Should be a rule against using "I" five times in one paragraph.

DownSouth,

I think you're overstating my advocacy of efficient market theory. I think markets can get highly out of whack. What I do believe is that it is very difficult (if the market is relatively free) to override fundamentals for long.

Lets say speculators could drive the price of oil to $120/barrel, but there were not enough buyers for all the oil. Furthermore, lets say that the condition of "oversupply" held for weeks or months.

What I say will happen is that producers will either cut production to bring it back in line with demand, or they will lower prices enough to bring in more buyers. What will not happen is for speculators in the futures market to keep on pushing the price up to $130 and then $140 and have the producers sitting on ever-increasing oceans of oil they cannot sell. Even if they did, it would be impossible to hide the oceans of unsold oil.

Obviously, that's an oversimplification of the situation. There is not one oil market. Oil is not perfectly fungible. Information is not transmitted perfectly. However, in general I believe it to be correct. If there is too much oil for the demand, that oil will not be invisible, nor will it find its way back into the ground. There must be a reduction in production, an increase in inventories, or an increase in consumption (likely caused by a price reduction). That is more the first law of thermodynamics than it is efficient market theory.

I do believe that speculation played a role in the height of the recent oil price run up and I don't believe markets are perfectly efficient. Nevertheless, I offer another view point. Supply and demand was not the mechanism pushing prices to their highest levels. Rather, speculators, using the best information available to them correctly recognized oil is worth a lot more in future value than current value. The increasing likelihood of global recession and the speed with which financial markets collapsed surprised many very smart people. I don't know how to value oil today - recovery, recession or depression would seem to produce different outcomes.

There are different types of mines. Iron ore mines are large holes in the ground. You can walk away from one, shut it down for a year, no problem.
Other kinds of mines can be ruined by walking away from them for one week. They flood, collapse, catch fire, explode, whatever.
For iron ore mines, the way you stockpile ore is to lay off the third shift and just don't mine ore for a while. Stockpile by leaving it in the ground.

Texas today is an oil importer, y'all do not produce enough oil to meet your own demand.

I wonder when Texas went from exporter to importer and if a plot could be created of Texas ELM ?

Best Hopes,

Alan

I'm going to probably lead off with this slide--the Texas & North Sea peaks lined up with each other

Didn't that graphic previously have Texas and Saudi? ;-)

Seriously, though, have you dropped Texas as your model for Saudi?

One thing about whale oil and prices you did not have access to the whalers while they where at see on their long whale voyages. The whale oil market was thus probably experienced more price volatility then we should see today. I'd be careful translating the price volatility from a period of very constrained information to our modern society. Indeed rumor and its effects on prices seem more common place in the past than today. Not that rumors and emotion are not important today but we probably have much better data on our oil stocks then what they had in the 1880's on the whaling fleet and its catch.

I'm not saying it won't be volatile but the current move is probably caused by a number of factors that won't be present going forward. Its a fairly unique set of conditions that allowed it to come to pass. I think todays surprising moves have a lot more to do with incorrect understanding of fairly correct information not outright rumors which probably drove prices around a bit in the 1800's this distinction is in my opinion important.

Not that we won't see steep downward movements and volatility going forward but the down sides will probably not be as deep nor as prolonged.

The head fake link you replied to mentioned that world consumption fell by 13% during the last major oil shock/recession in the 1980's. We have claims the US has fallen by 8% so far this year. Given the changes in oil usage since the 1980's one would readily expect that further falls in US consumption even to 13% will be more difficult. Worldwide its not clear that the rest of the world has experienced as steep of a drop.

Assuming we did decline by 8% and that the rest of the world has probably increased slightly this year the US does not have a lot of room left for further decreases.

Lets say oil prices get back on track and start increasing again the next consolidation point we would have say 4-5% at most we can decrease without getting below the last historical min in consumption. The one after that will be exponentially harder to cause a usage decrease.

Regardless of the reason the US at least has unfortunately blown a good bit of its ability to decrease consumption early in the peak oil game. Even if its closer to a 5% annual decline or less its still a substantial decrease very early in the post peak period. Further decline in consumption in the US will not do a lot to help soften prices going forward.

Given the changes in how oil is used I think we will have a much harder time getting additional decreases. In the 1980's the unemployment rate and decline in production where fairly close numerically i.e a 13% unemployment meant a 13% decline in oil usage. This time around I'd suggest its more like 2:1 not one to one with a 10% unemployment figure needed for a 5% decline in oil usage and a 20% unemployment to get a 10% decline. If you correct our consumption for the outright shortages caused by the hurricane this is probably pretty close to what we will see this year.

20% unemployment is getting well into depression levels of unemployment. Further consumption declines beyond this get even harder as unemployment much higher than 20% probably means outright economic collapse to much lower subsistence living standards as you simply lose the ability to produce regardless of demand.

All my scenarios actually assume that well before we fall into outright unemployment and serious demand destruction we will first default on our personal debts primarly credit card loans, home loans, and car loans. This staves off the point at which the population not involved in the financial, auto or housing industry enter a depression.

Indeed if you look around our depression seems to be exactly following this scenario with consumer debt defaults leading us into this depression. And I've said a zillion times that this first round of demand destruction is primarily driven by the collapse of the housing industry which is a one time event. And additional decreases in demand right now are probably better defined as demand suppression in fact probably almost all concentrated in the regions of the country that have suffered outright shortages.

So overall going forward one would expect that the debt bubble will continue to deflate the housing construction industry is toast and for the most part these are normal folks who will take lower paying jobs to make ends meet. Thus consumption from former construction workers will not drop all that much outside of the one time exodus of illegal aliens back to their home countries. Same of course with the financial and auto industry these workers can and will take lower paying jobs pushing more native American workers into competition with illegal immigrants that stay in the country. Again overall its not a fast destruction in demand at best slow to stagnant. Massive credit destruction but thats not oil demand. Finally only when low wage jobs are no longer available and you have outright unemployment do you start getting into real demand destruction.

We have a long long way to go here and the whole time oil prices can rise much higher as for the rest of the world follows a similar path behind us. Until the credit bubble is well popped which could take several years we really don't enter a real depression.

As long as home loans exist for less than 20% down for example we are still no where near the bottom and in fact in my opinion until 50% is the norm for home and auto loans I won't call the credit bubble dead. It could take five years before we finally give up on loaning money thats not effectively fully secured. And this implies a effectively complete cessation of the use of unsecured credit card debt.

Only at this point is the economy reached the level that further declines in oil consumption have to come from either fairly major lifestyle changes or outright economic destruction.

I strongly believe that as long as credit is extended then people will use it to maintain their lifestyles and this includes oil consumption only once credit is wrung out of the system effectively completely do we finally reach the point that people can no longer easily absorb higher oil prices and we finally start seeing oil prices stagnate as attempts to increase prices in a economy thats effectively all cash and not growing simply results in some true demand destruction forcing prices back down or slowly growing. Until we reach this point overall oil prices will continue to rise and credit will continued to be destroyed as people default on long term debt and unsecured debt.

Gail I'm saying the same thing. Peak oil induced price increases end when debt is not longer extended without being fully secured. Between now and then all thats going to happen is endless defaults and devaluation of anything that takes a significant amount of debt to either purchase or peruse. And as long as this debt keeps getting extended some of the credit will make its way into paying for oil whatever the price. Thus oil prices stop increasing only when debt is removed from the system. Effectively this means only when the economy accepts that it is stagnant to declining and can no longer grow.

A perfect example of debt being converted to purchasing gasoline is the person who defaults on his mortgage then lives rent free for six months or more. This entire time he is using the cover of defaulted debt to purchase gasoline. A better example is someone running up their credit cards using them in part to finance gasoline purchases then defaulting. A whole lot of gasoline has and will be bought in the US using credit with no intention of paying back the loans. On a bigger scale you get companies exhausting their credit lines and using this money in part to pay for goods and pay employees a precentage of this debt goes into purchasing gasoline and other oil based products and energy and once its defaulted on the energy has been used and not paid for.

I wonder how much energy and esp oil is being used today via credit purchases that will be defaulted on in the near future or via cash flow thats been freed up by earlier defaults. I suspect a LOT. Until we get down to the point that only real cash customers are available for oil prices can and will increase. Once its true cash transactions then people can finally decide if they want to spend real money on oil or invest in a longer term alternative.

One of the talking heads on CNBC said paper gold is as useful as a picture of a life raft.

Joule, one of the things that shifts the demand curve around is a change in expectations. Expectations can turn on a dime--and the expectations for change in the demand for oil can be amplified far beyond what they would be if everyone were rational and perfectly informed.

xeriod, I'm pretty sure you are not reading the graph correctly.

Nothing personal, just try reading it again. If you think the two lines are meant to draw a comparison, you are misreading the graph.