Does 'Speculation vs. Fear' Matter When Oil is Running Out?

Speaking of energy prices and the impact of fear, speculation and market fundamentals…

From the Financial Times:

The fear of a global oil shortage within five years on Tuesday propelled oil futures prices to well above $130 a barrel, further stoking inflationary pressures in the global economy.

Investors rushed to buy oil futures contracts as far forward as December 2016, pushing prices as high as $139.30 a barrel, up $9 on the day. Veteran traders said they had never seen such a jump. The spot price hit a new record of $129.60 a barrel.

Contracts to be delivered at the end of 2012 have soared almost 60 per cent while near-term prices have risen by 35 per cent since January.

Anne-Louise Hittle, of Wood Mackenzie, said investors were shifting their focus from the short to medium term where supply fears are dominating the thinking. “For example, we know Iraq has the oil but we don’t know if it will be able to bring the needed supplies into the market,” she said, referring to the political uncertainty in the country which has the world’s second largest conventional oil reserves.

This comes as demand, especially from China, is set to continue to grow. Adam Sieminski, chief energy economist at Deutsche Bank, said: “The price is going to go up until governments that subsidise oil consumption in Asia and the Middle East can no longer afford it.”

Despite the fact that fear is driving oil futures towards $140, it’s not an “unfounded” or “phobic” fear because there are some very real issues around global oil supply and demand that will cause prices to sky-rocket to a level where today’s prices seem cheap. I just have to wonder if the situation isn’t turning into some sort of self-fulfilling prophecy powered by the logical under-current of demand outpacing supply. Without a drastic reduction in demand or a dramatic increase in supply $140/barrel is inevitable; all fear is probably doing is causing us to see the energy prices of the future a year or so early.

Either way, oil’s daily raise in price just reinforces the need for alternative and renewable energy sources ASAP, because high energy prices are not a question of IF they’re a question of when. It isn’t particularly productive to continually analyze why the price of a finite resource that’s heavily in demand is going up, when more thought needs to be put towards developing alternative (and preferably renewable) energy sources.

Congress shouldn’t be holding hearings on high gas prices, they should be figuring out how the government can do more to incent people to use fewer fossil fuels and to develop and implement renewable energy sources.

Sources:

The Financial Times: “Shortage fears push oil futures near $140” – Carola Hoyos, Javier Blass and Geoff Dyer, May 20, 2008.

Comments

[Edward Janeck:]

Oil has a long-term supply/demand problem. It could be $400 a barrel in 10 years. It is going to cause a lot of inflation. I write about it:
theinvestingspeculator...

2008 May 23 09:23 AM

[Brian Pursley:]

Oil isn't running out. Production and reserves are the highest in world history.

2008 May 23 09:44 AM

[CLH:]

Pursley Right on! Oil will never run out. As the amount of oil goes down, the price goes up and demand disappears. Why cant people understand how the market works?

2008 May 23 10:13 AM

[Ramrod:]

I serious doubt this author has any concept of energy supply/demand ECONOMICS...

2008 May 23 10:45 AM

[Alex Filonov:]

First panic of "Oil running out" happened in the beginning of 20th century, 1908 I think. I well remember the same cry in mid-1970s. Oil is not running out. Common sense is.

2008 May 23 11:36 AM

[Scott Benson:]

We are not running out of oil. There is no supply shortage today. What we may be running out of is "cheap" oil, which our modern economy is built around. There are no renewables or alternatives that can replace the power of oil for any length of time. And the public is so unready to hear this news, that their suburban house may not be worth very much (without affordable gasoline, 50% of the U.S. housing is near worthless,) that they may have to ride a bus with smelly homeless people, that they won't be able to fly cheaply to the Bahamas for vacation, if at all, that their winter strawberries won't be available at the local grocery store, I dread the future. I'm still going to try to make some money off of all this in the short run, but Congress and the presidency will be hopeless to stop it. I can only hope someone figures out how to supercompress and superheat dead plant matter into oil over a few years instead of several million years, cause otherwise things are gonna be a LOT more expensive.

2008 May 23 11:43 AM

[jcrash:]

Maybe, if it WAS running out (which it isn't, so I didn't bother reading the article).

2008 May 23 12:37 PM

[Bergius:]

People seem to forget that gasoline and diesel are simply carbon-hydrogen bonds. As far back as the late 1940's small plants have been producing gasoline, diesel and heating oil from wood, coal, even used tires and garbage.

Fact is we can convert carbon into fuel very easily and very cheaply. In 1949 the head of one of the U.S. test plants said he could provide all the commercial grade unleaded gasoline America wanted for 1.5 cents per gallon before taxes and profit. Do a google search on "Begius process" for the history on this.

Oil is priced where oil is because people are, for the most part, sheep.

2008 May 23 04:40 PM

[Bergius:]

Sorry, typo (missed the "r"). That google search should be "Bergius process"

2008 May 23 04:41 PM

[Scott Benson:]

Gasoline and diesel are indeed carbon-hydrogen bonds from algae & plant matter that strengthened over millions of years under extreme temperature and pressure. If anyone could make it for a penny and half, someone would be doing it already. The sheep says ... they aren't doing it cause they can't do it that cheaply (anymore) .... BBBBBAAAAAAAAA!!!!

2008 May 24 01:20 AM

[Brian Pursley:]

Scott Benson: The extreme temperature and pressure necessary to generate hydrocarbons does not exist in the crust. Only in the mantle. Therefore hydrocarbons are abiotic. Algae and plant matter have nothing at all to do with hydrocarbons. See here: www.gasresources.net/e...

2008 May 24 02:37 AM

[Scott Benson:]

The only people who think oil was formed "abiotically" are Russian and French scientists from the 1950s and 1960s. Oil was formed "biotically," as almost all Western petroleum geologists and engineers believe. Oil was formed over millions of years via algae, plant matter and microscopic organisms under high pressure and temperature. Try a less biased source: wikipedia.org

2008 May 24 10:47 AM

[SW Richmond:]

Scott Benson: Without cheap fuel for trucks, large cities become uninhabitable, as no goods or foodstuffs can or will be cheaply grown or delivered. You obviously have no idea just how dependent on fuel you are, just because you happen to be able to walk to some of the things you need, which coincidentally get raised/grown using fuel and the trucked in to those places. So if urban centers are the 50% of housing that becomes worthless, I agree with you. At least I have a yard I can plant potatoes in, and real producing farms within bicycle distance. What do YOU plan to eat, tarmac or concrete?

We did this all before, in the 70's, you young people just don't remember. No one volunteers for austerity/pain, so occasionally it is forced upon us. We will lurch toward more fuel and energy efficiency, and demand will abate somewhat. Prices will stabilize at some higher mean level, and life will go on.

2008 May 24 12:35 PM

[Bergius:]

Scott, you should do your DD on this. The Bergius process is a low temperature, low pressure method for combining carbon and hydrogen using either nickel or titanium catylysts to bond into gasoline or diesel/heating fuel. Yields are very high, in the order of 5x or greater output than input.

Picture it as disolving a solid carbon/hydrogen compound (wood, coal, tires, plastic bags, etc) with hydrogen to produce a liquid. That liquid can be anything from heavy crude to natural gas depending upon how much hydrogen you bond to the carbon.

After WW2 America rounded up the German scientists who were producing Germany's fuel using this method and built test plants to master the technology. They found that you could produce huge volumes of gasoline from very little carbon using german hydrogen bonding technology.

Oil was cheap and plentiful and could be delivered by pipeline from the source directly into the process. The german technolgy was incorporated into the modern day cracking process where 4 barrels of gasoline plus many related products are produced from 1 barrel of oil. Actually you don't need oil. Any carbon/hydrogen compound can be converted into gasoline or diesel. The Bergius process converts 99% of carbon into fuel.

I know the process works. I had a forest company and a mill in the 70's. I built a stage-1 wood waste converter and ran a stationary 4-cylinder Datsun gas engine directly from the output. This engine powered all the hydraulics at the mill.

2008 May 24 12:47 PM