Why $140/Barrel Crude is Unsustainable 41 comments
-
Font Size:
-
Print
- TweetThis
click to enlarge image (graph courtesy of wtrg.com)
Despite the hand wringing about crude prices, there is plenty of evidence to suggest a top forming and prices headed in one direction --- down. The basic economic principle, which has stood the test of time and applies to this day, is that supply rises in response to prices while demand has an inverse relationship to prices.
Following the 1973 oil embargo, prices, which earlier had been at a nominal $20 a barrel since the twenties (in 2007 dollars), tripled and seven years later, following the overthrow of the Shah, hit almost $70 a barrel.
By turning down thermostats, using better home insulation, driving slower and buying smaller more fuel efficient cars, Americans conserved energy and consumption crashed. In the meantime, production had just begun to soar as high prices stoked greater exploration. As a result, oil began a 7 year decline back down to its historic average of $20 a barrel.
With a few shocks along the way, oil continue to limp along until the housing mania around 2003. Forgetting the lesson of the early eighties, Americans bought bigger cars, built mansions and raised their energy consumption. Easy credit fueled the buying binge and cheap energy made it feel good. As a corollary, exploration slowed down at the very time that newly industrialized economies began to demand more oil to fuel their growth.
Today, with oil at $140 a barrel, we hear the message that this time it's different and that cheaper oil is no longer in the cards. Well, we seem to be going by the same play book as consumption has already started to slow. Developed economies are using less oil as drivers consider making unnecessary trips and airlines cut routes. In the developing world, India and China have cut their fuel subsidies resulting in higher prices, and it's only a matter of time before demand slows, if it hasn't already. Crude inventories continue to build and supply may become even more plentiful as newly discovered oil fields such as in Brazil come on tap.
The most telling feature of a world awash in oil is the following statement from an Aramco manager from a recent story by the New York Times on the Khurais oil field in Saudi Arabia:
“We’ve asked all the international oil companies that buy from us if they want more oil,” Mr. Nasser said. “But we can’t find customers.”
Disclosure: none
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 41 comments:
online.wsj.com/article...
online.wsj.com/article...
However, I also disagree with the bull's views that "price can only go up" and "supply is forever going to be less and less from this point on". Essentially that everything (all industries) is going to become captive by the oil industry.
Remember, we may have an oil crisis, or even peak oil crisis (I don't think so, not yet anyway), but you're missing the big picture if you think we're at peak energy.
With prices climbing, there's growing incentive to grow a secondary energy source and channel and infrastructure. The incentive will eventually create enough breakthroughs that we'll no longer need/use oil like today.
It may seem "impossible" now, because we don't have it yet; but you can bet that once it happens, it'll permanently change the way we live our lives and our collective need (and valuation) for oil.
Food for thought, the next big release from car companies are electric cars that can be used for daily commutes that uses no oil. We have a myriad of ways to produce electricity, and electricity (per joule of energy) is 1/10th the price of oil. Even if electricity quadruples, we're still better off than today, but the real question is: what happens to oil as a resource when such real alternatives become reality? When we're no longer held hostage to it?
My main worry is that the war-like middle east will start world war 3. That's a lot worse than the oil crisis we face today!
Then the geopolitical and the speculaive markets also play a big role.
For oil to go back where it was there are many factors that have to converge, not an easy thing...
At the same time any of these factors alonw can make the price jump,...
Good thoughts. But let's see how many electrics commuters buy at $40-50K per click. MORE OIL is still the answer in our lifetimes.
Corporate America [the greed by corporations is unbelievable]had better wake up...jobs/production going out of the USA equalls NO buying prower in the USA...plain and simple, then we won't need to worry about the cost of oil or anything else. Anarchy and revolution is just around the corner.
World demand is going up. Emerging economies boost this. World population is going up by 70 MILLION more people per YEAR !!
DO THE MATH.
DONT BREED
Let's see if I have this right... The reason we're not exploring for more domestic oil is the CA Congressional delegation, and their public employee pension fund is at the top of the list of speculative investors, which they blame for skyrocketing oil prices.
This is fitting, and makes as much sense as the rest of our nation's Democrat energy policies.
Cheers Ispyoil
The real breakthrough could be something else. Behavior, Segway, Hydrogen, Terrestrial solar (or extra-terrestrial kind), etc. I can't tell you what it is else I'll be rich. :)
Remember guys, all breakthroughs only need to affect the top 20% of automobile oil demand for things to shift the market pattern in "game-changing" ways.
A cartel/monopoly/econom... hostage situation breaks down if it loses 20% of it's projected demand.
40-50K is definitely affordable for 20% of the automobile population -- if it makes sense to do it, there'll be people to buy it.
The Saudis always lie because they don't want to tell the truth, which is:
1. Khurais is a joke- never produced more than 144kbopd and was shut in in 1981
2. They don't have any other capacity anywhere in the country
3. They've explored everywhere and found nothing that we don't already know about
4. OPEC is a joke; they are all producing at capacity just as if they were in Texas or the North Sea.
Some of us learned about trusting the Saudis on 9/11. Others have yet to learn the lesson.
"The basic economic principle, which has stood the test of time and applies to this day, is that supply rises in response to prices..."
I think this ignores the fundamental fact that oil is non-renewable and finite, unlike most other products. If the supply of pencils runs low relative to demand, prices rise, and more pencils will no doubt be manufactured to meet the demand and to reduce prices over time. But oil cannot be manufactured like pencils. And most of the credible petrol geologists (which excludes the Russian 'abiotic oil' camp) are telling us that further exploration and drilling cannot even offset the depletion of existing wells, let alone add to top line supply numbers.
So the only way that this article and its author can be right, long term, is if the peak oil geologists are wrong. Hauling out an overly simplistic economics adage is not compelling. Solid evidence that the peak oil engineers and geologists are wrong would be - yet despite an intensive search for such, I have been unable to find such evidence.
Remember that an heretofore truthful adage like the one which undergirds this article's argument is obviated and becomes false when a fundamentally new paradigm replaces the old. If the peakers are right and we are at, near, or even past peak oil, then a new paradigm is upon us. And if that's the case, then I suspect that at some point, what happens to one's position in oil (or any other virtual, non-physical investment for that matter) will be the least of one's worries.
www.prosefights.org/fu...
good article!
LNG although attractive to Exxon and ship owners as a setter of marginal price for gas is not going to be a factor without the Congress being purchased as it was for ethanol. Nixon tried this in the 70's but one big accident with flames, cities and a possible rapid phase transition demonstration and it too will be forgotten. It could make 9/11 look like a marshmallow roast.
Our petroleum and automotive addiction will be cured "cooling turkey" by price. With few exceptions the oil industry is in liquidation. Back to the tar sands and coal conversion to methanol and dimethyl ether like the apolitical Chinese.
I'm sorry, I don't see much evidence in the article. World oil production has been flat for three years now, and many oil producing regions are in serious decline. New oil production if firstly going to have to make up for this decline. Even though demand might be dropping in developed nations, countries like China and India continue to have their economies grow at double digit rates, and some of their cities are registering a thousand new cars every day. Yes, it's supply and demand, but the supply is severely constrained, with no good alternatives, while demand continues to skyrocket. There may well be a short term correction in the price of oil, but the long term trend is in one direction, and it is the opposite of what the article claims. Do a search on Peak Oil.
NOBODY SO FAR HAS FOUND A WAY HOW TO SAFELY DISPOSE THE HIGHLY TOXIC RADIATING WASTE FROM NUCLEAR POWER PLANTS THAT WILL RADIATE AND THREATEN THE ENTIRE PLANET FOR AT LEAST 5,000-10,000 YEARS!
Can it be done at all? I doubt, but it may be possible some day. Will it cost a few bucks? You bet! It will most likely render nuclear power prohibitively expensive.
Yes, the geologists ARE wrong, which Hubbert himself admitted to astrophysicist Thomas Gold. Oil occurs naturally in the earth's mantle, which is why oil slicks are visible throughout the oceans from satellites.
I wonder what we're doing with all our deadly nuclear waste NOW. France must be in REAL trouble, 80% of their electricity is already provided by nuclear reactors.
Would the price still go down?
Or many other alternate possible events
(All of which are relevant , as evidenced by their being partly built in ,right now, to the oil price).
200 would not be out of the question , and a far cry from the present 140 , regardless of the l/t fundamentals.
My point is that a time/price analysis can be done at any time , and it won't necessarily reflect whether prices have peaked or not.
And right now , nobody has any freakin idea which way the next direction is after this "drop" to the 130's , or maybe lower.
All the analysis in the world won't accurately tell you when "peak oil" will kick in , or if an event will raise or lower the price tomorrow.
The only thing we do know is that if you're not in now , you've missed the boat , so jumping in at these levels can be risky regardlerss of the reward potential.
So , in that case - DO NOTHING .
If the price goes up , tough luck , you missed this one -
Try something else when it's cheap .
If the price drops appreciably -
Take some bites at positions at what appears to be intermediate term support and hope for the best.
People are sprouting doomsday scenarios with oil running out and society declining to 100w/hr "human" energy!!! sheesh!
"Prices will go up forever", "Buy now or forever be priced out", "There is no more supply! This is the last bunch!", "Future demand will grow! Regardless of prices!"
Sounds like oil? No I'm talking about houses at 2006.
Look at how similar this sounds to the peak oil crowd now.
Innovation is the final frontier of energy, not oil. This "false" peak oil may be the best thing to happen to planet earth and our science yet!
That's 70% of the world oil demand that can (start to) switch away if a viable alternative comes along. That's a HUGE risk if you're a perma oil peaker.
I think if prices keep going up, demand is going to follow supply: first stabilize, then the mix (industrial/automobile... starts to change, then as automobile alternatives gets hotter, total demand volume will drop off -- but by then, it is too late for oil. Once a technology becomes viable, we won't go back.
Think how email replaced snail mail and snail mail's volume never matched the actual exponential growth in "messaging" communication. It is also too late for snail mail to return to the "monopolistic" days.
A cartel/monopoly/econom... hostage situation breaks down if it loses 20% of it's projected demand."
Not with oil. With peak oil (and its consequent declining oil production each year) it would just delay total catastrophe a few years.
Let me tell you where I think the real "breakthroughs" will occur. When we go after our known domestic reserves of 85bbl of oil and trillions of feet of natural gas offshore, ditto for Alaska, our 250 years of coal to oil and gas (...a 60 year old technology), and our 200 years of oil shale in the Rockies.
Unfortunately, we're not suffering enough YET for this to happen right away. But $6-8 gasoline, the coming Depression, 8000 on the Dow, forcibly altered lifestyles, and becoming poor will get us there eventually.
Meanwhile, we'll make some nice strides with alternative energy technologies, which will help us out in the long run and keep us entertained in the interim. As for me, it's like the drill sergeant said in the Bill Murray movie, "I'm getting too old for this sh--!"
Saudi Arabia will peak soon if they haven't already, and the era of abundant light sweet crude will be over for good. Russia has already overtaken the Saudis as the world's number one producer. Once climate change starts to melt that Siberian permafrost and the Arctic Ocean is free of ice for half the year, Russia will become a superpower again. Gazprom already supplies 25% of Europe's gas, its subsidiary Gazprom Neft is sitting on loads of oil, and the company has close ties to the Russian government (Dimitri Medvedev used to be the head of Gazprom).
The US may reduce its demand, but it will be too little, too late. The time to get serious about conservation and a sound dollar policy was years ago, and we now have to live with the consequences of Alan Greenspan's liquidity idiocy. Furthermore, any reductions in US demand will be offset by China and India, which are both unfortunately following in the footsteps of our failed transportation policies and adding thousands of gas-guzzling cars to their roads every day. Gas prices are going to stay high, too - a new refinery is scheduled to be built in South Dakota, but it's the first one in 40 years. Again, too little, too late.
Crude oil is going to be harder to find, it's going to continue to be in the hands of hostile foreign governments (with a resurgent, nationalistic Russia at the forefront), and light sweet crude is going to be replaced by heavier, dirtier stuff.
Oil has nowhere to go but up.
I can't wait for when a 'scientist' can prove that some of our other great commodities are also made in the mantle. I'm sure that there's some corn and hog bellies down there besides all that 'naturally replenishing' crude. This despite the fact that all the geologists that actually work on extracting the stuff from the earth think Gold and the abiogenic theory is a loon.
Crude oil inventories are actually below avg for this time of year.
Brazil's "Tupi" field although huge is still 8-10 years away from meaningful production levels.
Any similarities between now and the last oil shock are meaningless. simply because the world has added almost one billion people since 1970. China and India have embraced a Western-style economy with autos, refrigerators, and other conveniences. The cutbacks in subsidies will not make a dent in oil consumption as the "new" pump price is still well below G7 pump prices. scimitar's comments are valid. US oil consumption no longer determines the direction of crude prices. Unfortunately oil is headed higher after a much needed "consolidation" period in the $120s.
The same store sells bottled tap water for $1.25, sugar-water for $1.40, milk for $1.40, and Nyquil for $8.00.
Seems to me, gas is still very cheap.
In 1973, Saudi Arabia had a huge spare capacity to flood the market with oil below the cost of most other producers, if they chose to do so. They claim that they still do, yet they keep their current production and reserve information tightly secret and their production has been slowly decreasing (especially in terms of quality, less so for quantity) in the last few years.
What if they don't? How much do you think people in productive economies (China, India, etc) might be willing to pay?
Remember, 1 gallon of gas produces about 20,000 watts of energy, while an average man's labor produces about 100 watts/hr.