - yet futures starting in 2009 are making ALL TIME HIGHS this week. In normal commodity markets (like gold) people would arb this - buy the stuff now and sell forward, thus locking in a profit. But if you buy nat gas now, how can you store it until 2010? This dynamic will be central to our energy debate going forward - how the market differentiates between having enough now and not having enough in the future other than the 'hope' that something will come through.

Of course, at sub $6 gas, the smart operators, those who arent yoked to shareholder demands, will shut-in production and stop drilling, which is a built in speedbump to price declines. This happened after Amaranth blew up last year when we had $4 gas handle.

We live in interesting times. But back on point, the worst thing for long term oil production would be a steep recession now, as you say, we would likely never get back to these levels again by the time the economy reloads.

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GreyZone on August 4, 2007 - 1:46pm

And yet a recession is exactly what is staring us in the face, isn't it, Nate? Maybe Ace is not so far from the truth with his bottom up forecast that put all liquids peak last year and C&C in May, 2005.

"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone

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totoneila on August 4, 2007 - 3:48pm

Hello Nate,

Your Quote: "But if you buy nat gas now, how can you store it until 2010?"

Standard Disclaimer: I am no expert.

As mentioned before in earlier speculative posts: pass legislation to store the natgas in the chemical form of fertilizer to help support prices to signal paradigm change, and to help bridge the transition to relocalized, organic permaculture.

Recall my earlier posts on the eventual mining depletion of phosphates, and the plant nutrient essentials of the elements: NPK [nitrogen, phosphorus, and potassium]. We also need to avoid the burning of billions of trees, and the consequent habitat decimation; to not recreate a primitive potash industry again [see earlier post on New England tree-burning in early America].

http://futureopportunities.blog.com/171828/
-------------------------------------------
April 15, 2005

Brazil, China and India have all simultaneously discovered a great need for potash. Bill Doyle, chief executive of Potash Corp. of Saskatchewan, the world's largest producer of potash, told shareholders in the 2004 annual report that:

[Paragraph broken apart to emphasize--BS]
++++++++
the upside of potash [potassium source-K-an alkali metal] is even higher than the other two key nutrients in fertilizer - nitrogen [N], and phosphates [phosphorus source-P].
+++++++

Farmers have been skimping on potash, and now China needs to double its ration to catch up the U.S., while Brazil needs another 50 per cent to compete with U.S. yields of soybeans in particular.
---------------------------
EDIT: IMO, I think people are drastically underestimating the postPeak importance of water and fertilizers: Please Wiki, "War of the Pacific" to see what countries did to gain access to NPK for fertilizers and explosives before the discovery of fossil fuels, or reread my earlier post on this topic. Thxs!

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

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totoneila on August 4, 2007 - 4:34pm

Hello TODers,

If I was an expert bat-biologist: I would be going apeshit to quickly setup a North American franchise operation on renewable [biosolar mindset] batshit shelters to help support relocalized permaculture. The ERoEI of batcrap to FF-fertilizers needs to be expertly analyzed, IMO.

Have you priced guano lately? A repost below:

http://www.theoildrum.com/node/2268/158584
--------------------------------------------
Yesterday's Drumbeat had quite a subthread on organic vs FF farming. Below is a repost of a Jan. 24 posting that got no comments at that time. Could batshelters be the key to drastically raising organic yields?

Hello TODers,

In the recent natgas keythread: I posted again how we should be using natgas to stockpile fertilizer to help us bridge to relocalized permaculture. If this isn't done, I hope, at a minimum, we can go back to the future:

-----------------------------------------------------
What would the reader think, if he were asked to invest in a gold mine from which all of the ore had been taken out, and, at the end of a year, it had all replaced itself? What would he think, if he had, attached to his mercantile establishment, a warehouse in which, as fast as the goods were removed for display and sale, they would replace themselves without the expenditure on his part of one grain of energy or one cent in money!
------------------------------------------------------
EDIT: to make link below activated [Please see photos!]

http://www.soilandhealth.org/03sov/0302hsted/030212campbell/campbell%201...

I was astounded by the amount harvested. Are there any TOD biologists that care to comment? A postPeak future with very little FF-pesticide will require lots of bats to keep the bugs at bay.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

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oilmanbob on August 4, 2007 - 5:03pm

Hi Bob Shaw,
The problem with storing natural gas as fertilizer is that the ammonia plants have mostly moved overseas in search of cheap gas.
Don't worry, nobody's going to flare gas. Its illegal, as well as economicially wasteful. What the pipelines will do is pro-rate how much gas a producer can sell, forcing them to shut in wells in accordance with the shut in provisions of the leases. All oil and gas leases have shut in provisions, gas has mostly been in surplus in the US. I'm a landman, we buy oil leases, this is in my area of professional expertise.

I like the bat farm idea. However, I'll bet the neighbors would complain a lot less with a worm farm, and worm castings are high dollar. Worms are high protein and can also be used in aquaculture as fish food or sold for bait. It might make a real commercial operation for a small farmer.
Bob Ebersole

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Lanterne rouge on August 4, 2007 - 5:04pm

Does the bat poop actually work any better than bird poop?

I think the difference is the lack of nitrogen leaching caused by the critters pooping in the dry. So a barn roost for swifts etc. would work as well.

Most of the huge deposits in places like Chile were made economically exploitable by steam power in the C19th have been used up, and what remains will be small beer. I would have bat roosts anyway, but I would for resilience' sake try to spread increased fertility across as many sources as possible.

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totoneila on August 4, 2007 - 5:28pm

Hello Oilmanbob and Lantern Rouge,

Thxs for responding. Good points by both of you,thxs. Worms and composting are good, but they don't eat the flying critters, and most birds poop everywhere. Yep, keeping any natural fertilizer free from water is the secret to reduce nitrogen leaching. We need 'em all; as many species as possible from extinction to optimize the decline: worms, birds for daylight, bats for night-time; the Circle of Life.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

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WNC Observer on August 5, 2007 - 10:29am

Interesting thought. Homemade bat roosts or bat boxes look pretty easy to build. Not much more than a couple of boards with a bat-width space in between and a little roof overhead. Maybe you rout some horizontal grooves on the interior boards to give the bats something to grab on to? Here's a link for one set of plans I have found, a Google will find you more:

http://www.dnr.state.wi.us/org/land/er/publications/bats/PDFs/BatHouseDi...

I suppose one could very easily set these things up over one's compost bin so that the droppings just go directly into the compost. That would keep the droppings from accumulating, assuming you turn your compost occasionally (and will thus keep down the smell) and it would also massively increase the fertilizer value of the compost. Plus that would eliminate any extra shoveling on one's part.

There are some do's and don'ts regarding bat house management - this link has all the good info:

http://www.batmanagement.com/Batcentral/batboxes/whyfail.html

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greenish on August 4, 2007 - 5:25pm

Hmmm.... I wonder whether bags of fertilizer would be good to 'stockpile' as a personal asset? That would be something one could potentially always trade to those who wish to grow food, and yet not necessarily be something that would be pilfered by thieves. Hmmm.

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souperman2 on August 4, 2007 - 5:30pm

I would be careful stockpiling fertilizer.

google Timothy McVay

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Nate Hagens on August 4, 2007 - 5:58pm

until they get 'et or wet or greenish.

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totoneila on August 4, 2007 - 6:40pm

Hello Greenish,

Possibly consider stockpiling bird & bat guano: besides NPK, it also has the other essential minerals for enhancing plant growth and avoiding some unforseen mineral Liebig Minimum to curtail efficient photosynthesis. Might be the best way to avoid being labeled another Timothy McVay too. I am no chemist, but if kept dry: it might not degrade anywhere near as fast as FF-fertilizers. My feeble two cents from a woeful city-boy from the Asphalt Wonderland.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

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oilmanbob on August 4, 2007 - 8:47pm

Phosphate would also make a great trade item, as would potash. Or just a premixed balanced fertilizer, like 20-20-20. If I wanted to keep fertilizer, I suggest plastic bags or 5 gallon pvc buckets, the paper bags would get brittle or soggy from humidity.

There is a USDA County Agent office in most of the country. They have arial photos to scale, and will do soil analysis to determine whats the best soil amendments to your garden. They're not free, but damn sure worth the low cost-maybe $20 a sample. They will tell you if you need sulfur to correct the PH, or crushed lime, or micro nutrients. The County agent can give advice as to what varieties do well in your area, all kinds of useful help. in Galveston County they even offer low cost classes and organise plant sales for stuff like citrus or fig trees.
Bob Ebersole

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totoneila on August 5, 2007 - 1:44am

Hello Oilmanbob,

My guess is guano, because it contains a broad mixture of minerals besides NPK, would need chemical processing and inputed energy to separate the desired molecules to make explosives. In other words: it is naturally at an energy entropy level best suited for plant growth; it takes alot of work to refine into the separate chems to support warfare. In short: guano properly used minimizes violence, and optimizes the drive to relocalized permaculture.

Please read my new post at the very bottom of this Drumbeat.

Edit: Oops! use control F, then venture capital to find it. not quite at the very bottom.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

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geek7 on August 5, 2007 - 4:39pm

Fertilizer does not have a good shelf life. In general, last year's purchase is not worth spreading on your plot of ground.

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Darwinian on August 4, 2007 - 11:07am

Nate, the S&P 500 plunged 2.66% on Friday! The S&P has plunged 7.5 percent since July 19th. Falling that far in that short a time is called a plunge by most market analysts. Google "market plunges" or "stocks plunge" and you will see what I mean. (The S&P 500 is a far better indicator of what the market is really doing than the Dow.)

A 10% drop is what most analysts look for before they call it a major correction. However such a correction normally takes several months.

Yes, a major recession, if it happens, will definitely create demand destruction and a drop in oil prices. However that may be what we are seeing right now. Oil prices this high is bount to have a dramatic effect on the economy, sooner or later. That is what we are seeing right now may be the effect of two years of very high oil prices. However everything affects everything else. It is hard to tell the chicken from the egg.

Ron Patterson

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Nate Hagens on August 4, 2007 - 11:11am

True but the SP was UP about 1% for the week going into Friday.
And I totally agree with the rest of your comments. Except we will know the egg when we see it..;)

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jbunt on August 4, 2007 - 2:24pm

jbunt

Ron

You are right!! Same as 1987, when on Monday, Oct 27th, Dow was down 508 points or 22.6% in one day. Oh wait - correct that - you were referencing a one day PLUNGE of 2.66% - I missed the decimal place.

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