Offshore Drilling Isn't the Answer - Supply and Demand Is 57 comments
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In my last post I made clear that due to increased demand and a lack of excess capacity, I expect oil prices (and commodity prices in general) to stay high. That being said, I think there’s a strong chance that we could see a pullback in the short term. Such an easing will not come from political rhetoric. Instead, prices will ameliorate when the symbiotic relationship between supply and demand turns favorable. Such a trend is beginning to take place.
Politicians are touting numerous so-called “solutions” to help ease the pain. Mr. McCain, for example, wishes to suspend the tax on petrol and open up the artice wildlife refuge for drilling. These ideas may seem appealing, at least on an artificial level, but after delving into these “solutions” it’s clear that, if implemented, there will be little to no positive short-run effect on energy prices. The development of deep-sea drilling rigs, after all, takes nearly 10 years before oil can be extracted. And placating the burden of high petrol via a tax reduction is counter-productive -- a lower price will just lead to increased consumption. These are not “solutions;” the free-market mechanism of demand destruction is.
$138 oil and $4.00 petrol is clearly starting to temper demand, just as economics textbooks say it should. On a side note, it’s interesting to point out that $4.00 per gallon is relatively inexpensive in the world economy. Nonetheless, Liz Ann Sonders, Chief Investment Strategist at Charles Schwab & Co, highlights that the world expenditure on oil (as a percentage of GDP) is at an all-time high (see chart). Small wonder that last month’s decline in miles driven is the largest on record.
click to enlarge
Fortunately, demand is now falling in developed economies and slowing in emerging-markets. China’s growth, for example, is slowing considerably, acting as a headwind, thereby helping reduce demand.
Another favorable trend is the relinquishment of gas subsidies. Although gas is heavily subsidized in many countries, we’re starting to see reductions in some countries and eliminations in others. To date, Indonesia, Taiwan, Malaysia, Sri Lanka, and Bangladesh have either raised prices or pledged they will. And in a surprise announcement last week, China said that it would raise fuel prices by as much as 18%. This is comforting news, as China has long been reluctant to surrender fuel subsidies.
Even speculators are now betting on a fall in gasoline prices (see chart).
If this reduction in demand continues (and is supported by a stronger dollar), a 20 point move to the downside over the next six months is quite possible. Time will tell. As always, I put my money where my mouth is -- I'm short at $138.
Disclosure: Short USO
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This article has 57 comments:
you are cultivating the myth that offshore drilling takes 10 years to produce and you make that the only argumnent for your headline. Do you really think that PBR is booking all the deep sea rigs they can get their hands on if the first drop of oil to produce is 10 years away if it takes a couple of $ 100,000,000 to drill a dry or wet hole?
Here comes Dave and claims it is not worth it because it does not do any good. How credible is that?
If we want oil to truly drop then not only must we conserve, but we must also discover and develop new supply. That means Offshore drilling, and opening Anwar. The Future's market in oil would drop substantially knowing that oil supplies once off limits could now be tapped, even though they would not be available for up to ten years.
Oh and by the way, US demand has to be cut by 25% PERMANENTLY.
That means 25% percent of THIS country will have to STAY OFF the highway FOR EVER.. You just dont get it, your too young. Grow up, and get real.
From a supply and demand perspective, there are long term fundamentals for oil use that cannot be ignored. Apparently the US uses about 26 barrels of oil per person. Other developed countries such as Western Europe, Japan, Australia, etc. use 13-15 barrels of oil per person per year. China and India use less than 2 barrels of oil per person. That figure is rising all the time. Even slight increases in the figures for China and India mean huge changes in oil demand worldwide because of their relatively huge populations. It is inevitable that the oil demand by China and India will increase in the years to come. The US will be put in a more and more negative economic picture by this if the US does not change the fundamentals of this situation. The US needs to speed the adoption of alternative energies. However, it also needs to produce much more oil so that its economy doesn't suffer dramatically. Recent news that Budweiser was just sold to InBev (a foreign company) should drive home the point that we are essentially selling our country by running these continued deficits. We need to act to change this now. It clearly cannot wait. A large part of this is oil. This part seems likely to get much worse. Further it will have a large effect on our standard of living, if we do not act. Offshore drilling seems a small price to pay. I don't believe there are the huge environmental issues that some are saying. I do believe the american oil companies have to be stimulated to drill and produce this oil. As pointed out by many, they have large US leases already that they have not drilled on. They seem content to let the supply problems drive the prices up, so they can make a bigger profit on their current production. They don't have to drill for more oil. The government needs to implement a strategy, not to impose windfall taxes, but to encourage oil exploration and production by US companies (the fact that they be US companies is important for US economic health not just for the cost of oil). There is clearly not a good enough policy in this respect. Some people have suggested a use it or lose it policy on US oil leases. There may be some merit in this suggestion. There is also probably merit to the idea of giving bigger tax breaks to US companies that are able to substantially increase their oil production. There has to be an incentive for the oil companies. Penalizing them for making money will not make them want to produce more, it will in fact likely have the opposite effect. There need to be tax incentive to produce more. Or there need to be penalties for not using enough of a percentage of profits for exploring for and producing more oil.
However, a more importnant point many people refuse to acknowledge is what a Oil is used for. Most of a barrel of oil is used to produce diesl fuel for things like trucks, ships, trains as well as various oil fuels for industrials, jet fuel, asphalt, tar, home heating oil, propane, wax, and other petro chemicals like beauty products, plastics, synthetic fabrics, and pharmaceutical drugs. Thus, less than 45% of a barrel of oil is actually converted into Gasoline.
Since most of the consumption of oil is Not as a result of driving cars, an economic down turn results in industrials to produce less products, thus curbing their use/demand of oil. This is also why price of Oil has been cyclical - rising during good times, and falling during recessions.
Here's an interesting fact to consider: 9 of 10 previous postwar recessions began shortly after a big spike in the price of oil. Yet, those recessions always slashed oil prices dramatically. People who have been predicting both a nasty US recession and $250 oil prices are contradicting themselves.
(To give credit where credit is due, the information I cite is from an article written by Alan Reynolds of the CATO institute. )
The long lead times, quoted by the Tree Huggers and echoed by clean energy advocates, are due to all the Environment Regulations and Lawsuits filed by the aforementioned which sometimes halt drilling altogether.
Anyone remember the Snail Darter which slam dunked a TVA project because the Tree Huggers claimed the area was their last refuge. No one looked for them before, but after, they were found to exist all over the place.
This type of idiocy is what brought us here in the first place. Yet we continue to allow it to continue.
It truly gets frustrating to even attempt to debate people on this issue when there is much bogus info accepted as gospel.
There is some sense in the article but drilling or even planning drilling would place huge downward pressure on expectations. It's simply the eco-extreme culture that doesn't care about market forces at the root that are the problem. Bush was 100% right on this point early on in the admin, it doesn't have to make him popular but he was correct.
>>>in the world did you come up with the 10-year figure?
The 10y figure comes from the government.
www.eia.doe.gov/oiaf/a...
>>>There is some sense in the article but drilling or even
>>>planning drilling would place huge downward pressure
>>>on expectations.
There's about 18bn bbls of potential oil reserves in the U.S. offshore shelf. The world consumes somewhere north of 85bn bbls PER DAY, with the U.S. accounting for about 25%, or roughly 20bn bbls per day. What we have is a literal drop in the bucket. It's hard to see how producing it would have any impact on prices.
oilismastery.blogspot..../
> jack
Pollute the skies. Blame Bush.
" Mr. McCain, for example, wishes to suspend the tax on petrol and open up the artice wildlife refuge for drilling."
Earth to "Dave": John McCain (wrongly IMO) has opposed drilling in ANWR and continues to oppose drilling in ANWR.
Next time take the time to learn the facts before inserting your size 10 shoe in your mouth.
Wonder if "Dave" will have the scruples to publish a correction?
The way to immediately lower crude consumption is to address TRANPORTATION.
Simply: 4 folks in a car instead of 1 is a 75% reduction; 20 folks instead of 10 in existing buses or transit systems is a 50++% reduction; rail transport of goods intead of rubber-tired interstate trucking is a 50% reduction; driving 55 mph instead of 65 is a 10% reduction.
Study this chart and get smarter, everyone of you:
static.seekingalpha.co...
Read my post again. Diesel and jet fuel were seperated from gasoline, and paired up with petro-chemicals. Gasoline, therefore, accounts for ~45% of a barrel of oil, and everything else accounts for 55%. I am correct, you're just not reading what I wrote.
MAYBE that will finally force us (the US) to do what has happened in Switzerland (100 electrified trains); Germany (40% solar); France (83% nuclear); Brazil (50% biofuel in vehicles); Europe in general (smaller vehicles, electric cars and delivery vans, rails and electrified rails); Holland (tidal and wind power); Spain and China (going solar); and good ole Boone Pickens (going wind; now if we could just get him to go extra wind and also solar and not use that natural gas in cars, but electrify them!).
You see, until the people get upset enough and then prove that the Government is to be by the people and for the people, we will continue to have lousy LEADERSHIP; the people must lead first, it appears! (proof is how minority voice and sometimes wrong-thinking has out-shouted and out-manuvered wisdom, be it saving owls or whales or salmon; the unborn; traditional marriage; SUV's; Houston to Detroit energy policy; drill, drill, drill Kudlow et.al. types; tear out the dams advocates; and so on).
If you study the chart I suggested above, you will note that 64% of all hydrocarbons (25.7 of 39.8 Quads) goes to TRANSPORTATION, whether gas or diesel doesn't matter. Only 14% goes into non-fuel uses.
AND, actually 80% of all that energy is wasted; only 5.3 of 25.7 Quads becomes useful work.
Study the chart. It may give a mathman plenty of new ideas.
We already produce and handle over 12 Quads of electricity with our existing grid - so lets increase it to 18 Quads (which we know how to do). That would require 5 Quads (per year) of new electric generation by wind and solar and tidal and geothermal and new nuclear; all of which is less than we now produce with our current 100 nuclear plants in the US.
RESULT: Crude consuption in TRANSPORTATION goes to ZERO.
Now, that's a target; it should become a policy.
Go Boone. Get that wind going. Stop burning the natural gas.
And when we've done that, make more solar and wind electricity and stop burning coal to make 50% of our electricity, of which 60% is waste heat (not electrical transmission and distribution losses, which are minimal). NOW WE ARE REALLY MAKING PROGRESS.
GET IT???
As of 3 pm today oil temporarily dipped below $130/barrel, and it's likely that by the end of July US consumers will see unleaded regular pump prices below 4 dollars a gallon. What remains to be seen is if US consumption spikes once a public that's been price conditioned to accept 4 dollar a gallon gas sees a relatively significant dip in unit cost.
Build, buid, build alternatives and convert, convert, convert to electric as if time-was-of-the-essenc... a Manhattan Project or Moon Program emphasis for stopping the burning of crude in TRANSPORTAION and coal and natural gas in GENERATION.
Result 1: Emergency situation solved within 5 years;
Result 2: Future secured in 10 years.
In the meantime import, import, import; and if that fails, we automatically conserve, conserve, conserve, just like we did in the 70's: we know how to do that; and it hurts - but apparently not enough to stop using it. DUH!
The differnce this "meantime" is we wean ourselves off the CONSUMPTION of oil, gas, and coal with methods that provide use of free and readily available energy, forever, at whatever conversion efficiency which is pure gain, and leave the hydrocarbons in the ground - even better than digging the gold or oil to again just store it in the ground - and that not only secures our future, but makes us basically energy independent FOREVER - NOW THAT'S A GOAL. MAKE IT A POLICY. AND, OF COURSE, THEN DO IT!
History constantly repeats itself, that is a given, im definately bull on that statement.
Death and taxes. We will all pay taxes, we will all die, oil & gold prices will rise. Period.
If you dont agree, just look back in time.
Felix
It seems that most criticism comes from my comment that, ‘opening up the artic wildlife refuge will do little to ameliorate prices.’ My reasoning stems from the fact that there are already 68 million acres currently leased offshore that contain an estimated ~70% of our oil reserves. I am not opposed to deep sea drilling in the least; in fact, the future anticipation of increased oil production can influence prices today. So, from a short-run perspective, the answer is not to open the Artic Wildlife Refuge, but to engage in contracts in the 68 million acres already leased.
From initial conception through project completion, offshore drilling rigs take years before becoming operational. An offshore jackup rig, for example, will take approximately 3-4 years before becoming operational. Construct a semi-rig, and you’re in the ball-park of 5 years. But these numbers only include construction times -- there are many other necessary steps (feasibility studies, environmental regulations, etc) that add significant time to these estimates. More information can be found here: www.eia.doe.gov/oiaf/a.... How will this help reduce demand or increase supply in the short run?
In the end, oil prices will ease when demand subsides. Eventually, as ‘Mathman Prophecy’ posted, people will spur demand destruction. This is best accompanied by maximized oil production, and significant investment in alternative energies. The profit motive will accomplish this.
PS – I strongly disagree that speculation plays a key role in the price of oil. I commented on this here: davews.blogspot.com/20....
PPS – Correction (per Investor612): President Bush, not McCain wants to open the ANWR to drilling.
www.pse.com/SiteCollec...
Siemens To Power Washington State with 130 Wind Turbines Apr 1, 2008 ... Siemens To Power Washington State with 130 Wind Turbines. ... wind farm and 58 for the Windy Flats wind farm near Goldendale, Washington. ...
azom.com/News.asp?News... - 40k - Cached - Similar pages
Whereas, if crude-based TRANSPORTAION were electrifed, requiring even fewer than those 7 Quads of useful enengy for the same work, and those < 7 Quads were supplied from "forever available on the surface" solar, wind, tidal, etc., at current conversion efficiencies which are pure gain, we would need only to add to the 12 Quads of electricity we already generate, transmit and distribute from source to end user.
We know how to electrify and find wind, sand and water to do solar, wind and tidal, etc.
We should strive much more to put solar and wind into place than to ever explore and drill or mine coal, oil, or gas, etc.; it would be simpler and easier, including the electrification of TRANSPORTATION, starting with the diesel-electric rails, and the others to be built, etc.......
We must address our consumption with more than mileage targets, clean air reasons, etc, and Al Gore tribe global warming noise. Deliberate conversion from crude to many free "somethings else" in parallel, like a house afire. Again, we are a very resourceful people under wise leadership.
Hey, according to this mornings paper even Al Gore agrees with 1/2 of my argument (no hydrocarbons for POWER GENERATION; now if we can convince folks of no hydrocarbons for TRANSPORTATION). So, now we're getting somewhere; well the Democrats are. Goodness! If the drill, drill, drill Republicans are not careful this election will go to the Dems. And they (the Republicans deserve it -and I am one; well, have been one!).
Where were they and/or what happened to all the objectors to oil rigs during the last 100 years (while farmers throughout the Nation huggged and blessed their windmills)?
Nakedjaybird since you don't quantify anything,equating the alternatives as to time to achieve a given amount of energy or the relative costs, is simply an assertion of the either /or persuasion and not the comprehensive plan that solves our most pressing economic problem.
Solar, wind, tidal have not been the first choice; China and many developoing countries has learned what pollution does and that there are now alternatives. They will switch just as Europe, Brazil, Switzerland, Germany, Spain, Holland when "foothold" power defeated - just as what the US is fighting right now in big oil, coal, etc. Alternatives have a difficult row to hoe. Just as defeating unions required elimination of mfg, outsourcing, etc. The energy transition will be slow but sure here and worldwide. Guess we just get to watch, should we live that long.
Do you think hydro would have ever made it in the US if it was strickly based on private business push and cost/benefit analysis?