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Freddy Hutter, TrendLines Research
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As a data analyst, Freddy Hutter of Trendlines Research provides guidance in chart format on the specialties of peak oil, realty bubbles, baseline GDP projections and election predictions. Virtually each day an update is published to the website's MemberVenue. All charts are made publicly... More
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  • PS2500 oil depletion model projects $210/barrel will determine PEAK Demand
    click to enlarge ... more peak oil charts @ my SA Instablog & website

    Jan 17 2012 FreeVenue public release of Oct 17th MemberVenue guidance ~ Today's monthly update of my global oil depletion model (Peak Scenario-2500) reveals there are sufficient Proved Reserves and a demonstrated capacity build for a natural Geologic Peak of 106 Mbd in 2030.  Production would suffer a 1.5%/yr post-peak avg decline rate to mid-Century.  This scenario assumes extrapolation of the long-term Consumption trend (1 Mbd/yr) and annual New Capacity averaging 3.2 Mbd to 2050.  The Underlying Decline Observed (UDO) generally increases from 3.0 Mbd today to 4.0 Mbd by 2050, inevitably exceeding the New Capacity build rate in 2031 (hence Peak in the preceding year).  Resource constraint (the inability to draw upon Proved Reserves at will) becomes an additional factor for enhancing the decline rate in 2040.  That said, this growth-as-usual oriented scenario will likely never come to fruition...

    Starting in 2004, Demand oriented medium-term extraction forecasts began to take a backseat to a new breed of practitioners using a new genre of "bottom-up" flow studies.  They were inspired by the realization actual Production could not attain the lofty magnitude numbers being forecast.  Projections of unrestrained future consumption as high as 126 Mbd were becoming commonplace.  But lately, an ironic reversal appears to be in play.  It is increasingly apparent these (bottom-up) flow determined targets are themselves significantly over-estimating probable production.

    The most recently designed Demand modules are re-stating consumption projections to account for the reality of demand destruction associated with Crude Prices approaching $350/barrel by 2035.  The four-decade 1 Mbd/yr Demand trend (upon which my "Geologic Peak" scenario is based) is giving way to a waning growth rate that will see annual consumption cease to rise after bumping against the Peak Demand Barrier.

    Because production is more likely to take this damped path rather than one creating excessive surplus capacity, the emphasis of my monthly Outlook updates have since July 2010 reflected the more conservative "Peak Demand" inspired scenario.  The March 2011 model run was the first to indicate production will PEAK due to insufficient Demand rather than geologic constraints.

    Today's PS-2500 monthly revision of the Peak Demand Scenario reflects four factors:  (a) target for Underlying Decline Rate Observed (UDRO) by 2050 increases to 4.4% (from 4.3%);  (b) the projected annual New Capacity trend to Year 2100 increased to 4.2 Mbd (from 3.6 Mbd);  & (d)  7 Gb decrease in URR/EUR.

    PS-2500's Peak Demand scenario projects All Liquids flow will attain its ultimate peak upon permanent breach of the Peak Demand Barrier ... a definitive Crude/GDP ratio that temporarily blocked rising production in 2008 & 2011.  The Barrel Meter model projects that the next time this line-in-the-sand is surpassed (2029), it will be the final incursion.  This rather unnoticeable event will occur when Crude Price crosses the $210/barrel threshold.

    Although this leaves less than two decades for stakeholders and policymakers to have infrastructure transition in place, they may seem mostly unconcerned when it is realized All Liquids production will not fall back below this year's pace of 88 Mbd 'til Year 2056 ... ensuring many decades of plentiful supply.  All Liquids will cross the midpoint of its 8.0-Tb URR in 2103.  With petroleum-based liquids exhausting around Year 2496, there appears to be only 500 years of oil left!  After that date, flow will be solely dependent on renewable Biofuels.

    status today - Global production has increased dramatically from the Recession low of 83.1 Mbd (Jan/2009), setting yet another monthly record (89.1 Mbd) in Sept-2011.  The oil sector is on pace to shatter last year's annual record and monthly production is poised to finally break the 90 Mbd threshold in Jan-2012, the 95 milepost in 2019 & geologic peak should be truncated via 100 Mbd Peak Demand in 2029.  International Inventories are starting to dip below the 5-yr avg, but 5% of global capacity is presently idle eagerly awaiting new Demand.

    See our World Production Records venue for higher resolution charts of current extraction both at the global level and by the Top 7 nations.  Historical analysis of Crude & Gasoline Price components & future target prices (out to 2035) can be viewed via our Gas Pump & Barrel Meter charts.

    It is little known the pause in global production seen in 2009 was actually the 11th annual decline since 1975.  Applying my study of North American business cycle patterns, it is almost certain similar softness can be expected from 2017, 2026, 2034 & 2043 contractions - and these potential economic downturns are indeed reflected in the PS-2500 modelling.  As BRIC nations become more prominent on the global scene, USA Recessions should eventually have reduced influence over the decades.

    A record 4.8 Mbd of flow from new facilities was set in 2010.  A sign of the health and robustness of the sector is evident in that after addressing Underlying Decline loss and higher production, global Surplus Capacity is only a tad lower this year @ 5 Mbd & Total Capacity is a record 93 Mbd.

    Year-to-date stats reveal Underlying Decline Rate Observed (UDRO) for All Liquids is up modestly @ 3.4% (2.94 Mbd) worldwide, up as well to 3.2% (0.33 Mbd) in Saudi Arabia & steady @ 2.5% (0.22 Mbd) in the USA.  In keeping with its cyclical nature, the loss factor should see its next high during a probable 2017 Recession or soft landing.  Modelling of the secular trend (including its 8.5 year cycles) suggests UDRO will rise to 4.4% by 2050.

    Due to the limited horizon of accurate long-term Demand projections and uncertainty of technologic advances, the PS-2500 All Liquids production profile post-2040 still reflects available flows from prudent Proved Reserves development ... not Demand.  To maintain the integrity of supply chain realities the model assumes Proved Reserves will continue to be developed from available resource at a rate consistent with the historic 40-yr Reserves/Production ratio and a static 4.0 Mbd of Surplus Capacity.

    PS-2500 is a composite analysis of the 7 major components of All Liquids.  Regular Conventional Oil (RCO) is the only category that is post-Peak, down over 5 Mbd from 69 Mbd in 2005.  The 11 streams tracked as All Liquids include RCO, NGL, refinery gain and the non-conventionals: GTL (gas-to-liquid), Deep Sea, Arctic, Bitumen (oil sands), X-Heavy, CTL (coal-to-liquid), Kerogen (shale) & BTL (biofuels-to-liquid) ... each with its own unique production profile.

    PS-2500 is a flow based bottom-up study with best-efforts projections for new capacity as constrained by Demand realities by Trendlines Research energy analyst, Freddy Hutter.  It is our contribution to the 17 models that comprise the TRENDLines Tier-1 Scenarios presentation chart I track each month, illustrating industry consensus on the timing of Peak Oil & Depletion.


    Target All Liquids  Extraction Rates :

      Mbd  
    2008 85.6 -
    2009 84.4 -
    2010 86.9 -
    2011 87.8

    (pending)

    2029 100 Peak Year & Peak Rate  (Demand)
    2032 99 extraction passes 2 trillion barrels
    2035 98 milestone
    2040 97 regular conventional drops to 50% of All Liquids
    2049 91 today's 1,256-Gb of proven reserves exhausted
    2050 91 milestone
    2056 88 first year with flow less than today
    2064 82 extraction passes 3 trillion barrels
    2075 76 milestone
    2100 72 milestone
    2100 72 regular conventional oil exhausts
    2103 72 Extraction of 50% of URR
    2103 72 extraction passes 4 trillion barrels
    2145 64 extraction passes 5 trillion barrels

      2174

    43 flow is 1/2 of today
    2200 33 milestone ~ flows limited to X-Heavy, GTL, CTL & BTL
    2216 32 extraction passes 6 trillion barrels
    2300 31 milestone ~ flows limited to CTL & BTL
    2400 20 milestone ~ flows limited to CTL & BTL
    2496 5 world runs out of (NYSE:CTL) oil ...  (excl BTL)

    Toward Peak Demand

    It is has been my judgment since July 2010 that the oil sector is on a path leading toward Peak Demand ... not Geologic Peak.  A record flow of 4.8 Mbd from new Capacity was set in 2010.  As shown in the chart#4 inset, this 5.5% of production pace had not been seen since 1983.  Today's 100 Mbd 2029 projection of Peak Demand mandates a construction pace of 3.4 Mbd/yr of new facilities to that date.  On the contrary, should there be a continuation of the four-decade growth rate of 1 Mbd/yr, Production would PEAK @ 106 Mbd in 2030, requires a capacity build of 3.6 Mbd/yr & assumes 4 Mbd of Surplus Capacity at Peak.

    PS-2500's Peak Demand module addresses the recent deterioration of the Demand growth rate - mostly reflecting a decline in OECD consumption.  Since its first monthly run in July 2010, it has been suggesting it is less and less likely a resource constrained geologic peak will occur.  This is welcome news from a Crude Price context as it is much easier to maintain reasonable Inventory balance & Surplus Capacity in such an environment.  That said, it is both technology advances and ever higher Crude Prices that are the inspiration behind Demand Destruction.

    My current analysis of the Demand growth rates indicates global consumption started to break away from the long-time 1 Mbd/yr growth trend in 2004 and will level off by 2029.  The Peak Demand Barrier is a definitive Crude/GDP ratio that has been twice breached:  2008 & 2011.  During the months it was surpassed, consumption failed to rise.  Except during economic recessions, naturally the DDB rises with GDP over time.  The level was $89/barrel in 2008 and is $101 today.  The Barrel Meter analysis warns the next time the Peak Demand Barrier is crossed, Crude Price will never return, thus paving the course for terminal decline.  This will occur when oil crosses the $210 mark in 2029.


    URR/EUR

    8,004 Gb All Liquids URR/EUR  2011/10/17 100 Mbd PEAK 2029 2011 flow: 88 Mbd
    2,055 Gb Regular Conventional Oil 69-mbd  2005 64 Mbd
    801 Gb Bitumen/X-Heavy 21-mbd  2115 2 Mbd
    1,708 Gb NGL-GTL-Ref/Gain 17-mbd 2039 11 Mbd
    938 Gb Kerogen 20-mbd  2058>> 0 Mbd>>
    266 Gb Deep Sea & Arctic 15-mbd 2028>> 9 Mbd>>
    2,236 Gb CTL 14-mbd 2046>> 0 Mbd>>

    1,256 Gb  PAST  (excl 4Gb BTL, to 2010/12/31)

    2 Mbd BTL

    Peak Scenario-2500 is constructed on a 8,004 Gb URR platform that spans over six centuries and reflects an ultimate recovery rate of 42% by Year 2500.  Six of All Liquids seven main components will probably have exhausted presently economic resource by Year 2496.  After that date, All Liquids is limited to BTL sourcing unless there are significant technologic advancements, or the Crude Price rises sufficiently to convert more OOIP (original oil in place: 19 Tb) to economically feasible resource.  Generally, my analysis reveals for every $1/barrel increase in Crude, another 33-Gb of resource is added to URR.  The October PS-2500 revision reflects a 7-Gb decrease in our URR estimate.  Rising petroleum prices also encourage technical advancements, enhancing this trend.

    One reason McPeaksters ("imminent" peak oil fear merchants) have been successful with their 23-year scare crusade is 'cuz most folks have little appreciation of the magnitude of Proved Reserves (1,256 Gb).  As can be seen in the table above, this is equivalent to all the oil consumed over the past 150 years.  In other words, if no further discoveries were made after today's date, development of present Proved Reserves would be sufficient to satisfy projected Demand 'til 2049.

    Since 1988 the oil sector supply chain has operated within a regime which assumes a 40-yr Reserve/Production ratio.  To maintain this metric, the industry has added an avg 50-Gb annually to the Proved Reserves tally over the last ten years.  This more than covers present Consumption of 32-Gb/yr.  The McPeakster hypothesis that Peak Oil occurs 40 years after Peak Discovery (1964 & 2004) is nonsense considering supply chain realities and industry best practices.  Published Proved Reserves have doubled since 1978.  URR has doubled since 1992.  Available remaining Resource has doubled since 1996.

    Due to the enormous time span over which economic resource is spread, it is more than probable the post-2050 "production" projection will be substantially reduced due to technologic obsolescence ... akin to the stone age, coal and whale oil dependence - the reality of demand destruction.  The adoption of hybrid, electric, natural gas & fuel cell vehicles will lead the transition away from gasoline/diesel dominance as a transportation fuel.  Analysis by my long-term Barrel Meter model suggests this weaning off gasoline & diesel must be substantially complete by 2028 ... upon Crude Price surpassing forever the then current demarcation for Light Vehicle Sales Collapse Threshold ($200/barrel).

    As a renewable fuel, BTL has virtually no end point.  PS-2500 projects BTL will attain an ultimate and permanent Peak Plateau of 5 Mbd in 2035 and will consume a cumulative 930-Gb to Year 2500 (excluded from URR/EUR tally).

    The All Liquids Demand Peak (2029) will occur at 24% depletion of presently-economic resource.  The midpoint of URR will be crossed in 2103.  Exhaustion of the first trillion barrels of reserves occurred in 2002.  The second trillion will have passed by 2032; and then the third by 2064.

    Due to the 600+ year time line and our 3.9-Tb of liberal augments to Heavies/Bitumen/Kerogen/GTL/CTL, PS-2500's 8.0-Tb URR varies immensely from the 4.1-Tb Avg found in the 16-model TRENDLines Scenarios.  And admittedly, the latter is remarkably in line with the last update of my URR Composite Estimates Study with its slightly different mix of 22 practitioners and sporting an average of 3.99-Tb URR.


    Underlying Decline

    In a typical profile, annual production builds over time, attains a peak, maintains a plateau, then declines.  Because fields and petroleum provinces are developed over years or decades, some of the wells of a field, or fields within a province, or ultimately provinces within global production ... can be in decline or retired while others are still in growth stage or plateau.  This annual loss factor is the field/province/world's Natural Underlying Decline.

    IEA calculates the annual Natural Underlying Decline Rate is 5% in post-peak Regular Conventional Crude fields, and as much as 15% in non-conventional post-peak Deep Sea fields, with a weighted avg of 9%.  A Producer's EOR activity can improve extraction results and diminish this loss factor.  After general EOR activity, IEA calculates the annual loss is 6.7% for Conventional & Deep Sea crude categories that represent 83% of global production.

    I call this net absolute figure, more applicable to our depletion studies, Underlying Decline Observed (UDO).  It is expressed in millions of barrels per day (mbd) per annum.  More commonly, analysis of RCC or All Liquids is conducted in percentage terms per time interval - and the Underlying Decline Rate Observed (UDRO) is appropriate.  To maintain a production plateau, Production Capacity must be incrementally increased each year to match UDO loss.

    Within a typical petroleum province, roughly a third of fields & wells are relatively recent and are annually ramping up their production rate.  Another third are in plateau.  And the balance are the mature and near-retired wells & fields where significant depletion is reflected by production decline within.

    Since November 2007, Peak Scenario-2500 has uniquely provided stakeholders with regular monthly reporting of Global UDO/UDRO status, along with progress alerts on the two key mature provinces (Saudi Arabia & USA).

    In March 2009, PS-2500 analysis first revealed Global UDO initially became a significant factor during the 1970 American Recession.  Chart#4 illustrates long term global annual UDO (red line), but it is the Underlying Decline Rate Observed (UDRO) inset showing annual rates that is most instructive.  I have found UDRO exhibits a tendency to ebb and flow.  These cyclical (8.5-yr) crests correlate with all six USA Recessions since 1970.  The cycle tops appear to reflect reduced maintenance & EOR activity during economic contractions, no doubt due to capital & cash flow challenges amid a reduced Demand environment.

    UDRO's highest annual surge (bold red line) was 6.3% of global All Liquids production in 1984.  The 4.3% & 2.9% cycle tops of the 1991 & 2001 Recessions were followed by a 1.9% UDRO trough in 2006 - then the 3.2% high during the 2008 Recession.  The 2011 setback of 3.4% appears to mirror this belated momentum pattern in the wake of the double-dip 80's Recessions.  The loss factor is expected to see its next cycle high (3.5%) during a probable 2017 Recession or soft landing.  My study of business cycle patterns strongly suggests future crests will occur as long as the USA is the dominant global economic engine (2026, 2034 & 2043).  Modeling of the general trend (including its 8.5 year cycles) suggests UDRO will rise to 4.4% by 2050. 

    Analysis by Trendlines Research reveals that over the last 40 years, UDRO has averaged 2.7% annually.  From 1970, this necessitated the construction of 120 Mbd of new facilities:  77 to address UDO & 43 Mbd to raise Extraction Capacity from 48 in 1969 to 91-mbd by December 2009.  In short, the oil sector has been adding 3 Mbd/yr ... or a new Saudi Arabia every three years for four decades!  Terminal global production decline will normally commence upon Annual New Capacity no longer exceeding the UDO trend line.  This intersection is accelerated if the sector winds back due to Peak Demand.

    In a more recent context, the industry commissioned 36 Mbd of new capacity from 2001 to 2010.  During that ten year span, a full 24 Mbd was applied against this Underlying Decline challenge; and the remaining 12 Mbd serviced new Demand & added to Surplus Capacity.  This impressive task (3.6 Mbd/yr) was equivalent to a new Russia coming on stream every three years.  Visually, the bold red line in charts #3 & #4 tracks annual Underlying Decline Observed.

    Cycles aside, the magnitude of loss will generally rise as Peak  approaches.  Viewing the future by our measure, 94 Mbd (3.4/yr) of New Capacity will be required to attain the 2035 target.  This will facilitate a 12 Mbd increase in Capacity (91 to 103) and the other 82 Mbd addresses UDO loss over the 26 years after 2009.  Added to the 77 Mbd to cover 1970-2009 decline loss, we calculate a total 159 Mbd of Capacity will have been dedicated to this loss phenomenon over the full six and half decades.

    The oil sector presently maintains a seven-year trend for New Capacity of 3.7 Mbd/yr, thus demonstrating an ability to attain the 2035 target.  And, perhaps even a less difficult task considering the record breaking 4.8 Mbd new capacity installed in 2009!  Based on present URR Estimates and subject to Capital availability, the Industry can maintain this activity level until inevitable resource constraints begin to restrain new development after Year 2072.

    Below, PS-2500 is compared to the short time frame practitioner estimates for All Liquids UDRO:

       1.9% - Adam Brandt (2007 - sole peer-reviewed contribution)

       2.0% - IEA (2010-2035 avg)

       2.1% - CERA (2009-2030 avg)

       3.4% - Hutter Peak Scenario-2500  (2011, cyclical & rising to 4.4% by 2050)

       4.1% - Matt Simmons (2009-2030 avg)

       4.2% - Jeff Rubin (2009)

       4.5% - EIA (2009-2030 avg)

       4.5% - OPEC (2008)

       4.7% - Chris Skrebowski (2010)

       5.0% - Total (2009)

       5.0% - Deutsche Bank (5% in 2009, rising to 8% by 2030 ... 6.7% avg)

       5.2% - Schlumberger (2009-2030 avg)

       5.25% - Sadad al Husseini (2009)

       6.0% - PFC (by 2030)

       7.0% - UK Energy Research Centre (2009)

       9.0% - consensus at theOilDrum & PeakOildotcom (2009)

     

    The PS-2500 findings surrounding the nature of Underlying Decline vary considerably from the consensus McPeakster hypothesis.  Chatter at PeakOildotcom & theOilDrum proposes All Liquids UDRO rose fast & furious from 0% in 2002 to 9% in 2009.  Their simplistic musings are void of any explanation for the above mentioned 77 Mbd of new facilities built from 1970 to 2009 that failed to increase production!  The 7% figure adopted by the UK Energy Research Centre is similarly a figure fabricated from thin air.  Acknowledgment by McPeaksters that their scary scenarios are groundless will not occur anytime soon.  These groups are agenda-driven and facts just get it in the way...

    Finally, let's give this loss factor some overall context.  The USA sports a 2.5% All Liquids UDRO as an 86% depleted petroleum province in 2010.  Less mature Saudi Arabia at 48% Depletion, sports a 3.2% All Liquids UDRO this year.  Both are reasonably good proxies as to what will be faced on the global scale in the domain of Underlying Decline.  With global Depletion at a mere 16%, it is almost certain the general trend of global UDRO will not exceed 5% 'til mid-century on its journey to ultimate exhaustion by Year 2500.

    All Liquids 2011 (year-to-date) Underlying Decline Rates Observed:  3.4% (2.94 Mbd) and rising Worldwide;  3.2% (0.35 Mbd) & rising in Saudi Arabia;  2.5% (0.22 Mbd) and rising in the USA.


    2035 Outlook

    This high resolution of PS-2500's Year 2035 Outlook provides illustration of the two current competing scenarios:

    (a)  an ultra conservative All Liquids trajectory with an apparent 90 Mbd Peak in 2012, declining to 29 by 2035 ( hashed lime line)).  It assumes an avg 3.2% Underlying Decline Rate Observed (UDRO) which undulates in correlation with GDP growth rates.  As a Worst Case Scenario, this projection assumes the oil sector will develop no further production capacity in the future other than the announced-to-date MegaProjects.

    (b)  the more plausible production profile wherein the same UDRO is employed, but assumes Megaprojects will avg 3.4 Mbd/yr thru to 2035 (current trend is 3.7 Mbd/yr).  This more optimistic trajectory represents projected Demand and reflects the current waning Demand growth rate (rather than higher historic four-decade consumption trend of 1 Mbd/yr).  Surplus Capacity averages 4.6 Mbd 'til 2035.  Demand peaks in 2029 @ 100 Mbd upon Crude Price exceeding $210/barrel.

    In practical terms, recent history (since 1970) has shown the pessimistic projection line ( hashed lime line)) incrementally rises thru time to meet the past production trend line ( solid lime line)).  Hence The Wedge as shown continually gets pushed back to "next year" (see chart#3)

    It takes up to 7 years to bring to fruition very large (MegaProject) capacity facilities.  The Autumn 2008 Credit Crisis jeopardized some planned ventures and may have deferred what were imminent announcements as stakeholders used the opportunity of a Recessionary environment to rewrite contracts and MOUs in a deflated pricing regime.

    To prevent Terminal Decline in the coming two decades, Producers need only monitor the UDO trend and commit to a New Capacity construction regimen that consistently matches or exceeds that loss.  As seen in Chart#4, the Industry has generally and stalwartly installed sufficient New Capacity to meet this challenge ever since 1970.  From a recent low of 2.6 Mbd installed New Capacity in Y2k, this metric has been on a steady rise, culminating in 5.0 Mbd of facilities in 2010.

    Resource availability for capacity additions poses no constraint until 2073.  With 1,256 Gb of Proved Reserves, the Industry doesn't need a newly discovered barrel of oil 'til Year 2050.  For over two decades the sector has relied on a supply chain that pre-supposes a 40-yr reserve/production ratio.  This means the exploration sector need only convert from Resource to Proved Reserves an amount slightly in excess of the amount it consumes ... 32-Gb per year.  The performance over the past ten years has actually been 50-Gb/year!

    Actual annual production will be affected by Price & Demand forcings, sometimes influenced by natural and geopolitical events.  I have attempted to account for these nuances by adjusting for future economic Recessions and high price periods.  The recent record 6.1 Mbd of global Surplus Capacity in early 2010 will generally decline but the model successfully maintains an avg 4.6 Mbd over the next 24 years.  It is the foremost factor in securing reasonable Crude Prices.


    the Peak ... & Terminal Decline

    The transition from ever growing Production to terminal decline is normally dependent on the delicate balance between Annual Underlying Decline Observed (UDO) and Annual New Capacity.  To complicate matters, we have shown that UDO does not rise incrementally each year as universally assumed.  UDRO rocketed to a 6.3% high after America's double-dip 80's Recessions, but then drifted way down to 1.7% by 1999.

    Add unpredictable OPEC interference to the fray and Producers have their work cut out in monitoring quota & UDO losses and stalwartly making up the difference ... and more.  Over the past four decades, new capacity installations averaged 3.0 Mbd/yr.  OTOH, the long term avg for UDO is 1.9 Mbd.  The balance of 1.1 Mbd/yr increased capacity from 48 in 1969 to 91 Mbd in 2009.

    Presently, Producers can extract at will from any of seven categories of conventional & non-conventional resource.  But on this second battle front, Producers must face inevitable resource constraint.  The first stream to peak was Regular Conventional Oil (RCO) in 2005.  A second stream, Arctic & Deep Sea extraction, starts terminal decline in 2029.  The NGL/GTL category declines in 2040.  Dwindling Proved Reserves will one day reach the point where our attributed Annual New Capacity ceiling (5 Mbd) is in jeopardy and can no longer be developed at desired levels.  Terminal Decline can present itself when Proved Reserves can no longer be drawn upon due to imminent depletion.

    These are the two conventional forcings (UDO & resource constraint) for the onset of terminal decline.  Below we see the resolution of these factors within our two scenarios.  Both assume a minimum of 4 Mbd of Surplus Capacity is maintained thru to 2100 to maintain supply chain best practices & integrity.  Lacking accurate Demand projections for the era after 2035, both production profiles reflect 7 stream bottom-up flows thereafter.

    Geologic PEAK Scenario:  This projection assumes continuation of the historic 1 Mbd growth rate for Supply&Demand, enabled by a New Capacity build rate averaging 3.5 Mbd/yr to 2050.  The normal course of events would see the secular trend of rising UDO surpass the sector's maximum proved ability for annual new installations (5 Mbd) in 2029.

    The PS-2500 model makes no distinction between the conventional & non-conventional streams other than the higher targets of this scenario requiring a greater draw on RCO Reserves.  Analysis infers the sector should see the first shortfalls in desired light sweet crude flows in 2058.

    Being the earlier of the two junctures, UDO would be the determinant of this scenario's Peak Date in 2030.  Annual production will have reached 106 Mbd by then.  Adding in that year's 4 Mbd of spare capacity reveals in a potential capacity peak of 114-mbd.  This would be followed by a somewhat manageable 1.5% post-peak decline rate 'til mid-Century.  The model foresees UDRO climbing to 4.6% by 2050.

    PEAK Demand Scenario:  This projection re-states production targets to reflect the realities of reduced Demand in a future triple-digit crude price regime.  Demand's rate of growth began to deteriorate with the first price shocks in 2004 and this scenario considers the occurrence of Crude Price spikes as high as $338 (2035).  Current analysis indicates Demand will level off @ 100 Mbd in 2029.  This would be enabled by a similar New Capacity build rate averaging 3.5 Mbd/yr to 2050.  Albeit terminal decline is demand-inspired in the early stage, eventually geologic realities determine the course of this scenario's  post-peak production profile.  The model foresees UDRO climbing to 4.4% by 2050.

    The breaking point for rising production will be an unrelenting breach of the Peak Demand Barrier.  Short incursions in 2008 & 2011 temporarily prevented increasing consumption.  The 2009 event will not see Crude Price come back below the critical threshold.  Demand destruction will prevail.  

    Already by 2031 the secular uptrend of UDO will see this annual loss factor exceeding New Capacity as the sector pares back new infrastructure.  Together this results in a manageable 0.5% post-peak decline rate, but accelerates when in 2058 the sector experiences shortfalls in developing light sweet crude (RCO) reserves.  It also means the topping will take on a classic bell curve path rather than either a plateau or a "plummet over the precipice" when R/P 9 is finally achieved as is more apparent in the Geologic Peak scenario that dominated earlier versions.

    Besides a more manageable decline, this scenario presents stakeholders and policy makers with softer Crude Prices via more padded Surplus Capacity - a critical factor.  None-the-less, the pressure to have substitutions, infrastructure & conservation measures in place in by 2029 is of greater importance than appears.  Coinciding with this event is the very real likelihood Crude Price will permanently breach both the Light Vehicle Sales Collapse Threshold & the Peak Demand Barrier.  The TRENDLines Barrel Meter warns that prudent mitigation should guide the transportation sector to significantly wean itself off gasoline/diesel based fuels ideally by 2028.

    Chart#1 illustrates how the down slope is shaped by the harmonics of the underlying unique production profile of each All Liquids stream within the Peak Demand Scenario.  Present data indicates Regular Conventional Oil (light sweet crude) will exhaust in 2100, the Arctic/Deep Sea resource in 2116, Kerogen in 2200, X-Heavy/Bitumen in 2249, GTL in 2402 & CTL in 2496.


    Saudi Arabia

    Russia & Saudi Arabia have enjoyed a friendly rivalry for the title of World's leading All Liquids Supplier nation for three decades.  OPEC mandated restrictions on member quotas since Autumn 2008 have enabled Russia to slip ahead once again.  Albeit the Kingdom announced in 2007 it is relinquishing its role as swing producer, its realization that triple-digit crude oil prices jeopardizes a stable world economy should result in reinstatement of Saudi Arabia as #1 in late 2011.

    Saudi Aramco started 2011 with an unrivalled 4.05-mbd Surplus Capacity and 12.25 MSC.  Despite OPEC quota restrictions, Aramco appears ready to draw this spare capacity to ramp up production ... even the remote possibility of new records.  "Remote" because this huge surplus capacity is masking the reality that the Kingdom has passed a major milestone:  the Peak of its Maximum Sustainable Capacity (NYSEARCA:MSC).  Trendlines Research declared in 2009 that KSA's 12.5-mbd MSC record that year would never be exceeded.  MegaProject analysis indicates there are insufficient new facilities planned within the visible horizon to outpace the Underlying Decline factor.

    After many years of support loyalty, my estimate of the Kingdom's URR has been drastically reduced over the past three years ... to 238-Gb.  The discrepancy between this linearization-indicated figure versus the 900-Gb resource base touted by the Kingdom is rather disturbing.

    Trendlines Research calculates Saudi UDO to be 0.32 Mbd/yr (3.2% of 2010 All Liquids).  Even assuming this to be a stable metric, the completion of announced MegaProjects would mean MSC of only 11.6 Mbd by the end of 2015.  Saudi Arabia must install an additional 1.0 Mbd in unannounced new facilities before 2016 to avoid 2009 being deemed its MSC Peak ... an almost impossible task at this juncture considering lead times.

    This historic event is consistent with our analysis that KSA will cross the midpoint of its URR in mid 2012.  Regardless, its reserves are quite large and the nation will continue to be the globe's number one (or two) All Liquids supplier for a generation.  Production Capacity of Regular Conventional Crude will not breach below the 8-mbd threshold 'til 2025.  The unrivalled Surplus Capacity makes it impossible to forecast Saudi peak production.  Aramco has many strategic options and is vulnerable to OPEC mandates.  See our separately released 5th Annual Saudi Outlook - an update for further discussion.


    Volatility of Crude Price

    One of the main reasons for the $92/barrel collapse of the monthly USA contract price from Aug-2008 to Jan-2009 was traders' confidence that robust Surplus Capacity was being reinstated ... via both the 5 Mbd collapse in Consumption & the historic Megaprojects coming on stream.  The TRENDLines Barrel Meter quantifies this beneficial development @ $38/barrel.  That's how much Crude price fell due to Space Capacity restoration.  With time, it is hoped the sector will come to realize the critical importance of this price component in maintaining reasonable crude prices.

    To that end, PS-2500 methodology has been tweaked to maintain a minimum of 4 Mbd of spare capacity thru to 2100.  When Saudi Arabia declared in 2007 it would no longer play swing producer, there were two reasons:  (a) with global production of 85 Mbd, the Kingdom was of the opinion its ramp-up potential was of too little consequence to move markets; & (b) the $12-billion cost of developing 1 Mbd of capacity was too high a price for its rare implementation.

    Due to imposed OPEC quota restrictions, Aramco by circumstance has at this time the ability to bring on up to 2.2 Mbd of crude.  The market has priced this in, but down the road KSA has a stated preference of trimming its idle capacity to only 1.5 Mbd.  Hopefully Iraq, Russia, Brazil, USA & Canada can share some of this critical role in the future as our price model reveals at least 4 Mbd of Surplus Capacity is necessary to maintain equilibrium pricing. 

    The second largest component in play takes the form of USDollar Debasement.  Failure of the American Congress to address its future structural deficits started a forcing in April 2004 that just kept growing.  Fortunately perhaps, the safe haven status of American investment instruments during the coincident 2008 Liquidity Crisis shaved $28/barrel off peak prices

    Geopolitical events are the third biggest mover of crude price.  The 2008 correction saw $16/barrel of "fear factor" evaporate in mere weeks.  This "phantom" issue is both the most volatile and least understood and makes its presence via direct Windfall Profits to Producers.  For the most part it is media & website driven.

    As an example one should remember from October 2006 to July 2008 the McPeakster fraternity was successful in originating/disseminating web-based rumours that Saudi Arabia's Ghawar giant field was in terminal decline.  PeakOildotcom, theOilDrum, Matt Simmons & Jeff Rubin (CIBC WM) were the main players that wrongly translated a reversal of Saudi extraction to be a harbinger of overall global decline.  But, as the Kingdom increased production from 8.7 Mbd to 9.5, the hoax by these perpetrators was exposed.  Prices plummeted as traders raced to eliminate their silly Depletion Fear Premium as a pricing component.  It can be safely said that the proponents of the myth of imminent Peak Oil (McPeaksters) have since 1989 been the best thing that ever happened to the sector since invention of the automobile.

    Of lesser importance during the 2008 price collapse were international Inventory Draws ($6/barrel), Extraction costs ($5) & Speculation/Hedging activity (-$1).  Together these six pricing components comprised the $92 correction from $129 to $37/barrel.

    Today the Barrel Meter is projecting a continuing rise of the USDollar Debasement factor 'til the stakeholders have a better sense of whether regime change is imminent in the Nov-2012 USA Elections.  This will be more than offset by a predicted drop in fear factor.  Contract Crude Price should decline to as low as $60/barrel by April 2012.  Thereafter, ever-rising Extraction costs will probably be the main driver of Crude Price as it resumes it secular uptrend.

    As explained above, July 2008 was a perfect storm of contributing factors.  Even in the headiness of that Summer, Crude Price was not exceeding its Fundamentals Fair Value.  This Barrel Meter analysis validates my stalwart position that this historic spike was not a bubble.  And maybe not surprisingly, this metric reveals Crude Price was a record 11% below FFV during the depth of the Price collapse in January 2009.  OTOH, the early 2010 spike was definitely not supported by fundamentals and the Crude Price bubble (as evidenced by obscene IOC reported earnings) reached a lofty height of 58% above FFV - a level not seen since late 2002.

    USA contact crude has exceeded $90/barrel since early February - a line in the sand which I have warned (since Nov-2009) that if breached would decimate the rebound of USA Light Vehicle Sales and manufacturing.  Another critical Crude-Cost/GDP ratio, signalled by $116/barrel, is a threshold which if crossed for any sustained time would induce a new round of G-20 Recessions.

    Interpretation of how these and other factors play a part in pricing structure can be viewed via my Barrel Meter & Gas Pump charts & discussions.  The former includes 1-Yr, 5-Yr & 10-Yr & 25-Yr price targets and my new Fundamentals Fair Value inset.

    original article


    Jan 22 4:51 AM | Link | Comment!
  • Barrel Meter model warns OPEC may intervene to prevent $60 oil
    click to enlarge ... more peak oil charts @ my SA Instablog & website

    2011/10/13

    $129 PEAK forcings:

    $92 SPIKE forcings:

    $37 TROUGH forcings:   $97 "Today" forcings:
    Windfall Profits  (fear) $18 $16 $ 2   $22
    Speculation/Hedging Activity $ 3 $ -1 $ 4   $ 6
    US $ Debasement $30 $28 $ 2   $17
    Inventory Draw $ 9 $ 6 $ 3   $10
    Lack of Surplus Capacity $44 $38 $ 6   $18
    Extraction Cost  (weighted) $25 $ 5 $20   $24
    Jan 18 2011 delayed FreeVenue public release of Oct 13th guidance @ Trendlines MemberVenue ~ $50 project fee, Annual Subscription ($10/month) or $13 monthly subscription equired for current charts & discussion

    The USA Contract Crude Price averaged $97 in September, up $1 over the last thirty days ... a mere 15% over its $84/barrel Fundamentals Fair Value.  This increase was mostly attributable to Windfall Profits ($2 - the fear factor associated with media noise), Inventory Draw ($1) & tighter Surplus Capacity ($1) ... offset by a rise in the USDollar ($-3).  At month end, the cost of imported oil ranged from $73/barrel for Canada Heavy to $111 for Malaysia Tapis Light.  Including spikes, the USA's contract crude oil monthly average could exhibit a trading range spanning $65 to $102/barrel thru the balance of Q4 & 2012Q1.

    Global production has increased dramatically from the Recession low of 83.1 Mbd (Jan/2009), setting yet another monthly record (89.1 Mbd) in September 2011.  The oil sector is on pace to shatter last year's annual record and monthly production is poised to break the 90-mbd threshold in January 2012, the 95 milepost in 2019 & geologic peak should be pre-empted by Peak Demand of 100 Mbd in 2029.  International Inventories are slightly below the 5-yr avg and 5% of global capacity is presently idle eagerly awaiting new Demand.

    For a second time in three years Saudi Arabia shocked McPeaksters by a virtual matching of its 2006 quarterly production record.  This validation of its Surplus Capacity and renewed role of swing producer assured the markets its claims were indeed bona fide and has served to drive down Crude Price.

    Improving fundamentals and declining Windfall Profits over the next several months should drive down Crude Price to a brief flirtation with $60/barrel.  Fear the Barrel Meter's forecast of an ultimate reversal in price won't come to fruition will lead the more nervous and vulnerable OPEC members to again break quota discipline and call for production cuts at the December meeting and even more so prior to the Spring event.

    FFV CHART INSET ~ The dashed red line in the chart above depicts the "fair value" of crude oil when considering its fundamentals:  worldwide Extraction Costs (production weighted), lack of global Surplus Capacity, international Inventory Draw (draw vs build) & US$ Debasement.  In general, Crude Price (red line) tracks quite close to oil's Fundamentals Fair Value.  The chart inset tracks variance from FFV.  Significant exceptions were:  (a) the 90% premium during the 1999/Y2k OPEC cutback;  (b) a 98% premium in the lead-up to the Iraq2 invasion; and (c) the -11% deficiency in December 2008  at the depth of the Great Recession.

    This unique FFV analysis serves to crystallize my consistent (and controversial) position that the July 2008 record price spike was indeed "not a Bubble".  The graph clearly illustrates the $129/barrel (monthly avg) peak Crude Price was indeed in equilibrium.  The price components table (above right) dissects the Crude Price forcings for both the 2008 spike and today.

    The inset further reveals Crude Price took on its own variety of irrational exuberance only a few weeks after the ultimate $37/barrel January 2009 correction trough.  Exactly a year later, the detachment from FFV attaining a lofty 58% premium - a level not seen since late 2002.  As TRENDLines predicted, Producers were rewarded with obscene record reported earnings during this 4 quarter spree.  Price discovery was utterly non-existent during this episode.  Yet, only $3 of the $75 Crude Price was attributable to spec/hedging activity.  Currency Debasement added another $8.  It is seen the early 2010 spike was heavily media driven (cable news fear-factor), as evidenced by a record $30/barrel assessed to Windfall Profits.

    One would have expected the juices to flow to new heights with the start of MENA geopolitical activity.  Regardless of Barack H Obama's faux rage in recent speeches, only $10 of the April 2011 price high ($113) is traceable to NATO strikes in Libya.  It is little known $11 was attributable to US$ Debasement and his Deficit & National Debt woes.  In fact, today's Crude Price reflects a $16/barrel (38¢/gal pump price) accumulated increase since Inauguration Day.  The FFV premium has calmed somewhat, sporting a 15% status in September ... $13/barrel above Crude's $84 fair value.

    PROSPECT OF $60 OIL ~ As has been the practice since Sept-2009, the Barrel Meter assumes a general continuance of the secular decline of the US$ 'til the Nov-2012 Presidential Election.  Despite this, the model projects the Debasement factor will be more than offset by improving fundamentals and decreasing Windfall Profits.  Ultimately this will lead to a Crude Price trough @ $60/barrel in the Spring.

    After attaining equilibrium, Crude Price will resume its secular uptrend 'til a probable USA Recession or at least soft landing occurs in 2017.  Fearful of the direction of dipping margins, the more vulnerable OPEC members are likely to voice promotion of quota cuts at the December meeting and most definitely by the Spring event.  In the meantime some of the same undisciplined suspects will no doubt be involved in production cheating.  A more strategic long-term course is for OPEC to strengthen Crude Price by holding to present production quotas in the face of record Demand Calls in 2012H2 when G-20 economies can better absorb higher prices.

    In summary, concern over a global recession, speculation/hedging reforms and improving fundamentals should lead to Crude Price falling to $60 by April ... en route to the 1-yr target of $77/barrel (Oct-2012).

    EFFECT on G-20 ECONOMIES ~ The USA contract crude price has exceeded $90/barrel ($3.26/gal pump) since early February.  This threshold represented a definitive Oil/GDP ratio about which the Barrel Meter has cautioned since November 2009 that if breached would strangle the post-Recession rebound of USA Light Vehicle Sales.  The TRENDLines Gas Pump model analysis reveals New Car Sales were previously decimated upon the crossing of this line-in-the-sand in 1980, 1990 & 2007.  The last event saw volume collapse from a 16 million unit annual rate to 9 mu/yr.  Sales had rebounded to 13.2 mu/yr by Feb-2011, but dropped back to an 11.5 mu/yr pace in June (see blue chart) as the auto sector again suffered pump price shock.  It is improbable sales will surpass the 14 mu/yr area in Q4 upon Crude Price dipping back below $92 ($3.33/gal pump).

    The Trendlines Recession Indicator calculates cumulative high petroleum prices over past Quarters trimmed o.8% off the annualized GDP growth rate in September ... just a whisker below the record for this GDP headwind set way back in Oct-2008.  It will take G-20 economies a couple of years to shake out the "baked-in" damping effect.

    Similarly, in January 2010 Barrel Meter chart annotations began to warn looming breach of a second critical threshold ratio would signal inducement of a new round of G-20 Recessions.  This definitive Oil/Global-GDP ratio saw 12 G-20 nations sink into Technical or Severe Recessions after Crude Price passed the $103 mark in early 2008.  Today this ratio is demarked by $116/barrel oil and it was no coincidence that as crude touched its 2011 high of $113 in April 2011, several nations were already reporting contractions.

    5 YEAR OUTLOOK ~ Looking down the road, the Barrel Meter expects Crude Price to resume it secular  uptrend in Spring 2012, eventually reaching my 2016 target of $96/barrel.

    10 YEAR OUTLOOK ~ Ever-rising extraction costs will be offset by rising fortunes for the USDollar as America finally addresses its Debt Wall.  After recovering from softness induced by a probable 2017 Recession or soft landing, Crude Price is projected to climb back to my 2021 target of $95/barrel.

    2035 OUTLOOK  (see chart below) ~ Despite Peak Demand in 2029, ever-rising costs for the marginal barrel will drive global Extraction Cost and Crude Price in a two decade secular uptrend.  Probable business cycle Recessions in 2017, 2026 & 2034 may give short respites but waning USA dominance over time will result in decreasing adverse effects on global GDP.  Crude Price will permanently encroach the Light Vehicle Sales Collapse Threshold in 2028.  It is at this juncture policy makers and stakeholders must aim all their efforts to have infrastructure in place for the transition away from all-dominating gasoline/diesel transportation fleets.

    Excepting the 2008 spike event, most  demand destruction on Crude Price's upward journey is quickly mopped up by eager emerging markets.  As Crude Price breaches the LVSCT ($192/barrel & $6.98/gal pump) for the final time, Peak Demand will prevail and stymie forever the increasing production of All Liquids.

    Not accidently, my Peak Scenario-2500 oil depletion model currently projects maximum production will occur upon a Demand Peak of 100 Mbd in 2029 ... not the 2037 Geologic Peak of 110 Mbd based on the current trend of converting proved reserves to new capacity.

    The benefit of a Demand-inspired scenario is its positive influence on maintaining global Surplus Capacity norms in Saudi Arabia, Russia, Brazil and elsewhere.  My analysis reveals approaching minimal spare capacity levels is the most critical forcing is raising Crude Prices today and over the next two decades.  Peak Oil will only be a problem if its unfolding results in drastic stock draws and waning idle capacity to the extent it causes price shocks.

    The Barrel Meter currently projects Crude Price will bounce off the Demand Destruction Barrier @ $338 in 2032, claw its way up to a new all time high of $351 in 2034, before settling to a Recession-induced $312/barrel - the 2035 target.

    NYMEX WTI FUTURES COMPARISON ~ For comparison to this price outlook, the similar NYMEX WTI Futures Contracts for the 1-yr & 5-yr targets are $102 (up $11 from 30 days ago) & $97 (same) respectively today.  Look for the futures prices to plummet $25 on the short term & fall $1/barrel for 2016, as they catch up with current realities.  Our comparative figure for the final futures date of Dec/2019 is $96/barrel, $3 below the $99 (same) for today's contract.

    PRICE DISCOVERY ~ There are over three dozen grades of oil across the globe.  Long ago, most were sold on long-term contracts via fixed price lists.   Saudi Aramco maintains this method.  Today, oil is often sold at a discount/premium to several standard blends, facilitated by consulting assistance from Platts.  Unfortunately, a new crop of mostly neophyte buyers have been found to be quite vulnerable to media noise (fear factor).  This has led to an era of irrational exuberance with respect to Crude pricing over the last four years.

    Less than 20% of crude is transacted on the WTI/Brent spot venues.  Most of the stakeholder activity there involves hedging.  An increasing trend is to contract some grades @ the front or second month of futures.  For the most part, futures contracts are side bets to guessing final outcomes ... akin to sports betting.  My research has consistently revealed that in periods of increased volumes (eg March 2011), these activities can add as much as $9/barrel to Crude Prices.

    Similarly, the myth of "imminent Peak Oil" has been the oil sector's best friend since the first of many annual declarations in 1989.  Enabled by the WWWeb, McPeaksters have provided the marketplace with dozens of outages and outright disinformation each week since 2003.  Their inferior forecasts have discredited them in the eyes of politicians, policymakers and the media, yet their influence in pushing up Crude Prices at every turn is evident.  Their ability to nuance fear factor goes straight to the bottom line in the form of Windfall Profits to Producers worldwide.  

    FAILED OUTLOOKS ~ The McPeakster blogosphere was burning up once again this past Winter in anticipation of Steven Kopits (Douglas-Westwood) forecast of an American and worldwide economic Recessions upon Crude Price exceeding $86/barrel.  Kopits subscribes to the myth that high oil prices are the main cause of Recessions.  He appears unaware correlation does not always imply causation.

    Crude oil is a miniscule portion of the consumer price index in most nations and the breach of the $86/barrel threshold passed unceremoniously in Spring 2011.  The IMF has since reported Q2 GDP grew at a robust 3.7% pace.  The Barrel Meter model long ago addressed this forcing and found only when Crude Price breaches the definitive Oil/Global-GDP ratio represented currently by $116/barrel would there be headwinds sufficient to result in a new round of G-20 Recessions.

    As did Colin Campbell before him, Kopits appeared before the USA House of Representatives Energy Subcommittee (2011/2/18) to fear-monger the outcome of Crude Price surpassing his $86/barrel line-in-the-sand.  He could have avoided subsequent embarrassment of his impotent screaming and handwaving had he learned from many of the same analysis errors made three years prior by economist James Hamilton (Univ of California).

    As a neophyte to the oil sector, Hamilton had adopted absurd assumptions relayed to him by the McPeakster fraternity with respect to alleged inadequate global surplus capacity, questionable annual new capacity build potential and over-the-top UDRO (underlying decline rate observed) assessments that were all terribly wrong.

    If that wasn't enuf, James Hamilton's failure to recognize USDollar debasement as one of the largest forcings of price spikes spoke volumes to the ultimate demise of his prediction the rise in oil prices was linear.  In an Aug-2011 update to his own Peak Oil study, Chris Skrebowski has adopted the same linear price growth assumption and predicts Peak Demand will occur upon Crude Price exceeding $135/barrel in 2014.

    PUNDIT IDIOCY ~ There continues to be absolutely no merit to the plethora of pundit forecasts (Feb-2011) for $200-$250 oil (& $5-$7 gasoline) by Summer disseminated by the lamestream media, McPeaksters & McDoomers.  We heard all the same rationalizations in the Summer of 2008 and our COPF chart (below) is testament to similarly hysterical musings.  Conversely, there was no hint of a MENA geopolitical event back in April-2010 when this year's spike episode with a founding on USDollar devaluation was initially foretold by TRENDLines!

    original article

    Jan 19 2:28 AM | Link | Comment!
  • TRENDLines Gas Pump: Price Components & Crack Spread for USA Gasoline
    click to enlarge ... more peak oil charts @ my SA Instablog & website

     USA Gasoline Price/gallon Components:

    Trendlines Research

    September 2011 2012Q4 2016 Oct
    Demand Destruction Barrier $4.34 $4.59 $5.46
    Light Vehicle Sales Collapse Threshold $3.33 $3.52  $4.19
    Retail Pump Price $3.67 $2.91 target $3.21 target
    Wholesale $2.95    
    Taxes $ .50    
    Profit $ .22    
    Metrics:      
    Contract Crude $2.30    
    Gross Margin (Retail less Crude) $1.37    
    Margin (Retail less Wholesale) $ .72   
    Crack Spread $ .65 ($27.14/barrel)   

    Jan 12 2012 delayed FreeVenue public release of Oct 12th MemberVenue guidance ~ All-Grades Retail Gasoline averaged $3.67 in September ... down 3¢ over 30 days.  Because the Gas Pump model projects Gasoline will trough @ $2.45/gal in April 2012, short-term anxiety within OPEC may spark an unnecessary intervention.  The current slide reflects increasingly favourable fundamentals for Crude Prices  via analysis by my Barrel Meter.

    The primary forcing for the recent multi-month price run was clearly Debasement of the USDollar amid heightened perception by the international investment community that Congress & the President were unwilling to address their Structural Deficits and mounting Sovereign Debt (see Debt Wall analysis).  Mismanagement of Federal Budgeting since Barack Hussein Obama's inauguration adds 38¢/gal to today's pump price.  MENA geopolitical unrest added another 24¢/gal but was totally extinguished upon NATO engagement.

    EFFECT on USA ECONOMY ~ When the Pump Price surged past the $3.26/gallon level in February  2011, it breached the Light Vehicle Sales Collapse Threshold - a definitive Gasoline/GDP ratio.  As seen in the (blue) chart below, the post-Recession rebound of unit sales was truncated right on queue in March 2011 upon the latest transgression.

    As far back as November 2009 the Barrel Meter has warned of a line-in-the-sand that if breached would strangle the post-Recession auto sector rebound.  New Car Sales were decimated upon the crossing of this threshold in 1980, 1990 & 2007.  This Great Recession saw volume collapse from a 16 million unit annual rate to 9 mu/yr.  Sales had rebounded to 13.2 mu/yr by February 2011, but then collapsed to an 11.5 mu/yr pace.  It is improbable that sales will surpass the 14 mu/yr rate 'til pump price dips below the LVSCT ($3.33/gal & $92/barrel) once again.

    The Trendlines Recession Indicator calculates cumulative high petroleum prices over past Quarters trimmed o.8% off the GDP growth pace in September ... just a whisker below the record for this damping factor set back in Oct-2008.  It will take the economy a couple of years to shake out the "baked-in" headwind effect.

    In case of a black swan event, the Gas Pump model reveals an extraordinary price spike would eventually be blocked by the same Demand Destruction Barrier (DDB) that firmly arrested the 2008 price run @ $4.11/gal ($129/barrel).  The negative effects of rising energy costs on the disposable income of consumers and the profits and viability of businesses and institutions eventually takes a toll against the economy.  The DDB represents a definitive Oil/GDP ratio (Sept = $4.34/gal & $136/barrel) where certain critical feedbacks come to fruition.  As happened in the Summer of 2008, Demand is reversed as alternative energies, substitutes and conservation measures are pursued.

    METRICS ~ Last month's avg Retail Price of $3.67/gal is comprised of $2.95 Wholesale refinery product & a $o.72 Margin.  In turn, Margin is made up of $ .50 Taxes & $o.22 Profit.  One would think the retailers are getting very rich, eh.  Well, the  Gas Pump reveals Margin was only $o.54 in January Y2k.  Taxes & Profit are up from 42 & 13 cents back then.  In other words, nominal Profit today is virtually unchanged.

    The post-Y2k Crack Spread (diff betw Wholesale & Contract Crude) for Refiners can be seen ranging from $1.06 & $0.18 per gallon ($44 & $8/barrel).  Crack Spread is currently $0.65/gallon ($27.14/barrel).  When this figure drops below $o.48/gallon ($20/barrel), Refiners prefer to produce diesel from available crude and import less expensive foreign gasoline.  It is this general lack of profitably that underlies the massive shuttering and sell-off of refinery & retail facilities.  Improvements in mileage performance has augmented the trend.

    SILLY PREDICTIONS ~ Trendlines Research at no time found merit in the rationalizations and musings in late February 2011 by cable news pundits warning of $5 to $7/gallon gasoline for the Summer.  Most are merely repeat guesstimates of the ilk we heard surrounding the July 2008 spike.  Some of their silly crude price forecasts are saved for posterity in our COPF chart.

    original article


    Jan 16 7:21 PM | Link | Comment!
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