perceptions_now

Oil: $20 a Barrel? Or $200?

Let me begin by saying that Oil does not exist in isolation and that there are many other factors involved.

I would suggest, however, that it is possible to glimpse some likely overall trends.

That said, if Oil were to remain the pre-dominant Global Energy source for the next 30-40 years, then Supply & Demand would suggest that the basic cost of Oil to the total GDP will increase significantly, over that time, given the general agreement that we are at or close to Peak Oil.

However, as the Costs of Oil Supply/Production escalate compared to total GDP, it will invariably reach an Oil Cost (based on a US$ Index) to GDP ratio, at which the Real Economy stumbles and heads back into recession.

In addition, the newer Deep Water fields and Unconventional sources, such as Tar Sands & Shale, the costs will be much greater & the EROEI will be much lower.

Given these facts and most likely after several more Oil Related Financial shocks, the time will come, in the not too distant future, when OIL/FOSSIL FUELS will cease to be perceived as THE VIABLE GLOBAL ENERGY SOURCE!

When that time comes, there will be a Tectonic shift away from the OIL/FOSSIL FUELS sector, as capital pours into a desperate search for alternative Energy sources.

As this occurs, investment in Exploration & New Technology for the OIL/FOSSIL FUELS sector will be decimated, causing the DEPLETION RATES for the OIL/FOSSIL FUELS sector to escalate rapidly.

The upshot of all of this is that both $20 & $200 are possible and may happen several times, over the short to medium term!

Credit Tightening Draws Nearer

"What’s going on? Are investors/citizens/con... really that shortsighted? "
============
The history Past Boom/Bust cycles would seem to suggest that is correct!

Regrettably, I don't see that current events have yet affected the human tendency toward the 7 deadly sins -
Lust
Gluttony
Greed
Sloth
Wrath
Envy
Pride.

JPMorgan and the Alabama Swaps

How many more???

Bank of America, Citigroup, JP Morgan and Wells Fargo Stocking Up on Liquidity

You gotta wonder -
1) Why these banks are hoarding cash, if the recovery is underway?
2) Why these banks are showing such reluctance to get into US Treasuries?
3) How much in hidden losses would be revealed, if Mark to Market rules on accounting for assets, such as Residential & Commercial Real Estate?

GDP Euphoria: An Artificial High

This is a rhetorical question, "what do you think would happen to the economy if" -
1) A National Annual DEFICIT, is increased from around 1%, to 3%, to 13% in consecutive years (in an effort to stimulate the economy) and is likely to stay above 10% in the medium term?
2) A National DEBT goes from around 60% to 100% of GDP, within 10 years and is set to continue rising, on the back of UNFUNDED LIABILITIES, ARISING FROM AN AGING POPULATION, IN THE SOCIAL SECURITY & HEALTH SECTORS.
3) That nations Central Bank acquires "assets" amounting to around 15-20% of GDP. The "assets" are now essentially worthless and the acquisition is made by "printing" more "money". However, the "assets" are still shown on balance sheets at their "former full value".
4) The nation in question had the largest economy (GDP) in the world, by far, equal to the next 3 largest GDP"s combined.

Oil: Supply and Demand? Hardly!

Mark,
"Supply and demand is ALWAYS the driving force behind the price movements.
ALWAYS. That's economic 101."

Whilst I understand where the comment comes from, it isn't ALWAYS so.

I would liken it to saying that "the market always gets it right". Perhaps, it eventually will, but it also invariably overshoots, both ways, there are some lengthy time lags and often there is vital information that is delayed, hidden or never presented.
That's economics reality!


On Oct 30 07:58 PM Mark Anthony wrote:

> Supply and demand is ALWAYS the driving force behind the price movements.
> ALWAYS. That's economic 101. If you apply supply and demand and could
> not draw the correct conclusion, that only means you missed something
> in your supply/demand equation.
>
> The one thing you miss in global oil supply and demand is the URGENT
> need for certain countries to increase their hoard of oil. Particularly,
> China URGENTLY needs to increase its strategic petroleum stockpile.
> The fact of the matter is China is hastenly building up infrastructure
> to be able to stockpile more oil and it could not build them fast
> enough, nor could it buy oil fast enough to fill up the new facilities.
>
>
> This is due to decades of neglect. For years China has been hoarding
> up a useless paper called US dollars, but neglect to hoard the more
> important stuff, petroleum, and critical industry metals.
>
> As it is now, China's petroleum stockpile is merely enough for 15
> days of supply. If China's oil importation is cut off, due to catastrophic
> events, within 15 to 30 days, China will be completely crippled.
>
>
> I don't think any Chinese leader can sleep well at night knowing
> that fact. I don't think China can buy enough oil fast enough to
> fill this void. This is one fundamental reason that oil price is
> driven up, regardless how you put the supply/demand numbers.
>
> seekingalpha.com/autho...

Have We Reached Peak Oil?

ValueInvestor,
Unconventional sources such as Canadian Tar Sands & Shale, as well as the newer deep water fields will contrbute, but they are simply not significant enough to offset the depletion rates at the old super fields, such as Ghawar & Burgan.

In addition, their EROEI is substantially lower and their higher cost structure will force the end user price to escalate.

That, in turn, would raise the spectre of increasing the Oil Cost/GDP ratio past the point, where it tips the Global economy back into recession?


On Oct 28 04:14 PM ValueInvestor wrote:

> The problem I have with peak oil is that its based on conventional
> oil production which means nothing IMO. The only thing that should
> be talked about is total world production. How can people completely
> disregard unconventional production? It counts for a couple million
> barrels a day and growing.
>
> I'm not saying it necessarily makes up for the slower production
> from conventional oil, but disregarding it paints a darker picture
> than reality.

Have We Reached Peak Oil?

Whilst it is good that you are reducing your personal consumption of oil, I have some not so good news.

Even if you & I may reduce our personal consumption by say 10% each year, there are some 2.5 Billion in China & India, who are eagerly trying to become 1st world consumers.

So, if the current Oil based Energy economy were to continue in a status quo mode for another 10 years, what do you think may happen, as the current 1 Billion 1 world consumers save 10%, but the 2.5 in Chindia increase their comsumption by 50%?

And, yes, I know!
On Oct 28 02:08 PM sethmcs wrote:

> Forget Peak Oil and think peak oil consumption. Every year I consume
> less oil. Oh by the way there is no shortage of oil nor paper oil
> contracts. Looking at the price of bonds and the price of oil somebody
> is terribly wrong. Maybe we will find out who shortly.

Have We Reached Peak Oil?

Regrettably, I am of the opinion that Oil Production has already effectively Peaked in 2005, in that it has subsequently failed to keep up with inflation, Demand or Population growth.

There are no new sources of Oil, which will now prove sufficient in size to overcome the depletion of the existing, but decaying old super fields.

If we were just treading water, with no growth, we would need 1 new Saudi Arabia every 3 years, just to stay where we are!

If Production were to keep up with inflation, Demand & Population growth, then another 2 Saudi Arabia's would need to be found & put into production every 3 years.

Unconventional sources such as Canadian Tar Sands & Shale and the newer deep water fields are simply not significant enough to offset the depletion rates at the old super fields, such as Ghawar & Burgan.

I suspect the current Production plateau may continue, for a short period, but production will fall behind Demand. However, as Demand outstrips Supply and Prices rise, those very Price rises will trigger the Global Oil Cost/GDP Ratio to run ahead too much, thus triggering another Economic & Share Market pullback.

The old rules are changing, the return on Money & Energy are being irreversibly delevered. The EROEI (Energy Return On Energy Invested) was 100/1 in the early days of Oil, it is now less than 10/1 and falling. New Oil is going to be much more costly to find & Produce and the Investment return is not going to be anywhere near what it used to be.

When the general perception finally accept that Oil has Peaked, then the rush away from Oil will begin, into the search for something else, which may not be there. This process will also severely dilute the capital needed for Oil Exploration and the EROEI will be further eroded!

In fact, even though Demand and Price has been rising, the investment in new Exploration has already been falling!

In the interim, Oil producing countries, particularly OPEC, refuse to verify or even discuss their actual level of their reserves.

If that happened, then the conjecture & uncertainty would come to an end.

There are a few likely scenario's -
1) The levels of reserves are substantially UNDERSTATED, THE IS MUCH MORE OIL THAN COMMONLY THOUGHT.
Whilst this is a very unlikely outcome, in this instance the result would be the usual where Supply exceeds Demand, the Price of Oil would fall!
An outcome not favoured by major self interest groups!

2) The levels of reserves are substantially OVERSTATED, THE IS MUCH LESS OIL THAN COMMONLY THOUGHT.
This would be the likely outcome and in this instance that would spark a MASSIVE & URGENT MOVE AWAY FROM OIL, towards other possible Energy sources, particularly for the transport sector.
That would result in a massive fall in Demand for Oil, in the near term and as usual where Supply exceeds Demand, the Price of Oil would fall!
An outcome not favoured by major self interest groups!

3) The levels of reserves REMAINS UNKNOWN, UNVERIFIED & SUBJECT TO CONSTANT CONCERN.
This is the current Status Quo outcome and the result is as usual where Demand appears to exceed Supply, there is constant pressure on the Price of Oil to rise!
THE PREFERRED OUTCOME for major self interest groups!

There are no guarantees in life, but the likely outcomes suggest that in 5-10 years, the Global Economic outlook, will be significantly different to today and I am not talking of upside!

Understanding Energy: Professional Money Management and Peak Oil

Regrettably, I am of the opinion that Oil Production has already effectively Peaked in 2005, in that it has subsequently failed to keep up with inflation, Demand or Population growth.

There are no new sources of Oil, which will now prove sufficient in size to overcome the depletion of the existing, but decaying old super fields.

If we were just treading water, with no growth, we would need 1 new Saudi Arabia every 3 years!

If Production were to keep up with inflation, Demand & Population growth, then another 2 Saudi Arabia's would need to be found & put into production every 3 years.

New unconventional sources such as Canadian Tar Sands & Shale and the newer deep water fields are simply not sigificant enough to offset the depletion rates at the old super fields, such as Ghawar.

I suspect the current Production plateau may continue, for a short period, but production will fall behind Demand. However, as Demand outsrips Supply and Prices rise, those very Price rises will trigger the cost ratio to run ahead too much, thus triggering the next Economic & Share Market pullback.

The old rules are changing, the return on Money & Energy are being irreversibly delevered. The EROEI (Energy Return O Enrgy Invested) was 100/1 in the early days of Oil, it is now less than 10/1 and falling. New Oil is going to be much more costly to find & Produce and the Investment return is not going to be anywhere near what it used to be.

When perceptions finally accept that Oil has Peaked, then the rush away from Oil, into the search for something that may not be there, will also severely dilute the capital needed for Oil Exploration, as the EROEI will be decimated!

In fact, even though Demand and Price has been rising, the investment in new Exploration has already been falling!

There are no guarantees in life, but the likely outcomes suggest that 5-10 years from now, the Global Economic outlook, will be significantly different to today and I am not talking of upsides!


On Oct 27 06:46 AM User 353732 wrote:

> 1. The easiest prediction to make about oil is a statement regarding
> what will happen in 5 years. No one can possibly know...... and no
> will remember even a year from now who said what and when in the
> Fall of 2009. It would be far more credible and impressive if we
> could have actionable predictions about oil production, storage and
> prices for 2010.
>
> 2. Oil will "peak" when demand for oil is put in a cage by the combination
> of major increases in global natural gas supply and nuclear energy.
>
>
> 3. The planetary endowment of natural resources, especially hydrocarbon
> resources, is unknown and unknowable. Geo-strategic developments
> that impede or facilitate resource developments cannot be forecast
> with any consistency(otherwise there would not be constant "surprises")
> and transforming technological and business process innovation cannot,
> by definition, be anticipated. Resource base, geo-politics, technology,
> risk capital all combine to shape and determine oil, or natural gas
> or coal or uranium or thorium supply. Anyone who can correctly and
> consistently forecast all these variables and their interaction 5
> to 10 years from now, should have no difficulty at all in providing
> investors with very specific trajectories for oil, natural gas, electricity
> etc price, supply and demand in the US and worldwide over the next
> 2 to 3 quarters. Yet no one does, because no one can.

The Greatest Depression Is Coming

What you need to, is ask yourself, are the fundamentals still the same?

If the answer is YES, then the old cycles will return and it's just a matter of timing?

If the answer is NOt, then you need to ask what has changed or what is changing?

As I have previously said, two of the major economic drivers (Population Growth/Aging & Oil) have recently Peaked (2005),

That said, and save a currently unknown major INNOVATION, the US & Global Economy will not return to the usual, historically accepted cycles!

Roubini Hates Gold: Is He Wrong Again?

No one is right or wrong, all the time!

Roubini has made some good calls and some not so good calls.

I would think, on balance, Gold is likely to go higher and the US economy & stocks will go lower, quite a bit lower.

This economic downturn has a few down legs left, as does the UD$.

I suspect Energy (Oil) Production & Pricing will have quite some say about where the real economy heads over the next 2-5 years and there won't be much fertile ground there for any "green shoots"!

Mathematical Realities Will Trump the Dollar

Bartlet & Martenson are right, you can not operate exponential Financial/Economic systems, in a world of finite resources and exploding Populations.

Something has to give eventually and we are now facing major tipping points.

I suggest you hold onto you hat, batten down the hatches and await the storm!

The Panic of '08: Cause or Effect of the Recession?

Let's try that link again?

www.sitkapacific.com/f...

The Panic of '08: Cause or Effect of the Recession?

Following is a perspective on historical consumer levels and current trends and the authors take on the debt/markets situation.
www.sitkapacific.com/f... pital_Management_Septembe r_2009_Client_Letter.pdf
==================
This perspective suggests that the US economy is continuing thru a deleveraging process, which may take many years.

In addition, it provides a chart on the Employment to Population Ratio (EMRATIO) and the Debt to Disposeable Income Ratio (TDSP), which provides some useful insights.

In particular, I would suggest the PARTICIPATION RATE (EMRATIO) will continue to fall for some time yet.

This arises from a mixture of the GFC causing layoffs in the US employment market, as well as employers NOT HIRING due to the state of the economy AND the cummulative effects of increasing RETIREMENTS in the Baby Boomer generation.

The combination of higher Debts, higher savings rates and less total jobs, means there is less real disposable income circulating in the US economy.

The net effects of these issues, plus Peak Oil, other Baby Boomer effects (Social security & Health costs) & Climate Change, means that THIS TIME IS DIFFERENT!