Things can get weird now, fast.
I have been following the "Peak Oil' story for over 5 years. I am neither a geologist nor a petroleum reservoir engineer - but I am an investor. As such I read everything I could get my hands on on the issues of oil reserves, production, and supply. As the story unfolded, I took the "long" side, betting that oil prices would rise, initially because I never fight the tape, and later because as prices rose supply into the market place did not increase. After spending thousands of hours researching the issue I was confident that NO ONE had a perfect model for predicting future production flows, so I felt that the collective international oil markets would vote with their dollars (and yen, and euros, and rubles...).
As I write this the price of the front month contract for crude oil last traded $108.03. I gotta tell you, at $108 per barrel there is an absolutely irrepressible amount of incentive to pump every last cup/gallon/barrel of oil, not to mention to run around and collect it from engine oil recycling centers, french fry vats, and left over salad dressing. Don't believe one freaking word out of OPEC. These guys would stab each other in the back to move 1 more tanker than the other guy (Very Large Crude Carriers often hold over 2 million barrels of oil - just do the math).
This is IT. Ground Zero. The End. If these prices do not bring substantial additional supply to the market... If all the bloody money in the world can't lure more oil out of the ground, onto a tanker, and on to our shores... Then the Oil simply is not there. The guys at CERA and ASPO can keep at each other until hell (along with Chicago, Boston, Minneapolis, etc...) freezes over. The debate is over, the crisis is clear - and it is here.
Now if 3 million more barrels per day show up... false alarm.
Whatever it is, it is. And whatever it ain't, it ain't. That's technical speak for Bayesian Probability Theory...
No, the world won't come to an end tomorrow, but your life savings, the totality of your investments as measured in REAL or CONSTANT Dollars, certainly could. Think me dramatic? Perhaps I just have more grey in my beard. Anyone who can remember the economic environment of the 1970's and early 1980's clearly will likely not think me too off base.
If Oil prices keep rising, to say $150 per barrel, all else being equal The U.S. "OIL ONLY" TRADE DEFICIT WOULD BE $711 BILLION PER YEAR. The only way that is even remotely possible is if we increase NOMINAL GDP (read INFLATION), destroy the Dollar, which in turn will destroy the bond and equity markets... But there is SOME good news. If you are upside down in a home mortgage this environment might just bail you out. Of course there is the pesky problem of not enough fuel to DRIVE to that newly upside right mortgaged house...
You will know soon enough, this won't take long to sort out. The question is:
Are you just going to stand there like a deer in the headlights of an oncoming 18 wheeler? I should think "Road Kill" to be a completely unacceptable and unsatisfactory epithet.
Yours for a better world,
Mentatt (at) yahoo (d0t) com
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7 comments:
Sigh.
It doesn't work like that.
We can have an temporal upstream crunch due to lack of investments (there is a several year lag, remember).
This does not mean necessarily final _geological_ peak.
Also, we can get a temporary upstream production surge, which is not a proof of no peak oil about now or so.
Because it is possible to temporarily produce much more than is sustainable, but do so by irreversibly damaging the reservoir, ending up producing less cumulatively.
Whatever happens, it is not 100% proof either way, although it can be a fairly clear indication WHEN combined with other factors.
I thank you for your comments.
Sigh...
I will stick with my analysis of the market's role as an indicator of what is probable. No doubt that others read this differently or there would be no investor willing to take the other side of my trades!
There has been extreme incentive t increase production for well over 2years now, so the short term "over production" argueument falls short by my meassure.
I have heard the arguement for lack of upstream investment... I simply remain unconvinced. The market does not move so slow that 3years of very high prices would not have made significant reallocation.
Lastly, there IS a time element for investment and/or geological peak. During the the 3 to 5 years that it takes reallocate the world will consume 90 to 150 billion barrels. .5 x qt gives us a fudge reserve of 180 to 300 billion barrels of possible reserves. I think it unlikely, but not impossible that the industry has overlooked that much oil.
BTW, nothing is 100% dispositive in all of this, hence my link to the definition of bayesian probability. It is just far and away the most likely outcome - that is, If production fails to climb in the face of enormous price pressures.
I look forward to hearing from you again.
Best wishes,
Greg Jeffers
I think that you may be on to something with this but I think the price point for the avalanche of production will be at $140.
Now the caps have come off a lot of wells, but I do know that domestically after speaking with some of the old drillers that I know, that they have only had a chance to get to less than 40% of the older wells that did not make sense to pump at $25 a barrel.
They simply are too busy and there is not enough equipment to go around. There is about a 2 year lag with that.
Heck on our most of the wells in the Midwest, they are still bleeding off the natural gas into the air. They don't even bother to recover it.
Curious to get your take on the fact that over 85% of known reserves in the US being off limits due to federal and state regulations? Such as most of the Oil along the coasts of Florida and California.
Anderson:
Thanks for your comments...
When I use the dramatic "This is it", I am not referring to Geologic "Peak Oil". I am referring to the dramatic effect higher and higher oil prices will have on our currency and our markets.
I pay little heed to the ASPO and CERO debates. For a host of reasons, I am sure, the ASPO folks are clearly winning the debate. For me, though, this is not academic. I am not running for president nor trying to publish an academic paper... I provide for a family by managing money and trading in the financial and commodity markets for a living.
I believe that the international oil market, OPEC not withstanding, is as efficient a market as we are going to get.
Yes, there will be more corrections in the price of oil in the future. The questions are from what price and when? Will the correction be from 120 to 100, or from 109 to 85. If you can help me figure that out with any accuracy you and I will be on the cover of Fortune, WSJ, Barrons, etc...
Oil off Cal, Fla, the North Slope?
Enough to make a few, well connected guys VERY rich, and probably enough to maintain the mobility of the U.S. military, but not enough to save the U.S. $ or the financial markets or the current American way of life.
But remember, I am just using the reported data, and I am not a qualified geologist or field engineer. I am a qualified trader, and I will tell you I change my mind several times per day on the markets... and that is the inherent difference - I never INSIST that I am right, when you do that you lose money cause Mr. Market is ALWAYS right.
Interesting conversation. But there's one problem with the 'perfect markets' argument - they rely on perfect information. We don't have that, we have distorted statements of reserves for political and economic reasons which suggest extra oil will be available in the future. If they turn out to be overstated, at what point will the market get to know about it, and how much increase would it generate in the price?
The other point is not (directly)about price but about the energy equation in extracting all this spare oil. The limit to viability is the point when the energy used to extract is equal to, or greater than, the energy you get out. At that point price doesn't matter.
US production this year (2007) actually exceeded last for the first time in many years, if only by a small amount. Production is expected to jump as much as 5% by 2009. US consumption is declining. OPEC is cutting back production intentionally, and they are losing market share in the US. These things take time to evolve, but they are starting to. Meanwhile, speculators, pension funds, etc. "buy" oil on paper. There is 3 month's supply or more of paper oil. Good luck.
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