52 comments on Have Oil Prices Bottomed Out?
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52 comments on Have Oil Prices Bottomed Out?
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If oil prices are stable and rational then so is Jim Cramer.
One of the few markets crazier than oil is North American NG. I don't blame hedge funds for all the volitility. You have a very capital intensive, very inflexible supply chain supplying a spot market with unpredictable needs and very little price elasticity. The result is chaos.
One important point here is that $40 oil is not cheap. Ten years ago it would have been viewed as really really expensive. The second important point is that if $34 turns out to be the cycle low then we have a pattern of higher highs and higher lows. The low in 2001/2002 was about $18, and the low in 1998/99 was about $10. It's a classic uptrend.
Regarding oil prices, I agree, and they rose for 9 out of 10 years, from $14 in 1998 to $100 in 2008 (annual average), and the fastest rate of increase was 2000, not 2008. The one down year was 2001, following the rapid 2000 increase. It remains to be seen what the average 2009 price will be.
I've been looking at some price and crude production numbers (EIA).
Let's use 5/05 as the index rate, 74.2 mbpd (which has been revised downward, from a higher estimate, I believe). The price of of oil (WTI spot) averaged $50 in 5/05. We have 43 months of data after 5/05. Let's go back to October, 2001--43 months after October, 2001 would put us in May, 2005.
Production & Price:
October, 2001: 67.7 mbpd & $33
May 2005: 74.2 mbpd & $50
Annual oil prices:
http://tonto.eia.doe.gov/dnav/pet/hist_chart/RWTCa.jpg
In the 43 month period ending in May, 2005, the cumulative increase between what the world would have produced at the October, 2001 rate and what we actually produced, through 5/05, is about 3.1 Gb.
In the 43 month period ending in December, 2008, the cumulative shortfall between what the world would have produced at the 5/05 rate and what we actually produced, through 12/08, was about 0.95 Gb. For 42 of the 43 months, the price of oil exceeded $50. We did see one month--July, 2008, subject to revision, generally downward--that exceeded the May, 2005 rate and we did see some voluntary reductions in production in the fourth quarter of 2008.
However, the 43 month period ending in May, 2005 showed increasing cumulative production, relative to the October, 2001 rate (in response to generally rising oil prices), while the 43 month period following May, 2005 showed declining cumulative production, relative to the May, 2005 rate (in response to generally rising oil prices).
Whats interesting is using my reverse concept i.e we have a command economy and for a long time the availability of oil was a key factor in how fast it was allowed to expand you get the same result.
As we entered the late 1990's the command economy was increasingly allowed to expand regardless of its effect on oil prices.
Rising oil prices where no longer taken in to consideration for putting breaks on the economy.
And I assure you despite the Feds claiming they don't look at food/energy prices as a guage of inflation this is exactly what they look at since this the key in determining of the economy is growing faster than its underlying resource base can be expanded.
You can work the problem both ways however viewing it as our leaders becoming less and less interested in the expansion of real inflation in commodities shows that they for whatever reason no longer felt that commodity price inflation was important or controllable.
This is compared to the previous decades where growth was far more controlled and commodity price inflation kept bounded.
Thus if you look at it from the perspective that the managers of the command economy became unconcerned with the strain on commodity prices caused by monetary practices you get a telling result.
This is why I like the way you look at this the economy was forced to grow despite this short fall in oil production.
Also this problem was widespread across a wide range of commodities across the board growth was straining the supply of practically every single commodity.
In the period October '01 to May '05 much of the increased production is from OPEC bringing spare capacity back into production. It is hard to get a handle on OPEC spare capacity because some of it is unusable for practical purposes. It would be my guess that the world capacity to produce oil hasn't increased much over the past ten years.
The stagnation in production since 5/05 is particularly disturbing in the context of a massive energy investment boom. Given the amount of activity we ought to be seeing a large increase in production capacity.
"$40 oil is not cheap" ROTFLOL, it is incredibly cheap when you think what can be accomplished for only $40. In Yurope we are paying the equivalent of $160/barrel and it's so cheap people are still buying gas guzlers.
It is so cheap that although it took millions of years to form and is finite we are going to have burnt through most of it in only 100 years and in a large extent to take trips to the mall to buy plastic crap that we don't need.
IMHO we should forget about complex cap and trade schemes that are open to abuse and will benefit traders (our good friends the banks again) instead adopt a simple tax on fossil fuels at source, say $40/barrel steadily rising. If wanted the proceeds can be returned to Joe Public in any number of ways, e.g. to provide a proper health system in the USA ??? to provide a more sustainable infrastructure, monthly lottery tickets....
Unfortunately tax based schemes are clear so are unlikely to be adopted instead of something that is obscure and does not immeditaly impact them. Remember politicians have only two goals 1 to be elected, 2 to be re-elected.
Perhaps i should just buy that Ferrari:-(
My favourite 'back of the envelope' calculation is to estimate how much oil we should use if we are to consider it a 'renewable resource'.
If you assume the world supply regenerates every 100 million years, and there are 2 trillion barrels available and 7 billion people on earth, then an equitable, renewable rate of consumption is about half a cup per person per lifetime
Of course, it might be as little as a thimbleful or as much as a pint...
RW,
I guess the point your making is it's not very much, whether a thimble or a pint. Even a barrel over our life time would would not help much.
Well, if we made something useful from it that we could reuse or recycle when we were done instead of just burning it there'd probably be quite a lot to go round.
Does anyone have a good handle on how the cost of producing oil has changed over the past decade? I'm an outsider at this game, but it makes me rather suspicious to see OPEC members constantly beating this "we need oil to be $80/barrel!!" drum considering what their own desired price band was not so very long ago.
In other words, surely the cost of production is getting more expensive, but has it really tripled or quadrupled in less than 10 years?
Re: Increasing costs....Costs have gone up a lot, partly because drilling rig companies (and others) are making a lot more money. Some years ago, drilling costs were below rig replacement costs. Drilling rigs did not earn enough to make it worthwhile building new ones. That has changed.
When OPEC complains about needing $80/bbl what they are talking about is the cost of domestic social programs rather than the cost of oil production.