Saturday, January 9, 2010

Rate of Change

One of the commenters mentioned Robert Rapier's excellent blog in my last post. I recommend his blog highly. Robert is a chemical engineer, with excellent math and analytical skills. I read his stuff on a regular basis.

The ongoing debate between Stuart Staniford, Jeffrey Brown, and Robert Rapier has been lively - sometimes a bit too lively for Rapier's tastes, and perhaps rightly so.

For my part, I am not a physicist, geologist, or chemist as the above mentioned are, respectively. I read their stuff, and a great many others, and then try to make sense out of it all with the help of the market's price mechanisms. I see the debate between them as one over the "rate of change", and I have been on the "slow and steady" rate of change for Oil import decline (wrong for 2009 where U.S. imports declined 11.5% and I had thought 6 to 8%) and increasing deflation (wrong for 2009). That is the problem with forecasting - you gotta be willing to admit error when the data does not support one's assertions.

So far, the rate of change projected by the doomers since 2005 or so regarding Saudi Arabia production capacity has been wrong - and the decline in Mexico's production was much worse than projected by all but the most doomer of doomers; meanwhile the U.S. surprised to the upside (although not for those who knew that Thunderhorse was coming on line).

Several years ago I made a call to the author of "Out of Gas", David Goodstein. He is a world renowned physicist and the provost at Cal Tech. Imagine my surprise when he picked up the phone and chatted amiably with me. I remember very clearly his idea of margin of error in making projections for world wide oil production - that it was best to use a decade, or even 2 decades. Most of the debate in community uses a 3 year margin of error, and I understand why - that gives one a 100 billion barrel margin of error. Goodstein obviously felt that a 300 to 600 billion barrel of error was more appropriate. Of course, folks with Dr. Goodstein's reputation are more circumspect about putting it on the line - and that is quite understandable (btw, I recommend his book VERY highly. It is no more than an afternoon's read, and very much worth the time for a any layman investor).

At first, I was convinced by Staniford's arguments - until it didn't happen. Remember my old trader's maxim - "when I am wrong, I am gone." But Stuart's assertions were primarily around production, particularly Saudi production. Jeff Brown's assertions were built around exports, and so far, those assertions have been borne out - whether by the mathematics of the "Export Land Model" or because of economics I cannot say with any authority. Which brings me to my point. "The truth will out." By the end of 2012 we will know which it is to be (well, at least I think so). This is not to say that Stuart Staniford will not eventually be proved correct, only that it did not happen on the time line projected. To be fair, every analysis of this issue is working with very incomplete data, to say the least. On the other hand, if you think like an actuary or pension fund manager, with 10 year horizons, the probability is a near certainty.

Which is why I always ask someone: "How old are you?" If you are 70+, own more bonds than equities, some gold, and go play golf! If you are 45 with kids and a family to provide for... well, its a whole different ball game than your father's experience. If you are 25! "Rejoice in thy youth!" But recognize that the rules governing your economic existence are going to be very different than mine.

It seems to me that many in the "doomer" camp at places like TheOilDrum.com were rooting for the end of the world for the sake of getting it over with, and because they HATE the current system. For me, the energy issue was always one of economics/politics - I am a capitalist, which is a dirty, dirty word with that crowd, and look to profit personally by betting on the outcome.

2009 turned out to be a year where EVERYBODY was more than a little bit wrong - some years are like that, as they said in my hometown when I was a kid: "sometimes it just bees that way". But the markets are still speaking. Inventories are still speaking. And they are at odds with each other. If you are an investor, this is no time to throw your hands up in the air and walk away.

16 comments:

Anonymous said...

what are your thoughts about shale gas? If estimates of reserves are correct we have plenty of gas and we passed the previous production peak in 2001 by a large margin.

bureaucrat said...

2009 was a confusing year because we had players in the markets that ARENT supposed to be doing what they are doing.

The only way the stock market could have a $6 trillion increase in value in the past year is with the ability to invest $600 billion (including leverage) in it, and no one had that kind of credit available except for the Federal government itself. Short term, having they (we) Feds buying stocks and bonds via the Fed and their member banks is only upside. But long term, it has to end and sometimes it ends badly. Last time I checked, having the government own private sector/businesses was called communism.

westexas said...

In regard to Stuart Staniford's "Nosedive into the Desert" posts in March, 2007 regarding the current decline in Saudi production, I posted a note to the effect that I expected to see a future rebound in production (albeit to a level well below the 2005 rate), but I was surprised at the magnitude of the apparent 2008 rebound in Saudi production (Matt Simmons has some doubts about the reported production).

In any case, this debate revolves around whether or not 2005 was the final Saudi production peak. I suspect that it probably was, but that issue is much less important than the net export numbers, and in my opinion it is extremely unlikely that Saudi Arabia will ever again exceed their 2005 annual net export rate of 9.1 mbpd (total liquids).

Greg T. Jeffers said...

Hey Jeffrey:

That's pretty much the way I see it. So far, the ELM has held. Still, the rate of change risk lies with how right or wrong Simmons et al is on SA.

Hope all is well.

bureaucrat said...

Kunstler gave your food shortgage theme some press in today's post ...

http://kunstler.com/blog/2010/01/six-months-to-live.html#more

westexas said...

I think that the following is pretty strong support for the thesis that the 2006-2008 Saudi production
decline was mostly involuntary.

I have frequently used the quote by the Saudi oil minister, in early 2004--that they were determined to support the $22-$28 OPEC oil price band, and I think that he was telling the truth (in early 2004), since they significantly increased their net oil exports in 2004 and 2005, in an attempt to bring oil prices down.

But then we have the 2006-2008 data points, when their net exports fell below their 2005 annual net export rate of 9.1 mbpd by a significant margin, as oil annual oil prices hit $100 in 2008.

If the 2010 annual oil price exceeds the 2009 annual price, and if 2010 annual Saudi production does not exceed their 2005 rate, they will have shown five years of production below their 2005 rate, as oil prices increased year over year in four of the five years.

Greg T. Jeffers said...

Jeffrey:

You will get NO argument from me... I believe you are correct, and I give it a 70/30 (.7 probability), which is as high as the "Jeffers Crystal Ball" probability meter can read...

You and I, the Mad Scientist, Stuart, and quite a few other guys that know how to work a spread sheet have been at this for a while, and all of us had monkey wrench thrown into the models by last year's near collapse of the financial system - but I don't think we need to be DEAD ON as to the date of this or that. Clearly, the market's price mechanisms during the worst recession since the 30's give great support to our argument.

bureaucrat said...

Yes, but that's the past. What about Iraq? (saying they can do 12 mbpd in 6 years), and Lord knows every oil company on the planet wants to help -- especially the Chinese. Can we leave a little optimism for those folks, since we really don't know very much about the condition of the Iraq fields or where new fields in the west might pop up. They could surprise us all. I doubt it, but it's a possibility. :)

Greg T. Jeffers said...

Bur:

If you think that accurate you should go long consumer, retail, luxury, etc... and short Oil (actually, I am not that bullish on Oil yet).

bureaucrat said...

I would never invest in consumerism as I find it a waste of resources. :) I am indeed "long" commodities, metals and of course energy. This conflicts with my belief that oil will never stay above $80 for very long as it impairs the economy so badly (and oil demand then drops and prices then drop). If the only people that can afford $10/gallon gasoline are the fleets of the dictators around the world, we ain't gonna butn much oil.

bureaucrat said...

burn

bureaucrat said...

Bye-bye to peak oil? ...

NEW YORK (CNNMoney.com) -- Iraq's ravaged oil industry is on the verge of a major reconstruction and experts now believe that by the decade's end it could rival the world's top oil producers.

But major challenges lie ahead.

Iraqis in the southern part of the country are hopeful foreign energy firms that won oil development contracts will bring the area a jobs boom.

Iraq's success depends in large part on a mosaic of international investments.

The oil ministry has awarded contracts to at least a dozen firms from around the globe to develop its oil fields and boost production in the next seven years to over 11 million barrels a day.

That's a five-fold increase, and would put it on par with top producers Russia and fellow OPEC member Saudi Arabia.

"They have the oil in the ground," said James Placke, a senior associate at Cambridge Energy Research Associates who specializes in the Middle East. "It's getting it out that's always been the problem."

Anonymous said...

B,

To bad that won't happen before Mexico depletes,or China sucks up the current excess. Or Chavos implodes Ven. Or Canada' shale is buried under the coming glaciers brought on by the next ice age,( okay I got a little carried away)Or, as Greg mentioned,possible rationing in 3-5 years. By then the Iraqi fields will be allocated to the super powers'(?) military. Go long military,short democracy.

peace

bureaucrat said...

So negative. The Jewel supermarkets and Shell stations in Chicago are filled to the brim. Go long on optimism, and short on grouchy-old-man. :)

Anonymous said...

B,

Thanks for reminding me:) Side note/question Shell gas has been using nitrogen in the gas. Is this anything that would change any usage data?

peace

bureaucrat said...

Since the composition of gasoline (like with tires) is highly regulated by the Federal government (that's why you can buy gasoline anywhere and it will work just fine in any car), all the magic additives like "nitrogen" and "invigorate" do little or nothing for your engine performance. It's just a way to create a false sense that one gaosline may be better than another.