Wednesday, July 18, 2007

On the Eve of Crisis

Oil prices, as measured by the “front month” contract for West Texas Intermediate and Brent are within a couple U.S. $ of their politically induced high of last summer. Unfortunately, this is not “The Problem”. The Problem, more than price, will be an import crisis.

The Problem is also breaking into Wall Street’s psyche:

In a report issued today by Barclays, ``If non-OPEC supply was going to mount any kind of a surge then one might have thought the signs of the renaissance would be evident by now,'' Barclays Capital analysts Paul Horsnell and Kevin Norrish said in their report. Concern is growing ``that the weakness in non- OPEC supply is a structural rather than a transitory phenomenon.'' – Bloomberg news

I’ll bet these guys are a hoot at a party. They certainly have a gift in understatement. "structural rather than transitory"? You can say it, guys: The Problem is not temporary - it's permanent.

A more poignant observation was made by “Fireangel” (that’s his handle) from

“Americans have to get over the notion that if they stand in front of an oil well with a large enough check in their hand oil will magically appear from the well.”

During the 1970’s, America’s economy, spirit, and vision of the future were broken by an oil import crisis that PALES in comparison to the import crisis we face today. This might lack originality, but this one is not your father’s import crisis. Then, the U.S. imported less than 3 million barrels per day (“bpd”), in 1990 the U.S. imported a net 6 million bpd, and in 2006 the U.S. IMPORTED 12 MILLION BPD, or roughly 60% of our liquid petroleum needs.

Stay with me through the numbers, because the scale of the problem is insurmountable – and that’s The Problem: Scale.

The world produces nearly 85 million bpd, but most of that oil is consumed within the countries that produced it. The surplus oil, that is oil that was produced by a given country but not consumed within that country, is then exported for trade amongst the importing nations - the U.S., Europe, Japan, China, and India. This surplus/exports is roughly 36 million barrels per day (2005). The problem is that the amount of surplus oil available for export to the importing nations is a function of:

The growth or decline in production within the exporting nation; and the growth or decline of consumption within the exporting nation. A nation producing 2 million bpd, consuming 1 million and exporting 1 million with an annual 4% decline in production and a 2% increase in consumption will not be exporting oil in just over 1 decade. As a matter of fact, their exports (not total production) will decline by 10% the first year after the production decline begins (4% of 2MM = 80k; 2% of 1mm = 20k; 80K + 20K = 100k or 10% of 1mm). The United Kingdom and Mexico’s oil production is falling much faster than that. The UK went from peak production to oil importer in 6 years.

The simple fact is this: Importing nations can only import that which the exporting nations are exporting. This is going to come down on us, fast.

Back to the numbers… The U.S. imports over 12 million bpd, or 1/3 of ALL OF THE AVAILABLE EXPORTS.


1. China and India’s oil demands are growing exponentially, and
2. Exporting nations aggregate oil production is declining, and
3. Exporting nations internal oil demand is growing (they benefit from higher prices and buy more “stuff” that consumes oil)


The oil available to the U.S. to import is going to decline permanently until oil imports are no more. Further, this has been the circumstance for the past 2 years, and it is my opinion that this will be the case, with a steepening in the decline rate over time FROM NOW ON. RIGHT NOW. THIS MOMENT. AM I CLEAR?

In relation to #3 above, the exporting nations are taking in billions of U.S. $’s and are expanding their automobile fleet, home size, HVAC, and appliances usage in fantastic terms. These require energy, much of which is most likely to come from OIL. Hence, with continually declining production, and continually increasing consumption, the exporting nations will have less, and less, and less, oil to export until, finally, they have no exports available at all. Jeffrey Brown, otherwise knows as “Westexas” at has given this concept the acronym ELM, for Export Land Model. In his model, Jeff posits that within 9 years, + or – 2 years, there will be little to no oil available for export. Got that? In 2016, no more super-tankers crossing the globe to bring us our Oil fix (Hope you aren’t long tanker stocks). This doesn’t mean we have until 2015 to make adjustments or feel the impacts. Unless something changes, a crisis environment will be upon us shortly – and IMHO, you are seeing the beginning effects of this now in the price of oil.

How do we continue to grow GDP, feed ourselves, support our currency, fund Medicare and Social Security, and fund our defense budget at the time when the U.S. oil supply is 40% of what we now enjoy? It can’t be done - something has to give – but there are a great many special interests whose holy cows will need to be gored to sort this out, and we all know what that means: Whatever programs the government adopts to deal with this will be late and very inefficient, long on politics and short on competence – and they will take good care of their own.

You need to take care of yours.

To paraphrase "Fireangel":

Americans have to get over the notion that:

Food comes from the grocery store - no, food is produced with oil
Their paychecks come from their employer - no, it comes from an economy driven by oil
Their water comes from a tap in your kitchen - no, it is pumped there by, among other things, energy from oil
Their transportation comes from GM, Ford, Mercedes - no, it comes from oil. (Try driving with no fuel)
Their sanitation, police, fire protection, and other municipal services come from local government - Nope, all brought to you courtesy of oil.
Fill in the BLANK - odds are, in American society, it was brought to by cheap and abundant oil.

And in 9 years you are going to have 60% less of all of the above

Mentatt (at)

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