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63 comments on Oilwatch Monthly December 2008
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63 comments on Oilwatch Monthly December 2008
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Strange thing shown by this data and charts: At the time when crude oil reached its all time high price ($147/bl), world liquids and crude+condensate also reached an all time high! Then as the price started to fall, production decreased almost in lockstep. Current world liquids production and demand are not down much but the price has fallen 65%.
I think this shows that a good part of the price rise in from early 2007 was not just supply trying to keep up with demand, but speculation pushing the price up. Prices above $80 to $100/barrel were not justified.
I doubt that the price will rise so fast again, but it will rise as new oil production is put on hold or deamed unprofitable at $40/bl, while the existing wells decline and fields deplete. I expect that demand will continue to drop keeping the price low for another 6 months, but then suppply drops even faster in 2010 as the lack of investment reduces production. I would also expect that OPEC (meant Saudi Arabia) will reduce supply early in the next year before non OPEC production falls due to non investment. KSA for a while can still control the price on the downside of production when the world is in recession. All IMO of course.
People continue to explain this the wrong way. There was not a crude oil bubble but a financial bubble - crude, copper, stocks, currencies, corn, etc. For those ONLY following the energy debate, it looked like a crude oil bubble. I'm sure farmers now say we were in a corn bubble and hedge fund managers are saying we were in a hedge fund bubble. The only way that $147 and $45 could BOTH be due to speculation, is if you broaden the term 'speculation' to include the easy credit and financial leverage of the last decade. Commodities have just hit 52 year lows. It's not just oil. It was the leverage and systemic risk in the overall system.
We do know for sure that price is not a valid measure of future scarcity. Look at natty gas prices now...
Another way of looking at it is that there wasn't a bubble in anything--there was a functioning, "growing" economy. Which is the way I see it.
I think the only way the whole shebang can be seen as a bubble is if we look at the economy as a whole as having outgrown the true source of wealth, which is energy. Everything in the economy is basically energy in another form. We "bubbled" in everything because we stopped getting more energy efficient at a time when it got too costly to produce more supply. (And I see virtually no improvement in efficiency happening now or in the immediate future.)
The fact that people still think in terms of a bubble in oil tells me that people will never understand what's going on. In fact, because many of the people talking about bubbles are at TOD, it tells me that people are incapable of understanding it. Which means that as the price of energy rises again, they're going to be screaming about bubbles again. This will lead to the political "solution" of crashing the economy again to bring down the oil price. And each time we crash the economy, we'll be taking out a bigger and bigger percentage of the population.
We've essentially decided to deal with peak oil by letting the richer part of the population continue to thrive at the expense of the poorer part.
From this point, you can pretty much map out your future based on where you are in the food chain right now. Sad.
"We've essentially decided to deal with peak oil by letting the richer part of the population continue to thrive at the expense of the poorer part."
You got it Moe.
The US used to be a net exporter of this situation but we are rapidly building our domestic version.
The problem is that no one believes it can happen to them, and if it does, well "shame on them".
It really can't be explained away so easily.
"It's an oil bubble" doesn't mean "oil and only oil"... it simply means "the current price of oil is in no way justified by the fundamentals and it will therefore likely collapse".
Of course this kind of statement was 100% correct.
Two other points:
1) It could easily have been a commodities bubble. Saying "other commodities went up too" doesn't mean oil wasn't in a bubble. Saying "XYZ.COM stock wasn't in a bubble because the NASDAQ fell overall" doesn't say much.
2) Similarly... how far does it get us to say "it wasn't an oil bubble... oil rose and collapsed due to an entirely different phenomenon that also wasn't worldwide scarcity of energy post peak?
The oil price hike of $147 in July 2008 was caused by China buying 80% of a 1 mb/d supply surge between May and July 2008. These were the most expensive Olympic games the world ever had. Most likely the last party on the Titanic.
The insiders basically knew that their markets were hedged using fraudulent practices. Knowing that they would trade commodities which had harder value. The commodities astronomical rise was not sustainable and neither is their crash. Who is going to extract oil, mine or whatever and sell it bellow the costs. This rapid decline and the ranting that goes with it will eventually backfire because once shut down, the ramping it up can be delayed for years. The Chinese are talking it down thinking they can buy all the mines and oil wells cheap but they wont be sold the stuff.
I do not see the logic in this from a pure supply-demand perspective. As demand increases, the price goes up. This makes more supply viable. When supply finally meets demand, the price will be at its peak and the production will be at its peak. That these two did in fact line up supports a supply-demand argument.
Suppose that there was a change in demand in August (Chinese and Olympics). The demand would drop and that high cost supply would be pulled back off the market.
I'm not saying that speculation or the financial bubble didn't play some role, especially in paper prices. What I am saying is that the price and production data are consistent with the thesis that supply-demand played a significant role in the price run-up. Some sort of demand data (other than paper pricing) would need to be analyzed in order to show that this was not the case.
Ultimately this is all too complex for simple models to explain, but the simple models can help to gain insight into aspects of the situation. Unfortunately, humans can't handle complexity very well and thus become heavily vested in a simple model when the reality is otherwise. This leads to endless bickering over simple models, none of which are entirely correct.
Well said.
This is true for just about everything that humans argue about.
Or is this just the case with models that look at too short a time scale and heaps of unimportant variables?
Looking longer term limits to growth style models, arent there emergent simplicities that make these price fluctuations make sense? as EROEI diminishes and limits are met shouldn't decreasing resilience in the system lead to these kind of fluctuations and instability?
We should realy have learned not to rely on short term market models like 'speculation' to understand the overall system. As we lose energy to power the system we'll also lose energy to smooth out its fluctuations, whatever form they take, whatever random time they appear.
But it does seem that people just have to keep up the futile activity of arguing about causes, and pretending that we could somehow use what we learn from the interaction to prevent future fluctuations! ('if only we had better regulations' etc etc.)
It could be wiser to spend the time disscussing the creation of resiliant systems that aren't affected...