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[Dec 08, 2012] Peak, What Peak

The Oil Drum

Black_Dog on November 19, 2012

I think the EIA has been playing fast and loose with the petroleum statistics. As noted last week, the EIA Annual Review for 2010 states that the US produced a total of 9,443 mbbls/d, of which US crude production at 5,512 mbbls/day (which includes lease condensate), NGPL's at 2,001 mbbls/d and processing gain of 1,064 mbbls/d. The difference of 866 mbbls/d appears to be made up by biofuels.

Total product supplied is said to have been 19,148 mbbls/d, with imports minus exports totaling 9,434 mbbls/d of that. The amount of crude imported was 9,163 mbbls/d. From these data, the total crude supplied to the refineries was 14,675 mbbls/d, of which 62% is imported.

I've previously suggested that assigning all the processing gains to US production is factually incorrect, instead the processing gains resulting from refining imported crude should be added to the total for imports. For a rough guess, using the fraction of crude imported given above, 664 mbbls/d should be subtracted from the US production and added to the import side of the accounting. This revision reduces US production to 8,779 mbbls/d and increases imports to 10,098 mbbls/d, increasing the fraction imported from 49% to 53%.

Of course, the EIA misses the whole discussion about biofuels, especially ethanol, which require a large input of fossil fuels to produce the final product. The EIA ignores this fuel input, showing biofuels as an input to the front end of the refining process. With ethanol production now using about 40% of the US corn crop, it would be more accurate to consider this portion of the US agricultural system to have been added to the energy supply system and the energy used would thus become an internal consumption which would be subtracted from the petroleum energy available to the rest of society. Doing this calculation would increase the fraction of energy imported, which would give a more realistic picture of our situation...

E. Swanson

carnot on November 22, 2012

Sorry Guys but you have missed the point on refinery gains. It is a mirage. Remember the 1st law of thermodynamics.

Energy cannot be created or destroyed. US refiners continue to quote their refining capacities and products in barrels - a unit of volume which is meaningless unless a density unit is also quoted. What you should consider is the mass unit. In ALL refineries if you measure in units of mass it should add up to 100% plus the mass of hydrogen and other inputs added which increase the mass. ( methanol for an MTBE unit for instance).

When the crude is distiller in the crude unit it will produce a number of products with different densities and therefore different mass per barrel. Measure the products in barrels and you will have the following barrels per tonne.

Butane. 11
Naphtha 9
Gasoline 8.7
Jet 8
Diesel 7.5
Vacuum gas oil 6.8
Fuel oil 6.5

In a cat cracker, with no hydrogen addition the mass of products is constant but because the volume of LESS dense light products exceed the total volume of HEAVY dense products , hey presto there is a refinery gain - in volume but not in mass.

Some refinery gain is due to the addition of hydrogen but typically this is 2-3% of the overall mass flow. Refiners love to sell in units of volume as they can benefit form the sleight of hand of selling a less dense and lower energy product to unsuspecting drivers. When energy density is compared in mass units there is NO significant difference between gasoline, jet or diesel. It is about 42-44 MJ per Kg but very different in volume units.

That is why diesels appear 30 % more fuel efficient on volumetric terms but in reality the differnce is much less.

Oil Watch - Rest of World Oil Production (IEA) by Euan Mearns

December 7, 2012

This is the final installment of the tour of global crude + condensate + natural gas liquids (C+C+NGL) production data as published by the International Energy Agency (IEA) and deals with the rest of the world. OPEC and OECD production was described in earlier posts.

After many decades of growth, Chinese oil production appears to have stalled in 2012 at just over 4 million bpd. It remains to be seen if this is a temporary glitch or whether this heralds peak and decline in Chinese oil production.

Russia + Former Soviet Union (FSU) production has been on a plateau for 3 years at just below 14 million bpd. Russian production continues to grow slowly offset by declines in other FSU states.

Oil production in Oman peaked at 960,000 bpd in 2001 and declined steadily to around 700,000 bpd in 2008. An aggressive program of enhanced oil recovery (EOR) has turned things around and production has risen by over 200,000 bpd in the last 4 years and Omani production is challenging the 2001 highs. There are profound lessons to be learned here about the potential impact of EOR on heavy oil fields and future global production.

Columbia has also seen a reversal of fortune with new field developments reversing declines and new production highs just under 1 million bpd have been set in recent months.

Figure 1 Oil production has been largely flat in South and East Asia over the decade, rising slowly from 2002 to 2011 and since then in gentle decline. Production in China and India has been rising offset by declining production in Indonesia and Malaysia. All data published in this interim report are taken from the monthly IEA Oil Market Reports.

From May 2007 to August 2010, Rembrandt Koppelaar published an e-report called Oil Watch Monthly that summarised global and national oil production and consumption data from the International Energy Agency (IEA) of the OECD and Energy Information Agency (EIA) of the USA. This is the fourth in a series of new Oil Watch reports, co-authored with Rembrandt and details crude oil production data for the Rest of The World as reported by the International Energy Agency. Earlier editions:

Oil Watch - World Total Liquids Production
Oil Watch - OPEC Crude Oil Production (IEA)
Oil Watch - OECD Oil Production (IEA)

World's oil industry won't be the same in the wake of shale

US domestic oil production has jumped by 18 per cent in the past year as the shale boom has expanded, and in the first eight months of this year oil imports were 800,000 barrels a day fewer than a year earlier. America's oil exports rose over the same time by 300,000 barrels a day, so net imports have fallen in just one year by 1.1 million barrels a day, or about 6 per cent of total consumption. If that pace if sustained the International Energy Agency's prediction of self sufficiency for the US by 2030 will prove to be conservative.

Oil production from shale in the US is rising much more strongly than expected because the boom itself is working to shift production into liquids. The shale contains a mix of gas and liquids including oil, and enough gas has been discovered to produce a structural downshift in the price of US domestic gas, which by law cannot be exported.

Companies that have bought into the shale boom, including BHP Billiton, have reacted by pulling drilling rigs out of fields that are gas-rich and relocating them in ones that are rich in liquids that take a price that is roughly four times higher, pushing US shale oil and liquids production up. It is now running at about a million barrels a day, and is predicted to reach about 3.5 million barrels a day by 2016 (OPEC collectively exports more than 30 million barrels a day at over $100.)

[Oct 24, 2012] Currency Wars Part II

the currency war is intimately tied in with the oil/energy situation, via the petrodollar.

Jesse's Café Américain

24 October 2012

"All war is based on deception. Of all those close to the commander, none is more intimate than the secret agent; of all rewards none more liberal than those given to secret agents; of all matters none is more confidential than those relating to secret operations."

Sun Tzu


"Let Hercules himself do what he may,
The cat will mew, and dog will have his day."

William Shakespeare, Hamlet

There is a currency war underway.

The international trade clearing mechanisms are tottering. Countries are using their economic power, their banks and currencies, as a part of overall foreign as well as domestic policy.

This is a huge source of the tensions and problems which are are seeing both economically and militarily in the world today.

The current trade system based on the US dollar reserve currency is not sustainable. It has had a good long run, but like the euro it has reached the end of its rope. The US cannot continue to print enough money and increase its debt balance through trade any further. See Triffin Dilemma. Yes I am familiar with Eichengreen's counter argument.

And I am also aware of the already written and vetted proposals for a 'single world currency' with independent local governments, an arrangement which is even more fallacious and ill founded than the euro. Yes I know that there could be a series of agreements that could kick this down the road five or ten years. But something has got to give. The charade is getting a bit thin but the deception must go on.

I still think the only tenable solution, if one still wishes to cling to the notion of 'free trade' internationally, is an SDR based on a wider basket of currencies with a gold and silver component. And I am of the opinion as you know that much of these international theatrics and sword hammering is just the 'negotiations' phase with regard to the composition of the new SDR, and the ownership of its maintenance.

There are some who would treat the dollar as an arm of the military strategy, but that becomes a bit dramatic, in the Dr. Strangelove sense, but is nevertheless a good source of Defense Department consulting fees for those who promote the idea.

And I would hope that it goes without saying that the currency war is intimately tied in with the oil/energy situation, via the petrodollar. If you are going to send your country into multiple preemptive wars, one might take the time to understand the reasons why they are doing it. It is about the oil, and the positioning for it.

The problem is that there is no mechanism in place to bring the disputing parties together for an expedient resolution, given their conflicting interests. And those interests run deep, particularly for the Anglo-American banking cartel in NY and London. The dollar is the basis of their power.

And so we are locked in a 'currency war,' a resolution of differences in interest by other, less destructive, means than war itself. After all, nine-tenths of diplomacy is economic, if money is power.

If this notion is alien to you, then one can sympathize, because it is like watching an opera in a foreign tongue without a libretto to help you to understand the action on the stage. To have such knowledge of the basic plotline might not only help your understanding, it could be good for your investment portfolio. For in this currency war, your accounts and your savings are cannon fodder.

If you wish to read one pivotal post on the subject read the first part of this: Currency Wars

If you click on the label 'currency wars' at the bottom of this post, it will bring up all the other posts here that touch on that subject, some admittedly only tangentially.

I think the currency war will intensify quite a bit before it resolves. I have been tracking this since 1999. It is the reason I first became interested in gold. I went looking for something like it, and only gold really fit, and to a lesser extent silver.

Gold and silver are intimately involved in the unfolding currency war, because they take no sides, and have no counterparty risk. No one can print them. And this is why I think GATA is right, not because of the evidence they have, which is more substantial than one might suspect given obsessive secrecy and the disinformation campaigns, but because it is exactly what one would do if there was to be a currency war, and such things as gold and silver existed. It is basic strategy of war: seek to control the high ground. And along with oil, gold and silver are strategic high ground in a currency war. And the first victim in a war is the truth.

If one does not understand these things, and the scope of what is happening with the dollar and the euro, then the significance of the important things that are happening will be missed and dismissed. People will connect the dots that they see and draw their pictures accordingly and they will be wrong. And what is particularly Machiavellian is that some of that is being done by intent.

And even with all sorts of technical trading knowledge, one will be in the dark, literally be fighting 'the last war,' in their understanding of what is happening in the world as it is today.

Currency Wars- Move to Make Treasury's Geithner a Permanent Member of US National Security Council

August 2012
"To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create.

What needs to be discussed is the terms of the world's surrender: the needed changes in nominal exchange rates and domestic policies around the world."

Martin Wolf, Financial Times, 12 Oct 2010

"...the Treasury secretary, who has primary authority on economic and financial issues in the cabinet, should be at every meeting to advise on how economic and security issues intersect, and to ensure that the United States is using its economic and financial strength in the most effective way."

Robert Kimmitt, NY Times, 23 July 2012

Looks like the US is getting ready to flex its financial muscle. I don't think the Anglo-American banking cartel will relinquish the dollar reserve currency supremacy easily. This is currency war.

I somehow missed this editorial when it first came out. But over the weekend and today I heard echoes of the same sentiment from various places in what looks like a loosely organized public relations campaign.

The National Security Council, formed in 1947 and comprised of the President, Vice-President, Secretary of State, Secretary of Defense, Director of the CIA, and the Joint Chiefs of Staff.

The National Security Council has an unmistakable military flavor.

The move to add the Treasury Secretary as a permanent member is just another sign of the currency wars heating up. At least from the US perspective, there is an unmistakable convergence between military and economic action.

As I have noted before, the language used often suggests that the US considers its TBTF's to be a modern form of financial battleship, able to move key markets at will to support official policy. And the credit rating agencies are like agile destroyers.

I think this will become very interesting.

NY Times
Give Treasury Its Proper Role on the National Security Council
By Robert M. Kimmitt
July 23, 2012

THE National Security Act of 1947, which created the National Security Council, the Defense Department, the Joint Chiefs of Staff and the Central Intelligence Agency, turns 65 on Thursday. But it's not ready for retirement; it needs, instead, to be rejuvenated by making the Treasury secretary a statutory member of the National Security Council, rather than an invited attendee.

The act and the organizations it created performed well during the cold war, the post-cold-war decade and the period after 9/11. But they need to be updated to recognize the close connection between security and economic issues as we look forward from the global financial crisis of the last few years. The concept of national security has broadened considerably since the N.S.C.'s early decades, elevating economic and financial issues to crucial elements to our nation's security, alongside the traditional diplomatic and military issues. Diplomatic and military issues are still important, of course. Iran, Syria and North Korea make that clear. But the growth areas in national security policy are economic and financial.

During the cold war, the German chancellor, Helmut Kohl, knew with precision the throw-weights of American nuclear weapons based in Germany; today, Chancellor Angela Merkel has to know with equal precision the spreads on Spanish and Italian sovereign debt.

It may seem odd that the Treasury secretary would have been left off the list of statutory members of the National Security Council by the generation of American leaders who helped lay the groundwork for Western Europe's postwar revival with the Bretton Woods conference and the Marshall Plan. But at the time, military, diplomatic and economic policies were seen as largely separate tracks. And as the cold war deepened, the military challenge from the Soviet Union assumed overwhelming importance.

This is where the National Security Act has not kept pace. The statutory members of the National Security Council are still the president, vice president, secretary of state and secretary of defense, with the chairman of the Joint Chiefs of Staff and the director of national intelligence as statutory advisers. This is a good, but incomplete, team. Even though the Obama White House says that Treasury Secretary Timothy F. Geithner is a regular attendee, along with the statutory members, it is now time to add the secretary of the Treasury to the list of statutory members. That would ensure that the economic and financial dimensions of national security challenges are given equal weight in council deliberations, now and into the future...

There are, of course, other officials integral to international economic and financial success, like the secretary of commerce and the United States trade representative. They should still be invited to N.S.C. meetings. But the Treasury secretary, who has primary authority on economic and financial issues in the cabinet, should be at every meeting to advise on how economic and security issues intersect, and to ensure that the United States is using its economic and financial strength in the most effective way.

Read the entire editorial here.

[Oct 24, 2012] SP 500 and NDX Futures Daily Charts - FOMC A Big Nothing

October 24, 2012 | Jesse's Café Américain

The FOMC announcement was nothing new as expected.

If the Fed acts again I think it will be as a result of some crisis or event, and will be done with a better rationale. Bernanke is primarily supporting the big banks with the Fed's activities, and not much of his balance sheet expansion is flowing through to the real economy for a number of reasons, and I think by intent.

This is how the Fed is avoiding the problem of a general monetary inflation. The inflation the US is seeing is largely secular and structural.

[Oct 24, 2012] The World is Suffering from High-Priced Fuel Syndrome by Gail Tverberg

Governments and economists around the world have not figured out that what the world economy is suffering from, to varying degrees, is "high-priced fuel syndrome".

High-priced fuel syndrome has a number of symptoms:

[Oct 24, 2012] Interview The Myth Of Affordable Energy -

It is probably possible to increase efficiency of small car twice from 20 miles per gallon to 50 miles per gallon, but that does not mean saving energy. All saving just go into battery and more complex drive train. For tracks efficiency increases are much less. For trains I doubt that they are higher then 10-20%, althouth low speed trains are much more efficient. The shale revolution is just extracting available underground energy faster.
Seeking Alpha

The following interview was conducted by James Stafford and originally published on Oilprice.com. It is reproduced here with permission.

Oilprice.com: Access to cheap energy is vital to economic growth. What do you see happening with the economy over the coming years as the time of cheap oil comes to an end?

Ed Dolan: In my view it is a myth that cheap energy--"affordable energy" as many people like to say--is vital to growth. The idea that there is a lockstep relationship between growth of GDP and use of energy is widespread, but the data simply does not bear it out. Instead, what they show is that the world's best-performing economies have become dramatically more energy efficient over time.

The World Bank uses constant-dollar GDP per kg of oil equivalent as an energy efficiency metric. From 1980 to 2010, the high-income countries in the OECD have increased their average energy efficiency by 55 percent. The United States has done a little better than that, increasing its energy efficiency by 81 percent over that period. That's pretty remarkable, considering that we haven't really had a policy environment that is supportive of efficiency.

Think what we could do if we did.

Even after the efficiency gains in efficiency we have made, we still have a long way to go. The U.S. economy is still 15 percent less energy efficient than the average for high-income OECD countries, giving it plenty of room to improve. Switzerland is almost twice as energy-efficient as the U.S., and the UK is 68 percent more efficient.

Some people say that the only reason the United States has been able to grow while using less energy is the deindustrialization of its economy, outsourcing heavy industry to China. However, compare the U.S. with Germany. Germany is an export powerhouse and Europe's best-performing economy, yet its energy efficiency has increased at almost the same rate over the last 30 years as the United States, an 80 percent gain in efficiency compared to 81 percent. Furthermore, despite being proportionately more industrialized than the U.S. and a major exporter, Germany squeezes out 41 percent more GDP from each kg of oil equivalent.

In short, we don't have to hypothesize about the possibility of someday breaking the lockstep relationship of growth and energy use-we and most of the rest of the advanced world are already doing it.

Oilprice.com: What effect can you see America's Oil & Gas boom having on foreign policy?

Ed Dolan: On the whole, I see it as beneficial. Energy dependence has led us to buy a lot of oil from countries that are unstable and/or unfriendly to us. Anything we can do to reduce that dependence gives our foreign policy more room to maneuver. The beneficial effects reach beyond our actual imports and exports. The U.S. gas revolution is having repercussions all the way to Russia, where Gazprom is seeing its market power undermined, and Russia, as a result, is losing some of the geopolitical leverage its pipeline network has given it.

Oilprice.com: From Siberia and Poland to China and Qatar - the shale revolution has politicians salivating at the thought of a cheap and abundant source of energy. But can the results seen in the U.S. be easily replicated in other parts of the world?

Ed Dolan: I think you're going to have to ask someone with more engineering background for the technical details, but from what I read, the answer is that it won't always be easy. It is my understanding that some countries where shale seemed just recently to have great promise have already encountered disappointments in practical exploratory work. Poland I think is an example. Furthermore, the environmentalist opposition to fracking seems even stronger in many European countries than in the United States.

Still, I am hoping that the shale revolution will pan out in at least some countries. Think how much difference it would make, say, to Ukraine's foreign policy if they were able to break their dependence on Russian gas.

Oilprice.com: Gail Tverberg has written a recent article suggesting the world is suffering from high-priced fuel syndrome, which has the following symptoms:

Do you think this is too convenient and an oversimplification of the problems facing world economies at the moment? What would you blame for the plethora of economic woes being experienced at the moment?

Ed Dolan: I don't buy the argument at all. Yes, when countries are hit by unexpected upward shocks in fuel prices, we do see short-run results like slower growth and layoffs, but those are short-term problems. When the proper structural adjustments are made, countries with high fuel prices manage to achieve strong growth and full employment.

Where are fuel prices lowest? If you look up the data and rank countries by retail fuel prices, you find the low-price end of the rankings crowded with countries like Egypt, Cambodia, Iran, Pakistan-not exactly economies we would like to emulate.

We've got big economic problems, but a lot of them don't have much to do with energy. What about a healthcare system that delivers mediocre results at the world's highest cost? Health care isn't all that much energy driven.

What about our steady move down the international rankings in education-are you going to blame that on the high cost of heating classrooms? Hardly.

Oilprice.com: Oil prices have been near to the $100 a barrel mark for some time now, and don't look likely to drop back to previous low levels. What effect could this increased price have on oil importing economies compared to oil exporting economies?

Ed Dolan: Clearly, any oil price increase has the short-term effect of transferring wealth from using countries to producing countries. However, the long-run effects are what matter.

In the long run, high prices just accelerate the trend for using countries to become more efficient and less dependent. Meanwhile, the producing countries often don't manage their oil riches well. They fall victim to the "curse of riches." The curse takes the form partly of a loss of competitiveness in their non-energy sectors (the so-called "Dutch disease"). Partly it takes the form of corruption of their political systems. Russia is a poster child for both aspects of the curse of riches.

Oilprice.com: Renewable energy is more expensive than fossil fuels, so how can people be persuaded to choose the less economical option of renewables over the likes of coal and natural gas?

Ed Dolan: There is only one right way to promote renewables, and that is to introduce full-cost pricing of all forms of energy. Full-cost pricing is a two-part program.

First, it means pricing that covers the full production costs for every form of fuel. No subsidies for anyone-not for oil, not for ethanol, not for wind or solar.

The second half of full-cost pricing is to include all of the nonmarket costs, what economists call the "external costs" or "externalities." The most publicized of these are pollution costs, whether those take the form of local smog, oil spills, climate change, or bird kills. Some people, I am one of them, would like to count in something for the national security costs of dependence on unfriendly and unstable foreign sources of energy supply.

Full-cost pricing accomplishes two things. First, it levels the playing field so that each form of energy competes on its economic merits, not whether corn-growing states have early primaries or oil companies have big SuperPacs. Second, by raising prices to consumers to a realistic level, it accelerates the trend toward energy efficiency that is already underway.

Subsidies for renewables are just plain wrong, even if you look at them from a hard-core environmentalist point of view. With a subsidy, on the one hand, you say, "produce more green energy" and other the other hand, you turn around and tell the consumer, "waste more green energy." We don't want to waste energy from wind or solar any more than we want to waste oil and gas. We shouldn't forget that even the greenest renewables can have significant environmental impacts.

The whole "affordable energy" idea is based on the myth that if we don't include those external costs in the price-the pollution costs, the national security costs-they just go away. They don't. Keeping prices artificially low just transfers those costs to someone else, someone unlucky enough to live downwind, someone who owns beachfront property that gets eroded away as the sea level rises, someone who has to go off to fight a war to keep the shipping routes open. There are two things wrong that. First, it's immoral. If we believe in the market economy, the rule of law, and all that, we have to respect people's property rights and their human rights. Second, it's inefficient. It doesn't strengthen our economy, it weakens it. If there's one thing we can't afford, it's "affordable energy."

Oilprice.com: Obama has made clear his desires to cut the $4 billion a year tax breaks given to oil companies. What affect do you believe this would this have on the U.S. economy and the U.S. oil industry?

Ed Dolan: If it is done as part of a comprehensive move toward full-cost pricing, it could only strengthen the U.S. economy. The oil industry would whine, but if we cut subsidies and tax breaks for competing energy sources at the same time, oil will remain a competitive part of the energy mix for many years to come.

Oilprice.com: The oil industry has enjoyed decades of subsidies and grants, so do you think it is unreasonable to already start cutting the subsidies to renewable energies and expect them to survive on their own?

Ed Dolan: As I explained above, the answer is yes, provided it is done as part of a package that reforms our energy policy as a whole in the direction of full-cost pricing.

Oilprice.com: Economic growth is generally dependent on the access to energy. As the supply of energy grows, so too does the economy (more or less). Global oil supplies are pretty much stagnant, so do you predict that only nations that successfully convert to a renewable energy mix with an abundant supply of cheap energy will be able to experience continued economic growth at a similar level experienced by the developed countries of recent years?

Ed Dolan: Again, I just don't buy the doctrine that growth is dependent on ever-increasing energy use. For sure, those countries that pursue sound policies, like full-cost pricing to rationalize their energy mix and promote efficiency, are the ones that are going to keep growing.

Oilprice.com: As the arctic ice melts at a rapid pace the world's superpowers are jockeying for position to exploit the region's vast oil & gas & mineral deposits. Environmental groups are rightly concerned, but is this a resource that we cannot afford to ignore?

Ed Dolan: Arctic oil, like any other source of energy, should pay full freight for any environmental impacts it has. If it can bear those costs and still be competitive, I think it should be in the mix. I am worried about Russia, though. It has a dangerous combination of an environment-be-damned attitude and low technical competence that could lead to headline-grabbing disaster worse than the Gulf blowout or Exxon Valdez.

Oilprice.com: What effect do you see the shale revolution having on investments in renewable energy?

Ed Dolan: If I were trying to make money by generating electricity with wind or solar, I'd be worried about gas. I don't have all the relevant numbers at my disposal, but my gut feeling is that even if you price in full environmental costs for wind, solar, and gas-including environmental costs associated with fracking-gas is still going to be pretty competitive.

Oilprice.com: What are your views on Ben Bernanke's QE3?

Ed Dolan: I've written repeatedly about QE over at Economonitor, so I am on record as saying we should try it. The trouble is, QE is not a magic bullet. Properly executed and properly communicated, it can help support the recovery, but it can't do it alone.

That is one point where I agree 110 percent with Ben Bernanke. Here is what he said in a speech at the Fed's Jackson Hole conference at the end of the summer:

It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. . . Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve.

Oilprice.com: How do you see the EU solving its debt crisis?

Ed Dolan: I'm afraid I'm a euro pessimist. The U.S. debt situation is hard enough to resolve, but Europe's is worse. At the same time, whatever you say about gridlock in Washington, our political decision making is a model of streamlined efficiency compared with the EU.

Oilprice.com: Do you think the EU was doomed to fail from the start with the format that it has? Could more success be seen in a split EU, with the northern/richer nations using one currency, and the southern/poorer nations using a different currency?

Ed Dolan: Doomed, I don't know, but flawed, certainly. Just recently, I was looking back at what economists were writing about the prospects for the euro back in the early 1990s, when it was still just a project. They were telling us, for one thing, that Europe is too diverse to be ideal for a currency union-and that was when there were only 15 EU countries. Second, they said that you can't run a monetary union without a central government, a fiscal union, and a banking union. You still don't have any of those.

I am not sold on the idea of a northern euro and a southern euro. If the currency union doesn't work, it doesn't work. Break it up. Sure, some countries will find it works for their special circumstances to tie their currencies to a large, stable neighbor. I could see the Danes or the Latvians keeping a link to the German currency, for example, and I'm sure the Vatican will continue to use whatever currency Italy uses. But a formal, north-south divide doesn't make much sense to me.

Oilprice.com: In terms of tackling the current economic situation in the U.S., of the two main presidential candidates, who do you suggest is the best man, and why?

Ed Dolan: I do not think we can tackle the current economic situation without a thorough-going fiscal policy reform that includes three key elements: Spending cuts, revenue increases, and a rewrite of the whole tax system to eliminate loopholes and cut marginal rates. Furthermore, the package can't be heavily front-loaded like George Osborne's austerity program in the UK, which has sent their economy back into recession. Ours should be back-loaded, with an element of stimulus now and an ironclad commitment to move the budget toward surplus as the economy improves. It's a lot to ask for.

We are not going to get good budget policy out of the GOP unless members of that party make a clean break with mantra that they will not accept a dime of new revenue, not even if it comes from eliminating the most loathsome tax loopholes. Personally, I am never going to vote for a candidate for President, the Senate, the House, or any office who has signed that nonsensical Grover Norquist tax pledge.

At the same time, I have been very disappointed at the lukewarm support Obama has given to the kind of program I would like to see. During the first debate, Romney said that when Obama didn't "grab" Simpson-Bowles-that was his word, and a good one-it was a failure of leadership. That was one point where I agreed with Mitt.

Then, you also have to take into account the vote for Congress. I'm afraid there is going to be continued gridlock as long as the GOP controls the House. In the Senate, there are at least a few people in both parties who are willing to meet behind the scenes and talk compromise, but not in the House, not right now, anyway. Maybe what we need in the White House is someone who is a real politician, a negotiator and dealmaker in the mold of a Clinton or an LBJ. Instead, we have the choice between a manager and a law professor. I'm not optimistic that either of them will be able to do what needs to be done.

[Oct 03, 2012] Replacing Economic Democracy with Financial Oligarchy by Michael Hudson

June 03, 2011 | Information Clearing House

Finance is a form of warfare. Like military conquest, its aim is to gain control of land, public infrastructure, and to impose tribute. This involves dictating laws to its subjects, and concentrating social as well as economic planning in centralized hands. This is what now is being done by financial means, without the cost to the aggressor of fielding an army. But the economies under attacked may be devastated as deeply by financial stringency as by military attack when it comes to demographic shrinkage, shortened life spans, emigration and capital flight.

This attack is being mounted not by nation states as such, but by a cosmopolitan financial class. Finance always has been cosmopolitan more than nationalistic – and always has sought to impose its priorities and lawmaking power over those of parliamentary democracies.

Like any monopoly or vested interest, the financial strategy seeks to block government power to regulate or tax it. From the financial vantage point, the ideal function of government is to enhance and protect finance capital and "the miracle of compound interest" that keeps fortunes multiplying exponentially, faster than the economy can grow, until they eat into the economic substance and do to the economy what predatory creditors and rentiers did to the Roman Empire.

mmckinl

Another brilliant essay by Michael Hudson …

Having no recourse in the third world at neoliberalism the banksters have turned on their own territories. The failure of the Doha round of trade talks spells the end of the bankster financial Ponzi Scheme. Third world countries now know well this game of neoliberal conquest.

The "elephant in the room" is peak oil and peak food production. Without these and other resources growing the end game is clear … private bank fractional reserve banking will inevitably implode. The banksters are well aware of their fate and will steal, loot and pillage as fast as they can ..

Unfortunately the only path ahead for the banksters is war. This is the only remedy to reshuffle the world economy and financial system to make them viable once more, until of course their Ponzi Scheme inevitable implodes again. The stakes couldn't be higher …

The end of economic growth as we know it has eluded Hudson, at least from what I've read of his work. The Hirsch Report circa 2005 spells out in detail the problems associated with peak oil. It was vehemently ignored … and removed for a time from the USG website. Just recently Jeremy Grantham produced a report on peak resources …

The Hirsch Report
http://www.netl.doe.gov/publications/others/pdf/o...

Time to wake up: "Days of abundant resources and falling prices are over forever" by Jeremy Grantham
http://www.energybulletin.net/stories/2011-04-29/...

The "end game" is here my friends … an "end game" unlike any other in history …

Emanon :

Let me state it very simply : "the borrower [debtor] is SERVANT to the lender". The whole point of creating debtors is to gain control of and rule over them. Prof. Hudson's article illustrates this admirably.

kate

The World Central Bank: The Bank for International Settlements

"...The BIS is the most obscure arm of the Bretton-Woods International Financial architecture but its role is central. John Maynard Keynes wanted it closed down as it was used to launder money for the Nazis in World War II. Run by an inner elite representing the world's major central banks it controls most of the transferable money in the world. It uses that money to draw national governments into debt for the IMF..." http://www.bilderberg.org/bis.htm

Reader

Small wonder today... The usurers' dictatorship started conquering the world decades ago. The entire EU was founded upon their "market" crap once promoted by sick brains like Milton Friedman.

sijepuis

Excellent summary by Hudson. Although I'm becoming increasingly weary of the "we are here" [ie, the antechamber of hell] approach to problems, which leaves out suggestions for concrete action.

If Michael Hudson, William Black, Nomi Prins and Mike Whitney are physicians, they're doing little more than monitoring the patient's failing vital signs: blood pressure, blood count, heart rate, etc, when the vampire that's proceeding to drain their patient dry is right there in front of them.

While clearly pedagogy is very important, in order that as many people as possible grasp what is happening, and why, if there are no accompanying suggestions for practical action, from the likes of Hudson, et co, a sense of helplessness will grow at the rate of the compound interest/ financialization that's killing us.

There are bloggers galore who are actively advocating hunkering down, buying stores of 'survival' goods: preserved food, medicines, toilet paper, tobacco, and the like, which may be a good idea in any case, but this is little more than a stop-gap measure, an admission of defeat. - And while mass strikes and demonstrations may be cathartic, they take a deep bite out of the real economy and ironically become an invitation to the IMF and increased austerity measures! [cf Egypt and Greece].

David Malone, author of the Golem XIV blog who, although not trained as an economist, has been doing a superb job of revealing the sources of European debt, laying bare the treachery of EC/ECB policies and proposing possible solutions.

See this, for example: Ireland was Germany's off-shore tart, wherein Deutsche Bank established subsidiaries in Ireland, in order to benefit from lax financial regulation, which eventually failed. DB has slipped away, leaving the Irish taxpayer with the bill.

In the following, Malone explores the idea of cross cancellation of European debt:How to destroy the web of Debt.

Excerpt: "Among the 'debtor' nations a Debt Jubilee means Ireland reduces its debt load to from 130% of GDP to under 20%! That would virtually wipe out the crippling cuts being forced upon the Irish. While even among the 'Creditor' nations France benefits by nearly eliminating its debt. So the French people too would benefit. Which does beg the question - who is benefiting by enforcing all the debts? I'll give you one guess".

Mutually agreed cancellation of what amounts to incestuous debt, in a first step towards the elimination of the 'vampire'.

[ Sep 28, 2012 ] Are Oil Prices 'Determined Solely by Fundamentals'?

September 26, 2012

Jim Hamilton on what determines prices in oil markets:

...The Wall Street Journal carried this account last week:

Oil prices dropped more than $3 in less than a minute late in the trading day on Monday, just as trading volume spiked. The move also dragged down prices of gold, copper and even the euro.

"Traders were looking like deer in the headlights," said Peter Donovan, a floor trader... "I called four different desks, and they all said, 'we don't know.' " ...

The move sparked talk of an erroneous trade-called a "fat-finger" error in industry parlance-or a computer algorithm gone awry.

Fat finger or no, there was an even bigger drop on Wednesday...

Those who doubt that oil prices are determined solely by fundamentals would naturally ask, what aspect of the supply or demand for oil could have possibly changed in the course of less than a minute last Monday? The obvious and correct answer is, there was no change in either the supply or the demand for physical oil over the course of that minute. The minute-by-minute price of a NYMEX contract is determined by how many people are wanting to buy that financial contract and at what price, not by how much gasoline motorists burned in their cars that minute. But since changes in the price of crude oil are the key determinant of the price consumers pay for gasoline, doesn't that establish pretty clearly that the whims or fat fingers of financial traders are ultimately determining the price we all pay at the pump?
In one sense, the answer to that question is yes-- last week's decline in the price of crude oil will soon show up as a lower price Americans pay for gasoline. But here's the problem you run into if you try to carry that theory too far. There are at the end of this chain real people who burn real gasoline when they drive real cars. And how much gasoline they burn depends in part on the price they pay-- with a higher price, some people use a little bit less. Not a lot less-- the price of gasoline could change quite a lot and it would take some time before you could be sure you see a response in the data. That small (and often sluggish) response is why the price of oil can and does move quite a bit on a minute-by-minute basis, seemingly driven by forces having nothing to do with the final users of the product.
But if the price of oil that emerges from that process turns out to be one at which the quantity of the physical product that is consumed is a different amount from the physical quantity produced, something has to give. Indeed, the bigger price drops we saw on Wednesday followed news that U.S. inventories of crude were significantly higher than expected ...

reason:

"Indeed, the bigger price drops we saw on Wednesday followed news that U.S. inventories of crude were significantly higher than expected ..."

So doesn't it stink of insider trading?

Paine:

Hamilton is an energy industry pimp
Paul krugman is the real caution

He wants to believe in way higher crude prices because he's green

Lots of nice friends of the planet types see the crude price gouging as a renigade pigou tax

Evil gains for the greater good

anne said in reply to Paine...

Lots of nice friends of the planet types see the crude price gouging as a renegade Pigou tax *

Evil gains for the greater good

* http://en.wikipedia.org/wiki/Pigovian_tax

A Pigouvian tax is a tax applied to a market activity that generates negative external outcomes.

[An important criticism.]

Darryl FKA Ron said...
You could write a book on all the commodities futures trading scams that manipulate market prices. Oh wait! Somebody did.

http://www.businessweek.com/magazine/content/11_09/b4217086779050.htm

The Asylum:
The Renegades Who Hijacked
the World's Oil Market
By Leah McGrath Goodman
Morrow, 398pp, $27.99

Anyone who accuses New York Mercantile Exchange (CME) traders of being greedy and lawless anarchists who blow up markets obviously was not working the floor in 1978. In that year a sign at the entrance decreed: Please check your guns at the desk. "A gunshot never went off on the floor," claims John Tafaro, a trader at the time. "That's where we drew the line." He says traders were pretty dutiful about checking their guns, too.

The rest of the rules, though, they ignored, skirted, or subverted, sometimes with brazen crudity, sometimes through deft manipulation of the law-at least according to Leah McGrath Goodman's The Asylum: The Renegades Who Hijacked the World's Oil Market. "Any customer who traded there was molested, if not raped," says one ex-regulator with the U.S. Commodity Futures Trading Commission, speaking metaphorically, one hopes. "As far as we could see, the NYMEX traders did nothing but run scams."

They weren't always oil traders. They only stumbled upon oil futures after screwing up Maine potato futures. A whole industry had been built around predicting the Maine potato harvest, and - more importantly - trying to manipulate it. However, the market was closed by regulators in 1976, after defaults on deliveries of more than 50 million pounds of potatoes.

Casting about for something else to trade, then-Chairman Michel Marks tried to boost futures in boneless beef and plywood. After that didn't work, in 1978, he introduced heating oil futures. The market proved a gusher that led to 30 years of good times. Booming with the oil scares of the late '70s and early '80s, heating oil futures begat natural gas futures and became a huge market revolving around the price of West Texas Intermediate Crude, now the benchmark for a barrel of oil.

The years trading potatoes help explain why the NYMEX was able to trade oil for so long without worrying about meaningful oversight. Formed to offer hedges for farmers, the futures exchanges are under the purview of the same people who produce the omnibus farm bills: the House Agriculture Committee, which also runs the regulator in the business, the CFTC. In Goodman's account, the CFTC issued more exemptions than rules and, in any case, only enforced the latter gingerly.

The first big exemption, allowing large trades for a financial participant, went to Goldman Sachs (GS) in 1991. Others soon piled in.

... ... ...

Darryl FKA Ron:

Of course market fundamentals matter and traders can lose as well as win if they place their bets in the wrong direction. The question is whether spot markets can be successfully manipulated or not and they can. There can also be unsuccessful attempts, similar to speculators trying to corner the gold market (e.g., Black Friday 1869).

spencer:

Fundamentals determine the underlying trend of oil and commodity prices, but at the margin traders and speculators drive the short term price moves.

Market assumed that QE 3 would drive the dollar down and commodities and oil higher so they bid the price of oil up.

But they soon decided that with Europe in recession, Asian growth slowing and US petroleum imports contracting the demand fundamentals were a little different now than under the earlier QE. So you got a market reversal driven by traders and speculators.

The fundamentals probably say oil should be in a $80 to $100 trading range with cost too high for oil to go below $80 and demand too weak for it to go above $100.

The marginal cost of new oil is in $80 to $100 range. Moreover, the economic structure of the oil industry is changing. Historically, oil was a very unusual market where virtually all the costs were fixed or sunk costs. But with the tar sands and fracking now the marginal source of oil this structure is changing and variable costs are starting to become important.

Under the traditional fixed cost model short run price swing did not really impact supply. But now with the industry experiencing high variable cost short run price swing are having an impact on supply.

First last year and again this year when the price fell below $80 we started to see some marginal source of oil withdrawing from the market.

anne:

President Obama has for months been doing all that can be done short of waging war to limit the flow of oil from Iran which is among the prime producers, nonetheless the pretense is that limiting the supply of oil internationally, when the President decides on such a policy, has no relevance to price.

anne:

What strikes me as increasingly interesting, is how much about American foreign policy that affects us in differing ways, such as the price of oil, is simply turned away from by analysts possibly because discussion of our foreign policy from differing perspectives can seem too risky.

sherparick:

from the blog http://www.lawyersgunsmoneyblog.com/

"It's probably not uncommon for City traders to wonder how they burnt so much cash during a drunken night on the town.

But Steve Perkins was left with a bigger black hole in his memory than most when his employer rang one morning to ask what he'd done with $520m of the oil trading firm's money.

It was 7.45am on June 30 last year when the senior, longstanding broker for PVM Oil Futures was contacted by an admin clerk querying why he'd bought 7m barrels of crude in the middle of the night.

The 34-year old broker at first claimed he had spent the night trading alongside a client. But the story began to fall apart when he refused to put the customer in touch with his desk for official approval of the trades.

By 10am it emerged that Mr Perkins had single-handedly moved the global price of oil to an eight-month high during a "drunken blackout". Prices leapt by more than $1.50 a barrel in under half an hour at around 2am – the kind of sharp swing caused by events of geo-political significance. Ten times the usual volume of futures contracts changed hands in just one hour.

….

The investigation also shows that he was able to trade huge volumes with very little cash up front and no position limit, exposing how it easy it was for a single British broker on a bender to cause chaos in the oil market."

I guess you are right in the long term, but the short term, not so much.

Mcwop:

A market controlled and manipulated by a cartel? No it does not always operate on fundamentals. However, increased demand does bolster the cartel's ability to raise prices. And investment/speculative demand also has an effect.

The price is falling now because we are heading to a global slowdown. Speculators/investors will be running away from oil is my guess.

B said...

All markets fluctuate - forever - until the market itself fails. There is no equilibrium. This is proven. That fact is what George Soros used to make his money, by applying his non-mathematical insight of reflexivity based on Karl Popper.

Mathematically, reflexivity is chaos theory. It is an iterated, unknown function showing stability within limits.

What is astonishing is that anyone in the 21st century still believes in equilibrium market theory. There is no such thing. It cannot exist.

Michael Pettengill:

"But since changes in the price of crude oil are the key determinant of the price consumers pay for gasoline, doesn't that establish pretty clearly that the whims or fat fingers of financial traders are ultimately determining the price we all pay at the pump?"

But very little of the oil refined trades as contracts on the commodity exchanges. What consumers are willing to pay for gasoline determines the price of gasoline, unless Saudi Arabia is engaged in a market share war against competitors breaking the OPEC price setting.

Obama policy to Iran serves the Saudi intention to keep prices at $100 well, offsetting the higher CAFE standards. When global economic growth strengthens, the Saudis might want resolution of Iran and other regional conflicts to keep long term prices from rising much beyond $100. $150 for 5 years would drive so serious changes in the energy mix, plus spur uneconomic oil production, threatening a rerun of 1985-1998.

Main Street Muse:

Is the headline a joke? When was the last time "fundamentals" determined the price of oil?

The "market" seems highly distorted by the hysteria of traders.

efh:

Who are funded by cheap money from Central Banks.

John Cummings said in reply to efh...

Except no cheap money is coming from central banks. All from BRIC man. Now that is drying up.

Econbrowser Fat fingers and the price of oil

September 23, 2012

Fat fingers and the price of oil
Can the wild swings in the price of oil over the last few weeks have anything to do with supply and demand?

The Wall Street Journal carried this account last week:

Oil prices dropped more than $3 in less than a minute late in the trading day on Monday, just as trading volume spiked. The move also dragged down prices of gold, copper and even the euro.

"Traders were looking like deer in the headlights," said Peter Donovan, a floor trader at Vantage Trading on the New York Mercantile Exchange. "I called four different desks, and they all said, 'we don't know.' "

The move came at about 1:54 p.m. EDT. West Texas Intermediate crude for October delivery plummeted to $94.83 a barrel on the Nymex, from more than $98. Some 12,500 contracts changed hands in a minute, compared with less than 500 a minute previously.

The move sparked talk of an erroneous trade-called a "fat-finger" error in industry parlance-or a computer algorithm gone awry.

Fat finger or no, there was an even bigger drop on Wednesday, leaving the price of West Texas Intermediate well below where it had been prior to Fed Chair Ben Bernanke's Jackson Hole speech on August 31 and the Fed's announcement of QE3 on September 13.

Those who doubt that oil prices are determined solely by fundamentals would naturally ask, what aspect of the supply or demand for oil could have possibly changed in the course of less than a minute last Monday? The obvious and correct answer is, there was no change in either the supply or the demand for physical oil over the course of that minute. The minute-by-minute price of a NYMEX contract is determined by how many people are wanting to buy that financial contract and at what price, not by how much gasoline motorists burned in their cars that minute. But since changes in the price of crude oil are the key determinant of the price consumers pay for gasoline, doesn't that establish pretty clearly that the whims or fat fingers of financial traders are ultimately determining the price we all pay at the pump?

In one sense, the answer to that question is yes-- last week's decline in the price of crude oil will soon show up as a lower price Americans pay for gasoline. But here's the problem you run into if you try to carry that theory too far. There are at the end of this chain real people who burn real gasoline when they drive real cars. And how much gasoline they burn depends in part on the price they pay-- with a higher price, some people use a little bit less. Not a lot less-- the price of gasoline could change quite a lot and it would take some time before you could be sure you see a response in the data. That small (and often sluggish) response is why the price of oil can and does move quite a bit on a minute-by-minute basis, seemingly driven by forces having nothing to do with the final users of the product.

But if the price of oil that emerges from that process turns out to be one at which the quantity of the physical product that is consumed is a different amount from the physical quantity produced, something has to give. Indeed, the bigger price drops we saw on Wednesday followed news that U.S. inventories of crude were significantly higher than expected:

Oil dropped to a one-month low after U.S. crude inventories surged the most since March as production and imports rebounded from Hurricane Isaac.

Futures decreased as much as 3.3 percent after the Energy Department said supplies rose 8.53 million barrels last week, more than eight times what was projected in a Bloomberg survey. Imports arrived at the highest rate since January and output rose. Crude fell before the report on speculation Saudi Arabia is moving to reduce prices.

There are several channels by which QE3 may end up influencing the quantity of oil physically produced and consumed. A lower value for the U.S. dollar would mean a greater quantity demanded worldwide at a given dollar price of oil. A higher level of economic activity (the ultimate goal of QE3) would also boost demand for the physical product. And lower real interest rates may make it profitable to store more oil physically, leaving less available for the ultimate users of the product. So I would have expected QE3 overall to be one factor that could contribute to a higher dollar price for oil.

But any investors who have been assuming that QE3 will boost the price of oil for no reason other than the fact that other traders expect it to raise the price of oil may find themselves tripping painfully over the fat finger of reality.

[Jul 31, 2012] The Saudi Problem by Tam Hunt, President, Community Renewable Solutions, LLC

Jul 17, 2012 | www.energypulse.net

Saudi Arabia is once again the biggest producer of oil in the world, surpassing Russia to regain its title. Saudi Arabia happens to be one of the most repressive and undemocratic regimes in the world. The Economist magazine ranked Saudi Arabia 161st out of 167 countries in their most recent Democracy Index.

The Saudis also have massive economic and demographic problems to deal with, including a pending peak and rapid decline in oil exports. You heard right: Saudi Arabia, the world's largest producer of oil, is facing a peak in its oil exports and a rapid decline thereafter.

There are solutions, however, to these very large problems, which I'll discuss further below.

Saudi Arabia's national oil company, Saudi Aramco, pumped about 11.5 million barrels per day for the last year, up from about 9.5 in early 2009. The Saudis are pumping more oil now than they have in decades, along with the rest of OPEC, which is at a 23-year high for combined oil production.

Russia held the top spot for oil production for a couple of years but Saudi Arabia came roaring back since 2010. The U.S. is a distant third place with about 6 million barrels per day.

Net oil exports, are, however, a very different picture. The U.S. is famously the world's biggest importer of oil. While our production of oil has taken an unusual upward tick in the last couple of years, spurred by record high prices, and our consumption of oil has declined even further due to increased energy efficiency, conservation and a still-struggling economy, we still import about half of the oil we consume: a massive 9 million barrels of oil per day.

Saudi Arabia exports about 8 million barrels per day (mbpd from now on), with Russia not too far behind at about 7 mbpd.

So far, this is all fairly familiar data. However, what is not well-known is the degree to which Saudi Arabia's massive oil exports are threatened by its demographics and a probable decline in its aging supergiant oil fields.

A new report from the UK's Chatham House examines this problem in detail. They conclude that Saudi Arabia's oil exports will peak around 2020 and, under current policies, decline to zero by 2038. You read that right: decline to zero. This decline will occur due to the dramatic growth in consumption by Saudi Arabia's rapidly growing population and increases in per capita energy consumption. Saudi domestic consumption of oil is growing at about 7% per year, which leads to a doubling of consumption in just ten years.

Now, 2038 is a long time away, in normal circumstances. But oil politics operates in decadal timespans, not normal timespans. 2038 is, in oil terms, not that far away, so if Chatham House's projections are accurate, we've got a major problem on our hands.

What will the world do if fully 10% of global oil production, and 20% of global net oil exports, is consumed by the Saudis rather than exported?

Saudi Arabia's governmental revenue will come under extreme pressure if net oil exports decline. The Saudis rely on oil revenue for fully 80% of their budget. Many things will have to give if oil exports do dry up. Net oil exports declined fairly dramatically from 2005 to 2010, as Figure 1 shows, but have risen back in the last couple of years. Chatham projects net exports will rise to about 9 mbpd by 2020, and then start a precipitous decline as the Saudis' demographic time bomb explodes.

Saudi Arabia's problem is not, of course, unique to Saudi Arabia. It is a global problem that afflicts many countries. Jeffrey Brown and Samuel Foucher have developed an "Export Land Model" to predict how the global net oil export situation will unfold in coming years. They found that the top five exporters of oil (Saudi Arabia, Russia, Iran, United Arab Emirates and Norway) decline from about 24 mbpd in 2008 to about 7.5 in 2020 and go to almost zero by 2030. Global net oil exports are about 40 mbpd, so these producers comprise more than half of the global export market.

The Oil Drum Evidence that Oil Limits are Leading to Limits to GDP Growth

Trend lines in Figure 1 were fitted to time periods based on oil supply growth patterns (described later in this post), because limited oil supply seems to be one critical factor in real GDP growth. It is important to note that over time, each fitted trend line shows less growth. For example, the earliest fitted period shows average growth of 4.7% per year, and the most recent fitted period shows 1.3% average growth.

In this post we will examine evidence regarding declining economic growth and discuss additional reasons why such a long-term decline in real GDP might be expected.

[Jul 22, 2012] The Oil Drum Tech Talk - Saudi Arabia Then and Now

Overall, OPEC sees demand staying below 90 mbd over the remainder of this year, with total growth in demand lying at 1.01 mbd.


Nevertheless, after putting all this together, I re-iterate my conclusion from last time in that I doubt KSA will increase production much above 10 mbd (in June it was producing 9.888 or 10.103 mbd depending on source, and with the rising internal demands (domestic use in the Middle East is now projected to average 7.7 mbd in 2012) world markets will get tighter in the shorter, rather than the longer term.

Darwinian

Dave, thanks for a fantastic article. You make the same point I have been trying to make for years now. And that is that Saudi has been able to offset declines in their old fields by bringing on new fields and with horizontal wells and in some cases MRC wells.

But these new additions are required to offset the decline in existing fields, which have been somewhat protected from the severity of declining well production by the switch from vertical to maximum reservoir contact (MRC) wells.

But when the water hits those horizontal wells the decline is likely to be swift and sudden. However with Manifa coming on line we may not see the decline hit with any impact until late in this decade. But we are all waiting with abated breath.

Ron P.

Frugal
Note that they defined the reserve as the total amount of extractable oil, not the amount left to recover; they have done that in later computations also, and the latest annual report uses 259.7 billion barrels as that discovered reserve
This explains why Middle East reserves always go up, even after several 100 billion barrels have been extracted. The problem with this type of reserve definition is that the rest of the world defines reserves as the amount of oil that hasn't yet been extracted. Yet the IEA, EIA, BP, and even OPEC themselves do not take this discrepancy into consideration when reporting world reserves. All these organizations should deduct the amount Middle East oil already produced from their reserve estimates. But are they going to do this? If not, why not?
ROCKMAN
jj – "Is it possible that the MRC wells are increasing the percentage of OOIP that is recovered?" Not only possible but likely. But impossible to estimate without much more detailed data than the KSA releases. In additional to probably having a longer commercial life than a vertical they'll have a better "sweep": the effective drainage radius. But there's the potential to be too optimistic of the gain based upon the higher flow rate. As pointed out the new hz wells won't show a significant increase in water production (indicating not much life left) until very late in the game. Though a different reservoir dynamic this is the same phenomenon we've see in Mexico's Cantrell Field

Extend field life for years? Since we don't have the data to make that call I can only offer a WAG: no. Not only not add years but perhaps reduce life. These wells might recover some additional URR but they will produce what is recoverable much faster. IOW recover more oil but do it faster than the vert wells alone would have done.

jjhman
Thanks, Rock, for the usually cogent reply but isn't " These wells might recover some additional URR but they will produce what is recoverable much faster." a choice? They can, and do, choose how fast they produce each resevoir.

I'm always impressed by the sophistication of the Saudi resource management and use of technology. Within the constraints of ELM (per Westexas)Saudi Arabia seems to be managing their output quite sensibly. It seems possible that they might keep their production rates down rather than use these capabilities to produce at the maximum possible rate.

As a congenital doomer I am constantly suprised at the resilience of BAU. After reading "Twilight in the Dessert" I expected KSA to have been in serious trouble by now, but they aren't and I now suspect they are much smarter than Matt Simmons gave them credit for.

Darwinian
isn't " These wells might recover some additional URR but they will produce what is recoverable much faster." a choice?
JJ, the very purpose of these new horizontal wells is to produce the oil much faster, to stem the decline rate. Had they not needed this oil much faster than they were getting it, they would not have spent the billions required to get it out faster. Saudi Arabia's Strategic Energy Initiative
Without "maintain potential" drilling to make up for production, Saudi oil fields would have a natural decline rate of a hypothetical 8%. As Saudi Aramco has an extensive drilling program with a budget running in the billions of dollars, this decline is mitigated to a number close to 2%.
As Dave (Heading Out) points out above Saudi has been able to offset the decline of older fields by bringing on new production from Haradh, Shaybah and Khrais. They still have Manifa yet to come on line.

No one has suggested that the Saudis were dumb, they know exactly what they are doing. They have kept their peak production, over the years, at between 9 and 10 mb/d with gaps in between where they cut production back substantially. Right now they are, in my opinion, producing flat out. Manifa will likely keep them able to produce at this level for a few more years before they start to decline. But the rest of OPEC may start to decline well before that.

Ron P.

ROCKMAN
Tony - Very true especially for carbonate (limestone) reservoirs. I don't know the details of this reservoir but in general semi-isolated pockets of oil can easily be distributed throughout the field. But there's the $64,000 question: better URR but at a faster rate so which wins the footrace? Perhaps the closer spacing recovers 10% more oil but at a 15% greater rate so the field depletes sooner as a result. Or maybe reverse those numbers.

I've always heard the KSA had some of the best Swiss engineers with some of the most powerful computers managing their fields.

But decisions about withdrawl rates are controlled by different factors. And such decisions are not always made to the benefit of URR. I'm about to work on a project where the previous operator produced 5 oil wells at too fast a rate for the sake of cash flow. He destroyed all 5 completions prematurely and lost all cash flow so he can't afford to fix the problem.

If for no other reason than ELM I suspect the KSA may sacrifice URR for cash flow in the future. Perhaps even more so if prices stay lower long enough.

See also

[Jul 16, 2012] Econbrowser May Temperatures, Economic Implications

From NOAA:

The United States reported its warmest spring since records began in 1895,...

... with 31 states in the eastern two-thirds of the country observing record warmth. The national temperature was 2.9°C (5.2°F) above its long-term average, surpassing the previous record by 1.1°C (2.0°F).

The globally-averaged temperature across land and oceans for the first five months of 2012 was the 11th warmest January–May o >

rj sigmund

quoting my hyperlinked mailing from this morning:

the early summer heat wave with its accompanying record high temperatures that we mentioned last week lifted in the east this past week, but it continues in the plains states & eastern rockies; as we expected, the first six months of this year are now in the record books as the hottest ever for the continental US; in addition, the 12 months ending June 30th also ranks as the hottest 12 month stretch in history, as June temperatures came in at an average 71.2°F for the contiguous 48 states, which was 2.0°F above the 100 year average...the more significant weather story, however, continues to be the worsening drought over the south and the important agricultural states, which has become severe enough for the US Dept of Agriculture to declare to declare a federal disaster area in more than 1,000 counties over 26 states, the largest agricultural disaster ever declared due to drought; the drought declaration covers almost every state in the southern half of the US, from s.carolina to california, with parts of Colorado, Wyoming. Illinois, Indiana, Kansas and Nebraska also included... according to the weather service's drought monitor, 61% of the US was listed as being in drought this week, up from the 56% of last week's report....corn crops in particular have been hard hit; the USDA cut its corn crop forecast by 12%, from 166 bu/acre to 146 bu/acre this week, as corn growing regions in illinois and indiana in particular are experiencing drought conditions of "severe" and "extreme" intensity, as you can see in dark orange and red on the adjacent map, a larger 12 week animation of which will be embedded below...with higher corn prices making refineries unprofitable, ethanol output fell to its lowest in 2 years...the USDA also cut its yield forecast for the soybean crop nearly 8%, to 40.5 bushels per acre from 43.9 bushels per acre...this will likely translate into higher prices for variety of foods from cereals to soft drinks and cooking oil, as well as for meat, dairy & poultry products, as producers pass their costs on...

i'll be posting that later, with links and other reports, on my MW666 blog...

Optimal conditions for oil extraction are now less commonly congruent in the fields that Aramco must now exploit to address the coming falls in production from the historic sources

The history of oil production from Saudi Arabia has largely come from individual wells that produced in the thousands of barrels a day. In order to sustain that production over decades, it has been necessary to ensure that

  1. The pressure differential between the well and the rock are sustained;
  2. That the rock has an adequate permeability to ensure that flow continues at a steady state;
  3. That the oil itself is of relatively low viscocity and is thus able to easily flow through the rock; and
  4. That there is a sufficient thickness and extent in the reservoir to allow such sustained production.

All of those factors came together in the giant fields that provided high levels of production over many decades, most particularly in the northern segments of Ghawar.

Yet those conditions are less commonly congruent in the fields that Aramco must now exploit to address the coming falls in production from the historic sources. These best of the rest (as the late Matt Simmons called them) must now increasingly carry the burden of sustaining Saudi production fail, individually, on differing grounds from meeting those earlier parameters.

Collectively and in the face of Ghawars decline, they will only be able to sustain production to their original targets and will not provide replacement production as the oldest and larger begin to fade. I would remind you of the curve that Euan put up back in 2007.

[Jun 27, 2012] World oil production - Looking for clues as to what may be ahead

Energy Bulletin

Countries in the Persian Gulf would like us to believe that there are great prospects for higher production from the area. Looking back at historical production and past changes in stated reserves, we should be a little cautious about believing what we are told. We should keep in mind that there are possibilities for disruption in oil supplies from that area as well possibilities for increases. The stories we are being told about higher productive capacity may be just that – stories.

The North Sea will no doubt continue to decline in its oil production. The US with its long-term decline also faces challenges. Unless a high level of deepwater production is maintained, it is likely that US oil production will again begin to decline.

The FSU and the Rest of the World have at least the possibility of increased production, but these increases are likely to be relatively small, based on past patterns.

In total, world oil production is unlikely to rise by much, and may fall in ways that are hard to predict in advance.

Gasoline Prices: $3 per gallon? Bill McBride

2012-06-24
The roller-coaster ride for gasoline prices continue ... remember when some forecasters were predicting $5 per gallon? Now we are seeing prediction of $3 per gallon.

From the Atlantic Journal Constitution: Expect gas prices to fall below $3

Is it possible the average price at the pump could be below $3 a gallon by the time leaves begin to change?

Absolutely, according to experts who follow fuel price trends, and some areas of Georgia have already broken the barrier. At one station in Macon on Friday, unleaded regular was selling for $2.90, and in Duluth and Suwanee prices were as low as $3.04 and $3.05, respectively.

Barring any unforeseen calamity that might disrupt production or distribution ... the price trend should continue, even with the arrival of summer and more vehicles on the road for vacations.

"[T]he market is suggesting gas below $3 by Halloween, and certainly by Thanksgiving," Tom Kloza of the Oil Price Information Service ...

There are always threats to the oil supply - Iran, a storm in the GOM, a strike in Norway, but right now it looks like prices will continue to decline with adequate supply and week demand growth.

Oil prices are still moving down. Brent is down to $90.98 per barrel, down another 10% over the last two weeks, and WTI is down to $79.76. The lower oil prices will not only lead to lower gasoline prices, but also a lower trade deficit and lower headline inflation (CPI).

The following graph shows the decline in gasoline prices. Gasoline prices are down significantly from the peak in early April. Gasoline prices in the west had been impacted by refinery issues, but prices are now falling there too.

Note: If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

1 currency now -yogi:

Yet there is severe inflation in the tolls on interstate highways, bridges and tunnels (Holland Tunnel-- $12), parking meters, registration fees, speeding fines, etc. Cars may stink, but this inflation is a regressive tax.

.Jonathan

CR wrote:

There are always threats to the oil supply - Iran, a storm in the GOM, a strike in Norway, but right now it looks like prices will continue to decline with adequate supply and week demand growth.

Are you including the demands for exported gasoline? Because retail gasoline in the US looks to be going the other way.

Mr Slippery:

The lower oil prices will not only lead to lower gasoline prices, but also a lower trade deficit and lower headline inflation (CPI).

A lower trade deficit would be nice, since we are monetizing about $50 billion a month of imports. If we could get that down to $30 billion a month, say $1 billion a day on monetized imports, we would be back on a sustainable balance of trade path!

vtcodger:

Is it possible the average price at the pump could be below $3 a gallon by the time leaves begin to change?

If so, I'd suggest buying a few thousand gallons and stashing them in your neighbor's garage. (You certainly don't want large amounts in YOUR garage. Unless it is an ugly-ass garage that you are tired of looking at.) Overall, it's probably more likely that gasoline in say five years will be $6 a gallon than $2.

Of course, there might be some problems. Modern gasoline is a witches brew of peculiar chemicals designed to achieve various beneficial and/or dubious purposes. Unlike 1930s gasoline, it isn't all stuff that has been in the ground for hundreds of millions of years, and it is alleged to degrade if left to set. I suspect that is mostly a result not of aging but of storing vehicles without getting the gasoline out of the carburetor/fuel injectors. But what do I know?

RayOnTheFarm:

Lower diesel prices will help the truckers, and the farmers. Lower diesel and gasoline prices will also take pressure off the budget situation at USPS. It won't do much for the high health care prices, but it will ease things in other areas.

energyecon

Oil and hence gasoline price declines appear to be a demand driven process (as opposed to supply driven):

Next Conference Board Update is Tuesday - note the values for May come after 5-6 weeks of continuous decline in gasoline prices:
Consumer Confidence Index® | The Conference Board
Consumer Confidence Index

Though 'flatlining' in this context appears to mean 'slowly declining':
Disposable Personal Income Update

And the Mihigan Consumer Sentiment, the latest number having an additional two weeks of gasoline price declines:
Michigan Consumer Sentiment Index

adornosghost

RayOnTheFarm wrote:

Lower diesel prices will help the truckers, and the farmers. Lower diesel and gasoline prices will also take pressure off the budget situation at USPS.

"Ammonia has twice the energy density of CNG (compressed natural gas).
Liquid hydrogen is shown as 30,459 BTU/Gallon... also less than ammonia, surprisingly.

So, the car has to carry three times as much weight in ammonia to go as far as it would on gas. That is still much better than the weight of today,s commonly used batteries to go the same distance.

30 pounds of gasoline
90 pounds of ammonia
600 pounds of batteries"

.adornosghost wrote on Sun, 6/24/2012 - 7:41 am (in reply to...) adornosghost wrote:

Ammonia has twice the energy density of CNG (compressed natural gas).

Ammonia 40,500 BTU/Gallon
Gasoline 116,090 BTU/Gallon
CNG@2400psi 19,800 BTU/Gallon

Gasoline - Wikipedia, the free encyclopedia

Comrade Alexei Mikhailovich:

RayOnTheFarm wrote:

Lower diesel prices will help the truckers, and the farmers.

I saw diesel @ $2.89 in NY state of all places, hadn't been below $4.00 in I don't know how many years.

Doc Holiday:

Gas @ $3 would help keep the fire from spreading out of control; if consumers are provided the means to consume more goods, demand will increase, but in the process, places like Texas, with their miracle oil manipulation economic miracle will face a wake-up call, as their economy stalls. That is a balancing act I'd like to see, because as texas goes, so goes America down the toilette ... re-balancing the American economy will involve great [pain for several industries, like BIG oil, Big pharma and banking -- not to mention housing ... I don't see anything to indicate real change that I can believe in. $3 gas is a fluke and the bankers will eat each other and destroy the global financial system; bet on it.

Comrade Elmer Fudd

paid like $4.25 in San Francisco a couple of days ago guess we're special

Doc Holiday:

Export Forecast (from a few months ago)

U.S. Was Net Oil-Product Exporter for First Time Since 1949 - Bloomberg [ Feb 29, 2012 2:] >

"The U.S. will ship abroad 350,000 barrels a day more petroleum products that it imports in 2012 and 320,000 barrels daily in 2013, according to the department's Short-Term Energy Outlook report released on Feb. 7.

Gasoline demand in the U.S. sank 2.9 percent to 8.736 million barrels a day last year as pump prices averaged $3.521 a gallon, the highest in records dating back to 1919.

Total U.S. oil product demand fell 9.5 percent to 18.8 million barrels a day last year from 20.8 million in 2005, department data show.

"The reason we can export so much is demand in the U.S. is weak," Cohan said. Since 2005, the U.S. has lost nearly 2 million barrels a day of total product consumption, he said."

==> Let the manipulators burn in hell ... I was bitching about this months ago(see story on the Hunt's)

[Jun 24, 2012] Why oil prices are lowest they've been in months

Bottom Line

Vyacheslav Oseledko / AFP - Getty Images

By Patti Domm, cnbc.com

The free-fall in crude prices is unlikely to reverse course without significant signs that the world economy is improving.

Oil, like stocks and other risk assets, fell sharply Thursday as fears of slowing global growth gripped markets, which were also beset by speculation about pending bank downgrades and Europe's sovereign crisis.

But the price of oil has a separate significance in that it is an important lever on the world economy, and its decline could help consumers.

Crude prices have fallen 30 percent from their March highs as oil production globally rose to a record level in May, according to the International Energy Agency.

The world is now pumping 91.1 million barrels per day, the most ever. OPEC production, at more than 31.5 million barrels in May, is also higher than normal.

"I think that we are seeing asset classes moving in response to expectations related to government policy in Europe and the U.S," said Edward Morse, head of commodities research at Citigroup. "I think they are short-term moves that will not be very long in duration. That doesn't mean there's not plenty of bearish news in commodity markets, in general, and the oil market, in particular."

West Texas intermediate plunged 3.5 percent Thursday, following government reports of ample supply and domestic production at a 13-year high. WTI finished $3.05 lower at $78.20 per barrel, the first close below $80 since October.

Brent, the international benchmark, fell to $89.23 per barrel, the lowest level in 18 months.

While Morse doesn't expect oil to keep falling for long, he doesn't expect it to get back to its year highs soon either.

"We think there's no reason for a sustained price recovery for Brent above $100 or WTI above $85 through the second half of the year," he said.

John Kilduff of Again Capital said after oil sinks through $78, the next level he is watching is $72 per barrel for WTI.

Oil and commodities fell as the dollar rose in its best performance Thursday since November. The fact the Federal Reserve did not announce a new easing program supported the dollar.

Also weak manufacturing data in China and Europe, and a series of disappointments from U.S. jobless claims to the Philadelphia Fed survey, added to the "risk off" temperament of markets Thursday.

In fact, traders say the months-long decline in oil may have been signaling a slowdown in the economy.

Market focus Friday will remain on Europe as finance ministers meet, and the leaders of Germany, France, Italy and Spain meet ahead of next week's EU summit.

"If the central banks stay put, they may see that oil is helping them out - $68 is not unconceivable," Kilduff said. "We're producing about a million barrels a day more than we're consuming. That's starting to be a lot."

IHS CERA Chairman Daniel Yergin, speaking from the St. Petersburg International Economic Forum, said the high production level made sense just several months ago, when speculation around Iran reaction to sanctions sent prices higher.

"It was a quite remarkable period when you go back four months ago. Oil prices got as high as $128 and people were talking about $160, and now it's at $90," he said.

"It shows three things: the relentless increase in supply, particularly led by the Saudis, who have been producing very steadily at high volumes since last year and the beginning of this year. Secondly, it reflects the growth of oil from countries as diverse as Iraq and the United states," said Yergin.

"The supply situation is very different than it was three months ago when Iran was threatening to close the Strait of Hormuz, and the other thing is the bad economic news and weak demand," he added.

The U.S. has restricted dealings with the Iranian central bank, and Europe has sanctioned Iranian oil starting at end of this month.

Yergin said some of the Iranian oil has already been taken out of the market and the drop in oil prices is also pinching Iran, which has been engaged in talks with a group of six nations on its nuclear program.

So far, Iran refuses to abandon its uranium enrichment program, denying it is seeking to develop nuclear weapons.

The Iran situation remains a wild card for oil prices.

While OPEC affirmed last week that it would hold production at 30 million barrels a day, production of oil elsewhere has increased.

"We're (the U.S.) probably close to 6.4 million barrels a day, the highest in 13 years," said Andrew Lipow, president of Lipow Oil Associates. "My unofficial estimate compared to last June, is we're probably up 800,000 barrels, and that is about a 14 percent increase year over year. It's huge and it's being led by North Dakota and Texas. It's just unbelievable."

He added: "What we don't talk about very much is the decline in demand in Europe and that is a good 3 percent year on year, which is a significant amount."

Lipow also expects gasoline prices to continue dropping to the point where they could be below $3 a gallon nationally by Halloween.

According to AAA, the national average for regular gasoline is $3.472 per gallon. That could be a major factor for the economy.

"To me what really matters is how much of consumer income filling the gas tank eats up," said Ward McCarthy, chief financial economist at Jefferies. "We've see it three times now, where gasoline prices get to around $4 a gallon for regular. It takes a bite out of consumer spending. So the further below you get from there the more flexibility it gives consumers. It also gives a boost to consumer confidence."

Follow Patti Domm on Twitter: @pattidomm

This article, "Why oil prices are lowest they've been in months," originally appeared on CNBC.com.

June 21, 2012

steve from Virginia

Alan sez:

And then there is the IMF analysis.

A safe range of outcomes -- with the mid-point being prices doubling every decade and volumes increasing by 0.9%/year - until we can't afford the oil.

We cannot afford the oil now, we cannot push the price to the high of 2008 four years ago. The level of economic activity has diminished since then, with less to come in the future. Production volumes might increase for a little while because of intense efforts to obtain very high initial recoveries. These are bankable but do not represent a trend of increased output capable of effecting the price.

It is declining access to credit and accompanying consumption that is effecting price. Price matters, in dollars peak oil took place in 1998. The economic perturbations of peak oil are being felt now even as various measures of liquid fuel production keep increasing.

The major trend that has buttressed industrial expansion since the end of World War One has been exponential increasing supply relative to consumption pushing down the price of fuel, this in turn expanding the base of crude customers who are also consumers of other goods: cars, houses, vacations, hotels, high-rise office buildings, highways, airports, etc.

... ... ...

Texas_Engineer

Leiten

I agree that all of those foolish enough to try to predict the "moment" of peak are eventually proven wrong. But I really do not understand why anyone cares. Several years ago I saw a video interview of Colin Campbell in which he was asked if his predictions of the peak will be proven correct and he replied without hesitation - "No - all of my predictions will be wrong - because the data we have to work with is so inadequate."

He went on to say that the only reason he provides periodic forecasts is that he is requested to do so.

Campbell has also stated repeatedly that the timing of the peak moment is irrelevant - the important concern should be the the envisioned future once the long decline begins.

I just think we have become so infatuated with our reasoning power we tend to demand that our "experts" provide us with very accurate forecasts. That will never happen. I have attended four ASPO meetings and listened to multiple predictions of the peak. I always disregard them. All that concerns me is that conventional oil production has roughly "stalled" and that has put the world in a very bad condition. Accordingly I am trying to to prepare my family for a different future.

I know that some believe that it is critical to convince the rest of the world about peak oil so that the world will "do something". Therefore we need to provide more precise forecasts. I really think that is a waste of effort. All I watch for is any reasoned arguments on whether future oil production will either increase or decrease. To date I have seen nothing rational indicating future increases. It appears (to me) that the "long decline" is about to start. Whether it starts in 2014 or 2020 is unknowable with the quality of the data.

And (surprise) - all of the things I have done to date (more insulation, weatherizing, solar screens, solar panels) have been excellent financial investments. Much better than the stock market. But they will not ensure BAU for me much longer.

RockyMtnGuy

Re: Enbridge Elk Point Spill Pumps About 230,000 Litres Of Heavy Crude In Alberta

This is moderately interesting to me because I did some work at Elk Point a few decades ago. We made some technical advances in heavy oil production inventing a technique now called "Cold Flow". It was also interesting culturally and historically because the restaurant we ate at in the town was across the street from the Ukrainian Orthodox Church, and many of the people in the restaurant were speaking Ukrainian.

The spill is relatively minor and there are no streams or lakes involved, so all they have to do is get in some bulldozers, build a dike around it, and then suck it up.

However, there is slide show at the end called "10 IMPORTANT FACTS ABOUT CANADA'S OIL INDUSTRY" which is unique for the mainstream media in that it actually contains some useful facts which are true, and it actually cites authoritative sources. The MSM usually sticks to misleading factoids and cites sources which don't know anything. It's worth looking at if you want to know something basic about the Canadian oil industry, e.g.

Oil Exports Have Grown Tenfold Since 1980
Canada exported some 12,000 cubic metres of oil per day in 1980. By 2010, that number had grown to 112,000 cubic metres daily. Source: Canadian Association of Petroleum Producers

97 Per Cent Of Oil Exports Go To The U.S.
Despite talk by the federal government that it wants to open Asian markets to Canadian oil, the vast majority of exports still go to the United States -- 97 per cent as of 2009. Source: Natural Resources Canada

Canada Has World's 2nd-Largest Proven Oil Reserves
Canada's proven reserves of 175 billion barrels of oil -- the vast majority of it trapped in the oil sands -- is the second-largest oil stash in the world, after Saudi Arabia's 267 billion. Source: Oil & Gas Journal

Canadian Oil Consumption Has Stayed Flat
Thanks to improvements in energy efficiency, and a weakening of the country's manufacturing base, oil consumption in Canada has had virtually no net change in 30 years. Consumption went from 287,000 cubic metres daily in 1980 to 260,000 cubic metres daily in 2010. Source: Canadian Association of Petroleum Producers

250,000 Jobs.. Plus Many More?
The National Energy Board says oil and gas employs 257,000 people in Canada, not including gas station employees. And the Canadian Association of Petroleum Producers says the oil sands alone will grow from 75,000 jobs to 905,000 jobs by 2035 -- assuming, of course, the price of oil holds up.

Now the last item is particularly startling, if you stop and think about it, because it implies that the northern oil sands town of Fort McMurray might be a city of over 1 million by 2035. All of a sudden you will have an industrial city bigger than Detroit in the supposed wilderness of the Canadian northern boreal forest. Greenpeace will be horrified.

[Jun 22, 2012] Short-Term Energy Outlook

June 12, 2012 | U.S. Energy Information Administration (EIA)

[Jun 21, 2012] Peak oil and price incentives

Econbrowser

The IMF model predicts that growth in demand will put continual upward pressure on price, with the inflation-adjusted price of oil headed for $180/barrel by the end of the decade. According to their estimates, those price increases would be sufficient to keep global production increasing at about the same reduced rate we have seen since 2004.

My view is that the IMF researchers' approach is clearly better than the simple Hubbert-Deffeyes linearization, but may still be subject to some of the other problems documented by Boyce (2012), as well as the familiar challenges of statistically distinguishing supply and demand effects. Notwithstanding, the IMF research should help raise awareness of an issue that remains underappreciated by many economists, which is that we will eventually reach a point, and may have already, at which quite significant increases in price and improvements in technology can produce only modest increases in production, or may be insufficient to prevent outright declines in annual crude oil production levels. For those still in doubt about that possibility, I would again call attention to Pennsylvania, the place where the oil industry began in 1859. The price of oil today is 5 times as high in real terms as it was in 1891, and of course there have been tremendous technological advances in the century since then. But the state produced 8 times as much oil in 1891 as it does today.

We like to think that the reason we enjoy our high standards of living is because we have been so clever at figuring out how to use the world's available resources. But we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that for a century and a half or so was relatively easy to obtain. Optimists may expect the next century and a half to look like the last. Benes and coauthors are suggesting that instead we should perhaps expect the next decade to look like the last.

Steven Kopits:

I seem to recall from the IMF paper that they expect ongoing price rises in the range of 7% per annum. My estimates, based on a carrying capacity approach, come out at 6-8% / year. So we seem to be in agreement on that, although it might be just coincidental.

Now, as I have stated before, the issue is the rate at which E&P costs will rise. These have been going up at 18% per annum. I spoke to the head of strategy for one of the big OFS firms, and this topic is now on their radar, too, as this may affect upstream capex budgets and spend on oil field services.

We'll touch on this issue at the oil symposium on June 19th in New York.

Steve Verdon:

Alternative energy proponents have been saying that technology would drive down the cost and thus make it competitive with fossil fuel. But alternative energy by and large suffers from the problem of energy density. For example, driving one's car usinig biofuel means creating a year's worth of transportation out of a year's worth of sunlight. With this natural physical barrier it is unlikely that technology breakthroughs alone could do much to wean us off of fossil fuel.

Currently conversion of coal or natural gas to liquid transportation fuel is deemed to be costly. However at its heart it means creating a year's worth of transportation out of millions of years worth of sunlight. With that kind of energy density to work with and a steadily increasing cost for oil, the odds are good that technology can lower the cost of conversion over time.

The major issue as Prof. Hamilton raised recently seems to be government. Celanese claims it can make ethanol cheaply out of coal or natural gas. It is allowed to sell the ethanol as an industrial chemical but it cannot sell it as motor fuel, due to the law only allowing a year's worth of driving to be made from a year's worth of sunlight (corn or cellulosic ethanol). It is building a plant in China so we will see if its claims are true. If we changed the law to allow ethanol of any type to be used in E85 fuel then oil might see a real run for its money.

colonelmoore:

"But we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that for a century and a half or so was relatively easy to obtain"

I don't understand the role of substitutes in this model. Even now, we are pretty close to the point where it is economic to convert trucks and large equipment to natural gas (CNG or LNG). Shell and a number of other companies are looking at "refining" shale gas into diesel (presumably heating oil and other products could be done as well) given the oil-gas spread per mmbtu. Shale gas in Europe has not been tapped (yet) to the degree it is here.

Higher prices not only incentivize production, but also substitutes, which accelerate the declining oil intensity of the economy.

intensity of the economy.

dwb:

Deffeyes was estimating total global cumulative conventional crude oil production at 2,000 Gb, and he put the conventional peak between 2004 and 2008, most likely in 2005. He thought that unconventional production would be help, but it would not be sufficient to keep total global crude oil production on an upward slope.

Note that global crude oil production has been virtually flat since 2005 (including 2011):

http://i1095.photobucket.com/albums/i475/westexas/Slide05.jpg

Slowly rising unconventional production has helped, but so far it has not been sufficient to keep total global crude oil production on an upward slope.

So, despite a doubling in global annual crude oil prices from 2005 to 2011, we have seen virtually no increase in global crude oil production.

And then there net exports situation, with developing countries, led by China, consuming an increasing share of a declining volume of Global Net Exports of oil.

A brief explanation of the difference between production and net exports:

A proposed new name for the P/C (Production/Consumption) metric: ECI, or Export Capacity Index.

For example, Saudi Arabia's annual 2011 production (BP, total petroleum liquids) was the same as 2005 annual production rate, but their ECI, or Export Capacity Index--the ratio of their total petroleum liquids production to their domestic liquids consumption--fell from 5.55 in 2005 to 3.90 in 2011.

As a country's ECI approaches 1.0, their net exports approach zero. At the 2005 to 2011 rate of decline in the Saudi ECI, Saudi Arabia would approach a 1.0 ECI, and thus zero net oil exports, around the year 2034, in about 22 years.

John Theodorou:

My view is that the IMF researchers' approach is clearly better than the simple Hubbert-Deffeyes linearization, but may still be subject to some of the other problems documented by Boyce (2012), as well as the familiar challenges of statistically distinguishing supply and demand effects.

It is obvious that we can change the production curve if we invest in capital destruction as is happening for tight oil and gas extraction in shale formations. It is also true that if we play around with our definition of what is crude and look at aggregates that allow NGLs, biofuels, or refinery gains to muddy the water we can make things look a bit differently. But what we cannot do is change the geological and thermodynamic reality. Using water drives to get out the oil from a conventional reservoir faster may help our curves today but only at a cost of hurting them tomorrow. It will also cost us in terms of energy investment that will be required to extract the oil and possibly negatively impact the ultimate extraction if we are not very careful.

I would say that, as usual, the official bodies like the IEA and IMF are too optimistic. Let us note that a decade ago we had CERA, the IEA, and the EIA claiming a depletion rate of around 3-4% while Deffeyes and others who relied on Hubbert's methodology were suggesting a much higher number. Eventually the pessimists prevailed and the depletion rate was recognized to be above 6%. The 'new' production that is changing the curves comes from areas that have depletion rates of over 25% and are much more expensive to develop. None of this will matter to the Peak Oil argument because we still have peak production for light sweet oil staring us in the rear view mirror even as big cracks are showing up on the balance sheets and cash flow statements of the shale sector. If anything the false hope and hype have made things worse because we have seen the closure of nuclear and coal generation facilities across the globe. This is bad news for developed economies and signals a massive crash ahead.

VangelV:

If there were any faith in alternative energy at all, we'd be drilling like crazy to get our oil and gas to market while the price is still high.

aaron:

Regarding projections from a decade ago, note the pricing mechanism worked! Clearly the IEA's projections were done without considering geology. Those of us much more pessimistic missed the great changes resulting from a new higher price deck: Efficeincy gains, new technology (horizontal drilling) and substitution (natural gas).

JJ Butler:

Oil has become a zero sum game. The more oil the third world uses, the less oil the west uses. Whoever utilizes scarce capital most efficiently to produce goods that can be traded for oil, gets the oil. Capital misallocation caused by wanton printing (housing Minsky) just makes the west less competitive on the international oil market.

In Keynes day, western nations could simply order their empires to send them oil and other natural resources. Today, the west competes efficiently on the global market, or someone else gets the oil. Less oil, less real GDP.

Ekim:

I think it's relatively clear that Deffeyes correctly identified a turning point in the supply quite accurately. Since late 2004, the crude supply has not really grown. What growth we see has been primarily shale oil. However, if one looks at Exxon's OECD oil supply forecast to 2040 (I sat through a presentation yesterday), it shows as essentially flat. If there's a shale oil revolution in the advanced economies, it's not showing in the outlook yet.

Much of the required increase in production is slated to come from OPEC, where we are assured there is amply resource. For modest production growth, there should be. But global oil demand is not necessarily the driver of OPEC production.

Steven Kopits

:The world consumes 31,755,000,000 barrels of oil per year (31.7 Billion Barrels)

The US consumes 7,117,500,000 barrels of oil per year (7.1 Billion Barrels [22% of World Consumption])

Gulf of Mexico Reserves
Discovered: 2006
Size: 7 – 15 Billion Barrels
Could keep world economy running for: 3 to 6 months.
Could keep US economy running for: 1 to 2 years.
Largest oil resource discovered since Prudhoe Bay.

Prudhoe Bay
Discovered: 1968
Size: 10 – 25 Billion Barrels
Actual Production To Date: 11 Billion Barrels
Remaining Reserves: 2 Billion Barrels

Alaska National Wildlife Reserve (ANWR)
Latest Estimates: 1998
Size: 5.7 – 16 Billion Barrels
Could keep world economy running for: 2 to 7 months.
Could keep US economy running for: 1 to 2 years.

North Dakota Tight Oil (Bakken)
The average tight oil well produces 1000 barrels of oil per day the 1st year.
The average tight oil well produces only 250 barrels of oil per day the 2nd year.
The average tight oil well will only produce 550,000 barrels of oil in its lifetime.
Compare that to The Deepwater Horizon which was set to produce 55,000 barrels of oil per day if it hadn't exploded.

Eric Rasmusen

Another way to forecast oil supplies would be to use the Hotelling model.

A few months ago I posed pretty much the same question to JDH. He provided a link to one of his papers on oil in the macroeconomy. I think the kwikee summary is that oil did not follow a Hotelling model in the past and in fact followed a random walk; but the reality of oil as an exhaustible resource might be just starting to dawn on folks. Some of the volatility in oil prices might be interpreted as the market trying to find a Hotelling price and extraction rate. The apparent fact that the Saudis can no longer open the spigot as wide as they wish suggests that they are having to think seriously about exhausting supplies.

2slugbaits:

Great post. The cornucopians quibble but on balance Hubbert and his disciples are being proven conceptually correct. When we take into account the number of moving parts and assumptions involved, the forecasts based Peak Oil Theory are extraordinarily accurate- certainly more accurate than contemporaneous "Peak Oil naive" forecasts.

The greatest problem in envisioning the future path is the inherent instability in modern human economic systems. This has been revealed and exacerbated by the encroaching reality of Peak Oil. Does anyone doubt that had the early 2000 decade EIA forecasts of oil production been correct that most of the global problems related to excessive debt and low growth would have been either non-existent or far milder?

Kenneth Deffeyes was early and accurate in drawing attention to the destabilization of commodity markets that reach supply limits. The destabilization of the oil market has serious knock-on effects on the global economy (separate and in addition to simply higher prices for oil).

If there is one area that needs further investigation and understanding, this is it. The feedback loops have feedback loops and I am increasingly concerned that an inability to cooperate at all levels could move forward the collapse scenario presented in LTG.

What we have is a very complex system and there is a real question as to whether it has outrun our ability to manage it.

Confronting Collapse The Crisis of Energy and Money in a Post Peak Oil World (9781603582643) by Michael C. Ruppert, Colin Campbell

Amazon.com
Justin Ritchie
I first learned of Mike Ruppert through a chilling trailer for his then upcoming movie, Collapse. Ruppert has a long history as an investigative journalist that began when he broke away from the mainstream after his excellence in the LA police led him to be actively recruited by the CIA for running cocaine through South-Central LA. Ruppert realized this wasn't the world he'd pledged to serve and tried to break the story only to find that the systems he was working to support were quite different from how we perceive them in the mainstream. I went to the Vancouver International Film Centre with a few friends for a screening of Collapse only to have my tentative notions of civilizational instability confirmed in a tour de force of face melting facts. I quickly got a hold of Ruppert's latest book, A Presidential Energy Policy, which had been re-printed as, Confronting Collapse to draw more attention to the work which had been largely ignored. Explaining bad news is not a route to popular success, as witnessed by the rapid end to careers of any American politician over the last 20 years that tried to curb deficits by cutting spending or raising taxes.

Confronting Collapse is a far better introduction to the topic of Collapse for the lay person than the corresponding movie is. And I say that because it is possibly too easy to write off Ruppert as a crank and a lunatic on-screen when he's talking about governments breaking down and a global population that might face a huge die-off. This is so far outside the mainstream narrative that most people who aren't receptive to it will completely block it out. It is much harder to ignore the case Ruppert makes for industrial civilization's collapse when it is nicely footnoted and indexed. Ruppert's writing style is absolutely clear and accessible to someone that isn't a technically adept reader but might come across as "arrogant" for someone unwilling to look at the evidence. Modern economists counter the claims of the Peak Oil/Collapse theorists by saying that market corrections will solve the problem, Ruppert clearly explains that the only market corrections available will be in the form of tremendous suffering and loss of human life.

In the book, Dr. Colin Campell sets the stage by discussing the short time humanity has had access to energy dense petroleum reserves (only about 150 years). Ruppert uses the first chapter to make the case on why the US Federal government might keep the severity of the energy supply situation confidential and why we might question the status quo on this issue, "if we were lied to about mortgages, 401(k)s, stock portfolios, hedge funds, derivatives, insider trading... the invasion of Iraq and torture... why do so many accept on faith everything we have been sold about energy?"

Ruppert is clear that he views the entire American political and economic system as broken and corrupt and subservient to corporate/financial interests. This is something that neither Barack Obama or John McCain were willing to confront in their naive energy policies and political solutions. Thus the reason no real leadership exists and America/The World might be headed off a very steep and disturbing cliff in the near future. This assumption might lose some readers right away but if you read further, you can see why Ruppert has reached these conclusions.

The case for collapse is made by Ruppert in his connection between the financial system and oil supplies/energy flows. Growth of this economic system is impossible because recent oil reserve discoveries (they are all in hard to reach places like 6 miles under the ocean) do little more than confirm the fact that extraction rates of oil supplies will continue to rapidly decline, leading to a quick and painful dissolution of the mechanisms of modern society. If our infrastructure was able to handle such a decentralization, America would be in better shape, but Ruppert destroys that myth by dissecting and reporting facts regarding global oil and gas infrastructure ($22 trillion in investment needed by 2030 to support the global energy-supply infrastructure), the electric distribution grid (coal supplies need oil for extraction), roads and bridges (a $1.6 trillion investment needed to avoid bridges collapsing), an over-reliance of commuting (asphalt prices and their tie to oil, impact of driving on economic growth in America) and the alternative energy infrastructure (which does not and will not exist).

For Ruppert, Iraq is confirmation that the US government knows what is about to happen to global energy supplies, if we are fighting over the scraps of the remaining global oil fields that isn't good news. Since Obama hasn't even begun to withdraw from Iraq or Afghanistan supports this notion. By the time Mike Ruppert ties together the dependence of our food system on cheap petroleum (10 calories of petroleum for every calorie of food, not counting for transport), the case he's making for a major reshuffling of society is clear... but you are only halfway through the book.

He continues by detailing how we should evaluate alternative energy solutions, that we should focus on how much energy we get out based on how much energy we put in and then completes this point by discussing why none of the available alternatives (solar, wind, tidal, etc...; all ranging from 3 barrels of oil energy equivalent for every one barrel of oil equivalent that we put in or 3:1 net energy) can match the net energy of oil (200:1 in 1900 and now 50:1 in 2009). But there is an alternative that works: localization. When everything requires tremendous energy inputs to bring it to you from far away, the most straightforward response is to make something and use it locally. This is where electricity sources like solar PV panels and mini-wind turbines can help.

Ruppert closes out the book with a realistic assessment of money and how it will respond to oil depletion, our system of fiat currency and fractional reserve banking has only existed since the late 1960s because of rapid oil extraction. This is where Ruppert's book shines as he lays out a 25 point plan for creating stability in the face of oil extraction rate depletion. Hi solutions would build local resilience and quickly reduce oil consumption if implemented on a Federal or even local level. Sadly, none of these solutions are being considered at a national level in the US because the paradigm is still so focused on solutions for growth that it ignores solutions for managed contraction. Only one of these 25 approaches is being considered by California, and that's the legalization of marijuana which could lead to pratical hemp production offsetting the need for many petroleum intensive fabrics and materials.

If Ruppert makes one mistake, it is that he appears to assume the rest of the world will follow the United States down the drain, while collapse for the US appears inevitable, the social fabric in other nations may be able to withstand the challenges of the oil age much better.

So in summary, Ruppert's claim is that the monetary system, supported by ever expanding supplies in oil will collapse bringing down the system of globalization and the failing infrastructure and weak communities of the US will lead to a long period of civil unrest.

Regardless of your preconceived notions, Ruppert's book is filled with clear concise charts, graphs, news articles and summaries which outline the magnitude of our current global predicament. I'm not completely sold on the concept of collapse, I think societies tend to seek out equilibrium in the face of dire circumstances. However, complex civilizations have fallen apart when energy sources were no longer accessible (see Ancient Rome and peak wood supplies). What is inevitable is that business as usual cannot and will not continue in the face of physical constraints imposed by reality. It is truly disappointing to see the citizens of North America, and specifically the leadership of its nations, completely unwilling to acknowledge the magnitude of these problems.

Garden Gal (Maple City, MI USA) :

Picture Jack Nicholson in 'The Shining.' Now picture a man in a dark room saying, "Heeere's your future!" In this video, Michael Ruppert paints a nightmarish vision of the inevitable collapse of our economic, political and social structures. He argues that we are on the downside of peak oil, that the rise in earth's human population is a direct result of oil and that our current way of life cannot be sustained without it. He talks about the looming crash, what has been leading up to it, and a few things we can do to survive the roller coaster ride we're in for, before during and after the final collapse.

We could easily dismiss his ideas as those of a paranoid loon if Ruppert didn't cite statistics so readily. The man has an enviable memory for facts and figures, and he readily tosses them out to illustrate those ideas. Ruppert tells us exactly how many gallons of oil it takes to create one tire on an automobile. He gives us the causes with monetary figures of the predictable 2008 banking collapse. He cites the riots in Poland and Spain and Eastern Europe as a feature presentation coming soon to the streets of America. Note: the recent British riots occurred after the film was made.

One critical review states that the narrator never questions or challenges Ruppert. Not so. The narrator interrupts, for example, to point out mankind's inventiveness. He mentions the alternative sources of energy that man has created. But Ruppert is quick to illustrate the inherent flaws of each. Nuclear reactors, for example, require massive amounts of oil to build, and they need a certain amount to run. Wind energy helps only those people living on the coasts.

Fortunately, a more recent interview of Ruppert is included with the DVD. In it he seems a bit more hopeful.

I highly recommend 'Collapse' as a vision of a possible future, as a lesson in economics, as a cautionary tale, or simply as a horror flick. See it, get all of your friends and relatives to see it, then let the dialogs begin.

[Jun 03, 2012] The Potential for Saudi EOR

Rising internal Saudi consumption (multipled on rapidly incrsing population) are causing a dent in Saudi exports over time. Some say the switch from oil power power plants to Natural gas in Saudi Arabia will mitigate the decline.
The Oil Drum

Without getting into the discussion of the other aspects of the site, it was interesting to read a post dealing with future oil production on "Watts Up with That" today, in which it is suggested that the forthcoming fall in Saudi oil production will presage the decline in overall global oil production. (The site has won the "Best Science" weblog award the past two years).

The relevant quote is

The next big one to tip over into decline will be Saudi Arabia.

And, if you have been following this series, then you will understand the basis on which I make the observation that this is, in fact, incorrect. The site uses a plot by Euan (without the link) from back in 2007, though it is credited to 2008.

... ... ...

When these current projects, in their various stages, are combined with the future production from Manifa, and enhanced production from Safaniyah, I expect that the Kingdom will continue to produce at around 10 mbd for at least a few years more, though I continue to doubt that it will be able to increase much beyond that. After all, even when field declines are held to 2% a year, after 50 years the arithmetic starts to take an increasing toll – Ghawar began production in 1951.

And so, with respect, I disagree with David Archibald, if only in the short term - but for those of you with a few minutes, the comments that follow his post at WUWT are quite entertaining.

westexas

...In any case, on the production side even the EIA, which has recently had significantly more optimistic production numbers than other sources like BP (for Saudi Arabia) and the Texas RRC (for Texas) shows 2011 annual Saudi crude oil production below the 2005 rate, and the EIA shows 2011 annual total petroleum liquids production the same as 2005.

My guesstimate is that BP will show annual Saudi 2011 total petroleum liquids production at about 10.8 mbpd (versus 11.1 mbpd in 2005), with consumption of about 3.0 mbpd, resulting in net exports of about 7.8 mbpd in 2011, versus 9.1 mbpd in 2005.

If we extrapolate the 2005 to 2008 rate of decline in the Saudi P/C ratio, it suggests that Saudi Arabia would approach zero net oil exports around 2031, which suggests* total post-2005 Saudi Cumulative Net Exports (CNE) of about 40 Gb. Cumulative Saudi net exports for 2006 to 2011 inclusive were about 17 Gb, putting estimated post-2005 Saudi CNE at about 43% depleted at the end of 2011.

BenjegerdesFarms

Where is the source material for that EIA production cost curve graph? Corn ethanol is competitive (at the lower end) with most of the 'enhanced oil recovery' setups I see... I also expect more ethanol plants and CO2 pipelines to start showing up in North Dakota if this continues.

What is probably *not* reflected in the corn ethanol cost is the tremendous reduction in cost for natural gas, which is a feedstock for both the distillation in ethanol plants, and the ammonia fertilizer. If we have a correction in farmland prices back to say $3500 an acre in Iowa, along with ammonia fertilizer under $500/ton, we could easily have $4.00 a bushel corn, which is going to contribute $1.30 a gallon to the price of ethanol.

At that point, we might as well turn the entire starch content of the US corn crop into ethanol, and feed DDG's for livestock.

As for food vs fuel, you can eat dried distillers grains and yeast extract, but you still can't eat oil.

[Jun 03, 2012] Crude Oil Output Is Soaring in Iraq, Easing Markets By TIM ARANGO and CLIFFORD KRAUSS

The complete and utter lack of scientific and simple journalistic integrity on display. So "grey lady" is overexcited that Iraq reached the level previously achieved under Saddam and priced dropped as a result. I think HFT is a better explanation. See a relevant quote from the article below: "In reality, No region -- from OPEC to Non-OPEC, from Africa to Russia -- has the single-handed ability to lower the price of oil now, because none can bring on new supply quickly enough for a long-enough sustained period of time."
June 2, 2012 | NYTimes.com

Despite sectarian bombings and political gridlock, Iraq's crude oil production is soaring, providing a singular bright spot for the nation's future and relief for global oil markets as the West tightens sanctions on Iranian exports.

The increased flow and vital port improvements have produced a 20 percent jump in exports this year to nearly 2.5 million barrels of oil a day, making Iraq one of the premier producers in OPEC for the first time in decades.

Energy analysts say that the Iraqi boom - coupled with increased production in Saudi Arabia and the near total recovery of Libya's oil industry - should cushion oil markets from price spikes and give the international community additional leverage over Iran when new sanctions take effect in July.

"Iraq helps enormously," said David L. Goldwyn, the former State Department coordinator for international energy affairs in the Obama administration. Even if Iraq increased its oil exports by only half of what it is projecting by next year, he said, "You would be replacing nearly half of the future Iranian supply potentially displaced by tighter sanctions."

For Iraq, the resurgence of oil, which it is already pumping at rates seen only once - and briefly - since Saddam Hussein took power in 1979, is vital to its postwar success. Oil provides more than 95 percent of the government's revenues, has enabled the building of roads and the expansion of social services, and has greatly strengthened the Shiite-led government's hand in this ethnically divided country.

... ... ...

The political battle over divvying up profits has prevented the enactment of a national oil law, meaning that the companies need to follow myriad regulations, some of which date back to the Ottoman Empire. Electrical shortages are forcing politicians to choose between serving the oil companies or restive civilian populations that want more reliable utility service.

To increase output, the country will need to develop a huge water project to filter and pump seawater into old oil fields to increase the pressure required to coax crude out of the ground. Planning has begun, but the project is progressing slowly.

Iraq will also need to negotiate a sizable export quota within OPEC to accommodate its increasing potential, a nettlesome process that could produce tensions with Saudi Arabia and Iran.

[May 22, 2012] Guest Post OPEC Has Lost The Power To Lower The Price of Oil

May 22, 2012 | ZeroHedge

No region -- from OPEC to Non-OPEC, from Africa to Russia -- has the single-handed ability to lower the price of oil now, because none can bring on new supply quickly enough for a long-enough sustained period of time.

And there is more to this story than meets the eye.

... ... ...

Many also believe that both OPEC and non-OPEC could be producing a lot more oil. In the case of OPEC, many harbor the view that state-run producers and governments are sitting on massive, hidden spare capacity and retaining it as a cartel to manipulate oil prices higher. In the case of non-OPEC, many believe that environmentalists, regulations, and other limits placed by democratically-elected governments are suppressing a wall of supply that could come to market easily if only the oil is 'set free.'

These views, however, are not only extreme but shaky. They are typical of the kind of grand claims that fit people's worries and suspicions, rather than fitting any empirical data. The fact is that OPEC spare capacity has been under pressure for some time despite persistent belief to the contrary, with estimates running below 3 mbpd, or even below 2 mbpd. (For recent commentary on OPEC spare capacity, see A Model of Oil Prices by Chris Nelder). The case for hidden, held-back oil capacity in OPEC is weak, especially as domestic populations in the Gulf have dramatically increased the consumption of their own oil.

Meanwhile, non-OPEC large producers like Russia have significantly increased production this past decade. And regions like North America have been able to slow declines. Western oil companies -- which dominate non-OPEC production -- have scoured the globe looking to replace their reserves, but largely to no avail. This is why ExxonMobil and ConocoPhilips eventually gave up, capitulated, and bought natural gas assets instead. By doing so, they followed in the steps of Royal Dutch Shell, which had taken the natural gas pathway years earlier.

Therefore, a fact about non-OPEC production that was unknown even to the industry ten years ago is now very plain: There just isn't a vast quantity of new oil that can come online easily and inexpensively outside of OPEC-controlled regions. Only Russia, the largest non-OPEC producer and now the largest single country producer in the world -- eclipsing even Saudi Arabia -- was able to significantly increase production.

spinone

It means war. Which is why we occupy the land between China and the middle east: Afganistan. Login or register to post comments

Errol

Crash, you are right: folks who are selling something are just trying to sell advice on profiting from adversity in the short/medium term.

Then again, some of us who have been debating the consequences of "extrapolate what oil scarcity means for 7 billion people" for years now don't really want to discuss it any longer, either. It is way too late for any meaningful intervention. As John Michael Greer puts it, "...the word problem implies there is a solution. What humanity has is not a problem, but a predicament."

I will mention that an engineer-president who has yet to be fully appreciated tried to warn America regarding the consequences of going all-in on fossil fuels. The voters FLUNG him out of office. Whatever happened to Americans who actually wanted to hear the truth? It seems nobody wants a president who "cannot tell a lie". How many Americans would vote for a guy whose campaign slogan is "Honest Abe"? It appears that humanity bought and paid for what they're gonna get, good and hard.

Joe The Plumber

Swing capacity is mostly a myth, but even if saudi could ramp up to 15 million barrels per day within a year it is heavy crude and the bottleneck is heavy crude refining capacity. There is no significant excess capacity that could absorb millions more barrels of heavy crude right now

We better hope that fraking applied to existing wells changes the depletion slope. I am cautiously optimistic we may enter another brief economic spurt from cheap energy over the next twenty years

sangell

Cheap energy has its own costs. If you drive the price of oil down you take out high cost production and new investment in hard to get oil. If it costs $75/barrel to produce Alberta tar sand oil any price below $75 shuts in that oil. Same with deep water oil. No one's going to drill for it if the price doesn't cover the cost of production.

grid-b-gone

One gallon of oil = 300 man hours of work. Some say it's as much as 600 man hours. There may be substitutes, but there is no comparable substitute.

Peak oil naysayers may try to ignore the issue and attempt to blow it off like critics are doing successfully with global warming. The difference is that oil has worldwide demand and a highly fluid market. When demand exceeds supply, the market discovers the imbalance quickly.

Since 1982, the world has not discovered more oil than it has pumped.

Vast reserves of U.S. coal and Canadian tar sands are theoretical alternatives. The huge difference comes when we no longer drill for energy, but rather mine for it ... a whole notha level of effort.

The title of the article exactly sums up the changed game and makes it clear why Saudis consistently over-reported their reserves.

Marginal Call

Cheap oil means expanding economies. It's growth in a barrel.

You've made the connection with stay cations and hobby farms, but couldn't quite finish the equation. Energy = the economy.

How many gallons of gasoline would it take to charge an iPhone by Ken Cohen

December 14, 2011 | ExxonMobil's Perspectives Blog

This may seem like a strange question to ask, considering iPhones obviously are charged with electricity, not gasoline.

But the answer speaks to why gasoline and other liquid fuels will remain an important part of the energy mix in the future.

In ExxonMobil's recently released Outlook for Energy, we predict that by 2040, about 90 percent of the global transportation fleet will still be powered by liquid petroleum fuels – that is, gasoline, diesel, and jet fuel.

When asked why that's the case, Bill Colton, ExxonMobil's vice president for Corporate Strategic Planning, often starts the discussion using this fact to put it in perspective:

All of the energy concentrated in one gallon of gasoline is enough to charge an iPhone once a day for almost 20 years.

Clearly, there's a lot of energy in a gallon of gasoline. And energy density is one of the key factors behind the reliability, affordability, versatility and convenience of any fuel. These are key elements that drive consumer choices today and will continue to drive consumer choices in the future.

So, let's take a look at the role energy density plays in fuel choices, and how it affects consumer convenience and choice.

Energy Density

Consumers typically want to pay the least amount of money for the most amount of any product, energy included. So, the energy content of any fuel is a critical component of consumer choice. When it comes to transportation, though, another factor comes into play – namely that the energy to power a vehicle must be carried on the vehicle.

One of our top scientists uses the analogy of backpacking when talking about the importance of energy density: You want to buy the lightest, most easily carried food for backpacking, but it also needs to contain a lot of energy to keep you going. Likewise, gasoline and diesel are the lightest and most energy-dense fuels to carry for transportation. A typical car's gasoline tank contains less than 100 pounds of gasoline but can power a 3,000 pound car for 400 miles at 60 miles per hour. This performance sets a high standard, and there are few transportation fuels currently on the market that are as light, energy dense and portable as gasoline or diesel.

Convenience

The energy density of a fuel also contributes to its convenience.

For example, contrast the 300 to 400 miles that a gasoline vehicle can take you with what it would take to do the same in an electric vehicle. Electric vehicle batteries have just a fraction of the energy density of gasoline, meaning they would have to be charged multiple times during a 400-mile trip. There's currently no major infrastructure for charging electric vehicles on the road, and it can take hours for an electric vehicle battery to charge.

Consumers at times may take for granted the convenience and time-savings offered by the existing fuel station network. The technological processes that recover crude oil from the earth, transport it to refineries, refine it into gasoline and diesel, transport it to fuel stations and store it over time are so incredibly advanced that consumers can fill up with gasoline 24 hours a day, seven days a week, in as many quantities as necessary. That's a convenience that does not currently exist with other transportation fuels.

Affordability

The energy density of a fuel also contributes to its affordability.

When gasoline prices are high, you may hear more discussion about introducing more biofuels, especially ethanol, as a means to reduce price. After all, some consumers see the lower E85 price at the station and (understandably) think it's more affordable than regular gasoline. But a gallon of E85 contains roughly 25 percent less energy than a gallon of gasoline, meaning you end up paying more because you fill up more often – even though the E85 price per gallon at the pump is lower.

A few years ago, Edmunds.com did an interesting test on a flex-fuel SUV, driving it from San Diego to Las Vegas and back first on gasoline and then on E85 to find out the difference in fuel economy and cost. They found that fuel economy was 26.5 percent worse when using E85. That means having to buy more fuel to go the same distance, meaning this sort of trip using E85 could cost a consumer about $20 more than using gasoline.

Looking to the Future

Even though I talked about the current challenges of fueling vehicles with electricity and biofuels here, that doesn't mean we don't expect further technology advances in this area that will greatly expand the use of such vehicles. In fact, you might be interested to know that in our Outlook for Energy, we actually predict that hybrids and other advanced vehicles will account for nearly 50 percent of the vehicles on the road in 2040, compared to just 1 percent today.

More efficient vehicles will mean that global demand for fuels to power the light-duty vehicle fleet is likely to actually plateau and gradually start to decline about 10 to 15 years from now, while still meeting the needs of consumers.

There's a lot more information about the future demand for transportation fuels, advances in vehicle efficiency and more in our 2012 Outlook for Energy – download a copy at exxonmobil.com or visit our interactive website for more data.

[May 13, 2012] MPG of a Human Do the Math

The article contains a very interesting discussion that is very informative and highly recommended...

Nutrition labels in the U.S. use kilocalories (or Calories with a capital "C") as an energy measure. One kilocalorie (kcal) is 4.18 kJ of energy. Carbohydrates and protein come in at 4 kcal/gram, while fat registers 9 kcal/g. For comparison, coal ranges from 4–7 kcal/g, gasoline is 10 kcal/g, and natural gas is 13 kcal/g. So fat is pretty much like gasoline.

...I did a food experiment for blog's-sake: for several days, I ate exclusively packaged foods with good labeling. Excluding drinks, the food averaged 1.85 kcal/g. If we then assume that the food has a density similar to that of water, we get 7000 kcal/gal (1 gal is almost 4 liters, which itself is 4 kg). By comparison, a gallon of gasoline contains 36.6 kWh, or 31,000 kcal-about 4.5 times more potent than our typical food mix...

...We all have a baseline metabolism to just run our bodies and carry out our daily activities. I'll take the easy number of 2000 kcal per day. Smaller or less active people will need less, and larger or more active people will use more. Cross-country bikers classify as "more active," but we're accounting for the activity explicitly, so we can use the couch-potato baseline.

If you're in good-enough biking shape to contemplate a multi-day cross-country trip, you can probably maintain about 100 miles (160 km) per day. That 100 miles will take an extra third of a gallon of food per day, or an extra 2400 kcal. Each day therefore consumes about 60% of a gallon of food, and you would therefore make 160 miles on the 7000 kcal gallon of food (720 miles per gallon of gas/lard).

This is meant to be ballpark, people: good to a factor of two. So here's a table.
Activity MPG food MPG gas/lard kWh/100-mi
Biking, incidental 290 1300 2.8
Biking, long-haul 160 720 5.1
Walking, incidental 75 340 10.4
Walking, long-haul 40 180 20
Another consideration to bear in mind: in most cases, cycling and walking involve a single "passenger." A Prius loaded with four people effectively gets 200 MPG per passenger (18 kWh/100-mi per passenger), so make sure to account for this when making comparisons.

Our walking or biking economies look pretty decent stacked up against cars-especially if we considered consuming foodstuff as potent as gasoline. This is all well and good until one appreciates that because of the way Americans grow, harvest, distribute, and prepare their food, every one kilocalorie of food eaten has consumed about 10 kcal of fossil fuel energy (dominated by oil). Our 7000 kcal gallon of food therefore took 70,000 kcal of fossil-fuel energy to produce, or a little over two gallons of gasoline. So you would divide the "food economy" values we calculated by 2.2 to get the fuel economy that supported your bike trip or hike. Now walking consumes 18–34 MPG of oil equivalent, and biking comes in at 70–130 MPG.

Dojomouse

Good point on the embodied energy – I hadn't thought of that.

Another critical consideration is that a healthy level of exercise gives a healthy metabolism, which means you can extract more energy per unit food… unhealthy overweight people usually consume more calories per day despite not exercising… and may have fewer calories available for body-work, the remainder go as waste. So you could argue that, at least for moderate values, biking/walking for transport actually *reduces* the burden on the energy intensive food system as while your personal output increases the inputs required to achieve a given output reduce.

I'm with Ben on the long haul issue too. Resting consumption would occur in a car as well. Of course, relative duration plays a part… Unless you bike really fast.

Anyway, neglecting the exercise is healthy and can result in eating less angle, I think the obvious answer is electric bikes :-) Cheap, fast, easy, and WAY efficient!

[May 13, 2012] Flex-Fuel Humans

As an approximate rule-of-thumb, each kilocalorie ingested by Americans consumes 10 kilocalories of fossil fuel energy to plant, fertilize, harvest, transport, and prepare.

...An earlier post on how many miles per gallon a human gets while walking or biking touched on the fact that fossil fuels undergird our food supply.

[May 12, 2012] New IMF Working Paper Models Impact of Oil Limits on the Economy

From comments: "...the IMF analysts are gradually trying to break the news to their audience that we live in a finite world, with finite natural resources."

The analysis in the IMF Working Paper shows that neither approach has worked perfectly, but in recent years, forecasts of oil supply using the geological view have tended to be closer than those using the economic/technological approach. Since neither model works perfectly, the new paper takes a middle ground: it sets up a model of oil supply where the amount of oil produced is influenced by a combination of (1) geological depletion and (2) price levels.

This blended model fits recent production amounts and recent price trends far better than traditional models. The forecasts it gives are concerning though. The new model indicates that (1) oil supply in the future will not rise nearly as rapidly as in the pre-2005 period and (2) oil prices are likely to nearly double in "real" (inflation-adjusted) terms by 2020. The world economy will be in uncharted territory if this happens.

It seems to me that this new model is a real step forward in looking at oil supply and the economy. The model, as it is today, points out a definite problem area (namely, the likelihood of oil high prices, if growth in oil production continues to be constrained below pre-2005 rates of increase). ...While oil production did not rise as fast as the economic/technological view would predict, higher oil prices have allowed oil production to stay on more or less a plateau after 2005, rather than declining as predicted by geological methods.

...prices of homes may be affected by high oil prices. People with less discretionary income are less likely to "trade up" to a more expensive homes, so high oil prices seem to be one of the reasons for the decline in home prices (Tverberg). Lower home prices affect ability of homeowners to borrow against the value of their homes for new purchases, so affect GDP, apart from oil price's direct impact on the number of new homes built.

...the availability of inexpensive oil and other fossil fuels is one of the main drivers of economic growth (in addition to the other drivers I mention in the subparts of Item 1 above). Perhaps the cycle is started by the availability of cheap fossil fuels for industrial use and continued by the increased demand to which this growth gives rise.

oilfield-trash

I just read with interest that Iraqi officials and Shell have agreed to reduce the planned target output from the super-giant Majnoon field from 1.8 million/bbl/day to 1 million (must be nice to have such large fields eh?). Again, a quick calculation shows that as about 0.3 billion barrels per year.

If this has not been factored into the chart then you can take a third of a gigabarrel away from the thick blue line in figure 4 above. The upside is that the plateau will last a bit longer.

This news item also suggests other oil majors will seek to reduce their earlier optimistic production targets for Iraqi developments. Those earlier contracts were agreed upon boosting Iraqi production to 12 million barrels per day by 2017. Those targets are now alleged to be nearer 8 million per day, with some analysts predicting 6 million barrels per day being more realistic.

Again, I wonder if these revisions factor in the EIA estimates anywhere? Some must do already. If not take another 2.2 giggabarrels off the 2017 production...!

http://uk.reuters.com/article/2012/05/08/uk-iraq-shell-idUKBRE8470H22012...

[May 01, 2012] ISM Manufacturing index indicates faster expansion in April

"When people ask me how much oil reserves are left, I ask them: At what price?"
traderwalt:

adornosghost wrote:

km4 wrote:
Jobless in the West, Millennial Generation Turns to Asia | Global Spin | TIME.com
"… while slowly increasing US crude oil production is very important...

'Was down in the Louisiana "oil patch" last weekend and heard this story:

An old oil field had been producing for year and years but the production rate was declining. For a number of years the owners and operators expected the field to be shut in because it was becoming uneconomic to operate. (Oil platforms are expensive to operate...)

With steady crude oil prices over $100/barrel, petroleum engineers and geologists "costed out" and expensive and extensive horizontal drilling program which would have been impossible when the field was originally discovered year ago. As a result, after spending lots of money, production is back up again. A large "played out" oil field was replaced by new production with recoverable reserves increasing even though no new oil field was discovered.

The guy told me, "When people ask me how much oil reserves are left, I ask them: At what price?"

memmel:

traderwalt wrote:

A large "played out" oil field was replaced by new production with recoverable reserves increasing even though no new oil field was discovered.

Good example of false bookkeeping. Rising oil prices allow you to invest a lot more money to extract the remaining reserves at a faster rate. The mistake they made when booking these "new" reserves is simple.

Lets assume the field was produced using normal maintenance through the end of its life. No fancy and expensive horizontal wells. Figure out total volume produced likely over many decades. Compare that to what they will get from the horizontal program. What you find is no they did not significantly increase reserves instead they pulled production forward. Oil that would have been produced using stripper wells for decades is produced now.

In general these horizontal drilling programs keep production high for five or at most ten years. Consider what happens next.

The underlying problem is the way reserves are calculated using production esp from horizontal wells. Bottom line is a lot of the reserve claims are likely bullshit.

arthur_dent :

traderwalt wrote:

As a result, after spending lots of money, production is back up again. A large "played out" oil field was replaced by new production with recoverable reserves increasing even though no new oil field was discovered.

that's not unexpected. Even with tertiary recovery methods in the past about 70% of the oil was left in place. With more technology and higher prices one can recover more, but at some point it becomes more like mining than pumping.

As long as you can do something to "flow" the trapped oil, I guess there is a chance at getting more. The oil is basically bound up in pore space, part of it is a lack of permeability(channels to connect things) and part is just natural surface bonding that makes things sticky.

memmel :

arthur_dent wrote:

that's not unexpected. Even with tertiary recovery methods in the past about 70% of the oil was left in place.

Two words ... water cut.

adornosghost:

memmel wrote:

Two words ... water cut.

Oil stained brine.

traderwalt:

memmel wrote:

Rising oil prices allow you to invest a lot more money to extract the remaining reserves at a faster rate.

As I understand it, the field was about to be "shut in" because production had decreased so much that it was uneconomic to maintain a rig to produce such a small amount of oil. Either spend the money and keep producing or stop producing the field.

traderwalt:

Nanoo-Nanoo wrote:

Ethanol Glut Weighs on ADM's Profit - WSJ.com

The government subsidy for blending ethanol with gasoline was eliminated on January 1, 2012, IIRC. Lots of energy companies made deals to get the subsidy which resulted in demand being pulled forward.

[Apr 22, 2012] Saving Capitalism From the Capitalists Are the Trading Desks Destroying the Futures Markets

April 14, 2012 | Jesse's Café Américain

Dan Norcini is my friend, one of the more savvy people I know in the markets. He has made his living as an off-exchange trader for many years. The concerns he has about the viability of the markets is genuine, and of great importance.

People forget the reasons why some markets exist, what their function in support of the real economy is fundamentally all about.

The responsibility for this distortion of the markets, and their taxing effects on the real economy, are the responsibility of the Congress and the regulators. Unfortunately they have been bought by unenlightened, short term self-interest in a variety of ways. And the same people who bought them have sold the public a bill of goods, and appealed to the worst of their emotions to keep them from thinking.

And the public bears some responsibility in this for their long standing willingness to see themselves and their fellows duped, abused, and ill-used for the sake of some outlandishly misguided idealism or a craven selfishness.

There is nothing new or unique in this. As long as there have been markets there have been those who would tip the scales, cheat and defraud, buy the judges, and take what belongs to others, often hiding their misdeeds under sanctimonious camouflage like slogans about freedom and the flag.

The difference is that this time it is not our fathers and grandfathers and great grandfathers that stand the watch on the wall, but ourselves. And our children and grandchildren will live with the results of our faithfulness or folly.

This deterioration in the quality of the markets is another nail in the coffin for the efficient markets hypothesis, and the power of deregulation to free the natural goodness of traders and bankers in its full flower.

Order in society is the result of hard work, sacrifice, integrity and a never ending devotion to the principles of justice. On the other hand, the natural outcome of unbridled greed and fear is crime, injustice, and anarchy.

Algorithms Gone Wild - AGAIN, and AGAIN, and AGAIN
By Dan Norcini
April 13, 2012

What more is left to say at this point other than the fact that the hedge fund computers and their damnable algorithms have destroyed the integrity of the US futures markets. The sheer size, extent, ferocity and volatility of the moves that these pestilential computers are creating have rendered these markets basically useless for what they originally came into being for, namely, risk management for commercial entities.

Price swings of this magnitude are blowing up hedged positions put on by commercials and other end users/merchants/processors, etc. While margins are reduced for legitimate hedgers, they still must meet any and all margin calls on any hedged position, whether that is a long position or a short position. Some will say that all they need to do is to buy or sell the corresponding physical commodity and while simultaneously lifting the hedge. That might work fine on paper but in the real world it is a fabrication.

A cattle feedlot, a grain elevator owner/operator, a cocoa processor, a cotton mill, etc, may or may not have the actual product ready to sell as it is still maturing or growing in the field or may not be ready yet to actually buy the product but they might have hedges in place while they are waiting. So much for their hedges in this sort of idiotically insane trading environment. Their hedges are getting blasted to kingdom come but they must maintain the thing if it moves against them meaning that they need cash to meet any and all margin calls.

At some point, the cost of doing so, with hedge fund running prices all over the damn planet on a daily basis, is no longer feasible.

I am predicting here and now that unless something is done to corral these hedge funds, the futures market is going to become useless as a risk management tool for non-speculative entities...

Read the rest here.

[Apr 22, 2012] The Criminal Manipulation of Food and Commodity Prices

April 14, 2012 | Jesse's Café Américain

Michael Greenberger of the University of Maryland has been an outstanding spokesperson for financial reform. I have carried his interviews before.

He served on the CFTC with Brooksley Born in the late 1990's. This is how I first became aware of his opinions about regulatory matters.

I had hoped he, among some notable others, might have found a place in the Obama Administration if it had been truly interested in financial reform. And we all know how that went, and how it still goes today.



h/t via Yves

See the entire story at the Real News Network here.

Since July 2001, Michael Greenberger has been a professor at the University of Maryland School of Law, where he teaches a course entitled "Futures, Options and Derivatives."

Professor Greenberger serves as the Technical Advisor to the United Nations Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System. He has recently been named to the International Energy Forum's Independent Expert Group that provided recommendations for reducing energy price volatility to the IEF's 12th Ministerial Meeting in March 2010.

Professor Greenberger was a partner for more than 20 years in the Washington, D.C. law firm of Shea & Gardner, where he served as lead litigation counsel before courts of law nationwide, including the United
States Supreme Court.

In 1997, Professor Greenberger left private practice to become the Director of the Division of Trading and Markets at the Commodity Futures Trading Commission (CFTC) where he served under CFTC Chairperson Brooksley Born. In that capacity, he was responsible for supervising exchange traded futures and derivatives.

He also served on the Steering Committee of the President's Working Group on Financial Markets, and as a member of the International Organization of Securities Commissions' Hedge Fund Task Force. After service at the CFTC, Professor Greenberger served as Counselor to the United States Attorney General in 1999, and then became the Justice Department's Principal Deputy Associate Attorney General.

[Apr 22, 2012] Bart Chilton of the CFTC Discusses Position Limits - Economists Remain Craven, Compromised, Blind

April 18, 2012 | Jesse's Café Américain

Bart Chilton discusses position limits and commodity price manipulation with Becky Quick and her assistant. Silver is mentioned at about 5:35 on the tape.

'Speculators' might be confused with 'investors' if you come from the land of the privileged hedge and vulture funds.

Speculators look for market inefficiencies and exploit them, thereby contributing to price discovery in a healthy market. Investors take longer term positions and tend to be involved in fundamental production and distribution of goods and services.

The problem comes when speculation becomes too large and over-leveraged, and runs out of natural market inefficiencies, and starts to create its own market opportunities by cornering markets, naked short selling, and other forms of price manipulation.

The hot money tends to drive the investment money out of the market and price discovery fails. The distortions caused by malinvestment over periods of time can have significant effects on the real economy.

The Street knows this, and so do the economists and politicians and spokesmodels. They just pretend not to notice because the money is too good to stop, and the painful consequences too remote to care.

Still, 'progressive' economists like Thoma and Krugman continue to believe that speculation does not result in high commodity prices in this case oil. For an example read it here.

I think they are victims of their own lack of understanding of how real markets, versus their theoretical models of markets, work. They say they have never seen any evidence of speculation as a factor in the commodity markets. Have they ever spoken to a regulator like Bart Chilton? I think not. Why burden one's mindset that largely ignored the housing and credit bubble while it was forming under Greenspan? At the time Brad DeLong said that 'Greenspan had NEVER made a policy decision with which I disagreed' and censored my comments about the bubble because 'he knew that I was wrong.'

The abuse of the speculative element and its ability to move any paper markets, particularly in a hot money environment, is almost overwhelming in the available historical examples. I think their romance with paper money makes them blind to its corrosive effects on the real economy.

And it is easy to say that one has seen no proof if all one reads are papers, and do not go out and talk with those working to reform the markets and are closer to the action. That is why they 'do not understand the passion.'

More likely is it the inertia of thought that seems to plague the ivory towers. They seem to lag the current trends in finance and the economy by about ten to fifteen years.

I remember being in grad B-school in the late 1980's, and arguing with a few of my profs about 'the Japan miracle' and where it was likely heading. I had been doing business there, learned the language and business culture in particular, and they were tossing around theories and 'facts' that had little or no connection to the reality of what was going on there, with the rampant monetization of real estate and speculation in paper asset bubbles.

They were enthralled by the myths of 'Japan Inc.' that were so popular in their circles of the day, too often promulgated by grant-seeking, honorific econo-whores. By the time the rest of them figure it out the crisis is safely past and we're on to the next. I found an ally in my old macro prof who took me aside and said, "They're young, they'll learn. Money never lies, but you must learn its language, or chase illusions."

And this is why economics is a disgraced profession, and continues to be so.

[Apr 22, 2012] A Study On Speculation in the OIl Market For Those Economists Who Have Apparently Not Seen It

"a study from the St. Louis Fed on Speculation in the Oil Market that indicates that speculation contributed about fifteen percent to the increase in prices in the oil market during a recent price increase."
Apr 19, 2012 | Jesse's Café Américain

Here is a study from the St. Louis Fed on Speculation in the Oil Market that indicates that speculation contributed about fifteen percent to the increase in prices in the oil market during a recent price increase.

Anyone who trades these markets and follows the real economy does not require such a study to tell them what is plainly visible to their own eyes, especially when the studies always seem to come out five years after the fact, in the manner of regulatory actions against market manipulation.

The markets have become deregulated to the point where hot money from big hands can push prices around at will, especially using large positional advantage and High Frequency Trading. And even if traders are caught blatantly rigging the markets and painting the tape bringing in hundreds of millions in profits, they will only be chastised, make a hollow promise to do better, and endure a wristslap fine that is a very modest cost of doing business.

Granted, the larger markets cannot be moved for long against the primary trend, and the trend in oil has been higher for any number of long term fundamental reasons. But traders feed on volatility, both up and down. And they introduce faux inefficiencies to take profits for themselves, adding no value, as a tax on the real economy.

And of course no financial engineer wants to discuss the effects of money printing on the price of real goods and services.

In the smaller commodity markets the scams can go on for longer periods of time creating more substantial damage to fundamentals of the related industry. I would love to show you the CFTC report on the effect of absurdly large positions in the silver market, but it has been sitting on that report for four years.

We have to ask ourselves, what are markets for? Are they fulfilling that function honestly and efficiently? What is the benefit of speculation and what are its limits?

Even Bernanke has seen the effects of speculation in the markets, and this from a man who ordinarily could not find a bubble with both hands as he expels it.

It is harder to get an answer to this now, because like some periods in history prior to this, the markets and the public are awash in hot money looking for an easy path to enormous returns as quickly as is possible. And that money flows through the avenues of Washington and Wall Street, and the media, and the universities and think tanks, distorting perception and public policy discussions.

And that is the danger of speculative excess, against which we have been warned time and time again.

Now the Fed will likely point to ETFs and blame investors who flocked to commodities to protect themselves from money printing. But that is only part of the story.

If you want to know who is benefiting from this, follow the profits. Look at the big trading desks who are gaming the system, and not at the small fry trying to find some investment haven in the storm of paper games. And the reason they are so desperate is because of the reckless and irresponsible actions of the government in allowing the overturn of Glass-Steagall and the unbelievable growth in the unregulated derivatives market which even now poses a clear and present danger to the financial system.

And if you want to know who is to blame for that, skip the study, and go ask Brooksley Born.

"The increase in [oil] prices has not been driven by supply and demand." - Lord Browne, Group Chief Executive of British Petroleum (2006)

"The sharp increases and extreme volatility of oil prices have led observers to suggest that some part of the rise in prices re‡ects a speculative component arising from the activities of traders in the oil markets. " - Ben S. Bernanke (2004)


The run-up in oil prices since 2004 coincided with growing investment in commodity markets and increased price comovement among different commodities. We assess whether speculation in the oil market played a key role in driving this salient empirical pattern.

We identify oil shocks from a large dataset using a factor-augmented autoregressive (FAVAR) model. This method is motivated by the fact that the small scale VARs are not infomationally sufficient to identify the
shocks.

The main results are as follows:

i) While global demand shocks account for the largest share of oil price ‡uctuations, speculative shocks are the second most important driver.

(ii) The comovement between oil prices and the prices of other commodities is explained by global demand and speculative shocks.

(iii) The increase in oil prices over the last decade is mainly driven by the strength of global demand. However, speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse.

Our results support the view that the financialization process of commodity markets explains part of the recent increase in oil prices.

Speculation in the Oil Market - St. Louis Federal Reserve, January 2012


And I have to offer a bit of an apology to Paul Krugman. As you may recall, I have taken issue with his absurdly incorrect description of the relationship between spot prices, inventories and the futures markets in the past when he stated emphatically that he saw no speculation in the oil markets.

Apparently he did see speculation and admitted it later on. He just didn't think it was a problem.

NYT
Oil speculation
By Paul Krugman
July 8, 2009

Oil speculation is back in the news. Last year I was skeptical about claims that speculation was central to the price rise, because what I considered the essential signature of a speculative price rise - physical withholding of oil from the market, in the form of high inventories - just wasn't showing.

This time, however, oil inventories are bulging, with huge amounts held in offshore tankers as well as in conventional storage. So this time there's no question: speculation has been driving prices up.

Now, "speculation" isn't a synonym for "bad". If the underlying assumptions that seem to have been driving oil markets were right - namely, that a vigorous recovery is just around the corner, and demand will shoot up soon - then it would be perfectly reasonable to accumulate oil inventories right now. But those assumptions are looking less reasonable by the day.

Anyway, the moral of this post is that the oil story this time looks very different: this time, the signature of large-scale speculation is clearly visible.


Paul Krugman saw no issue with it because he wanted to see a recovery in the economy at that time, to prove in the benefits of the financial engineering being done by the Treasury and the Fed. Alas, it was a phantom.

Hey Paul given this admission, that 'withholding' is a signature of speculation to the upside, would you consider creating 'phantom inventory' and 100:1 leverage of existing inventory to be evidence of speculation and manipulation to the downside? And brazenly bombing quiet markets with enormous sell orders that crush price lower without even the appearance of legitimate price seeking?

If so, you may wish to talk with Bart Chilton about the silver market. That is, if you were interested in reform and not just proving some economic theory about stimulus.

Few care about genuine reform of the financial system and the markets, caught as we are in a credibility trap. But that is the only path to sustainable recovery. And therein lies a tragedy.

[Apr 17, 2012] The Oil Drum Has the Global Economy Become Less Vulnerable to Oil Price Shocks

This paper examines the impact of oil price changes on global economic growth. Unlike some recent studies, this paper finds that oil price rises have had significant negative impacts on world economic growth. A time-series analysis of the data from 1971 to 2010 finds that an increase in real oil price by 10 dollars is associated with a reduction of world economic growth rate by between 0.4 and 1% in the following year. As oil prices approach historical highs, the global economy may be vulnerable to another oil price shock.

... ... ...

It is well known that world economic growth depends on the constant expansion of energy supply, and oil accounts for about 40% of the world energy consumption and almost all of the transportation fuels. Thus, the global economy depends on oil for normal functioning in the purely physical sense.

However, it is commonly argued that over the years, the oil intensity of the global economy has dramatically declined and as a result, the global economy has become less vulnerable to oil shocks.

It is true that measured by oil consumption per dollar of world GDP, world average oil intensity has declined from 0.116 kilogram per dollar in 1980 to 0.060 kilogram per dollar in 2010 (measured in 2005 purchasing power parity dollars), or oil intensity has fallen by about half over three decades.

However, this observation by itself does not tell us if the world economic growth has become less dependent on oil consumption growth. Consider two cars: suppose car A is twice as energy efficient as car B. With access to fuel, car A can drive twice as long as car B with the same amount of fuel. But if additional fuel supply is zero, then neither of the two cars can operate any more.

[Apr 16, 2012] Oil and coal-backed groups far outpace Obama, allies on energy ads

WASHINGTON -- Energy has become a touchstone issue in the presidential race, and groups backed by oil and coal dollars have spent far more money on ads bashing the president's record than the Obama campaign and its allies have spent defending it, according to a new analysis by the Center for American Progress, a left-leaning Washington think tank.
Relying on the groups' own announcements and data provided to press clients by Kantar Media/Campaign Media Analysis Group, the Center's Climate Progress blog calculated that in the first three and a half months of 2012, "groups including Americans for Prosperity, American Petroleum Institute, Crossroads GPS, and American Energy Alliance have spent $16,750,000 on energy attack ads."

In comparison, the Obama campaign and an affiliated "super PAC," Priorities USA, "have spent at least $1.67 million defending the president's energy record," the analysis reported.

[Apr 16, 2012] Saudis committed to lower oil prices

I still remember times when anything above $80 per barrel was a sign of eminent recession...
Al-Naimi recorded output in March at 9.9 million bpd, when he said Saudi Arabia was prepared to produce at its full capacity of 12.5 million bpd.

He identified $100 a barrel as an ideal price for producers and consumers earlier this year.

Brent traded above $120 a barrel yesterday and has risen about 13 percent this year as tightening US and European sanctions target exports from Iran.

There are some analysts who believe the world is at 'peak oil', meaning we will never increase oil extraction by significant numbers; certainly, not enough to meet growing needs.

[Apr 16, 2012] China's Unconventional Gas Pursuits Threaten Australian LNG Build Up

China has aggressive plans to increase the role of natural gas in meeting its burgeoning energy needs. Estimates suggest that the country may as much as quadruple its gas consumption levels last year by 2020 and is looking to meet this demand from a number of sources including LNG.

The opportunity has prompted oil majors like Chevron and ConocoPhillips to start work on multibillion dollar LNG projects in Australia to target demand from Asian markets and in particular from China. Chevron is presently involved in two giant LNG projects in Australia – Wheatstone and Gorgon. However, LNG imports suffer from a cost disadvantage over domestically produced gas or gas imported through pipelines.

[Apr 07, 2012] The oil in Eastern Siberia

February 1, 2012 | Bit Tooth Energy

In the last post on Russian oil production I discussed the amounts of oil that have been produced from Western Siberia, the region that currently produces the most, and which in its prime contained the second largest producing oilfield in the world at Samotlor. But those fields are now in decline, and while modern technology is seeking to retain as much production as possible, Russian investment is moving further East to the region known as Eastern Siberia. It is not the most hospitable of places, even when compared with Western Siberia.

The cold is staggering, even for Siberia: winter temperatures can fall to minus 70 degrees Fahrenheit, at which point all outside work is banned. The nearest human settlement is 250 miles away, and the forests are full of bears, wolves and elk. . . . Workers shivered in winter and in summer were tormented by midges so vicious they have been known to kill cows.

[Apr 2, 2012] "Speculation in Oil Markets? What Have We Learned?"

More on the impact, or lack thereof, of speculation in oil markets (one of the issues is how to define speculation, and what types of speculation are good/bad according to some metric -- see here and here for more on that topic):
Speculation in oil markets? What have we learned?, by Lutz Kilian, Vox EU: A popular view is that the unprecedented surge in the spot price of oil during 2003–08 cannot be explained by changes in economic fundamentals, but was driven by the increased financialization of oil futures markets.1 It is well documented that, starting in 2003, there was an influx of financial investors such as index funds into oil futures markets. At about the same time, both spot and futures prices of crude oil began to surge, soon reaching unprecedented levels and peaking at a record high in mid-2008. A popular view among pundits and policymakers is that this sustained oil price increase was facilitated by the financialization of oil futures markets. Non-academics such as Michael Masters and George Soros testified before the US Congress that financial investors were taking speculative positions that resulted in rising oil futures prices, which in turn were responsible for a surge in the spot price of oil. The accuracy of this view is not obvious at all and much of the academic debate centers on the evidence, if any, supporting this hypothesis.

One reason that the Masters hypothesis has received a lot of attention among policymakers is that it seems to provide an obvious remedy to the problem of rising oil prices. To the extent that financial speculation is the cause of the problem of rising oil prices, policies aimed at controlling trades in oil futures markets can be expected to prevent increases in the price of oil. This interpretation has informed recent policy efforts to regulate oil futures markets as part of a larger effort by the G20 governments to impose more control on financial markets. While these policy reactions are perhaps understandable within the broader context of the global housing and banking crisis, they are not based on solid evidence.

In a recent CEPR Discussion Paper (Fattouh et al 2012), my co-authors and I review the evidence in support of the Masters hypothesis from a variety of angles, mirroring the evolution of the academic literature on this subject. The study concludes that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the spot and futures prices responded to the same economic fundamentals.

Discussions about the role of speculation often degenerate into blanket generalizations because it is rarely clear how speculation is defined. The most general economic definition of a speculator is anyone buying crude oil not for current consumption, but for future use. What is common to all speculative purchases of oil is that the buyer is anticipating rising oil prices. Speculative buying may involve buying crude oil for physical storage leading to an accumulation of oil inventories, or it may involve buying an oil futures contract, provided an oil futures market exists. Either strategy allows one to take a position on the expected change in the price of oil. Standard theoretical models of storage imply that there is an arbitrage condition ensuring that speculation in one of these markets will be reflected in speculation in the other market (Alquist and Kilian 2010).

It is immediately clear that speculation defined in this manner need not be morally reprehensible. In fact, speculation may make perfect economic sense and indeed is an important aspect of a functioning oil market. For example, it seems entirely reasonable for oil companies to stock up on crude oil in anticipation of a disruption of oil supplies because these stocks help oil companies smooth the production of refined products such as gasoline. The resulting oil price response provides incentives for additional exploration, curbs current consumption, and helps alleviate future shortages. Hence, it would be ill-advised for policymakers to prevent such oil price increases.

In the public mind speculation has a negative connotation because it is viewed as excessive. Excessive speculation might be defined as speculation that is beneficial from a private point of view, but would not be beneficial from a social planner's point of view. It follows naturally that the public has an interest in preventing excessive speculation. The broad definition of speculation we discussed earlier makes no distinction between socially desirable and undesirable speculation. Indeed, determining whether speculative trading is excessive is difficult.

One strand of the literature defines speculation in terms of who is buying the oil. Traditionally, traders in oil futures markets with a commercial interest in or a physical exposure to oil have been called hedgers, while those without a physical position to offset have been called speculators. The distinction between hedging and speculation in futures markets is less clear than it may appear, however. First, the oil futures market cannot function without speculative traders providing liquidity and assisting in the price discovery. The presence of speculators defined as non-commercial traders tells us nothing about whether speculation is excessive. Second, in practice, commercial traders may take a stance on the price of a commodity or may not hedge in the futures market despite having an exposure to the commodity. Both positions could be considered speculative. Likewise, efforts to detect speculators on the basis of high ex post profits are not compelling. After all, speculators take risky positions and the return on holding oil must reflect that risk.

Another argument has been based on the relative size of the oil futures market and the physical market for oil. For example, it is often asserted that the daily trading volume in oil futures markets is several times as high as daily physical oil production, fuelling the suspicion that speculators are dominating this market. Academic research, however, shows that this ratio – after taking account of the number of days to delivery for the oil futures contract – is a fraction of about one half of daily US oil usage rather than a multiple, invalidating this argument.

An alternative approach due to Holbrook Working (1960) has been to quantify speculation as an index measuring the percentage of speculation in excess of what is minimally necessary to meet short and long hedging demand. A high Working index number, however, does not necessarily indicate excessive speculation. One benchmark in evaluating this index is the historical values of this index for other commodity markets. By that standard the index numbers for the oil market even at their peak remain in the midrange of historical experience. Moreover, there does not appear to be a simple statistical relationship between this index of speculation and the evolution of the price of oil. For example, the correlation between the Working index of speculation and daily price changes is near zero.

Sometimes excessive speculation is equated with market manipulation. For example, it has been asserted that financial traders are herding the market into positions from which they can profit, resulting in excessively high oil prices in the spot market. It is important to stress that market manipulation and speculation are economically distinct phenomena. The increased financialization of oil markets does not by itself mean that market manipulation is on the rise, and there is no widespread evidence of market manipulation in oil futures markets.

In short, there is no operational definition of excessive speculation. Indeed, existing academic studies have focused on indirect evidence of excessive speculation rather than direct evidence. The academic literature allows several conclusions:

  1. There is clear evidence of the increased financialization of oil futures markets. Whether this financialization also was responsible for increased co-movement among different asset prices continues to be debated. Although there is some evidence of increased co-movement across asset classes, that co-movement is also found in markets in which index funds do not operate and for which there are no futures exchanges, which is suggestive of an explanation based on common economic fundamentals. Indeed, there is evidence that price increases were somewhat higher for non-exchange traded commodities than for exchange-traded commodities, consistent with the view that financialization actually dampened price increases.
  2. There is no compelling evidence that changes in financial traders' positions predict changes in the price of oil futures. Conflicting results in the literature in this regard can be traced to the use of datasets in some studies that are too aggregated to be informative about these predictive relationships or otherwise inappropriate. To the extent that any evidence of predictive power from index fund holdings to oil futures prices has been found, that evidence has not been based on rigorous real-time analysis and the extent of the out-of-sample gains has yet to be quantified. Finally, evidence of predictability is not evidence of causation. This predictive power, if any, may arise simply from traders' positions responding to the underlying fundamentals of the oil market, for example.
  3. Contrary to widely held beliefs that increases in oil futures prices precede increases in the spot price of oil, there is no evidence that oil futures prices significantly improve the out-of-sample accuracy of forecasts of the spot price of oil. This result holds whether one is forecasting the nominal price or the real price of oil. In contrast, there is evidence that models based on economic fundamentals help forecast the spot price of oil out of sample.
  4. The simple static models that have been used to explain how an influx of financial investors may cause an increase in the spot price of oil are inconsistent with dynamic models of storage. Economic theory tells us that both spot and futures prices are jointly and endogenously determined.
  5. The oil price–inventory relationship tells us nothing about the quantitative importance of speculation in oil markets. In particular, the absence or presence of speculative pressures in the oil market cannot be inferred from studying oil inventory data without a fully specified structural model.
  6. Structural economic models of oil markets that nest alternative explanations of the evolution of the real price of oil (including speculative demand) provide strong evidence of speculation in 1979, 1986, 1990, and late 2002, but are not supportive of speculation being an important determinant of the real price of oil during 2003 and mid-2008. Instead these models imply that both spot and futures prices were driven by a common component reflecting economic fundamentals (Kilian and Murphy 2011). Alternative studies that claim to have found evidence of financial speculation suffer from identification problems and are uninformative.
  7. There is no empirical evidence that the short-run price elasticity of gasoline demand is literally zero, as required by theoretical models that explain increases in the spot price based on speculation in oil futures markets without an accumulation of oil inventories. Recent oil demand elasticity estimates that take account of the identification problem in estimating demand elasticities from price and quantity data are considerably higher in magnitude than traditional estimates based on reduced form models.
  8. Recently developed theoretical and empirical models of time-varying risk premia may help enhance our understanding of fluctuations in oil prices, but it is not clear how representative these models are for the global market for crude oil, and their ability to explain fluctuations in the price of oil has yet to be explored in full detail.

To conclude, one of the problems in this literature – and, more importantly, in the public debate about speculation – is that it is rarely clear how speculation is defined and why it is considered harmful to the economy. For example, the aim of recent regulatory changes in oil futures markets is to reduce price volatility, when increased oil price volatility was never the problem, but the persistent increases in the price of oil after 2003. Moreover, the literature has shown that the presence of index funds has, if anything, been associated with reduced price volatility. This view is also supported by historical analyses on the relationship between futures markets and price volatility. It is sometimes suggested that academics have failed to adequately address the issue of speculation in oil markets and that more research is needed to establish what seems obvious to many policymakers. This is not the case. Rather, extensive research has produced a near-consensus among academic experts that speculation has not been a key driver of recent oil price fluctuations. This finding has important implication for on-going policy efforts to regulate oil futures markets.

References

Alquist, R and L Kilian (2010), "What Do We Learn from the Price of Crude Oil Futures?", Journal of Applied Econometrics, 25:539-573.

Calvo, Guillermo (2008), "Exploding commodity prices, lax monetary policy, and sovereign wealth funds", VoxEU.org, 20 June.

Fattouh, B, L Kilian, and L Mahadeva (2012), "The Role of Speculation in Oil Markets: What Have We Learned So Far?", CEPR Discussion Paper No. 8916.

Working, H (1960). "Speculation on Hedging Markets", Stanford University Food Research Institute Studies, 1:185-220

Kilian, L and DP Murphy (2011), "The Role of Inventories and Speculative Trading in the Global Market for Crude Oil", University of Michigan.

Krugman, Paul (2008), "Calvo on commodities", NY Times Blog, 21 June.

Thoma, Mark (2008), "Oil prices and economic fundamentals", Economist's View, 26 July.


1 On this see the debate between Guillermo Calvo (2008) and Paul Krugman (2008) as well as comments from Mark Thoma (2008).

Darryl FKA Ron said in reply to A Facebook User...

Actually your comments have nothing to do with the claims of speculation in the oil market. You are suddenly so much smarter than George Soros (eh, I am not a fan) in speculative markets? Can I have a ride on your yacht? See eric upthread and my response to him. Also, watch the video at this link and then maybe you might want to buy the book:

After Words: Leah McGrath Goodman, "The Asylum: The Renegades Who Hijacked the World's Oil Market" hosted by Jerry DiColo

http://www.booktv.org/Program/12285/After+Words+Leah+McGrath+Goodman+The+Asylum+The+Renegades+Who+Hijacked+the+Worlds+Oil+Market+hosted+by+Jerry+DiColo.aspx

Darryl FKA Ron said in reply to Darryl FKA Ron... Samantha Harke's review of Asylum begins:

"A must-read for anyone either in or on the sidelines of the energy industry. If there was any last remnants of belief that fundamentals rule the energy markets, this portrait of the NYMEX pits and how screen trading as completely overcome the industry, will bury that belief firmly six feet under."

Actually the history of various schemes to rig commodities futures markets is roughly as old as well, er, commodities futures markets. The replacement of people with computers has just shifted the benefits to outside speculators.

paine:

buying into the indy FED line and no bubbles on commodity markets ...

what is it about these two pillars of the great weeble rip off seems to bring out the worst in academic economists ?

comma1:

"It is well documented that, starting in 2003, there was an influx of financial investors such as index funds into oil futures markets. At about the same time, both spot and futures prices of crude oil began to surge, soon reaching unprecedented levels and peaking at a record high in mid-2008."

I'm convinced. The car driven by a drunkard that hopped the curb and ran over the 85 year old grandmother was not the cause of her death, but instead it was a heart attack and her underlying heart condition. So really, this calls for more regulation of saturated fat.

With oil prices where they have been over the last decade the burden of proof is not on those making speculation arguments, it is on those claiming market fundamentals.

anne:

It is well documented that, starting in 2003, there was an influx of financial investors such as index funds into oil futures markets. At about the same time, both spot and futures prices of crude oil began to surge, soon reaching unprecedented levels and peaking at a record high in mid-2008.

-- Lutz Kilian

[It is well documented that, starting in 2003, America went to war in Iraq and we have been at war in and about the Middle East ever since, let alone doing all that we can to stop the flow of oil from Iran these last months and threatening Iran repeatedly in addition. Iraq, Libya, Iran...]

[Seriously, how can a person write such a sentence and never mention that America went to war in Iraq in 2003? We simply refuse to ever allow a thought that American militarism can have a fearful price for us as well as other peoples.]

I find it intolerable ethically that in writing such an essay, the effect of American foreign policy on oil prices is given no attention at all. President Obama is even now expressly and methodically trying to stop the flow of oil from the 3rd largest producer and an analyst cannot understand what this could mean?

The astonishing complacency about the costs of American foreign policy evidently know no limits. (By the way, there is even now an oil war going on between Sudan and South Sudan which we supported in leaving Sudan.)

Darryl FKA Ron said in reply to anne...

I have to agree with you somewhat that it is abysmal that folks cannot put two and two together so to speak. Economists and market participants would rather ignore the evidence of speculation. Those outside observers leap to conclusions that they really cannot backup because they do not understand any of the details of how futures trading markets work. Mostly they share that ignorance with economists, whose focus is only on how they are supposed to work free of collusion or clever schemes of arbitrage (some of which would be illegal if only you could prove they were occurring behind the anonymity of intermediaries).

What you say is exactly true, but with a sour twist. The ability of speculators to be market movers is directly proportional to the perceived risk of price volatility. If the speculative investor is also a producer then this can be pure arbitrage free money playing both ends against the middle.

[Apr 02, 2012] Rising Gas Prices Don't Actually Affect Americans' Behavior

"As billions of people, throughout the world, enter the middle class in the coming decades, there will be an enormous increase in the demand for gas."
"When they talk about solar and wind and things like that, it's like applying Prozac to a cancer patient," he says. "It has nothing to do with the problem."
NYTimes.com

Like a lot of carless New Yorkers, I am generally confused by bursts of populist outrage over high gas prices. But I have always assumed that the anger is genuine - that hard-working Americans, who already spend a lot on gas, are thrown into turmoil when they have to spend even more. After all, 63 percent of Americans insist that these price increases have caused them some financial hardship.

Deep thoughts this week:

1. Americans are surprisingly immune to gas prices.

2. But the U.S. economy isn't accustomed to real price volatility.

3. Or a market it has little control over.

But amid the recent mania over prices hitting $4 a gallon, I decided to figure out whether this fury is economically rational. So I took a look at data from the Census Bureau, which conducts a quarterly survey of American spending habits. During these last few years of historically high oil prices, Americans spent about $40 a week, or $2,000 a year, on gas. That's around 5 percent of our overall spending. It's less than half of what we spend on restaurants and entertainment.

High gas prices must be forcing Americans to cut back in other ways, right? That's what the economists Lutz Kilian at the University of Michigan and Paul Edelstein of the consulting firm IHS Global Insight wondered. They looked at personal spending habits during periods of high energy prices and discovered that "somewhat surprisingly, there is no significant decline in total expenditures on recreation," which was one place they expected to find frugality. More specifically, rising gas prices had "no significant effect on the consumption of movies, bowling and billiard[s], casino gambling and only insignificant declines for recreational camps, sightseeing, spectator sports and spectator amusements." Some people bought fewer lottery tickets, they told me.

In other words, Americans may protest loudly, but their economic behavior indicates a remarkable indifference to the price of oil. In Europe, where taxes keep gas prices well above $5 a gallon, citizens are more likely to take public transportation and live near the center of town. The streets are filled with mopeds and tiny cars. The United States, on the other hand, barely exerts the minimum effort expected of a gas-phobic society: its enthusiasm for car pooling, enhanced public transportation and fuel-efficient vehicles remains relatively low. The average American even spends more gas money on social and recreational trips (about $13 a week, on average) than on their commutes to and from work (around $8). If gas prices truly damage the quality of our lives, we have done a remarkable job of hiding it. --[ this is not true -- NNB, how about $10 a day]

Yet they attract so much attention for other very rational reasons. First, we're still adjusting to a world of volatile gas prices. From World War II to the mid-1970s, the overall U.S. economy was largely insulated from the rest of the world. Our exports and imports were a small part of most businesses, and gas prices, which were carefully managed by complex government controls, barely budged. (In inflation-adjusted terms, they actually fell.) As the massive cars of the time attest, Americans didn't need to think about the global supply or demand of oil. Even after the oil shocks in the 1970s, prices went up by what now seems like a trivial amount.

While sustained high gas prices would certainly produce some turmoil, so would potential spikes in countless other globally traded commodities. But there's a reason populist outcries don't start around soybean prices or magnesium spikes. Oil is the only volatile commodity that most Americans deal with directly: we are buffered from most other price swings by our relative wealth. Unlike people in poor countries, consumers here don't generally buy raw commodity foods; we buy our meals processed or prepared. There's about a nickel's worth of corn in each box of Corn Flakes, but Kellogg's doesn't adjust the price of its cereal every hour to follow global supply and demand. (Though it has raised the price slowly over time to reflect the rising price of corn.) With most goods, the commodity price has even less impact on cost. "When people buy a phone," Kilian says, "they don't buy the copper that makes the wiring."

With gas, though, hurtling prices are unavoidable. Every day, U.S. drivers pay a price determined by forces all over the world that are hard to understand and harder for the United States to control. Even if we invested in better refineries and exploited every possible energy source, from the Keystone pipeline to the Alaskan wilderness, the impact could be minimal. It could eventually lower prices at the pump - but only if nothing else affects them, like OPEC lowering its production to drive prices back up again. The price of oil is, of course, affected by hundreds of interrelated factors.

"The folks on the right say: 'Drill here! Drill, drill, drill!' But that will not impact the global price of oil," says Gal Luft, co-director of the Institute for the Analysis of Global Security. "How do I know? Because we had this great experiment for seven years where our dependence on oil declined from 60 percent to 45 percent. We import much less percentage-wise than we did 10 years ago. What happened to the price of oil? It doubled." And the left, Luft says, isn't offering any better solution. "When they talk about solar and wind and things like that, it's like applying Prozac to a cancer patient," he says. "It has nothing to do with the problem."

Many analysts I've spoken with suggest that oil prices should fall fairly soon. This will be welcome news to the less-fortunate American families who are not impervious to the price at the pump and to anyone who claims to be pinching pennies because of gas. But as unpopular as it may sound, the best possible future for most Americans may involve much higher gas prices. As billions of people, throughout the world, enter the middle class in the coming decades, there will be an enormous increase in the demand for gas. This, along with rising environmental considerations, is likely to send the prices far higher than they are today. But at that point, we will all probably be driving solar-powered hovercars anyway.

JuneCharleston, SC

I find it hilarious that the very people who advocate for the benefits of the free market, because "government is the problem", are the first to demand the government "DO SOMETHING!" to reduce the price of oil. Their ignorance of how the free market works in addition to their advocacy for government subsidies for the petroleum-industrial complex indicates their low level of intellectual honesty. March 31, 2012 at 8:21 p.m.Recommended21
..Lebur2New mexico
Why is U.S. gasoline price tied to the international oil price ( Brent, not Nymex). Because if, as currently, Nymex crude is it now is) about $20 /barrel cheaper than Brent, Gulf Coast refineries buy U.S. (Nymex) crude and export gasoline, diesel etc to Europe etc. where it sells at prices tied to Brent. That reduces domestic supply, so gasoline etc. rises more or less tied to Brent-based costs. March 31, 2012 at 8:21 p.m.Recommended1
..William J. BayerCleveland, Ohio
This fruadulent article is a good example of how a person with an agenda can use statistics to make a fraudulent argument concerning people's spending habits not reflecting their outrage over high gas prices. The writer says, "During these last few years of historically high oil prices, Americans spent about $40 a week, or $2,000 a year, on gas. That's around 5 percent of our overall spending. It's less than half of what we spend on restaurants and entertainment." It claims $2000 per year spent on gas is 5% of "our overall spending," but doesn't state that it's 10% of what someone making $20,000 per year earns and only 1% of what someone making $200,000 per year earns. The writer fraudulently mixes in statistics concerning average spending that includes the spending of high-income people and tries to claim that there's no basis for complaining about high gas prices. This dishonest tactic ignores the fact that it's not people earning $200,000 per year that are doing the complaining --- it's people earning closer to $20,000 per year that are being devasted by the price of gas and screaming in pain. The writer's contentions about spending on "restaurants and entertainment" are fraudulent for the same reason. $2000 per year may be less than half of that spent on restaurants and entertainment when the spending of high-income people is included in the statistics, but it's not representative of the spending of low-income people. This article is bogus and intentionally misleading. March 31, 2012 at 8:21 p.m.Recommended9
..Bartholomew RobertsMid Wisconsin
Supply and demand can be manipulated. The reality is that there is no shortage of oil. The shortage is in refining capacity. And the oil companies will not invest in any new refineries as that will only lower the price of gasoline. Meanwhile they keep plugging away as the most profitable companies on the planet.

They aren't getting rich off me though - I've been biking to work going on 3 years now, including for the fist time this year, through the whole of our Wisconsin winter (though admittedly, this one wasn't much of a winter) And yes, in my case the high price of gas was a major influence in changing the way I live. But it's a change I am glad I made; At 53 years old I feel better, see more, feel more in synch with the world, the weather, the people around me and life. Some days I just need to take a full deep breath and just smell the air. Not a bad bargain for about an extra hour of my day.

Give it a try - just once. You might surprise yourself, as I did, and find that it's not as difficult as you imagined. March 31, 2012 at 8:21 p.m.Recommended12

..BOBParis
Americans should make better use of their cars. For example, although gasoline costs the equivalent of $8 a gallon in France, no one here would dream of curtailing their annual August vacation (by car). However, a lot of people use public transportation every day to go to work, commuting from near (or far) suburbs to city centers. Those most adversely impacted by the exorbitant price of gas live and work in rural areas where public transportation is very limited. The "moral" of the story is that it is quite possible to have and use a car even when the price of gasoliine is double the price in the US. But this requires abandoning "thirsty" SUVs, a throwback to the "massive cars" of the 70s which most people simply don't need or if they feel that they do, not to cry about how much it costs to run such behemoths BOB March 31, 2012 at 8:21 p.m.Recommended8
..john southernpensacols
He missed the daily view: the posted gas price is visible every few blocks and we take it to heart (particularly when we see a $50 gas fill-up). March 31, 2012 at 8:21 p.m.
..KarlaMooresville,NC
I would love to find ways to live agreener life, but the hard reality is there are very few ways to do that in rural areas for low income people. My sister and i live in farm land. We grow our own vegs and fruits and only go grocery shopping every 4 to 6 weeks. But there is no public transportation. If my nephew were to use the school bus, he would have to ride a total of 4 hrs.That's not fair to him when we can drive him in 15 mins. I have major med problems but my docs and hospital are 40 mins away. We try to order things online, but my nephew ( 6 yrs old) is growing everyday and needs clothes and shoes every other day it seems. We buy what we can at the Goodwill, but that is 30-40 mins away. All stores are 40 to 60 mins away except my pharmacy. Our heating/electric bill was the same as last year despite the fact that we used nightlights and candles when necessary, a fireplace for heat, soup that lasts for 4 to 5 days. We are trying, but the list goes on forever. There are very little efforts to help us address these issues. We can't afford to live in a metropolitan area and can't, won't leave our small farm. Green energy is something we believe in, but how do we do it? There is no attempt from those that have more "power" to do so. We live paycheck to paycheck. Until all these great ideas that are talked about become more affordable and available, there is very little more we can do to try to make the planet a greener, cleaner for the kid and and his generation. March 31, 2012 at 8:21 p.m.Recommended10
..Andrew ClearfieldAustin TX
Weird that you ask whether high gas prices affect how much we spend on bowling and movies but you don't ask if high gas prices cause us to purchase more fuel-efficient cars. They do by the way. March 31, 2012 at 8:21 p.m.Recommended4
..leslieBLos ANgeles, CA
The increase of oil price is unstoppable and people become hopeless with the issue. March 31, 2012 at 8:21 p.m.Recommended1
..PlainSimpleTruthWA
While "statistically speaking" it has not impacted American spending habits, we have experienced exactly the polar opposite of your statement: "More specifically, rising gas prices had "no significant effect on the consumption of movies, bowling and billiard[s], casino gambling and only insignificant declines for recreational camps, sightseeing, spectator sports and spectator amusements."

1. We used to go out to the movies once a month. We've seen 1 movie in the last year. 2. Haven't gone bowling, billiards, or casino gambling at all. 3. Haven't gone camping or to any fairs/amusement parks at all. 4. We used to drive to state & national parks for sightseeing on a regular basis. In the last year, we have been to the national park twice.

Gas prices, combined with rising grocery prices have had a significant impact on our family. One benefit has emerged -- we spend a lot more time reading books! March 31, 2012 at 8:21 p.m.Recommended6

..harrymichigan
Anyone with an ounce of common sense should know that we have to transition to al alternate way of energy for personal transport. Oil wil not last forever like some people actually believe. Do you want to leave the planet on a better path for your children and their children? Or do you want to live your pathetically short life as a greedy person who could care less about sustainablilty? Americans have answered that question repeatedly---we are greedy and will not give up anything. Last year the Chinese purchased more new cars then Americans, where exactly do people think we are going to get all that oil? March 31, 2012 at 8:19 p.m.Recommended3
..Val MalteseNew Mexico
The Saudi oil minister a few days ago made a emphatic statement that oil SHOULD be at $100.00 a barrel, and there was absolutely no reason why oil is at the current price per barrel. His tone seemed to be outraged and allied himself with the general consensus as we pull up to the pump. Given the oil producers must be profiting from this sustained run-up, it is as usual the oil speculators who reap the cash windfall by propagating their usual terror and fear scenario to maintain pricing levels that allow them to perpetuate their lifestyle. When will we pay attention to the man behind the curtain? March 30, 2012 at 4:12 p.m.Recommended6
..The Old Netminderchicago
The media don't help. When they hammer away in speculating whether Americans will cut back on vacations, they help build the notion that the increase in gas is a significant part of the cost of a vacation, which, even if you drive 1,000 miles, it is not in a modern car. You might spend more on one meal than on the extra price in gas. March 30, 2012 at 4:12 p.m.Recommended2
..MikeScottsdale, AZ
I drive every day and in the past few months gas has jumped about 60-cents. With the amount of miles I put in every day it does add up. Now with gas $4 I've just been researching the cheapest gas prices online. This site has been really helpful and accurate for me: http://www.allstate.com/gas-price-locator.aspx

[Feb 14, 2012] Advice To President Obama Yes We Can, But Will We by Rembrandt

All energy is not equal- each energy investment entails different input costs, and has different output quality, often not recognized by the market system, nor by many environmentalists. We are at peak oil globally and are likely approaching the net energy cliff for the USA
February 13, 2012 The Oil Drum
The post below shares Nate Hagen's timeless address to President Obama about the importance of energy in our society, written in January 2009. It goes into how energy ties into our economic system, the importance of energy quality, and discusses policy options to deal with decreasing availability of high quality energy supply.

The post/letter below is very important to me, as it brings together much of what I have worked on the past few years. We are at a major crossroads in the history of our nation and our world - the juncture where financial capital no longer can function as an effective marker for real capital. The crisis we face is the product of our own success - therefore it is highly unlikely to be fixed with the same policies and thinking that steered us to the present precipice. There are dozens if not hundreds of salient aspects of our supply and demand situation, each with its own cheerleaders, opponents and unaware. Unless one casts a wide boundary net, myopic focus on any particular issue runs the risk of creating more long term harm than good. In this letter, I attempt to highlight our situation's most critical components, not claiming other issues are unimportant, but that the following principles likely trump/supercede the others:

1) It is energy, not money, that powers our economies. Money is only a marker for real capital and the divergence is large and growing at an accelerating pace.

2) All energy is not equal- each energy investment entails different input costs, and has different output quality, often not recognized by the market system, nor by many environmentalists. We are at peak oil globally and are likely approaching the net energy cliff for the USA

3) We can likely deal with energy decline, but our current economic system of claims and wealth distribution cannot. It is likely that collective policy responses to resource depletion (more debt) will create another form of bottleneck in the form of currency dislocations or social reactions to jubiliee.

4) The highest odds for arriving at a better energy future lie in exploration of, understanding of, and ultimate jettisoning of our cultural addiction/habituation to conspicuous consumption. Ends and then means.

[Feb 13, 2012] The Link Between Peak Oil and Peak Debt – Part 1 Our Finite World

July 11, 2011 | gailtheactuary

The economy is closely linked with the physical resources that underly it. Most economists assume debt can rise endlessly, just as they assume GDP can rise endlessly. But if there really is a limit that prevents oil supply from rising endlessly, it seems to me that there is also a corresponding limit that prevents debt from rising endlessly.

As I analyze the situation, it seems to me that here is really a two-way link between peak oil and peak debt:

1. Peak oil tends to cause peak debt. Some will argue with me about this, because they believe it is possible to decouple economic growth from energy growth, and in particular oil growth. As far as I am concerned, though, this decoupling is simply an unproven hypothesis–the normal connection is that a flattening or decline in energy supply causes a slowdown or actual decline in economic growth, and this slowdown causes a shift from an increase in the amount of debt, to a decrease in the amount of debt, as it did for US non-governmental loans in 2009 and 2010 (Figure 1).

Figure 1. US Domestic Debt, split between government debt (excluding Social Security) and non-governmental debt. Based on Federal Reserve Z.1 data. Excludes Foreign Debt.

Governments try to step in and keep the growth rate in debt up, but the gap is too great for them to make up. This tendency of governments to take on new debt (together with problems related to the original slowdown in economic growth) are reasons many governments have been getting into financial difficulty recently, in my view.

2. Once debt growth peaks (shifts from growth to decline), we can expect a feed-back loop that will tend to make the peak oil decline even worse than it would otherwise be.

In the current post, called "Part 1," I will cover the first of these two issues; I will cover the second issue in Part 2.

The Relationship Between Growth and Debt

I have talked many times about the need for economic growth, in order to make our current system of borrowing money, and paying back loans with interest, work on the extensive basis that it is used today.

Figure 2. Two views of future growth

As long as the economy is expanding, as in Scenario 1, businesses feel confident that their future prospects will be better than they are today. As a result, businesses will borrow funds for new equipment and will be fairly confident they can pay back the loans with interest in the future. Governments will also borrow, knowing that they will likely have higher tax collections in the future. Because of these higher tax collections, the governments can expect to pay back the debt plus the interest on the debt.

In Scenario 1, even common citizens feel that debt is a reasonable prospect. If the individual loses his/her job, there is a good chance of getting a new one. With prospects for better wages in the future (or at least no worse wages in the future), it makes sense to take out an automobile loan, or a student loan, or even a loan on a new home.

If the economy is expanding, promising Social Security benefits to future retirees looks like a safe prospect, as does promising Medicare benefits. Just as a "rising tide lifts all boats," an expanding economic circle leaves room for more and more types of payments (Figure 3).

Figure 3. A growing economy makes allows room for interest and other payments, without crimping budgets.

If the economy starts contracting as in Scenario 2 of Figure 2 (or even stays the same size) then it becomes much more difficult to repay debt with interest, and to fulfill promises of future benefits, as illustrated in Figure 4.

Figure 4. Paying promises becomes much more difficult after economic decline.

Of course, in a contracting economy, there may still be a few instances where debt "makes sense." These might include very short-term business loans, for example, covering goods in transit. They would also include some business loans where the economic return is high enough so the loan would make "economic sense" even if the interest rate includes a fairly high charge for risk of default (because of the declining economy) as part of the interest rate.

This decline in the level of debt becomes a real problem for countries, because the availability of debt tends to add to reported GDP. For example, if a person takes out a car loan and buys a car, the cost of the car gets added to GDP, even though the car is not yet paid for. The availability of debt financing also makes it possible for businesses to obtain capital for expansion, so the business can, for example, build more cars, without waiting for sufficient profits to accrue to have enough revenue to finance the expansion. Both of these activities tend make it easier to increase reported GDP.

What has happened in recent years, at least for the US, is that it seems to be taking greater and greater increases in debt to create a given increase in GDP.

Figure 5. Relationship of change in debt (private and government combined) to change in GDP.

This changing relationship may reflect the greater headwinds the economy is encountering, now that oil supply is tighter and oil prices are higher.

Declining oil availability (manifested as high oil prices) tends to lead to economic contraction

Oil use, and energy use in general, tends to be tied to economic growth in many ways. Clearly there is a need for oil (or another energy product) to manufacture and transport goods, and to grow and transport food. Given the cars, trucks, trains, and farm equipment currently in use, it is not easy to change the dependence on oil quickly, either.

James Hamilton in his paper Historical Oil Shocks has shown that 10 out of 11 US recessions since World War II were preceded by oil price shocks. Charles Hall, Stephen Balogh, and David Murphy have shown that high oil prices tend to be correlated with recession. Robert Ayres and Benjamin Warr have analyzed the amount of work (in a physics sense) that is done by energy of various types. Using this data, they have developed a model explaining the vast majority of US real economic growth between 1900 and 2000, except for a residual of about 12% after 1975.

A comparison of annual increases in oil consumption with annual increases in world GDP in constant 2005 $ shows a close correlation.

Figure 6. Percent growth in world GDP vs percent growth in oil production. World GDP in constant 2005$ from World Bank; Oil consumption from BP.

In spite of all of this evidence, there are some who argue that it is not clear which direction the causation goes with respect to oil supply and economic growth–perhaps the only issue is that the world uses more oil when it is expanding, and less oil when it is contracting. With this belief, it is difficult to explain why oil price shocks would precede recessions, but some economists have learned this view in the past, and seem not to be open to looking at the evidence.

There is also a question as to whether we can move quickly away from this close relationship between oil and the economy. Vaclav Smil in Energy Transitions: History, Requirements and Prospects has shown that because of the very large amount of built infrastructure in place, in practice, energy transitions from one fuel to another take a very long time–30 to 50 years.

In spite of what Vaclav Smil has shown, there may be some possibilities for short-term decoupling. For example, if car-pooling suddenly becomes much more common, it could tend to change this relationship. It is not clear that such a change would be fast enough, or significant enough, to change the basic relationship, however.

Recent Debt Problems of Governments

Recent debt problems of governments seem to be related to a combination of (1) the tendency of high oil prices to cause recession and (2) the additional debt the governments have tried to take on, to stimulate the economy and to bail out failing banks and other businesses. Part of this debt may be taken on, to try to offset the decline in private debt.

In the United States, federal external debt started increasing more quickly immediately after oil prices hit their peak in July 2008 (Figure 7).

Figure 7. Average quarterly oil price and US Federal External Debt

Even with these huge increases in federal debt, the increase in governmental debt has not been able to offset the decline in debt held by businesses and private citizens, as shown in Figure 1 near the top of this post.

Governments around the world have been finding this additional debt burden increasingly difficult to handle. If nothing else, if interest cost of this debt becomes very burdensome, unless interest rates are very low. Furthermore, even when they do try to intervene, their debt doesn't have quite the right effect–their new debt may buy a new road, but it doesn't buy a new car for the consumer.

This combination of problems–recession caused by limited oil supply, increasing need for government debt because of shrinking private debt and need to stimulate the economy–is likely the cause of the debt problems that so many governments (including the US government) are experiencing today. Many European countries are experiencing problems as well–Greece, Portugal, and Spain, for example.

In Part 2, we will look at some of the feedbacks of peak debt that may have an impact on the shape of the peak oil downslope.

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