Saudi Arabia, Goldman Sachs, the U.S. Treasury, The Federal Reserve Bank, Russia, The U.S. Department of Energy et al... all employ cadres of Mathematicians, Statisticians, and Analysts - and not one of them saw this bear market in Oil coming. Zip. Zero. Nada. Bupkis. Ugatz.
I have had nothing to say for most of this year. Speculating in the commodity markets requires discipline - sometimes you have to stay away from the table. When the markets do not jive with ones sense of the world it is better to keep your mouth shut and your hands in your pockets. I fear boom times. The end always seems to come when you least expect it and you are rolling (temporarily) in profits. Busts can be wonderful things - if you have any capital left to take advantage of them, that is.
So what happened with Oil?
In short: Too much Oil at the moment.
This moment will pass. It might take a year or 2... but $50 Oil assures $120 to $150 in 5 years or less.
$30 Oil will assure $200. That's how commodity markets work.
I spent the last couple of months talking with the Mad Scientist & Westexas and others, particularly folks working on the ground in the Bakken and Eagle Ford, asked for and was kindly granted by Darwinian vast amounts of data that he used for his assertions at his excellent site www.peakoilbarrel.com (thanks Darwinian!).
Before I get to my personal anecdotes and the observations from my contacts in the industry here is what the production data says (to me):
- "Peak Oil" happened to conventional Oil sometime between 2005 and 2010. (Scroll down to graph showing "World Less USA Left Scale). The peakniks - Hubbert, Deffeyes, Simmons, Heinberg got this part right.
- There is a lot more non-conventional Oil and other liquid fuels than the peakniks had counted on (enough to move the needle on "peak" 8.3 years for 500 billion extra barrels), and in the final analysis it is ultimate recovery/production of every atom of liquid (or gas to liquids) hydro carbons, right down to ear wax, that really matters. (I bet you didn't know that ear wax is a hydro carbon. It is. No kidding!)
- There is a lot more non-conventional Natural Gas than the peakniks had counted on (of this the "peak" needle might have a great deal more than 8.3 years to move... though I have not gathered enough data to give me great confidence to say more).
- There was a great deal more "efficiency" that could be wrung from the system in the U.S. than the peakniks counted on.
- It was non-conventional Oil production in the U.S. that kept the world from "Peak Liquids", which we may or may not be at or close to. Peak Liquids has happened in the Rest of World Ex U.S. (so far). If someone comes along and figures out some technical solution to really and actually improve fracking technology and recovery (despite claims, this has not happened yet. The technology has been around for a while, and improvements in recovery have been tactical and economic not physical) and raising ultimate recovery of Tight Oil from X to 3X or 5X, well, that will move the needle another decade (or 2).
- "Total liquids" consumption in the U.S. peaked some years back (2008 give or take 6 months) and subsequently declined by several million barrels - even with the production increase of 4 MILLION barrels per day of tight oil and nearly 1 MILLION barrels per day of ethanol domestically. The economic "recovery" during this period was anemic at best, and we should be "thankful' (not really, but I will get to that shortly) for that and give all of the credit to increased production and consumption of Natural Gas to offset the decline in liquid hydro carbons.
- Whatever industrial processes that Oil could be replaced with Nat Gas has happened for the most part. 5 years+ of $100 +or- Oil and $25 barrel of oil equivalent Nat Gas has likely been long enough and incentive enough to make what substitutions were economically possible . There will not likely be much more of this (in the near term, say 5 years) as we have increased our production and consumption of Natural Gas greatly - and yet our inventories have not risen. By mathematical necessity the "days of supplies" number must have declined precipitously - and cut our use of coal. Since all new power plant additions have been Nat Gas (little new coal power added of late) the 25% increase in Nat Gas production is spoken for and any discussion of exporting Nat Gas is just political posturing.