Monday, December 13, 2010

Oil, Oil everywhere... and not a drop to drink...

Several reports going around the web claim that oil output rose to its highest point ever last month, and that there is 6 to 8 million barrels per day of spare capacity around the world.

Yea... and I'm still young and handsome (and I would be if it weren't for these g0t damned mirrors).

The price of Oil is holding quite well at near $90 per barrel... but there is plenty of Oil in the market place... and the producers are standing ready to bring the price of Oil down to the $70-$80 target band...

Hoo-boy.... who writes this stuff?  And who believes it?  Does any investor really believe one word coming out of the mouthpieces of the producing countries?

Not a one of us has any idea of the truth in places like Saudi Arabia, Kuwait, Iran, Venezuela, et al... the only thing WE DO HAVE is the f*&%$(ing price mechanism, and a small ability to extrapolate, infer, and induce.  We can't deduce squat.

I will bet $$ to donuts that in a few months the production numbers for November will be adjusted... downward.

Now look.... I will be the FIRST to say that I could be wrong... but if Oil cracks $100 in the next 90 to 180 days, that will give you a good idea of just how accurate or truthful these knuckleheads have been.
This is not something that can be swept under the rug and explained away in the media.  $100+ Oil means a great many things... but the most important thing it means to America is that our supply of imported Oil is in steep decline, and at some point the Federal Government is going to be forced... BY TOTAL SUPPLY.... NOT BY PRICE... to do some really, really unpopular-with-the-markets type of policy shift.

Allow me to be specific:

Bill Gross of PIMCO fame thinks that capitalism cannot survive a long term population decline, and I think that concept has merit.  Take that concept and apply it to long term energy inputs and I think you come up with the same outcome as declining population (with unlimited energy inputs).

As a stone cold free-market capitalist... I am here to tell you that that is quite disconcerting... because it means that physical rationing of things like heating fuels is a very real possibility... as in, no matter how rich you are the government might not permit you enough fuel to heat and cool a 10,000 square foot mansion or to fly a private jet... and that would be the end of free market capitalism, and the beginning of a whole new phase of Big Brother. (I mean, come on... our government wouldn't use this as a ruse to enact MORE CONTROLS, now would they?)

This is not to say that Shale gas, Coal to Liquids, solar, wind, hydro, switch grass ethanol, et al, won't make that outcome the stuff of fiction... but its worth thinking about.

Its all in the giga-joules, and your first indicator is the price of Oil.  Time will tell.

--------------------------------------

On another unhappy note.... here is yet again another perfect example of what years of entitlement spending has wrought... a society that firmly believes that something can be had for nothing and a political class unwilling to even try to re-educate the electorate in the simple math or the truth.

Peak Oil is small potatoes next to this.

28 comments:

bureaucrat said...

I said it before and I'll say it again .. you can believe the EIA data or not, but we YET to fall under the 5-year average range for either oil in storage or gasoline. And again, the gas stations are all open and filled up. The reason the price of oil is elevated at $90 is the same reason it was elevated in 2008 .. middle-age commodity "investors" (like me) using cheap, borrowed money to invest in what they think is the investment of the century (aka oil), and they are bidding up the prices. Look how they came crashing down to $30 a barrel in late 2008. It was 99% speculation. There is no shortage of oil or oil products ...yet.

What no one knew was how LONG it would take for the world to come to an end. :)

I've seen the news report that oil demand last quarter was 88.3 million barrels per day. But that was DEMAND, not supply/production. And if production didn't satisfy demand, they would necessarily have to take oil out of storage.

Anonymous said...

"I said it before and I'll say it again .. you can believe the EIA data or not, but we YET to fall under the 5-year average range for either oil in storage or gasoline"

Look at the oil in storage across the globe and the oil in offshore tankers. We are seeing draw downs.

"And again, the gas stations are all open and filled up. The reason the price of oil is elevated at $90 is the same reason it was elevated in 2008 .."

bureaucrat, of course the gas stations are all open and filled up. We are able to pay for it! Now go look at the diesel shortages occurring throughout China. (http://www.manufacturing.net/News/2010/11/Energy-China-Hit-By-Diesel-Shortage/)

Their government is keeping oil at around $90ish/barrel and they are experiencing shortages!?

Greg T. Jeffers said...

Bur:

You really gotta stop repeating yourself.

Empty gas stations will never occur IF the government does not impose price limits... the market will take care of that.

EIA data? No longer relevant. As Westexas has humorously said looking at EIA data is like looking for your lost car keys under the street light, even though you could no have possibly dropped them there, because the light is better.

The U.S. is no longer the axe in the price of Oil.

westexas said...

And of course, where we should be focusing is on demand in the developing countries, and Chindia's combined net oil imports, as a percentage of global net exports, rose from 11% in 2005 to 17% in 2009.

To put this a different perspective, the supply of available net oil exports to non-Chindia importers, expressed as a percentage of global net exports, is dropping at about 5%/year.

Donal Lang said...

Greg, you say that capitalism cannot survive a population decline. That's right, we'll need all those slaves to replace all the things we do now using oil!

So the big question for future capitalist investors is; how do you invest in slaves? ;-)

bureaucrat said...

Still is a LOONNGG way to ship Canadian, Mexican and Venezuelan oil halfway around the world to China and India, and for whatever reason, Saudi Arabia continues to send us a million barrels of oil a year, and have for the last several years. We didn't even seem to care Nigeria was at war with itself again last year. :) It's a hell of a lot closer to Asia from Saudi Arabia. Why do they sell us any oil at all?

bureaucrat said...

Pardon me .. a million barrels a DAY. :)

Greg T. Jeffers said...

Donal:

I said the contention had merit... i need to noodle it a bit more... not as sharp as I once was...

Greg T. Jeffers said...

To be fair, I think PIMCO's Gross is correct... I just need to work on that a bit more...

Donal Lang said...

As you know, the problem with slaves is that you have to feed them, so you need productive land. So (as you've said before) land is the investment. Then their 'profit' is the extra work they do over and above growing their food.

But with 6.9 billion people trying to live off one-Earth's worth of agricultural land (without the leverage of oil) I'd guess there'll be barely enough land or food to go around, in other words no profit.

In fact if you apply the Export Land Model to the final USES of oil - in other words who can afford to pay for the last few drops, then I'd guess food will be one of the first products to suffer shortages/price hikes. Food is elastic in that poor people can't afford it so don't drive the market. And ELM applies to food to, so countries producing will export less and less as their population/wealth grows. We can see that already with ethanol production.

Military and government will be the last buyers of both oil and food, along with a few rich people.

Hmmm. lots of interesting spin-offs from those thoughts!

westexas said...

Re: Volumes of "Available" Net Oil Exports (available to non-Chindia net importers)

If we look at total* global net oil exports, and subtract out Chindia's** combined net oil imports, we get the the following "Available" Net Oil Exports for 2005 to 2009 (and rate of change relative to 2005):

2005: 40.8 mbpd
2006: 40.5 (-0.7%/year)
2007: 39.1 (-2.1%/year)
2008: 38.6 (-1.8%/year)
2009: 35.5 (-3.5%/year)

*2005 net oil exporters with 100,000 bpd or more of net exports (99%+ of global net exports, BP, with minor EIA inputs)

**The rationale for combining China & India is that they are both showing very rapid rates of increase in net oil imports

westexas said...

Good essay on the current and future budget problems for local and state governments, using Texas as a model:

http://www.energybulletin.net/stories/2010-12-14/oil-limits-lead-state-budget-squeezes

Anonymous said...

Bur,

In a weird irony you are on to something, " denial" ,the pumps and shelves will be full until the day when we hit the wall. The majority of the population is unconcerned, until its time to be concerned ( to late ).

Greg,

I beleive the Gov is way to inempt to do much, BUT cause this thing to be even worse. The minute, no the second rationed starts the world goes bananas. Hoarding will overwhelm the system, all systems.

After hoarding starts, the capitalist system as we know ends. However, the black market and orginized crime will come to the need ( true capitalism way ) I am thinking wood stoves, firewood,food, etc. Of course up North anything that burns is fair game. Just look at pictures from the 1850s. There is a reason that no trees,shrubs etc are not in those pictures. They burn well. Since this is an every man for himself moment, all haves will be overcome by have nots. People will do WHATEVER is needed to survive. The time of year will have a play in survivability, but more importantly, the sooner the correction happens the better. A few more years and a few more million people that have gone bust financially, will only make the change that much more difficult.

This could happen easier then it will,but the Bur thinkers in the world will make it much worse.

Bob

bureaucrat said...

I'm sure you all have considered the possibility that China and Indias' demand for oil could drop hugely in the years ahead. I'm sure you all have seen the Jim Chanos videos ... "over 60% of China's GDP is construction. They are printing currency and building millions of units that no one can afford." The Chinese are communists first and foremost. They can pretend to be capitalists, but they are still overbearing, centrally-planned communists. They've never gotten anything right and they never will. They are also hugely corrupt at every level. Throw in inflation and 30 million younger Chinese guys with no wives and you got yourself a "revolution
problem. They are one big bubble waiting to pop. Trees don't grow to the sky.

India is a different model (services, not products), but they stand to be villified more since America is gonna get fed up with India's "outsourcing" sooner than the "inporting Chinese crap" dynamic.

If demand for oil falls thru the floor because China and India blow up, there is no peak oil. Demand will fall faster than supply. :)

Anonymous said...

Westexas-

Your projections for net global exports minus Chindia indicate that the OECD countries will be fighting for their very survival within a few short years?

BEST,
Marshall

westexas said...

Marshall,

I think that the US is well on its way to "freedom" from our dependence on foreign sources of oil--just not in the way that many people anticipated. I suspect that we will continue to be outbid for declining volumes of global net oil exports.

This is a summary of our 2010 ASPO presentation, with a couple of scenarios for 2015:

http://www.energybulletin.net/stories/2010-10-18/peak-oil-versus-peak-exports

Anonymous said...

Westexas-

Thank you!

BEST,
Marshall

Anonymous said...

Bur,

Strictly speaking peak oil,yes, you have a point on China's failure potential. I hope that does not happen, I would rather deal with oil shortages here then China's implosion.

Bob

bureaucrat said...

From Bloomberg yesterday (what a load of CRAP! -- it says that oil inventories are in "decline" cause oil in storage in the US has gone from being 13% above normal to being 9.8% above normal. THAT IS STILL ABOVE NORMAL NO MATTER WHAT DATES YOU USE!! Who are they trying to kid? From what I see, we still have LOTS of oil!) ....

"The first stage in the oil market’s recovery started with the decline in inventories, the bank said. Crude stockpiles in the U.S., the largest oil-consuming nation, declined earlier this month to 355.9 million barrels, according to the Energy Department. That’s 9.8 percent above the five-year average, down from more than 13 percent two months ago."

Anonymous said...

Bloomberg? Your quoting Bloomberg!? I get my news from the TV Guide. Expand your mind.

Bob

Dan said...

India has a demographic problem similar to China’s though not as extreme; and a disputed border with China. There is a good chance they will help solve each other’s problems with restless malcontented single males with the border dispute as a pretext.

Stephen B. said...

I want to correct something I keep seeing here regarding northern forests, the 1800s, and heating.
The main reason forests were leveled was not for heating fuel for homes and business. Rather, forests were leveled for a wide variety of reasons but two in particular stand out.
The first and foremost was agriculture. When Europeans arrived in the Northeast, they found a largely intact forest very unlike the landscape of England which was mainly cultivated farm fields and pasture. Indeed, when one reads some of the Pilgrim narratives that came out of Plimoth, they constantly spoke of the dark, wicked forest. They *hated* and feared forest land and removing forest was a high priority of the settlers. Even better, it gave less places for the wild beasts (wolves, bears, and the “savages” to hide. (By the way, Natives, contrary to popular opinion today, did clear land for farming too. Think: corn, squash, and beans, the so-called Three Sisters which they farmed extensively.) Cows and later sheep, demanded much pasture land, and the fact that one could rid the world of the “hideous thicket” and provide more land for sheep and cows, was all the much better. (Google “sheep craze” for more on the sheep explosion in New England in the early 1800s.)
The second reason forests were leveled was for the chemical uses of wood, especially lye, saltpeter, potash, and charcoal, the latter for iron making. All of these chemical feed stocks were highly in demand in Europe, which had already largely exhausted its forests. Here is an excellent primer article on what wood was used for before the advent of petrochemicals from Northern Woodlands Magazine, itself a most excellent magazine focused on environmentally sensitive utilization of working forest land: http://northernwoodlands.org/articles/article/the-wood-chemical-industry-in-the-northeast/
The fact is, a great deal, in fact I dare say, the majority of the northern forests were burned *in the forest* or very nearby, reduced to ash heaps for the charcoal and chemicals. Surprisingly little wood was hauled far away from where it grew for indoor fuel.
Large timber was also a cash crop much in demand in fairly treeless Europe. This was so much the case that the King of England laid claim to most of the large timber for the throne. His agents roamed the countryside of New England, marking the best and largest trees for the king. Google “King Pine” for more on that.
(continued below)

Stephen B. said...

(continued from above)
These three uses had very little to do actually, with the heating fuel needs of a cold climate. In fact, most of the forest misuse of the pre-oil era in the North pretty fairly resembles the forest clearing and misuse that we’ve seen much more recently in tropical and Amazonian forests. That is, large scale land clearing for agriculture, chemical use, and timber, often to make products to sell to more prosperous and cash-paying nations.
All too often in Peak Oil circles I see people, especially people from warmer areas, looking at old pictures of largely destroyed northern forests, then looking at the much lower population of the day, and then simply (and somewhat smugly) exclaiming those forests will once again be history as many MORE people try to avoid freezing to death.
In fact, I’ve seen Sharon Astyk argue that the North *could* largely heat itself, even now, off of forests, and do so sustainably, if only people would shrink houses, insulate, combine some households, accept some cooler household temperatures, etc. I think it would be tough, but also I think it would be close enough that I can see her point.
What really worries me is the possibility that, never mind heating, that we may return to harvesting and raping the forests for chemicals and gross overuse of pasture animals again as oil and natural gas chemical feed stocks deplete.
Here’s *my* warning: southern forests make just as good a source of lye, potash, and pasture land as northern forests do. Just because it doesn’t get all that cold in Alabama in the winter, doesn’t mean that Alabamans won’t rape their forests for methanol (aka “wood alcohol” – ever wonder why methanol was called that?), lye, potash, and charcoal just as quick as Vermonters and Maineiacs would and did.
Utilizing and protecting forests post Peak Oil is about so much more than simply wood for the (inefficient) home fireplace.

Stephen B. said...

I'm sorry about the messed up, mismatched parentheses in that long post. Hopefully it's still readable.

Dan said...

Bur,
You mean to tell us that, that is what you are cooing over. A measly 355.9 million barrels of oil! That is an 18 day supply. Sheesh!

westexas said...

Dan,

It's a lot less than that. The most commonly used number for the US Minimum Operating Level (MOL) is 270 mb. Currently, we have about six days of crude oil supply in excess of MOL (not counting the SPR).

The "glut" in US crude oil inventories represents a couple of days of supply in excess of recent numbers. Note that the recent numbers, in terms of total Days of Supply, are measurably less than what the industry used to carry. I suspect that the industry has gone to more of a Just In Time inventory system, because they have the SPR as a backup. So, minor changes in crude oil inventories just represent minor variations in a thin cushion of oil in excess of the MOL.

westexas said...

Here is a Total Days of Supply commercial crude oil inventory chart for the US:

http://www.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=W_EPC0_VSD_NUS_DAYS&f=W

westexas said...

Incidentally, I briefly consulted for a start up hedge fund, but I parted ways with them because of this very issue. The lead oil analyst kept insisting that the fund take a series of bearish bets on oil prices, because of US inventory numbers.

I repeatedly used the drunk looking for his keys joke that Greg referred to up the thread (a drunk is looking for his car keys late a night under a streetlight, because the light was better there, even though he lost his keys down the street). My point was that the increasing demand was in developing countries, and the modest increase in US inventories was basically just continued confirmation that US demand was weak, relative to 2005.

My prediction to the hedge fund guys last year was that 2010 would mark the return to year over year increases in annual oil prices. If the doubling pattern in recent year over year price declines continues, when we see the next annual year over year price decline, it will bring us down to an average price in the $120 range. Time will tell.