2006 Data points in review

A number of data points are worth mentioning at the end of 2006. Here are some, in nor particular order:

The price of Corn rose 81% during the year, as the costs of fuel to raise corn combined with increased demand for the crop to make ethanol. (Bloomberg)

Wheat prices surged over 60% in 2006. (Bloomberg)

Gold had its best year since 2002, up 23% for the year. The U.S. keeps printing dollars, and its trading partners will match that with their own currency debasement activities in a bid to protect their export markets. (Bloomberg)

West Texas Intermediate actually fell slightly from the beginning of the year, but the average cost for 2006 was higher than 2005. (Source U.S. Department of Energy)

North American Natural Gas prices fell during 2006. An “unusually” warm winter in 2006 was mentioned.

World production of crude oil and natural gas condensates declined in 2006 from 2005 (comparing October 2004 – September 2005 with October 2005 – September 2006) despite record prices. (Source U.S. Department of Energy)

Total liquid petroleum available to the U.S. economy fell in 2005 and again in 2006 from its 2004 peak. (Source U.S. Department of Energy)

U.S. crude oil inventories as of 12/28/06 were slightly lower than the December 2005. (Source U.S. Department of Energy) Remember that in August of 2006 the financial media reported that inventories were surging. What happened?

Food prices are surging, and oil prices are firm while crude inventories are falling. Sound familiar?

The actual peak in world oil production will not be clear until several years after it happens, longer if the peak is shaped as a plateau, but the economy will “know” it far sooner. Several large projects are expected to come on line in 2007-09. Can these projects produce more than the decline rates in the existing fields? At the very least, it is going to be a close call. By the time we get the September data next December, we will have enough data to make that call. You can follow the supply data from the U.S. Department of Energy’s EIA website at:

http://www.eia.doe.gov/ipm/supply.html

For the sake of discussion:

Assume peak production of crude and lease condensates remains May 2005 (the most recent data is up to September 2006 with May 2005 the current peak), at 74,056,000 barrels of oil equivalent/day (“bpde”), and that a plateau should last 2 years, and that beginning in May 2007 the rate of decline for bpde was 2% per year. This was the approximate model of the production decline in the lower 48 U.S. Using less than perfect logarithmic function, this would translate into a decline of about 1.5 million bpde per year, or 7.5 million bpde less in 2012 than 2007- 66,500,000 bpde.

10% less crude oil and condensate will be available for the world to use in 2012 than in 2007, while the world’s population will have increased about 7.5%, and energy demand by a likewise amount. That would be a BIG problem. If the decline rate were 3, 4, or 5%... well, that would be a much BIGGER problem.

What is the probability that the May 2005 peak will hold? I do not know, but I am comfortable that it is some number greater than 0.

email me at menatt (at) yahoo (dot) com