Tuesday, December 7, 2010

Oil Continues Melt-Up - needle's in the red-zone

Oil is now $91 for February Delivery (in reality, that means late January).

We appear to be crossing that strange boundry where monetary stimulus drives Oil prices to the point where they tank the economy... or maybe its just a coincidence and this is what Peak Oil Imports looks like either way.

The American political response?  Extend and pretend.  Extend those benefits, and pretend that the Oil is is not wracking the American economy (along with credit issues and a population insidiously addicted to social programs that will absolutely, positively not be there as expected). Pretend that things will get back to "normal" and we will all live happily ever after in our mortgaged McMansion, with our Borderline Personality/silicon-enhanced-trophy-liability keeping us company in our champagne filled hot tube.  Yep, and "you are not getting older, you are getting better..." (I fantasize of pushing the Ad exec that came up with that one down an elevator shaft in a tall building along Madison Avenue... just kidding... sort of.  One of my Boca friends told me that 50 is the new 30!  Holy smackers! The human capacity for denial is hyperventilating!  He's in great shape... but hair implants, botox, and silicon ain't youth... but who am I to burst his bubble...).

The liquid petroleum system is now priced for perfection - nothing - no wars, attacks, hurricanes, earthquakes, "watered-outs", or, MOST WORRISOME, an exporter coming to its senses... can happen, or Oil is $200 per barrel, and overall supplies to the U.S. economy have dropped by 5mm barrels per day.

In my opinion, one of the above mentioned issues is a "when", not an "if".

As always, we will be looking for someone to blame.  Remember in 2004, when the media and the political establishment were blaming the high price of oil on "speculators"?  Thankfully, no innocent investors or traders went to prison as a sacrifice to the mob (so far).  The problem was Peak Oil, not those "speculators", and our government knew it (remember the "Hirsch Report"? Well that was commissioned in 2004, and must have been in the works somewhat earlier).  Still, many a "speculator" feared for his life.  Welcome to 21st Century Rome.

Still, this run-up might be just another run thru.  Deflation has been beaten back... but is it beaten? Stay tuned.

23 comments:

bureaucrat said...

I haven't read what you wrote in the last set of responses to my response, but I'm sticking to my guns .. there is no shortage (yet) of oil or gasoline in the U.S., per the EIA graphs (if you believe them). (gasoline) demand is back on its historical track. Oil stocks/in storage are still historically overflowing. Gas stations are all open. Prices are rising because of speculaiton. It is indeed SPECULATION running up the price of oil, but it will come crashing back eventually when it starts running up against a collapsing economic picture partly due to high oil prices (and U.S. 360% debt to GDP too).

It isn't a crime or a bad thing to be a speculator. I'm a speculator. You're a speculator. In the old days, we were called "investors." And investments go up AND down, and the trick is to predict which way when.

I believe in peak oil. So, for the long term, I'm in DBE. Short-term, with the economy teetering today, we have plenty of oil to burn. If the economy goes on to a 20-year malaise (like 1966-1982), it is possible peak oil will never come. Demand would always be less than supply.

bureaucrat said...

And since the China thing and the India thing are both running out of gas (partly due to mass corruption), that oil/gasoline demand could falter as well. Tress don't grow to the sky, I think you mentioned. :)

Bill said...

Bur,

I know what you are saying but with a finite resource demand cannot always be less than supply unless demand goes to zero. Eventually you would use up the resource with any amount of demand.

bureaucrat said...

These are BIG industries and BIG amounts we are dealing with -- 31 BILLION barrels in just ONE year. :) Demand can drop slowly, just barely ahead of a dropping supply, and have an impact. But your point is taken.

Anonymous said...

Bur,

Get the picture of enraged motorists whacking the crap out of each other at the gas pumps out of your head. That is NOT peak oil. Peak oil is the dwindling supply driving up the price over time until few can afford it.

PEAK OIL IS THE ECONOMIC CATASTROPHE!!

Why do you shrug off the economic catastrophe as no big deal?

If there is a free market for oil, there will ALWAYS be some at the pump. It will be to expensive for 95% of us to buy. All the nasty things the Greg talks about will have come to pass. There will still be gas at the pumps. The economy will have collapsed and we'll all be poor. That's peak oil.

Regards,

Coal Guy

Greg T. Jeffers said...

Coal Guy:

That's Peak Oil.

bureaucrat said...

People buy oilproducts/gasoline/diesel to improve their lives and to make the economy run. When the price goes up too much, people stop buying, so demand goes down, then oil prices go down (2008). There isn't going to be a catastrophe in the near term. This is basic supply and demand. Prices will NOT go to the moon because no one will pay that price. Everyone in the oil complex (from the drillers to the service stations) have to sell at least SOME oil to pay their fixed costs. They can't accomplish that at $20 a gallon.

Indeed, peak oil means the peaking of oil production, and we all can read the graph that says clearly worldwide oil production has peaked (if nothing else changes), and has been on a plateau for 6 years. There is still lots of oil out there. But since this has already been agreed to, the question becomes: what happens next?

You predict a "catastrophe," I guessing resembling a "Mad Max" ultraviolent world with no government at all.

And some of us optimists still hold out for hope in the areas of: ending the huge wastes of oil and energy, alternative fuels (electricity, ethanol) taking up some of the slack, Iraq pumping some more, people getting around in other ways, travel less, etc.)

Bottom line is: prices CANNOT go to the moon for long because the economy won't let it. The answer to high prices IS high prices. As for the ultraviolent stuff ... eh, maybe. :)

Anonymous said...

Bur,

I'm not expecting Mad Max, and I'm also not expecting people whacking the crap out of each other with farm implements at the pump. But, at what point does recession become depression become collapse? We're at close to 20% unemployment now? What about 40%, or 60%? This does not fall equally across the population. We don't all take 50% pay cuts. Some lose their jobs, some don't. Some will lose their pensions. Some have children to help them, some don't. There will be a lot of destitute people out there, and Uncle Sugar will not have the resources to support them in the manner to which they have become accustomed. The federal budget is 50% underfunded now. What happens at 40% unemployment?

And don't go on about the tax the rich stuff. Yep, the rich have taken most of what the middle class had, and the poor to boot. However, they have really pissed in the punch bowl. Their investments have worth based on the underlying economy. Guess what they did to themselves with the credit bubble and outsourcing? Ha!

The Fed and Congress are printing money and running up debt as fast as they can just to keep things even, and by that I mean preserving the dollar value of the equities and bonds that the rich hold. That is a losing battle. Sick babies run at both ends. They can only prop up investment instruments long term at the expense of ruining the value of the dollar. Bondholders can take a haircut, or be paid back in cheap dollars. Either way, they lose. Expect TPTB to pursue the course of maximum long term damage.

Regards,

Coal Guy

Bill said...

Greg,

So what do we do to get ready if you are right? I still think you should do some articles on that.

PioneerPreppy said...

Oil prices have little if anything to do with individual use. Agriculture and industry are where high oil prices hit and those business' do not buy oil/gas/whatever to improve their lives, at least not directly, they buy it because they have to. They pay for it in shipping, drying produce, running massive electrical systems etc.

An individual consumer may just decide to not take a Sunday drive but it is much harder for a business to scale back on oil usage.

Sorry to sound like Captain Obvious as I know most here understand the basics.

Most business' these days have no options for rail or other forms of transport as these alternative systems no longer run to the warehouses and such. Other infra structure like wind and solar can be built but not until they know it has become more economical. Will that ever really happen considering the amount of oil used in those alternatives? Who knows. I doubt it will happen soon enough to help us anytime in the near future.

Where $90.00+ oil hurts the economy, especially at this time of year, is with the large companies that must ship product. Once the costs reach a certain point these companies have little leeway between keeping people employed and planning for shipping fees. As uncertain as things are $90.00 oil will usher in more industrial layoffs.

Dextred1 said...

Coal guy,

Good post. Could not agree more. I think we are looking at a much more decentralized government, maybe we get our constitution back but without all of the wealth that we built. Although many tyranny’s have been the result of a failed state. The uber rich have stolen it all through scam and fraud with the governments help. This is what I don't really think bur understands. It is only because of the government that they are allowed to manipulate the malleable nature of spineless punks that we send to Washington. This is just what happens when the weakness of a lazy and self-indulgent population give people power reflect themselves.

"It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth cannot be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society — the farmers, mechanics, and laborers — who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their government. There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and, as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing."

~ Andrew Jackson, Can I get a AMEN after that one.

Greg T. Jeffers said...

Amen.

Greg T. Jeffers said...

Bill:

I have no idea what any individual, given the myriad of issues and outcomes that are ours alone, should do now... When I began blogging in 2005, I advocated buy precious metals and gaining skills (mostly because I had no valuable skills... there won't be a big demand for securities and commodities traders on the other side of this, me thinks)... now, metals have gotten pricey (versus farmland) and we all know we should know how to do something other than turn on a computer and write a report.

I do not believe that there are one-size-fits-all-solutions any more than I believe that there are macro solutions to maintaining the status quo.

Having a contented and fulfilling life has always been the challenge and will always BE the challenge...

Greg T. Jeffers said...

Pioneer:

I have a binary view of oil: Economics and physics.

Economics boils down to commuting and consuming... both of which require extensive auto use - and this area consumes 50% of the U.S. liquid fuel "allotment".

Aggregate available Oil is apportioned by price (economics) but yields work (physics). Less Oil in means less work out. How that manifests itself is the $64,000 question

PioneerPreppy said...

Greg

I see your point, and I admit while "finished motor gasoline" has been above the 50% mark for years (if not since Ford started producing cars) finding a breakdown as to business and personal transportation of that usage is elusive.

My theory is that the decline in FMG has been from the private sector and where we see high dollar oil really hurt the market is in areas where it cannot be reduced without having several layers of ripple effects.

Perhaps it is simply my place of employment that puts me closer to seeing actual layoffs and pullbacks due to oil prices.

bureaucrat said...

There was a time before oil was discovered (in 1859 I believe) and while having to revert back to the hard lives of the horse and buggy era might damage our self-esteem for awhile, we did manage to actually live during the 1500s, 1600s and 1700s without oil -- not well, but maybe thats ok. Maybe we don't need to have the speed of life, facilitated by cheap energy, we have now. Less oil, if there even is less oil, could be a blessing. But until the oil stocks start dropping below their 5-year average, the sun continues to shine.

Dextred1 said...

Bur,

In the 70's when we had the oil crisis, we never actually ran out of oil until the government implemented price controls. It is the artificial pricing power that disrupts the oil stocks not the actual amount of oil in usage.

Stephen B. said...

A small note on oil history...

Oil actually was discovered far earlier than 1859 as the stuff actually oozed out of the ground in many places around the world including Pennsylvania were Drake drilled his first well. (It still oozes out of the ground in a few places in the Arctic National Wildlife Refuge I'm told. Then too there are those La Brea tar pits in the Los Angeles area.) Some places used it as a wood preservative. It also had various naval uses and was also used to power crude lamps. Doubtless that if one researched the subject some, one would find many other uses prior to Drake as well.

What happened in 1859 is that Drake pioneered the commercialization of the stuff and found that you could actually drill a hole in the ground to get commercially useful quantities of crude oil that way.

Anonymous said...

Yeah there is an Oil museum there. Pitt has a very small Satellite campus in Titusville, PA where many people became rich off of Oil. They started re-opening old wells a couple years ago in that area, with the higher prices making going after reserves in the ground viable.

That area is a poverty ridden place now adays, but still some remnants in the form of old mansions from the oil rush days.

Now it seems that Natural Gas is the big push in PA, the Hydro Fracking method seems pretty iffy though, destroying water tables etc. Ever see the documentary Gasland, pretty scary stuff, but we have to prop up the deck of cards for a bit longer--while we try to perfect nano-technology the only 'magic' that can theoretical prevent civilization from going into the abyss.
-Meiyo

Dextred1 said...

Jeffers,

A couple days ago you were talking about the tax cuts. Well the dems are fighting it tooth and nail saying that they are not receiving enough in return. Well if you noticed the house has not changed hands, yet. Obama got the best deal he could becuase the repubs have not been seated. There is no way he gets 13 months withrepub house, maybe 5-6 months at most. Everyone knows he can not let the tax increase happen because of those campaign promises, already see those commercials just showing obama say no tax raises over and over, with the finisher of the headlinefrom some paper of the tax raise. The repubs have the best hand. If the dems fight this and stop the tax cuts, the repubs win a big, big victory. The funny thing is that the far left is destroying any chance of retaking 2012. I predict repubs pick up another 20 or 30 seats if this keeps up. The new districts will be in place and they are almost all getting redrawn in red states. Though they need a much better canidate if they want to beat obama.

westexas said...

Bur: Re: Oil Price "Collapse" in 2008

The average annual oil price in 2008 was $62--which exceeded all prior annual oil prices prior to 2006.

And as I have noted several times, there appears to be roughly a doubling pattern in the three year over year annual oil price declines from 1998 to 2009. Whether that doubling pattern will continue is unknown, but as demand destruction moves up the food chain, I think that it will take a higher price to force more energy conservation.

bureaucrat said...

Higher prices would be the 'ol capitalist way of introducing more energy conservation, no doubt. :)

But the theme for 2008 was the same for all commodities, including stocks, housing and oil. There was never at any time a shortage of oil or oil products, and there still isn't any shortage (yet). It was all a speculative investment bubble, pumped up with borrowed money being invested. To think I was stockpiling rice, sugar and paper products in 2007 cause I thought the world was coming to an end ... foolish. :)

westexas said...

Price is where supply meets demand. Annual oil prices have exceeded the $57 level that we saw in 2005 for five straight years, with four of the five years showing year over year increases in oil prices--as flat to declining levels of global crude oil production were auctioned off the high bidders.