134 comments on POLL: Credit crunch, new IEA production high (but what about the net?), lower world exports? Whither Oil Prices?
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Jeffrey - I think you are spot on here. And the evidence is already there in UK equities for all to see. Banks and house builders have been hammered, energy and resource stocks have carried on up. And the market moves side ways - and down.
Euan,
As you and I know the pain from low oil prices in the past was highly concentrated, while the benefits were very diffuse. Today, it's the opposite. The benefits of higher oil prices are highly concentrated, while the pain is very widespread.
In a larger sense, I think that we are seeing is a fundamental transformation in the relative positions of producers and consumers, especially regarding food & energy, which led to my oft-repeated advice: "Cut thy spending and get thee to the non-discretionary side of the economy."
Also in a sense the credit bubble and oil prices are tightly coupled since cheap credit has allowed the economy to expand despite the flow of money into ever increasing commodity prices. I have to think that the credit bubble and commodity esp oil price increases are tightly coupled. Without the credit bubble demand would have stalled at much lower prices.
So in my opinion the credit bubble and high commodity prices are synergistic. The problem is this ends if commodities are scarce with the economy being composed primarily of non-discretionary spending and high commodity prices. Your right about that being the place to be but its also a sign that the economy is effectively stalled. I've traveled to a lot of poor countries and noted that the milk producers always make money.
I would consider oil producers to be pretty much in the same league as milk producers. They sell a product we must have no matter the cost!
The credit bubble have had a big influence on spending, and with the credit squeze hitting hard in '08 spending will surely plummet.
The average investor will not get hit by the credit squeze as much as the average spender.
When spending stops I think oil will be pretty far down the list of things not to buy.
I would mention:
No need for new clothes as my wardrobe is full
No need for a new car (although this would be wise)
My summervacation alone is more costly than my anual gasoline bill, and is easily made cheaper
No need for homeimprovements.
No need for another big TV or other gadgets.
I believe the above mentioned were the biggest winners of excess spending the past years, and the sectors to get hit the hardest in '08.
I feel very sorry for places like Thailand that gets a big part of GDP from tourism.
Almost everyone I know have been far away on holidays several times in the last 5 years (far away is minimum 6 hours flight)
Sectors to die in '08:
Tourism / Auto / Home improvements / Gadgets
But demand for gas just will not die!
On a personal note my spending on petrol is less than 4% of household income after tax, and that is with danish price of petrol around 7$/gallon. The cost of fuel is such a small part of the cost of the car and such a small part of the budget that I see several less painfull places to save.
Rune
Your forgetting that fuel costs are built into virtually everything you buy. So even if you did not own a car indirect fuel usage accounts for a good bit of your expenditure. For many articles the cost of shipping and packaging is greater than the actual item.
So you can expect pricing pressure across a broad range of products even as a slower economy is causing a downward pressure on prices. The net result is of course profit margins for most corporations will begin to fall and the weakest will cease to exist.
Not sure what you do for a living but for most of use if the consumer stops spending on gadgets which still have a fair amount of human input in their manufacture distribution and sale and a retreat to basic commodities which have far less human intervention will effect all of us. Especially as people move to preparing their own food at home.
I think focusing on direct fuel usage is missing the big picture. I barely drive at all but it does not make me comfortable. For better or worse our economy is based on consumption and in particular these days on luxury items.
Its like the housing bubble people are now realizing that it hurts everyone not just the people who where directly involved.
Well, everybody can't do that at the same time. Ok, tourism is an axception here.
If everybody cuts discretionary spending to buy fuel and fuel production drops, it's price will just rise until somebody can't afford it.
A net exporter reminder. Our middle case shows that the remaining post-2005 net exports from the top five net exporters will be on the order of 100 Gb of total liquids, versus 2005 net exports of about 8 Gb. Net export decline rates tend to accelerate with time, and I expect that the 2007 top five net export decline rate will be sharper than the 2006 net export decline rate.
IMO, this is the key difference between the early stages of this recession/depression and prior events. One of the benefits of a recession is lower prices across the board. Who knows where oil prices are headed, but in relative terms--especially given the export situations--I think that they will be extremely high.
Jeffrey,
if you don't have time to finish off the entire article on the ELM how about posting a simple table of net oil exports for your middle case for the next 10-15 years?
In addition I was wondering if you had any thoughts on what might happen as these exporters begin to realize their upcoming negative predicament -and that it is closer than they think- as there is a 'rolling cascade' of countries going from Exporters to Importers. Personally I would expect a frantic investment in substitutes: solar thermal arrays, the nuclear option, in-country downstream oil product production and yes even taxes and allowing some demand destruction to bite... I.e. as awareness grows consumption declines somewhat.
Nick.
Our middle case shows a 50% net export decline by the top five by 2015. Or, our middle case shows that it would take 100% of the total 2015 net exports from Saudi Arabia, Russia, Norway, Iran and the UAE to meet current US net imports.
The EIA data show a -3.3%/year top five net export decline rate for 2006. Based on year to date data and assuming the same rate of increase in consumption in 2007 as 2006, I estimate that the 2007 top five net export decline rate will be about -5%/year, in other words an accelerating net export decline rate, which is what our model and recent case histories show.
Some analysts and the media are gradually beginning to catch on to the ELM, but they are primarily focused on the consumption side, without paying attention to the possibility of lower production combined with increasing consumption, which results in the accelerating net export decline rate.
Shouldn't be using UAE there. Kuwait is the 5th largest exporter. Shouldn't effect the numbers much. Doesn't matter. 5 through 8 are virtually identical with their production and exports controlled by how messed up and corrupt their leaders are at any given time. The split between 1st and 2nd rate exporters comes after Angola.
http://www.eia.doe.gov/emeu/cabs/topworldtables1_2.htm
If I understand you correctly a 50% decline by 2015 would be an absolute disaster... no?
I'm trying to get my head round this as I don't know what % of the total production amount (85 mbpd?) will see this 50% deduction. As an example if we produce 85mbpd and -say- 55mpd of that is 'Net exports' you are saying by 2015 we would be down to 27.5mbd of Net or the equivalent of NOW producing (85-55) + 27.5 = 57.5mbpd
I would guess at this NET decline rate that things are going to be looking pretty grim in just 2 or 3 years no? (I mean 50% decline is 7%+ a year, although I think you said it accelates over time. Whats your extimated decline %for 2007, 8, 9 and 10?)
Nick.
Total world net oil exports (total liquids) were around 47 mbpd in 2005, and the top five accounted for about half of that, about 23.6 mbpd in 2005.
I estimate that the top five 2007 number will be around 21.6 mbpd, which would be an accelerating decline rate (-3.3%/year for 2006, estimated at -5%/year for 2007), which is what our model and recent case histories suggest.
We are forecasting that this slide in net exports by the top five (and by many smaller exporters too) will continue, and our middle case is that the current top five will be down to about 12 mbpd by 2015.
Net exports is falling both as a result of falling production as well as rising consumption.
If a country produces 100 oil and consumes 80, a 10% increase in consumption will lead to a drop in export of 40% with constant production.
If production falls 10% in the same period exports will have fallen 90%.
The bad news is that in the oilproducing countries people dont have to pay full price which reduces the demand destruction in these countries.
In the ongoing auction for oil we must remember that a large part of the oil is not sold at full price.
Personally I just hope that the danish government will lower the tax on oil with rising prices.
When oil sells for 150$ they could easily lower the tax on petrol to make end users price paid pretty much the same and still get the same revenue.
I guess I am dreaming, but it would be a nice way to protect end users.
If they just decide that petrol should cost 10 DKK/litre this january and rise 1% each month they would be well of.
Rune
Household energy conservation will help the home improvements industry to some extent.
People might decide to vacation closer to home rather than just skip vacations altogether; this would be positive for US domestic tourism.
The one exception in your gadgets categories is television sets - the switch to all-digital in 2009 will force a lot of replacements.
Jeff,
I'm feeling mixed on this. If something's going to go up in price and I'm going to need it eventually then I'm thinking I ought to buy it now.
Also, I'm wondering how to avoid losing money to inflation? I'm very open to suggestion on that point. Got any ideas?
One practical thing I just ordered: A sleeping bag so I can put the lower body into it and sit and work in a cold (40s Fahrenheit) room.
I'm also shifting my cooking toward using more raw materials and less prepared stuff.
*Also, I'm wondering how to avoid losing money to inflation? I'm very open to suggestion on that point. Got any ideas?
Hello FuturePundit,
Here are some suggestions from financial analyst and author Peter Warburton. This is found in an article titled *The debasement of world currency: it is inflation,
but not as we know it.*
I highly recommend his book Debt and Delusion.
The full article may be found at www.gold-eagle.com/gold_digest_01/warburton041801.html
****
Beneath the surface, the values of the dollar, the yen and the euro have been eroded simultaneously by the over-extension of credit. The latent losses in the credit system, emanating from non-performing loans and defaulting bonds, represent a charge against the value of the currency, as surely as if the edges of the notes and coins had been trimmed away. There has been a reduction in the quality of credit rather than an increase in the quantity of money (net of write-offs). The search is on for a valid yardstick, a measure of monetary value that has not been (and cannot be) distorted by central banks’ firefighting and wrecking tactics.
The search is on for the perfect hedge
What would be the ideal characteristics of such a numéraire? First, it would be in fixed physical supply. Second, it would be resistant to weather-related influences. Third, its ownership would be diffuse, rendering futile any attempt to restrict supply through a non-competitive structure. Fourth, it must be freely tradable. Fifth, there would be no futures or options markets attached to it.
Finally, I list some of the candidates, in no particular order. Each seems promising, yet none of them seems to me to satisfy fully all five of the requirements above.
1. Arable land with a dependable climate
2. Oil refining capacity
3. Electricity generating capacity
4. Water treatment capacity
5. Drinking water, bottled or piped
6. Coastal access, harbours and ports
7. Palladium/platinum/diamonds
8. Real estate in long-standing, distinctive locations
9. Antiques, fine art, stamps and coins
10. Commodities without futures and options markets
"there would be no futures or options markets attached to it".
interesting. but the search for the perfect hedge has always been on. some describe it as a search for liquidity. who knows its origins? tulipmania? does mankind really know how to acheive this successfully without these markets? OK. I see your point.
Cold room 'livin....
1) Cover your head
2) if you do not need fine fingerwork - there are these great new gloves with 'heat pipes' - takes heat from your arms and moves 'em to your fingers.
3) See #2? If you keep the 'core' body as covered as you can, that means your toes and fingers will stay warmer.
4) The less you eat, the colder you will feel....starvation protocol for the body.
All I know for sure is what I am doing--working very hard on finding "leftover" oil fields in the Lower 48.
It might not be a bad idea to invest in the equipment and materials needed for small scale permaculture gardening, with a plan to learn how to do it and to then teach others--basically a plan to set up a small business of showing others how to become closer to net food producers.
In other words, strive toward being a net energy and/or net food producer.