Monday's Open Thread

In this season of annual reviews, and predictions for next year, the floor is yours . . . .
I was listening to some financial talking heads on Bloomberg this morning on the economy next year, and they were both arguing that the price of oil will come down in 2006. Certainly Exxon's chief has been arguing for $40 a barrel soon to come back again. I have read some threads here at THE OIL DRUM that support that view.

My thoughts are fourfold. 1) in the long term oil will increase in price as we hit the peak. I agree with the Danes that it will be out in 2020. With shale oil and other sources and with the Big Oil companies pouring money into drilling rigs this next year, production should see an uptick. BUT, I do not think they can get any real return on their investments for a couple of few years just with everything involved (permits, site issues, set-up, shipping, etc.). So I would conclude that in 2006-08 production should not increase too much but than some new wells, etc. will come on line which will temporarily ease rising demand over that same period.

  1. Global warming, if the world's governments get serious about it, would impact my point #1, by discouraging the use of oil based energy. But there again it would take several years to see any real impact.

  2. There are wildcards out there. If Iran is bombed for three days by Israel or USA or both over the Nuke issue, figure the Persian Gulf will be shut down for sometime. No tankers leaving those waters for weeks would smash up the Far East, and Europe economies to a degree. Iran's new President is not helping this option go away, that is for sure. If a world wide recession results from this or some other economic/terror event, and there are a lot of potential triggers out there, oil prices would plummet.

  3. the other event this past year and going on worldwide is that the world's economies absorbed the higher priced oil much much better in 2005 than in the 1970's. It still hurts the poorest of every nation the most, but petro-dollars in the Middle East mean more fancy car sales, and more buying of the latest military equipment, which keeps economies moving ahead. Places like Nigeria, Canada, and Venezuela all get a big kick in their economies and that means more stuff is bought and sold.

P.S. I do a local radio show in Central California from time to time and have a "Rush is Wrong" segment. This week it is how wrong Rush is about the "expensive" (his words, not mine) Prius! He echoed the President of GMC (boy I am glad I do not own any stock in that turkey) who last year said that hybrids were a fad.
Remember that first the world needs to increase production from new or existing wells just to stay level...due to the decline of some of the existing wells.

Then, if possible, the world needs to increase production even more for the actual increase in demand.

Rick

Great point, Has anyone here tried to model, for example, the additional demand necessary to assuage the rapid decline rates in Prudhoe Bay and the North Sea?  I would think that EIA and IEA estimates for US and UK demand growth only include expected demand growth without any regard to depletion. I know this issue has been discussed here quite a bit, so maybe someone has done this already?
Peronally, I don't expect to see oil quite that low.   I am thinking that crude won't dip very far below the $45 mark.  I expect OPEC will most likely defend crude somewhere between $50-$53 barrel.  What is the possible high water mark for crude in 2006?  Difficult to gauge really.  I think we might still have several years to  go before we start seeing ramifications of PO hit the markets.  If we don't see any natural disasters or Geo-political events of major import, then I don't think that we will see crude much higher than $65 a barrel this upcoming year.  If oil remains relatively cheap ( $45-$65 ) then perhaps there won't be enough incentive to conserve and thus no real demand destruction will occur and thus perhaps global demand will remain relatively robust.  If demand remains strong throughout 2006 then perhaps we will see some issues going forward into 2007 or 2008.  I do expect however that OPEC and Non OPEC producers will be trying to produce everything possible  and they might just be able to produce enough to satisfy demand ...  barely ... for a little while longer ....
Again, I don't think estimates of $45 are realistic, the price is set now around 60 because there is no additonaly production or refining capacity.  Predictions of dropping prices can only happen if there is steadily increasing supply, which hasn't happened since May, and Saudi Arabia has all but flat out admitted to not being able to produce more. What if along with US and UK depletion rates of 8-13 percent, Gawar, and other major saudi giants go into rapid depletion?  If that happens, I would think that Goldman Sachs' prediction of well over 100 per barrel is more realistic.  Just the fact that Goldman Sachs', which vehemently denied "Peak Oil" a year ago, is now saying that it is possible, is extremely significant. And this scenario doesn't even take into account disruptions due to geopolitical events like terrorist attacks by either Islamic fundamentalists, or US, UK, and Israeli fundamentalist.
Production will always satisfy demand - today, tomorrow, a hundred years from now, whether we are talking about black gold, yellow gold, or golden grain. Prices may vary.
Umm... this "supply = demand" thing has been botherin me for a while now. I understand that, in the technical use of the words, supply is defined as the ammount of stuff that is sold and demand is the amount of stuff bought, so doesn't this just mean that:

amount of stuff sold = amount of stuff bought?

Is there more to it? Have I got the definitions wrong?

Economists use "quantity supplied" and "quantity demanded" for the values you're equating.  In a free market, those will be equal (by definition).

When an economist uses "supply" or "demand," they're usually talking about the whole curve--the whole range of quantities that would be supplied (or demanded) at the whole range of possible prices.  Normally, those functions a graphed, and the two graph lines cross at a single point--the market clearing price--and give you the quantity supplied and the quantity demanded.

If there's a lack of a free market (such as, if there are price supports or import restrictions), you can get into a situation where you don't clear the market.  For example, if there's a price ceiling making it illegal to sell gasoline for more than $2 a gallon, but the market clearing price would be $2.50, you'll see shortages.  Contrariwise, if the market clearing price of corn was $4 a bushel, but price supports hold the price at $5 a bushel, you'll see surpluses.

All of which is a bit off the point the previous poster was making, which I read the same way you did:  in a free market, the price will move as high as necessary to prevent there from being a "shortage" of some good.  Of course, that's what most people call a shortage--when there's so little of a widely used good that the price moves so high that ordinary people can't afford to use as much as they're used to using.

I think you have to account for the different factors behind the oil price - namely (a) pure market supply and demand, (b) a fear factor that seems to be waning, (c) speculation, and then finally (d) plain old inflation. Of these, inflation seems to be the one not talked about often. Measured against the gold price, which doubled since 2001, the present oil prices look a lot less threatening. Even taking the CPI as measured by pre-Clinton formula at 6% compounded per year (see http://www.gillespieresearch.com/cgi-bin/bgn/) you can account for a big part of the present oil price increase over the last 5 years.

Talking about $100 oil in 2010 needs to be in the context of which dollars you are measuring with. In particular as a lot of us expect inflation to accelerate.

This is my feeling as well.
Agric and I talk about it some, but mostly engineers post here, so they are not all that interested in economic issues.
Inflation is out of control all over the world right now, kinda of the "hush hush", in these economic "boom times".  All that money must go somewhere and the housing bubble has hid most of it since 2001.  When people start pulling their money out of housing, they must put it somewhere, if it goes into oil.....look out.  A bad hurricane season could put the speculators at the edge of their seat.  The price of oil has much more to do with inflation than anything else, as long as the supply stays somewhat stable.
You'll be happy to know that the housing numbers for November indicated a 12% decline in new home purchases, which, in economic measurements, is completely staggering.  From some economists you can hear the murmer of bubble bust talk.  Perhaps it's now sooner and no longer later.  
Be careful drawing a conclusion from that number too quickly.  The error bars in those numbers are huge.  See this discussion at The Big Picture.  
Also Stuart,there is a recurring concept that is rarely talked about in this whole spectrum of topics.

Oilmen in particular are playing poker with all sorts of variables.And by nature they hold their cards covered to their chests!I have spent my last 33 years living in an oil field in North Texas and have to deal with them because I have oil under my HomeStead!

Have worked on triple deep hole rigs.

The old fields are still producing 75 yrs after discovery

New oil is still found in Texas

Shut in oil/gas is rarely discussed,but it is a fact that Texas is not producing near what it could if real crisis appears

Good point.

But how big is the overall impact?

With steadily decreasing US and TX production and $60 prices, you'd have a lot of convincing to do to get me to believe any really significant production increase is possible.
Well made that point Stuart. 'New house sales' are NOT 'new houses bought' nor are they even 'new houses started'. They are mostly (in these times, anyway) more like: here's a pretty picture and a piece of land, can I have some money in exchange for an option to buy the maybe house in perhaps a year's time.

There is plenty of evidence that the domestic real estate market has peaked for now, properties for sale are at the highest level since 1986. Australia and UK seem to be ahead of the US on the property market cycle. Based on their experience the slow down should be mild and manageable, but one can never be sure...

1 Bombing Iran is not likely to cut non-Iranaian output from the Persian gulf, just like bombing Iraq did not stop production during the two Iraq wars, in spite of their holding the eastern side of Hormuz. Nevertheless, Iranian output would be out for a time, and prices would no doubt spike at the loss of 203mbd. Iranian output would eventually return, both to fund food imports and to prevent their neighbors from enjoying the high prices.
2 It is often said that high oil prices might drive the world into a recession, and that the recession would than cause prices to crash. There were three recessions during the seventies, not least the one that followed the Iranian oil embargo. Oil prices climbed 9x during the period, and never declined yoy. Recessions sometimes stop prices from climbing further, but have not so far actually induced any decline at all.
      2 main predictions[one nightmare]

1 War,with Israel trying to takeing out Irans nuke capacity.
2 Peak oil becomes a mainstream topic.

   The crystal ball gets a bit cloudy at that point.The political consequence of the various scandles,and unhappiness
of the public with the administrations wiretapping will affect how the public reacts to price shocks from war in the
 middle east

  The two wild cards I see are china and russia...who both got a dog in this fight...

all bets off at that point....

March 31 2006 (est)- Working natural gas minimum trough (EIA) - 1050-Bcf
Dec 31 2006 - Year-end Henry Hub Nat'l gas Spot Price (WRTG) - $9
Dec 31 2006 - Year-end USA avg Contract Price (EIA) - $45
2006 - Annual Avg Supply (IEA) - 85.5-mbd
My prediction is this:

Expect the unexpected. I wont bother with oil price forecast -too many variables - if we have upheaval or terrorist attacks in middle east - triple digits almost overnight - if we have worldwide stock mkt sell off - then $30bbl due to demand destruction - so $30-$120 sounds reasonable - anyone 'betting' on a detailed prediction doesnt understand markets or chaos theory - the trend is your friend with market prices.

Another prediction: in North America, Peak Oil will ultimately be secondary in importance to the natural gas cliff. I have no idea how in 5 years time we will get close to the amount of gas we are pumping now. Numbers of rigs and wells have doubled in last 5 years source yet our production is down source.  Canadas new wells have tripled in last 5 years and their reserves are down 12%. source. How can we change the heating structure of everyone in the northern states (5.1 quads out of national total of 7.1 from heating are from NG)quickly? TOD showed a graph earlier that our new wells have decline rates of 30-40% annually! TOD link here

NatGas is different than oil - we cant just invade a country with excess firepower and ascertain a steady flow of energy to our shores. LNG ports need time, political and public approval, and even then are fraught with difficulty. My prediction is that nat gas in north america will our gordian knot here. Who, among 6.6 billion is Alexander?

WOW - nat gas down 86 cents in night session to $11.45 (Jan contract) from high of $15.75 last week. Dont know what the news is but Im pretty sure this is the biggest one week drop ever.

(Some traders must have read my prediction...;)

Interestingly, last weeks price drop was only in the near contracts - mid 2008 and beyond made new highs.

Thanks for the detailed info & links.I agree, heating& heating bills  via natural gas is our most most immediate energy crisis.
As I see it, there are three possible ways to handle the heating issue:

  1. Cut what we need.  Retrofitting insulation is expensive, but doable.  Raising standards in building codes is easier (and should have been done a decade ago, but our pols are idiots).  Passive-solar buildings can do with very little, and sometimes without.

  2. Make more efficient use of what we use.  Feeding gas to an engine-driven heat pump gets more BTU's from a therm of gas than just burning it in a furnace.

  3. Switch to other things.  To the user, electricity and natural gas have similar convenience.  If you expand the options to fuel delivered by truck, you can include liquid fuels (petroleum or possibly bio-oil), pellets (wood pellets or shelled corn) or cord wood.  Some of these fuels are amenable to cogeneration, so fuel burned for heat could also charge traction batteries to run vehicles.

One possibility is to go back to heating with coal.  Not the old, dirty stoves, but with syngas taken from the gasifier trains of IGCC plants.  This could be piped to the point of use (commercial or industrial customers, probably too dangerous for domestic use) and used either in furnaces or in small gas-turbine cogenerators.
Hi Fred.

The last two lines do not match with each other. You can have an insight on World Oil Demand here.

IEA predicts an overall demand growth of 1.5 MDB for 2006. At least in 2006 1Q and 4Q Demand will be over your projected production. How can that lower prices?

Moreover, from this we can easily expect demand to go beyond 88 MDB in 2007 1Q. How can such demand be matched with production?

P.S.: Freddy although you might get the feeling of being bashed all the time, I mean no hostility against you, I just divert from your opinion.

The same IEA report that u quote states that Angola and FSU will provide the increase in Production.  Also remember that 1.7-mbd went into stock building in Q2 & Q3.  This was done for strategic reasoning and unwarranted demand.  Fortunate, but that cannot continue.  Look for 2007 demand to be matched almost entirely by Iraq.
Run-away Global Warming is going to take center stage over Peak Oil in 2006.

Welcome to the Meltdown Millenium !!!

Story at:http://www.adn.com/front/story/7312139p-7223885c.html

Step Back,

Note that when you check this story out that it is saying this will all happen by 2100 - just a few years off geologically but long last all of us NOW.

The melting of the permafrost in Alaska has been news in places like the NYTimes for almost a decade now, certainly the past five years. I think you have too much faith in human nature responding to this and not what guides many who run our nation - economic reality. As it was once said, "America's business is business" and that means many decisions, often wrong in the long run, will be made strictly on economics. Thus I would argue $40 -$45 - $60 or even $100 a barrel will be what people will be worried about and not Alaska melting, at least not quite yet.

Anyway, you still have the conservative right, which has much of the power in this nation, arguing that "yes it is warming but has nothing to do with 7 billion people doing what people do." It will take more to prove this point to them and it may mean we will have to wait for them to lose power or die off.

Probably two things that hurt us the most is 1) fear of a new Ice Age predicted in the 1970's and 2) The same fear expressed back then that we were about to run out of copper, zinc, other minerals in 10- 20 years time. The fact that we were WRONG on these two items hurts our credibility today. I get that thrown in my face all the time and have to agree we screwed up on those predictions.

With the minerals we were just off by a few decades though ocean mining is coming in the future.

JG,
Saw that hopeful sign about maybe it won't happen until next century.
Then again, many a traditionally cold places on Christmas 2005 were enjoying summer weather:
Extreme Warmth in Alberta
Sunday, December 25, 2005

Extremely warm weather was reported in Alberta, Canada, on December 25th. Both Drumheller and Bow Island, Alberta reported temperatures of 61 degrees this afternoon.

The normal high today is 29 degrees for Calgary, Alberta, according to our Pro site.


from http://wwwa.accuweather.com/adcbin/public/community_blog.asp

It's Christmas,
Got Snow?

A friend called from Tahoe here in California. Normally they ski the week away. But heard it just rained and rained. My, what a 1 degree change of temeperature can mean (0 deg C versus 1 deg C). Rain in December translates into drought in August because the Sierra Mountains don't pack the moisture away as snow.

SB,
There is clearly enough data from the past decade to indicate that a warming event is occurring and I would certainly argue it is due in large part to human activity.

I think Alaska (and most every place else, though we do not fully understand some of the corrections Mother Nature may make for us) will get that much hotter much sooner.

But knowing something and seeing govts. doing adequate stuff about it are two different things.

Here in California we can not get homes to be oriented for passive solar and building more and more suburbs out there and with longer and longer distances to drive is still happening and we are supposed to be leaders at this. What about Alabama or some other red states (like Texas)?

As an aside about Tahoe, if snow melt is poor and stays that way for several more years on average, how will and what will California do if people continue to flow into the state at 6 million every decade? Desal plants? Shut down more and more agriculture (which will probably happen anyway with the population pressure?)

The warming of Alaska and the other Arctic regions should be a concern to the entire world, not just to those unfortunate few whose houses are tipped and whose roads are broken by melting soil.  

Right now, about 500 trillion grams of methane is released into the air every year.  This release results in an increase in the greenhouse effect comparable to the one from carbon dioxide.  It is estimated that over 30,000,000 trillion grams of methane are locked up as frozen hydrates in the Arctic.  If  just 0.01% of that hydrate is thawed yearly, methane release would be 3,500 Tg/year, seven times what it is now.  Methane would then probably be more signficant than carbon dioxide for climate change.

Everett,

You raise a concern voiced before that is very valid. I understand that the methane hydrates in Siberia are even more extensive and that Japan is starting to try off shore mining of it.

It has been well argued that it may be part of the reason for heat spikes in the distant past that humans can not possibly have any claim to.

The tar sands in Canada and Venezuela are often mentioned as the next source of oil after the regular oil peaks. I know companies are working on the tar sands in Canada. What about Venezuela, has anyone read about the tar sands in Venezuela being developed?
The housing bubble is bursting. Energy prices rose significantly last year. These are both precursors of recession. That's my prediction and I think it will arrive in the springtime. This may lower demand which may lower prices a bit. Otherwise, if I am wrong--and, of course, I am never wrong ;)-- I see prices for oil staying at or above the current price. The reason for that is simple--nothing else except an economic downturn will lower demand and I can't see where any significant excess supply capacity will come from. I think we've documented that here at TOD all this year.
As discussed with Stuart earlier, Real GDP looks great for 2006Q2 due to infrastructure rebuilding and content purchases in the Gulf. Watch for 4.5% to blow out your Recession call!
Ever the optimist, aren't you Freddy? You believe the IEA numbers? As you've acknowledged, they have been wrong in the past and they clearly they have a mandated agenda to support the mainstream political policies of the IECD countries.

Infrastructure rebuilding? What are you referring to? Looks to me like we're stuck with what we have now in the near term (no new LNG, refineries). If we get back to where we were, prices were still high before the hurricanes and have been rising 20%/year since 1999. "Content purchases" from the Gulf? -- I assume you mean the Persian Gulf? The Gulf of Mexico?

Wise up a bit. Don't believe what you read. Be skeptical. Follow the data like Stuart and the rest of us do. Peak oil is a theory that will be borne out by the data going forward, not some toady agency's self-serving prophecies.

But why do you (and some other TOD contributors) have such a need to cling to optimistic scenarios when there is ample evidence that the situation is at best ambiguous, if not downright threatening? This is the question you (and some others) need to ask yourselves.
Dave,

Is there no room for any opinion other than yours?

The recent exchanges between Stuart and Freddy have been among the most educational that I have read on this (or any other) site. A theory can not be kept alive without exposure to opposing points.

While I tend to agree with Stuart a bit more than Freddy, their fact and analysis-based discussion moves us all closer to the truth.

Commentors on this site has a huge tolerance for people eager for the immediate end of the capitalist/industrial society as we know it, but little for JD or Freddy who dare to challenge the gospel.

The peak oil movement needs more challenging analysis and less conspiracy theories. This is the only way to dispel the (currently fairly accurate) assertion that peak oil is in part a doomday cult.

Re: "Is there no room for any opinion other than yours?"

How did you read that into my remarks? I said
Be skeptical. Follow the data like Stuart and the rest of us do. Peak oil is a theory that will be borne out by the data going forward, not some toady agency's self-serving prophecies.
The IEA is not independent--I think you know that. I would call O&GJ an independent source. A call to "be skeptical" is a call to openmindedness, not a closed opinion. I said "will be borne out by the data". That's a call to wait & see what the 2006 numbers bring, again not a closed opinion.

I said the situation is at best ambiguous, if not downright threatening. This means that multiple outcomes are possible. Again, I did not say the case is closed. But I was also trying to make a more important point. When Yergin, IEA, ExxonMobil & the rest cling to their rosy scenarios, they are telling the people what they want to hear. Usually, they back these remarks up with talk about huge reserves numbers--trillions of bbls out there waiting for the taking. These numbers sound impressive but don't increase incremental yields from declining megafields or put new small fields into production because the economics don't justify their development. What's going to happen to Russian production this year? Mexico has tipped--how bad is that? Is the Burgan Complex going to see large decline rates? Will West Africa meet projected numbers?

My personal view of TOD is that this is a place where questioning mainstream authority is the right thing to do. Stuart's post using the IEA numbers still showed a flattening out of production in 2005. Meanwhile, US demand last month was the highest ever. Here's what Stuart actually said earlier
The EIA graph shows 1mbpd or some more spare capacity in 2006 than 2005. However, 1mbpd is significantly less than our uncertainty in the decline rate of fields in production, and I don't believe the EIA knows it much better than we do, since it shows little sign of serious study of the issue. So I don't buy that we can have any confidence in this number (I'm not saying it definitely won't be so, just that there's no way to really tell next year's spare capacity with anything like that precision).
There's nothing controversial in this. We've been discussing this all year. If the IEA can just come along and say "everything's fine", what are we supposed to do, just believe them?
Dave, if u remember the original GDP discusion that i had with Stuart debating Miles musings, i linked to a CBO post Hurricane report that forecasts that employment will be back to Pre levels by 2006Q2 and that there are six quarters of enhanced growth coming in the rebuild era.  My comments above wrt infrastructure and contents relate to the ground in Louisiana et al and household contents.  The discussion relates to Real GDP ... not oil.

And, i "cling to optimistic scenarios" 'cuz they have been the "most" right since 1991 in global short/medium and long term prediction.  It is easy to cherry pick their data and say they got this or that country wrong but in what matters most, the global supply, they are always right within their perameters and caveats.  There was no levelling in non-opec supply capability in 2005 that some are gloating about.  It was a stat based on the GOM impact.  Take that out and all was fine.  And we saw how quick gasoline exports were diverted to the usa (with IEA guidance).

As i challenged last week, when y'all have someone that u want me to add to my Scenarios that is representative of the EOTWAWKI cause, i will add their data to the graph and we'll watch how they do over the next ten years...

In my mind Colin and Rembrandt fulfill your quest.  We know Colin's record.  It's graphed at my site.  And Rembrandt Koppelaar is not predicting the dire picture that is painted by some here.