And things quietly appear to be getting incrementally worse
Posted by Heading Out on February 7, 2006 - 12:26am
Topic: Supply/Production
Tags: gas, manpower, rig costs, rig count, russia, turkmenistan, ukraine [list all tags]
"Everything is extremely unpredictable," former Ukrainian First Deputy Foreign Minister Olexander Chaliy said by telephone from Kiev. "This is leading to huge uncertainty. This is all very bad for Ukraine." Chaliy coordinated talks with Russia on gas issues from 1998 to 2004.It appears that this may note bode well for the current government.
"This is a big problem for Yushchenko," said Peter Bobrinsky, head of equity sales at Kiev-based investment bank Concorde Capital. "When you swim with the sharks and you start bleeding, you're in trouble."Part of the problem appears to be that the initial agreement was achievable because Ukraine gets some gas from Russia and some from Turkmenistan. At the time the Ukrainians agreed to pay a higher price for the Russian gas, but, by blending this with gas from Turkmenistan, which retained a cheaper price, the overall increase could be kept to an acceptable level. Unfortunately the Turkmenistan government would now like to be paid at the going rate also. The fact that Ukraine has also increased its take by 70 million cubic meters to cope with the cold, which the Russians must allow since otherwise their customers in Western Europe would feel the pinch again, does not make the negotiations any more friendly.
"As much as 98% of registered oil and gas deposits are now being developed," Vladimir Litvinenko, rector of St. Petersburg State Mining Institute, said. Litvinenko said a federal program should be launched for geological prospecting of deposits, with involvement from the state and the private sector.
"The state, which levies the so-called 'flat' mineral resource tax, must allocate funds for the recovery of resources, create means for the funds to be used in new areas, and determine the terms for access to new sites," he said.
Unfortunately, as we have noted before, it is not just a lack of immediately known reserves that is limiting the possibilities of future supply. An article in the Sunday Times points out that the majors are now paying for more exploration, and paying more for it.
Seismic surveys, which cost about $2m a time, are designed to detect the kind of geological structures where oil might be found, such as rock formations whose outline resembles an upturned teacup.And as for manpowerOwners of offshore drilling platforms, such as Rowan, which offers the Gorilla and Tarzan rigs, are also among the first to profit during an oil-industry upturn. The most sophisticated deep-water drilling rigs cost up to $500,000 a day to hire, compared with $150,000 two years ago. With the world fleet of such rigs numbering less than 100, demand far outstrips supply. . . . . . . The going rate for hiring a floating rig is $250,000 a day. Two years ago it was $50,000 a day
Last year, only 200 petrochemical engineers graduated from American universities compared with thousands in the industry's 1970s heyday. Britain produced 88 from three or four universities.And to give hope to those of us who are chronologically challenged, they note that pay rates are thus rising, and that the average age of the American oil worker is over 50.
Most of this information is not new to these pages, but I gave the quotes since some of the numbers have changed. It also indicates that those who expect a sudden increase in production to lower pricesmay expect to be disappointed.
I wonder if I could ship tree starts through the mail?
Me thinks some folks will be needing some soon.
I think the photo is not showing a lack of trees, but actually a glut of snow...i.e. Europe is in a deep freeze at the moment...and heating energy is use is high.
You could be right, but I doubt snow would be all the way down to southern France and Italy in March of last year.
Anyone else have a guess?
Thus, while global warming may rise average overall Earth temperatures, it could lead to colder European winters if this scenario is what's playing out.
I can't tell you how many collegues left the oil business during the oil market crash in the 80s to make orange juice for the Coca Cola Co, etc. In 1985 I worked for 3 service companies in Houston and each went broke during that same year. Nobody with any brains stayed in the business. Oil compaines paid a massive cost in loss of experience, which in my opinion, has never been recovered. In 1986 after I couldn't pay my mortgage for 6 months, I left the USA for South America, Saudi Arabia, Asia and Europe, where I find there is a much longer term view of corporate strategic needs, so they tend to hang on to experienced people rather than cut the higher cost workers at first opportunity, as does USA Corp. Now with Peak Oil coming on, I'm average age+2, and I only see a limited time to continue in this business myself. I certainly can't see much of a future for any new graduate getting into this now. Its going to be a few busy years then a quick run off a very high cliff. So, for now, I'm as busy as I want to be, I just raised my day rate, and I'm working on a deal to move to a completely unrelated industry to build what may the largest plant to be constructed of its type. I don't have a habit of looking back and I am budgeting a massive alternative energy feasibility study for the new plant. If I don't find it, it may not get built, but then again, It'll be close to Venezuela.
This is the way every noble lemming plans his life.
Stay the course.
May the LemmLord greet ye with open paws.
6 MMM3 (212 MMCFD)
Last 2 weeks;
http://www.eni.it/eniit/eni/internal.do?RID=@2xc6B|0?xoidcmWopk&catId=-1073759905&cntTypeId=1005&portalId=0&lang=en&sessionId=11083780
The Hubbert Linearization (HL) method was 93% accurate in predicting post-1985 cumulative Russian oil production (using only 1985 and earlier data to predict post-1985 production). This same method suggests that Russian oil production will be down to about one mpbd in 2020, versus about 9.5 mbpd right now.
Will there be new production put on line in lightly explored basins? Yes. But there are several problems: (1) it will take a long time to bring on new production; (2) as the above post discussed, there are critical personnel and equipment bottlenecks and (3) I seriously doubt that production from new fields will have a material effect on the impending collapse in Russian oil production.
This is why I think that a very serious Peak Oil crisis is months--not years--away.
The crash of 2006 [or it could be 2007; there is no way to know which year] when it comes will blindside most of the pundits, except for the chronic bears. Bears (people who preach gloom and doom and predict the market will go down) have a bad reputation, because most years stock markets go up. Of course, if every year you predict the market will crash down, sooner or later you will be correct.
I have no idea of what the exact scenario of the coming crash down in financial markets, nor do I know what month or even year it will come. But do you want to be afraid? Do you want to be very afraid. Sorry, that is not enough. If I am correct, a few years from now we are likely to see:
Dow Jones Industrial Average 1,000 to 1,200 range
Prime interest rate in U.S. 12% to 18%
Rate of inflation as measured by GDP deflator 15% - 25%
Why such cheer (That is a joke.) on my part? Primarily because of the huge and increasing debt load in the U.S. There is exactly one way to deal with excessive debt and avoid another great depression, and that is to have an unexpected and very large increase in the rate of inflation.
What will the future look like? Go back to the 1970s, after oil prices jumped. What did we see for the next ten years after 1973? Stagflation. What do I see for the next ten years. Stagflation much worse than the 1970s. Forget about economic growth, because with oil above $100 per barrel there will be no real economic growth. Oh, by the way, I think the odds are about five to three that the trigger factor for financial collapse will be the recognition that the housing market is kaput. Note that this issue is much more one of perceptions than reality. With financial markets, self-fulfilling prophecies come true with a vengeance.
How long did it take for Japan to recover from a collapse in real-estate prices? Fifteen years? In fact it has not yet fully recovered.
When will the U.S. and the world recover from the coming stagflation? I do not think that is the correct question. The big question is how well we will make the transition from cheap fossil fuels to other energy sources. The answer depends on political questions that are anybody's guess.
How did that ancient Chinese curse go? "May your children live in interesting times."
Rather than trying to inflate the currency, Bernanke will be under political pressure to cut interest rates, but even cutting them to zero would not be enough, as the Japanese discovered. Nominal rates can go no lower than zero, but when inflation is negative the real interest rate can still be high. A corollary of this is that cash appreciates whether or not it is held in a bank, which would give individuals who still have cash no incentive to keep in the system. The withdrawl of cash combined with copious amounts of bad debt - from the crash of the housing market among other things - may well cause bank failures, which would cause further cash withdrawls and further bank failures. Before long, the US begins to look like Argentina.
There is no way out of a deflationary depression as the huge imbalances which have built up begin to unwind. The future will look a lot more like the 1930s IMO than the 1970s, although this depression will probably be compounded by natural resource supply interruptions and extreme price volatility. Deflation puts downward pressure on all assets relative to cash, but price reductions would not lead to greater affordability as purchasing power would fall even more quickly for most.
For those burdened by debt - a large percentage of the population - interest rates would be crippling. As credit spreads between high and low risk debts widen with a flight to quality, nominal rates for high risk debt could increase dramatically, which would be in addition to the effect of negative inflation. Purchasing power under these circumstances would fall off a cliff.
We have a great deal more to be concerned about than a 3% annual decline in oil production would suggest. A financial crisis does not play out as a slow squeeze. Vicious circles of positive feedback driven by fear can pick up momentum very quickly, leaving very little time to adapt.
However, a study of 4,000 years of the history of money shows one great eternal truth: The history of money is the history of inflations. True in the time of Hammurabi, true almost always except for abnormal periods such as 1815-1913 when there were no major Eurpean wars, and also there was the gold standard and the increase in value of the English pound during most of this hundred years--a very unusual time.
Big disruptions bring big inflations.
American revolution . . . hyperinflation.
Civil war . . . hyperinflation in Confederacy, extreme inflation in the North
Note that in terms of 1900 dollars, the dollar in the year 2000 is roughly worth 4 cents.
If the choice comes to 30% unemployment or 30% inflation, which way do you think the Fed will jump.
Oh, BTW, I like your idea of dropping money from helicopters; it would be much more efficient and effective than our current income redistribution programs. Also, it would work great on reality TV . . . .
Unemployment is terrible for the unemployed. Inflation is terrible for just about everybody.
Not quite. It depends on how deep in debt you are, and whether the interest rate for your debt is fixed. Let's assume it is and do a little math.
Let be:
Inc(0) Income at t=0
FP(0) Financial Payments at t=0 (principal + interest)
PGSB(0) Price of the Goods & Services Basket you consume
PI(0-1) Price Inflation of your basket from t=0 to t=1
So PGSB(1) = PGSB(0) (1 + PI(0-1))
II(0-1) Income Inflation for you from t=0 to t=1
So Inc(1) = Inc(0) (1 + II(0-1))
Finally FP(1) = FP(0) by initial assumption
Assuming zero savings rate at t=0
Inc(0) = FP(0) + PGSB(0)
To be better off or at least break even, you want
Inc(1) >= FP(1) + PGSB(1)
Inc(0) (1 + II(0-1)) >= FP(0) + PGSB(0) (1 + PI(0-1))
Substracting Inc(0) = FP(0) + PGSB(0) from both members
Inc(0) II(0-1) >= PGSB(0) PI(0-1)
II(0-1) / PI(0-1) >= PGSB(0) / Inc(0)
Replacing above PGSB(0) = Inc(0) - FP(0)
II(0-1) / PI(0-1) >= (Inc(0) - FP(0)) / Inc(0)
II(0-1) / PI(0-1) >= 1 - (FP(0) / Inc(0))
So, if right now your financial payments take 25% of your income, and "your" CPI rises by 10% over a certain period, you break even if your income rises by 7.5% over the same period.
The relevant questions are:
What proportion of Americans are net debtors?
What's their average Financial Payments/Income ratio now?
Of course, the biggest losers are very poor people with no debt whatsoever and whose Good and Services Basket consists of the bare essentials, which are the products whose price will rise most.
The next biggest losers are net creditors, i.e. bondholders. Who are the main holders of Treasuries? Japan's and China's Central Banks. They do not vote nor will they turn to the streets.
http://www.theoildrum.com/story/2006/2/6/232626/0516#30
I see deflation as inevitable, but deflationary episodes are generally rapid downward spikes which do not necessarily last for a long time. I would argue that the Japanese bubble has taken as long as it has to deflate because it was cushioned by a thriving export market and because they had such an enormous surplus to burn through before the bad-debt situation would really have to be faced head on. I would expect the final resolution of the Japanese bubble to begin shortly as the former creditor nation has become a debtor second only to the US and its export markets are likely to dry up as the US moves into a financial crisis compounded by peak oil and gas. I would predict another round of deflation and a systemic banking crisis for Japan, but once that deflationary impluse has run its course, hyperinflation may be a real possibility there.
I can imagine something similar for the US, although probably over a shorter time frame as there is no surplus to burn through. The US has already outsourced wealth creation, and would probably not have been able to find healthy export markets in any case as so many other economies would also be impacted simultaneously. If a deflationary crisis eventually leads to the US being cut off from foreign capital and foreign resources (having lost the ability to project power at a distance effectively), and with limited capacity to produce even the necessities of life, then hyperinflation may occur here as well at some point. Stability does not necessarily return just because a deflationary phase comes to an end, although that far into the future uncertainty becomes huge. I think we are in for a rough time for several decades at least.
On the historical point, you might enjoy The Great Wave: Price Revolutions and the Rhythm of History by David Fischer. It's a meticulously drawn history of inflation over the last thousand years, but also very readable. I first read it many years ago and found it fascinating.
I see the some indications of a flat spot starting to happen right now. I'm keeping my seeing eye on the SP500 and my blind eye on Treasuries. If the FX stays the same, interest rates must go up. If interest rates stay the same, FX must go up. If neither happen, then buy gold. To me the SP seems like a reliable indicator of foreign investment appitite for equities and often indicates the general inversed direction USD:FX conversions will take. Any feelings on that?
Another possible path:
Gasoline $6 per gallon, unemployment 20%, American cities burn as the Dow Jones Industrial Average crashes down to 550 and National Guardsmen refuse to fire guns at rioters and looters.
Or if you really want to cheer up, consider possible outcomes to the 2008 Presidential election:
Hilary Clinton 30% of vote
John McCain 30% of vote
Pat Robertson on Moral Majority party, 40% of vote and wins in Electoral College
No, I do not have a crystal ball. But I own no stocks, no bonds (though I might buy some TIPs, sorry, Treasury Inflation Protected securities), and I keep the balance in my checking account below $500 in case there comes another bank holiday.
Actually this has already begun and accellarated precipitously with the appearence of GWB and his war games. But as for now they are keeping it hidden by manipulating inflation statistics (2% a year? tried to buy a house recently?) and as a consequence getting artificial economic growth. The latter and the ever widening interest rates differential will keep the foreign investments flow for some time but everyone is aware that it will not go on forever.
Houses are considered assets, and asset appreciation is not counted as inflation.
At least in Bulgaria I know for sure that housing is included in CPI, I find it strange (manipulative?) if it is not included here.
This is what I mean, has been going up pretty much in synchron with real estate prices. If you purchase real estate as an investment then I suppose it is not included in CPI; but if you are buying to live in it, it would be included, isn't it?
Obviously this is what the "owners' equivalent rent" is about. Unfortunately I'm not aware how they calculate it but if I buy a house to live in it, I'd expect it to be correspondent to the mortage I'm paying.
Sometimes reading too much takes you back.