<DrumBeat: March 7, 2009 The Oil Drum How $30,000 Can be More Than $300,000>

32 comments on Matt Simmons' Video on Oil and Gas Markets

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ThatsItImout on March 8, 2009 - 7:03am Permalink | Subthread | Comments top

OUR "JOB"

Listening to Matthew Simmons is always a fascinating experience for me, even when I differ with some of his conclusions I am always taken by his methodology and his willingness to speak what he sees as the unvarnished truth but still avoid most of the cultural/political/philosophical flights of fancy that many in the peak oil community (including myself) are prone to. "Twilight In The Desert" is still THE peak oil book, the bible of the cause in my view, and earns my respect. Even when I doubt some of the minor points, the big picture it provides is priceless.

The scope of Matt's presentation was broad so I will not comment on every major point here, and am not qualified to comment on some of the more technically detailed aspects of Matt's speech, so I will simply make a few points, as an informed overview would require a small book.

-First, Matthew Simmons does NOT see recent high oil prices as the cause of the recent economic catastrophe. In this I think he is absolutely correct. He is so correct to point out that much of the industrialized world has long paid a gasoline price that would reflect $300 barrel oil, and lived nicely advanced and prosperous lives (Europe comes to mind, as does developed Asia)

-Mr. Simmons seems to almost completely dismiss the power of speculators in driving up (or down?) oil prices. In this I must differ with Mr. Simmons. The hedge funds and the bringing of big banks into the energy pricing market (caused when Glass-Steagal was repealed in 1999) is a relatively recent development and created tidal waves of money which dwarfed the price moves caused by physical changes in supply and demand of the product. Matthew speaks of a trillion dollars as though it were a lot of money. Im comparison to the financial power of the combined hedge funds and gambling banks, it's pocket change.

-Mr. Simmons points out that oil prices are too cheap. I think he is absolutely correct on this point and feel vindicated. It was not so many months ago that I posted on TOD warning of the horrific possibility that oil prices could collapse, a prospect I saw as far more threatening to the economy than high oil prices. Mr. Simmons was articulate in pointing out the many ways that cheap oil may starve the energy industry, both fossil and renewable, to death. We will never know how much paper capital was wiped out from the coffers of the banks and hedge funds when the price of oil collapsed, but this surely helped accelerate an already deflationary spiral that was out of control. The damage of the oil crash may last for at least a decade and be much more damaging than the spike was (I have personal friends who have lost easily 60% of their estate when they were advised to flee to commodities funds to "protect" their wealth.)

-I have said that oil at approximately $90 per barrel was easily sustainable for the developed nations and would be high enough to spur renewable energy development. If it crossed over to $100 plus pricing, the psychological effect would only build support for alternatives, plug hybrid electric vehicles and even full electric vehicles. A price around $100 is a sane price, a price I would be happy to pay for the rest of my natural life.

-Amazingly, if what Mr. Simmons says is true, we should be looking at the greatest re-industrialization (perhaps a better word would be redesign) of the advanced economies in their history, something very close to what Alvin Toffler predicted in his book of 1980, "The Third Wave". We all knew it would have to happen. The question has always been when.

-Now the problem is timing: How long will it take for the employment and investment to begin rushing into the areas that must be redesigned? An investor can buy rail and barge companies right now at givaway prices! Alternative energy plays in batteries, super-capacitors, and solar are as cheap as dirt. No house builder of any size has tried to build and sell the efficient smaller homes we need. The most efficient aircraft ever built (the Rutan and Beech Starship) are museum pieces from the 1970's. America's broadband communication network, which could free people to enjoy entertainment, culture and education and even employment with little travel is far behind where it should be and was envisioned to be by this time only a few years ago.

-A major reform of our management, education and banking structure MUST occur. If the financial community and the management and financial schools of our elite universities are not now totally discredited, they should be. The business media with it's screaming and table banging windbag commentators and "financial advisors" should be viewed as one would view professional wrestling...sometimes entertaining simply as a show of excess, but culturally useless and probably destructive. We should have no more respect for this generation of so called managers and bankers than the Russians had for the Politburo in the final days of the Soviet Republic.

-This is of extreme importance: We should open our American eyes to the international aspect. Much of the talent pool to salvage the energy industry that Mr. Simmons says is needed will have to come from the developing and third world nations. The U.S., Japan and Europe are nations with aging populations. We could not deliver that workforce and talent pool even if we wanted to, and most young Americans, Japanese and Europeans DO NOT want to work in the energy industry.

-The OECD nations are declining as a percent of total world oil and gas usage, and as contributors to carbon emissions. It is the developing world that is increasing in world share of both consumption of fossil fuel and output of carbon emissions. It is the developing world that will need much of the new energy that can be developed. They will have to provide the workforce, technical talent and effort to help secure future energy supplies. The developed nations can contribute most by example and by setting the style for efficiency and conservation, making it "chic" to the developing world. The changes we make can have very little real effect on world consumption of fossil fuels or on climate change.

-Matt Simmons presentation points out once again the absolute inevitability of renewable, and in the end, solar energy as the path to the future. Those who support solar are easily discredited as "technobuffs" and designers of "techno-toys". But without these techno-toys, the future is too horrific to contemplate. Without correct use of the sun, our planet indeed is a "closed system", and we will be in an endless depletion chase, if not now, soon. Even if we were to find the 2, or 4, or 7 new Saudi Arabian oil replacements we would need, the carbon release issue means that we could not use them without, as some other posters here on TOD say "frying the planet". I have said before, the only thing worse than if the oil is not "out there" may be if it is "out there".

It may be the destiny of this generation of technically educated OECD citizens to lead the world into the only potentially sustainable energy future available. Those of us in the advanced nations who developed advanced technology first are a minority of the world population. Advanced solar energy may be our "job" as the rest of the world advances out of poverty and misery. It would be a noble job, if we will take it.
Thank you for your time.

Roger Conner Jr.
RC

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HoustonB on March 8, 2009 - 9:31am Permalink | Subthread | Parent | Comments top

-First, Matthew Simmons does NOT see recent high oil prices as the cause of the recent economic catastrophe. In this I think he is absolutely correct. He is so correct to point out that much of the industrialized world has long paid a gasoline price that would reflect $300 barrel oil, and lived nicely advanced and prosperous lives (Europe comes to mind, as does developed Asia)

The price paid for gasoline in the USA, Europe or UK is not relevant - whether considered in absolute or relative terms, it makes no difference. What does make a difference is the time period over which each economy arrives at its price.

The typical UK and European price is considerably higher than the price in the USA but it was arrived at over many years, people gradually adjusted their budgets to accommodate the price of gas. The timescale involved also allowed the car fleet to change to reflect the value of gasoline to each economy - hence the preponderance of small efficient vehicles in Europe.

The elasticity of peoples budgets was broken by the pace of the oil price increases when they rose close to $150 a barrel. This was more the case in the USA than in Europe because a $1 per gallon increase in the USA meant a 100% increase, but the same increment to the end user in the Europe had less impact because prices were already high.

The ability for either the USA economy or European economy to adjust to a sudden increase in price is a function of available discretionary expenditure - if people's budgets are already at breaking point, then a sudden and significant increase in price of any commodity might have been the straw that broke the back, and once broken it went into free-fall.

When the cost to fill your gas tank more than doubles in a short period of time (the USA), then it is quite possible that this could happen at a pace that is faster than most peoples ability to stop drinking a large latte every day, stop the gym membership, cancel the newspaper and other subscriptions, and so on and so forth. A lot of people probably thought they could use their credit cards as temporary buffers, maybe were late on a utility bill, then got hit by a jump in the credit card interest rate, etc. Then compound the impact by adding in the end of low introductory interest rates for sub-prime mortgage holders (probably for largely the same set of people) and you have the ingredients for the perfect storm.

Once again, I do not think the absolute or relative prices in the USA or UK etc. are relevant - it was the fast paced rate of increase combined with a low initial price in the USA.

I believe that if the USA already had prices that matched those in Europe and had a similar vehicle fleet instead of stupid SUV land yachts and monster trucks and also less urban sprawl, then the price run up caused by limited supplies would have had a smaller impact - maybe to the point that the subsequent economic crisis would have been manageable.

Instead we have Armageddon.

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bensa02 on March 8, 2009 - 10:06pm Permalink | Subthread | Parent | Comments top

This economic situation has got more to do with discretionary expenditure. The cost of energy and food increased dramatically over a short period leaving few people time to change thier circumstances. Interest payments also increased over a number of years and people moving from fixed rate deals to tracker mortgages exacerbated the issue. The poorest communities, some on 100%+ mortgages were forced to default, as their outgoings increased too quickly. I think that this was the start of the deflationary spiral we are now seeing as people lose confidence in the riskier debt. Most of the money the banks were making were from the riskier financial products. In a more global context, the increase in the money supply drawn from these products were not backed up by material assets mainly in the form of energy. The lack of growth in industry, home sales, and therefore the lack of job creation, promotion etc. was due to the higher expenditure on energy. The banks would not lend to each other because they knew that the growth in development, industrial or commercial, would not match up to the growth in the supply of credit. The growth in the supply of credit was dependant on an increase in output (increase in energy supply) that did not materialise.

To quote Colin Campbell:

May 2005:

"banks lent more than they had on deposit because the banks had confidence
that the resulting expansion of all this investment.. was sufficient collateral for todays debt... this expansion is not going to go on anymore without the cheap energy to make it happen, that means the massive amount of debt throughout the world is losing its collateral. The crisis that might emerge could come instantaniously to the bankers..."

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HoustonB on March 9, 2009 - 1:41am Permalink | Subthread | Parent | Comments top

This economic situation has got more to do with discretionary expenditure. The cost of energy and food increased dramatically over a short period leaving few people time to change thier circumstances. Interest payments also increased over a number of years and people moving from fixed rate deals to tracker mortgages exacerbated the issue. The poorest communities, some on 100%+ mortgages were forced to default, as their outgoings increased too quickly.

How does that differ in meaning from what I wrote? Is the "has" in italics some kind of tacit agreement? You appear to have largely précised my comment.

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bensa02 on March 9, 2009 - 11:37am Permalink | Subthread | Parent | Comments top

Sorry. I was in agreement - I thought i would expand on your argument. Didn't mean to detract.

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HoustonB on March 9, 2009 - 7:12pm Permalink | Subthread | Parent | Comments top

No problem. Obviously I also agree with what you have written.

It would be great if credit card banks published meaningful statistics so that it is possible to see if their was a run-up in debt that ran parallel to the run-up in oil price. This would indicate that in general people were hoping to use credit as a buffer whilst waiting for a 'return' to normal. If main-stream-media at the time was also only able to chant a mantra of "recovery and return to normal", then this would have made the case worse.

Alas, the Office of the Comptroller of the Currency, that is supposed to regulate the credit card banks and represent the interests of the people, has failed miserably since the beginning. In my dreams the credit card bank statistics would include details of the number of people subject to hikes in interest rates, actual interest charges and late fees etc.

My suspicion is that the banks, by screwing the public, effectively also screwed themselves. The claims by the USA Administration that the banks need to be protected from failure to protect the public have got it backwards - the public was already hurting long before the banks started to hurt. I say let the banks fail and crucify the banksters.

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bensa02 on March 9, 2009 - 11:08pm Permalink | Subthread | Parent | Comments top

I googled for some graphs and these caught my eye:

National Debt

Total Debt

The run up in oil price occurred around 2004. The first graph shows the upturn more effectively.

I dont think that the OCC would have had much choice regarding regulatory measures. It is interesting to note that real gdp has been falling since 2004. Less development surely means a greater need for debt. I agree though, the banks do deserve to fail. However, any government intervention, whether it helps the bankers or the public, encourages the expansion of credit. I personally think that eventually the entire financial framework will have to be reinvented. When growth becomes impossible, debt becomes meaningless.

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HoustonB on March 10, 2009 - 2:53am Permalink | Subthread | Parent | Comments top

Largely agreed, except:

I dont think that the OCC would have had much choice regarding regulatory measures.

They could be forgiven if they had actually publicly tried to do anything. For example, they could have attempted an injunction preventing credit card banks hiking interest rates to 30% on the basis of information from third parties that should have been confidential - e.g. miss a utility bill, up goes the credit card interest rate. Obviously the credit card banks probably have it in the small print of the contract that they can do this. One has to wonder though, why the utility companies might be so willing and ready to help screw their own customers and not for their own profit.

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Termoil on March 10, 2009 - 7:57pm Permalink | Subthread | Parent | Comments top

I believe that if the USA already had prices that matched those in Europe......then the price run up caused by limited supplies would have had a smaller impact - maybe to the point that the subsequent economic crisis would have been manageable.

Europe has not handled things any better than the US in this economic crisis but it has little to do with last years price spike. The current crisis is still substantially rooted in the financial system rather than any real shortage of petroleum. There is a crisis of confidence in the future but but little understanding that the source of that fear is, or should be, energy decline. The USA may "get this" earlier than Europe. In fact I think you can already see how energy is a major and persistent theme of US politics in a way that is absent from other countries. Acknowledgement of having an addiction is the first step to recovery and it seems that America is far more advanced in this thought pattern than the rest of the world. The Oil Drum itself is a microcosm of global thought that originated and continues to be dominated by Americans even though it is open to a global audience.

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thewatcher on March 8, 2009 - 11:31am Permalink | Subthread | Parent | Comments top

He is so correct to point out that much of the industrialized world has long paid a gasoline price that would reflect $300 barrel oil, and lived nicely advanced and prosperous lives (Europe comes to mind, as does developed Asia)

I think you need to be careful here. You can't simply compare pump prices to underlying oil prices and equate them in terms of strain on an economy. Don't forget higher prices in e.g. europe are reflected in higher taxes that are spent in other areas of the economy. The same pump price driven solely by higher oil prices would eliminate this extra spending.

In my opinion the best way to think about oil prices, and what is realistic or sustainable, is in terms of gdp. At $50 oil takes up around 3% global gdp and is clearly sustainable. Matt talks quite glibly about $300 or even $500pbbl but this is plainly nuts whilst supply is anywhere near (or even 10-20mbpd lower) current levels. At $500 that would be 30% of gdp. Throw in other energy prices, esp gas which tends to follow oil, and over half global gdp would be consumed on FF's! Inflation may take the prices to those levels but that's a different argument and in any case inflation is impossible to predict so better to stick to real prices and %gdp.

Based on history I would not expect real oil prices to be sustainable above around $120, or 7-8%gdp. Prices may spike above this level but not for long. Or at least not until supply has dwindled sufficiently to allow it - total %gdp being a function of both price and quantity.

TW

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efpalinos on March 8, 2009 - 12:13pm Permalink | Subthread | Parent | Comments top

Isn’t it a moot point arguing whether oil price spikes were the result of speculation or based on real facts and the realization of peak oil? Speculators gamble on possibilities and the possibilities for plenty of cheap oil are going downhill. If these these super-fund speculators can gamble so much money could that mean they have the ability to know better?

Claims of the insignificant effects of oil price spikes to some countries (mainly European) must take into account:
1. Reduced oil dependency in some sectors, for example the widespread use of public transportation and denser urban fabric.
2. The cushion effect provided by the Euro. Without the measure of stability offered by the strong Euro, several European countries would be bankrupt today.
3. Higher gas prices for Europeans, as well as higher taxes for gas guzzles, are part of a policy that’s been implemented for many years unlike, last years sudden oil spike. Europeans are better prepared for weathering oil spikes or high oil prices but that’s quite different from claiming that high oil prices won’t have any detrimental effect to the current European economies, which are after all based on the same unsustainable capitalist model.

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32 comments on Matt Simmons' Video on Oil and Gas Markets

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