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83 comments on Countdown to $200 oil (10) - oil at $115!!
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83 comments on Countdown to $200 oil (10) - oil at $115!!
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The blue diamonds look to me like an exponential best fit curve to the data from 2001 to 2008. The "+30% per year" is a growth rate which essentially tells you the shape/"slope" of the exponential fit. I find exponentials are easier to understand in terms of doubling time. Using the "rule of 70" (which by the way, is the natural log of 2 multiplied by 100) 70/30 = 2.3 years. So, since 2001, it looks like the oil price has doubled every 2.3 years.
Personally, I see no underlying mathematical reason why oil prices should follow an exponential trend, but it looks like they're doing just that... I'm guessing that Jerome's fit is an empirical one rather than a predictive one. I don't know if he agrees, but I don't see how the oil price can remain on a simple exponential. At some point it has to rise faster (when production starts to decline). At some point it has to tail off because there presumably comes a point when nobody can foot the bill anymore. But for the time being, it looks like exponential growth, and a rather fast one at that.
The yellow numbers/arrows seem to indicate the sizes of sudden declines in the oil price.
That's right. Of course there's no fundamental reason why it should be exponential, and no reason to think it will continue to be so. The only message is that for some seven years now this simple exponential trend has described oil price. The yellow numbers are just the sizes of past rapid drops, the message being that we got rapid drops in the past too.
So if oil is growing exponentially at the doubling rate of every 2.3 years we can expect $200 oil in spring, 2010. That would be a simplistic prognosticator--but who knows?
There's no reason to suggest the past trend will continue, but if it does, ~$200 would be hit at the end of 2010.
There are some good reasons to think that it won't continue, at least for a few years, - chiefly a global economic slowdown being lead by the USA as a result of popping property market bubbles, and the ongoing credit crisis effecting the global financial/banking sector.
Where I am (if the Spanish Govt supplied rose tinted spectacles are removed) economic growth next year will probably be 0%, plus or minus a fraction. This years growth figure has been consistently revised down as the months go by.
I agree that there "are some good reasons to think that it won't continue".
The statement that "there's no reason to suggest the past trend will continue" is however simply wrong. There are also some (maybe not so good) reasons for the global demand to grow in the coming years. Some of the reasons are
- Most economies in Europe and Asia have proved to be quite robust so far.
- Thanks to the high energy taxes on gasoline in Europe, the demand for fuel has not dropped in many countries. Where I live (Switzerland), the consumption is even increasing.
- Demand growth for oil will also come from China, India and the oil exporters.
- The Olympics will soon be over.
- Let's see where the dollar goes.
$200 a barrel might prove deadly for the US economy, but not so elsewhere.
Then again: What would a deep recession in the US mean for the global demand for oil? 1% down? 10%?
Chris
Much appreciate your chart and explanations.
You and Jerome add value.
Phil
If oil doesn't go up today, then the oil bull market is not only dead, the funeral preparations are being readied. If you want to kill your portfolio, go long on oil.
Making a guess, in the absence of shortages the price of oil can not rise faster than refineries can pay for the next shipment of crude oil. For example, an oil refinery buys 1 million barrels of crude oil for $100 / barrel and has a profit margin of 10%. The oil is refined and the products are sold for a gross amount of $110 / barrel. In the meantime the price of crude oil rises to $110 / barrel forcing the refinery to use all of his profit to purchase the next shipment of 1 million barrels of crude oil. Refinery margins were very small while the price was rising this year. This places an exponential limit on the rate at which the price of crude oil can rise when the supply is insufficient to meet demand.
A 6% increase per month will cause the price to double in a year.
That is what happened between July 2007 - July 2008.
I am not suggesting that this will continue but even a 30% increase in price every year will be very bad for the economies of the oil importing countries.
Wowza, dtbka! That was a SUPER explanation! Thank you!
I want to clarify that I'm "pretty good" in math, but never made it past trigonometry in high school. So this kind of statistical mining for numbers does not come to me as intuitively as it does for people who immerse themselves in numbers and graphs all day long. (I'm actually a writer, so I was always moreso one of those "SAT Verbal Score" wiz students rather than an "SAT Math Score" student.)
Your clarification of the blue diamonds as exponential growth gave me half the answer I needed. But the other half came to me when you explained what the yellow arrows were. So now I totally get the overall gist of the chart, and so now the full weight of just how scary that chart is has been driven home for me. You rock!
As a closing remark I want to say that whenever they posted those polls here at TOD asking where we thought the price of oil would go next, I always voted that it would DROP sharply (and yet briefly) before shooting up again even higher. Such as during the recent poll from three weeks ago when oil was at something like $142.00 a barrel, I checked off that I believed it would plummet back down to something like $127.00 before shooting back up to meet/exceed $150.00. And so if those yellow arrows in this chart are correct, then that is exactly what shall be happening at some point between now and November.