262 comments on DrumBeat: May 28, 2008
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262 comments on DrumBeat: May 28, 2008
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After the massive runup in the last two weeks there just has to be a correction. Whether it stays down depends IMO on how late that long list of 2008 megaprojects actually turn out to be.
"there just has to be a correction."
Every week's inventory number will show that zero
extra oil is coming to market regardless of the price.
How can the price drop?
Only with the dollar getting stonger.
If oil falls back to $100, beer will double in price.
Deffeyes-
"How big is the problem? Multiplying production (barrels per year) times the oil price (dollars per barrel) gives a total cost in dollars per year. It's an enormous number; tens of trillions of dollars per year. To put a scale on it, the three thin curves on the graph show the oil cost in contrast to the total world domestic product; the annual value the goods and services added up for all the world's countries. The three curves show the oil cost at one percent, two and a half percent, and five percent of the total world economic output. At $130 this morning, we are at six and a half percent.
If we see oil at $300 per barrel, we will be looking out over the smoldering ruins of the world's economy.
Oil production obviously cannot consume 100 percent of the world's income. My intuitive, uninformed guess is that it cannot go above 15 percent. If we see oil at $300 per barrel, we will be looking out over the smoldering ruins of the world's economy."
http://www.princeton.edu/hubbert/current-events.html
I agree. When Gold and Silver start bubbling up, old mines are re-opened. People take their hairloom jewelry and silverware and sell it in mass and the supply increases. When the housing bubble rocketed up, there was massive overbuilding. Now with the huge run-up in oil, there are no substitutes and declining supply. During the great whale oil price spike in the mid-1800s, at least there were alternatives.
But what's this?
I love looking at sites that are so correct in their field.
But refuse to believe in civilization ending scenarios
coming from outside their expertise:
"
Oil has gone from $55 a barrel on up to $132 a barrel. Inflation could account for about $30 of that increase. I wouldn't blame this mess on the oil companies, this has all of the ear marks of a speculative corner of the oil market by parties unknown.
The commodities markets are going to have to limit the number of contracts written and only accept liquidation orders like they did with the Hunts. It's kind of like sticking a broom handle into the spokes of a moving bicycle. It will be quick and brutal. Hold on to your SUV and your hat, another bubble is about to pop."
http://greatdepression2006.blogspot.com/
And as this very same site picks up on who really owns the markets.
Let me post this again:
"The commodities markets are going to have to limit the number of contracts written and only accept liquidation orders like they did with the Hunts."
Inflation is responsible for an increase in the price of oil or is it that the price of oil is responsible for an increase in inflation?
Yeah, well that's the question, isn't it?
In my opinion, it's the price of oil that is primarily responsible for the price inflation we're seeing, but there certainly has been a pile-up of dollars in the world over the past few years, which means it's probably both.
Or how about inflation is the result of an increase in the money supply?
As an example:
http://www.futurecasts.com/Understanding%20Inflation.html
Hi mcgo, here is a day later from denninger
"Now with the huge run-up in oil, there are no substitutes and declining supply."
the electricity that runs your computer can run your car. some can use waste vegetable oil. we can use oil most efficiently. those are some substitute.
we still have half our oil left.
"we still have half our oil left."
"Low-hanging fruit" that just bubbled out of the ground.
EROEI is exploding now.
"...the electricity that runs your computer" is taxing the grid.
Tell me why the UK's collapsed yesterday.
This was the kind of outage that happens sometimes, and appears coincidental.
Blackouts from shortages and retired equipment together with short supplies of natural gas is a pleasure that is not here as yet, but it is coming.
"it cannot go above 15 percent [of the world GDP]"
- two comments:
(1) as the rate of oil extraction decreases the same % of GDP will allow a higher price per barrel. (Of course, that's assuming the same GDP, which won't hold, so it's more complicated than that.)
(2) when the EROI decreases to 5:1, for example, then 20% of the economic activity will be in energy extraction. Etc.
Either way, the real consequence is that the economy will fundamentally change, which perhaps is what Deffeyes means by "smoldering ruins".
VTP - Of course Deffeyes means the economy is going to fundamentally change...IT'S GOING TO COLLAPSE. How in the hell can you read some quasi-cornucopian crap into a perfectly straight forward statement? He is saying that energy costs are going to destroy the world's economy.
And, as I have looked at his graph time and again, I am scared shitless because the change looks like it is going to be a cliff not some nice time-line that gives people and government years to adjust.
Todd
"...because the change looks like it is going to be a cliff..."
Yes Deffeyes' recently posted graph is beautiful in its simplicity. Clean, clear and crisp. And I share the same sentiment that you have. The message told in that one plot is very sobering.
-best,
Wolf in YVR BC
"it cannot go above 15 percent [of the world GDP]"
You're probably right. Perhaps it can spike for a bit if people reach into their capital.
The world capital markets are worth about $118 trillion dollars, and world real estate was once worth 75 trillion (ok, it's less now). World GDP is about $50 trillion. [I wondered if we could sustain a larger spike in prices by borrowing against our capital, but this doesn't seem likely].
Imagine that we produce 26 billion barrels of oil in 2013 (about 70 million per day), and that prices have reached $500/barrel. That's $13 trillion, 26% of GDP. It's hard to imagine prices going higher than that. Even borrowing against capital (selling our companies and real estate to Saudi Arabia) won't allow much more. But this is in today's dollars. It isn't too hard to imagine 20% inflation, or even 1000% inflation, in which case nominal prices go through the roof. If inflation averages 15% for 5 years, for example, we might have $1000 oil by 2013.
But I expect that even 15% of GDP going to oil will kill the economy [remember, all other forms of energy and food aren't included in this]. $250 oil is probably a real ceiling on the price.
Figures for world valuation: http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/...
the falacy is the statement that at $300 a barrel the world economy goes into decline lies in the time frame and the amount of oil being produced. It is possible, for example, that in 7 years price levels will be 50% higher than today and the amount of oil being produced will be 15% less than today. In that event, oil could be $500 per barrel and would "only" consume somewhere around 10% of global GDP.
If you keep going out in time and assume lower production each year in a post-peak-oil world when we are transitioning to an electric economy it is perfectly reasonable to see $1000 oil in, say, 10 - 15 years. We might then be using only 65% of today's oil and price levels could be double or more what they are today.
Your argument simply assumes that there is little real rise in the price of oil at all, and that most of it is a rise in nominal terms in a devalued currency.
All the analysis that is done here indicates that real shortages will mean that prices will need to be much higher in real terms to create the demand destruction needed for supply and demand to balance.
The scenario you draw would actually imply weak cost pressures on demand, so there seems no particular reason why it should be so restrained.
I have looked at the argument that if the price of oil goes to $300/barrel, the world economy stops. One serious problem I find with it is that Deffeyes uses the same World Domestic Product (WDP), the one for 2007, for all years in comparing with world oil production (WOPR) times Oil Price (OP). The WDP will increase in years ahead, so when oil is $300 a barrel, the percent of WDP that will be will probably be considerably less than 15%. Further, I would like some justification as to why the dollar value of WOPR cannot exceed 15% of WDP. His analysis does give some sense of warning, however, that perhaps in the decade ahead our lifestyles will change substantially. I would like to see this analysis cleaned up so we can see what is going to happen in the future.
I don't think it is going down. Depletion rates are often left out of the equation when discussing price. Production at Cantrell continues to crash, just like the North Sea crashed. Matt Simmons believes that the big Middle Eastern fields will very soon crash like the North Sea. When interviewed, he sounded extremely confident about this, like it was a near certainty.
My point, which I stand by, is that 20% in two weeks is not compatible with the actual 2-4%/year increase in shortfall, especially as demand destruction seems to finally be biting in the OECD.
Sure the price will be back up soon, but we'll get a few weeks before the next new record.
When one barrel of Pepsi costs significantly more than one barrel of oil, then we can talk about unjustified 'massive price runups'. In the meantime, I expect violent upsurges in price.
People are only starting to grasp the fact that oil is finite. They haven't really begun to realize that net exports will disappear (forever) within the next 20-odd years. As these things become understood, it will dawn on people that oil is currently ridiculously under-priced.
___ cents a cup.