 | DrumBeat: August 14, 2007 | The Oil Drum | The Resurgence of Risk – A Primer on the Developing Credit Crunch |  |
80 comments on Oilwatch Monthly - August 2007
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80 comments on Oilwatch Monthly - August 2007
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Interestingly, the recent drop in production is ocurring without any "above-ground" factors like a huricaine or an Iraq production decline.
The crude oil chart especially has had a number of attempts at breaking to new highs that have failed. This suggests that new projects can create temporary bumps but that it just isn't enough to increase overall production.
One thing that struck me is that the volatility in output for 2005-07 is low compared to 2002-04. To me that suggests that everyone is pumping at capacity without large increments of supply being taken out or added (compare Stuart S's analysis of Saudi output.) The bumpy plateau isn't very bumpy and one wonders whether the descent likewise will be gradual -- at least until a big field like Ain Dar waters out.
I think we will have to wait till late summer of 2008 to see how peak oil will play out. At that point potential demand should be excess of supply. Export Land seems to be running in full force and feed back loops or correlations caused by tight oil supply will begin to have more effect etc.
Right now we basically can't afford any sort of "event" hurricane etc by late next summer we should be having problems with events. Which means of course if we have a bad hurricane next year things will get interesting. On the semi-plus side the global economy should be really cooling down by then with the US in recession so we should see if this helps to slow oil consumption. In my opinion the years after 2008 will be similar to what happens in 2008. While 2007 is sort of the last year of relatively cheap oil.
I think the key will be when major shortages develop without outside events and I think summer 2008 is the earliest we could see these again with the caveat of no major events.
Whats amazing right now is we are probably one major world event away from really expensive oil even a cold winter would probably be sufficient. Its a bit strange that right now both our oil supply and monetary system are susceptible to a single calamity. Next year I think our global food supply will also be in the same boat with one bad harvest sufficient to cause a crisis.
So in 2008 we will have three key parts of our economy under threat or having problems oil money and food a hell of a trifecta.
"Its a bit strange that right now both our oil supply and monetary system are susceptible to a single calamity."
The idea that a massive credit cycle peak and Peak Oil could occur at roughly the same time is very scary. The credit cycle, no problem, we can get over it with a depression or recession, but could PO have come at a worse time?
Given the mood of the people, the denial is likely to last longer and the chances of a serious response to the problem are diminished.
You say a 2008 peak, but the chart of global liquid is not showing any upside momentum. I think we are at peak oil now. A strong month next month could change my mind, but as it looks at this moment, I think we passed it. Any significant leg down and price will react to the upside. Odds are we get a Carribean hurricaine or a cold winter that has an effect.
Just note I'm not saying a 2008 peak but it takes years after peak before the effects of decline begin to be felt. If we peaked in 2005 then 2008 is the first year when what I call post peak forces are really beginning to have effect. Once we have insufficient oil for potential demand then the condition is in place even less oil does not change the dynamics.
I think the critical factor is how much demand destruction is caused by a faltering global economy. I happen to think it will not be that much or more important lack of investment in the oil industry will drop oil supply faster than economic induced demand destruction. So if you include this effect I think that lower prices from demand destruction wont happen.
So you can see how in 2008 the factors the will influence oil prices for the next several years will be in place.
Right now we still are in effect living off our credit cards from the financial bubble so we won't know how a reasonable economy will respond until later in 2008.
"Its a bit strange that right now both our oil supply and monetary system are susceptible to a single calamity."
A global recession will cause demand to drop. Prices will drop and production will not increase. But the prices will not induce additional exploration and development.
I think eventually growing emerging markets will mop up the excess at low prices. For nations who are too deep in the credit crunch, they will see oil prices drop for a while and the prices rise as the productive nations mop up excess. The nations stuck in depression/recession will see inflation at the same time. What is a central banker to do in this situation?
I happen to doubt prices will drop that much if at all. What will drop is investment in the oil industry because of uncertainty about future prices plus OPEC will continue to pull back production especially KSA which would I'm sure be happy to have real reserve production if they have peaked.
We will see next year. But I'd be surprised if prices drop below 70 and expect them to stay in a 70-100 band between major events. The weakest post peak argument is that demand destruction will cause prices to drop. Since this means demand will drop under supply which does not make a lot of sense given a lot of pent up demand already exists for cheaper oil.
This is conventional wisdom but it assumes that a recession lowers production faster than production drops naturally. If production drops faster than consumption drops due to the recession, prices can actually increase during an economic downturn.
In short, you have limited yourself to thinking in terms of when oil was plentiful. It is less plentiful now and there may be consequences depending on if/when consumption intersects production declines.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
Not strange at all. You may think they aren't related, but in fact they are. The credit crunch is partialy caused by peak oil and wouldn't happen otherwise.
Follow me... At the root of this credit crunch are the "twin debts" of the United States (external and internal debts). Those debts were what made americans poorer, and forced them into debt. Since the government didn't want a recession, it made cheap credit available to its people, that took advantage of it. Then, after cheap credit was not enough, because there was nobody to get it, it started to undervalue risks, so even people that didn't afford credit could get it, what leads directly to now.
Now, what was the cause of the twin debts? Expensive imports and a bad government. Ok, a bad government (responsible for the internal debt) isn't a fault of peak oil, but expensive imports (responsible for the external debit) are caused exactly by expensive oil.
Does anyone know how much extra money went into buying oil over the last 4 years say vs a price of 20 dollars a barrel and how this would effect the economy. TPTB claim its had no effect but they also claim a lot of things that simply are not true. I agree I think the effects have been masked by the huge amount of liquidity thats been pumped into the system. Once this stops I think we will find that 70 dollar oil did and does have a real effect on the economy.
One aspect that makes me think its had a big effect is even with the debt boom we have seen US car makers not do that well. This tells me that in general people have not been able to afford cars unless they used home equity loans for the purchase. It seemed from the outside that US car purchases where tightly tied to the HELOC craze and not any sort of general gain in income.
On the other side since buying and selling goods simply moves money around its seems that high priced oil causes capitol to be concentrated and slows the velocity of money for daily business. So it seems that in might be a big factor in the overall concentration of wealth. Since the ME countries tend to reinvest in big companies etc we have wealth flowing from the middle class through the Middle East and back out into the hands of the banks and other wealthy people for reinvestment for a fee.
The recent concentration of wealth is obvious but I don't think people have looked at the role that expensive oil plays in the process to me it seems to be a big drive in causing concentration of wealth.
The timing of current correction is in my mind worst case.
People start believing that the lower growth in GDP will reduce oil demand. - Oilprice will fall.
OPEC will at its september meeting use this now popular theory and keep quotas unchanged.
Now they got an excuse not to raise production, if oil was 85, and stocks low, they would have to raise quotas, and as many believe would have a hard time actually producing to quota. They would have been called on their bluff.
The more times we have high oilprices, that "always fall again" the harder it will be to pursuade people to change their way of living, once the rising cost of oil "Is for real"
If there is to be a recession before PO is accepted mainstream, the cushion (in the form of wasted oil) will be gone once the news about PO is accepted.
If people realized PO today, it would be much easier to saved 5 mbpd, and we would have much more time.
In two or three years (I expect a full blown recession would give us this time before the daily lack of oil would cause attention) people are living on basics, and we are no longer at the top of the peak with steady or -1% production.
We might be on the slope down with -2% annually!
I truly hope that the market will recieve soo much liquidity that it will survive.
Adding liquidity might be as temporary a fix as wetting you pants when cold, but once PO is fully understood I don't think these exstra billions in fictious money will make any difference.
Anything that will delay PO awareness is a BAD THING as it gives us less time to react.
Rune
check my posting below, canada dropped 500,000 barrels in 5-6 months with NO warning or news.