April 27, 2009
A very unfortunate turn in America’s power
Last year who would have thought that the US President would be bowing to the King of an Islamic theocracy? Well it has happened. Obama is waving the white flag and kow-towing to the oil states while paying lip service to oil replacements. This is unbelievable. Set America Free has good coverage of this.
The perils of bowing to kings
Another reminder of our nation's state of affairs was given to us by President Obama in his recent meeting in London with the Saudi King. The sight of a US president bowing before one of the world's most corrupt and dictatorial leaders was a repudiation of America's power abroad. To those who think this is reflective only of the current administration read here for a reminder that subservience to the oil rich Saudis transcends political boundaries. Set America Free's Gal Luft was asked by Foreign Policy Magazine to toy with the idea of a world without Saudi Arabia. Here are some of his thoughts.
December 7, 2008
so what is with oil?
Can we all go back to driving big SUV's? Was all the "peak oil" stuff just a bunch of crap? Don't believe it. The latest fundamental supply/demand numbers show that oil has peaked. The prices reflect the deleveraging of the financial system. When the people have to generate cash quickly, they sell what liquid assets they have. commodities sell. So prices are down. But demand/supply have not changed. We are still tight. We have overcorrected in price. I predict > $100/barrel by next summer.
August 18, 2008
Price of Oil has been constant in gold terms
Humm, i don't think the fall of currency valuations is the ONLY thing causing oil to go up, but it certainly is a large one. this chart is a bit missleading in that all commodities have gone up gold, oil, etc. Showing a preference for physical commodities over currency by asset holders. This relationship can just as easilly change the other way. The part that puzzles me is that Oil is facing fundamental structural changes in supply/demand while most other commodities, inlcuding gold are not. Why are all commodities tied so closely? humm...
August 12, 2008
Anne Korin on Oil dependency
Anne was just in seattle last week. She has a series of videos from CSpan on Utube. Watch them all
July 8, 2008
What is happening with oil prices?
The hard facts
* The world price of oil in US dollars has doubled in the last year (June 2007 to June 2008) from US$67/barrel to over US$135/barrel
* The world price has gone up by 6 times in 6 years, from US$20/barrel in 2002 to over US$135/barrel by mid 2008
* With hindsight we can see that the great cheap oil era lasted 16 years from 1986 to 2002 when the price was mostly in the range $15 – 25/barrel, coming off a $39 peak during the "oil shock" of 1980 (equivalent to about US$95/barrel in 2008 money). The short sharp spike seen at the end of 1990 was due to the first Gulf War.
Lead times for new industry infrastructure are typically 3 to 10 years. All new mega-projects on the production side are well known out as far as 2012, and few seem likely to boost global supply by enough to overcome declines in old oil fields. See the comprehensive listing of oil megaprojects at http://en.wikipedia.org/wiki/Oil_Megaprojects/2008. Note that major oil projects are developing a history of running late, often years late, as they encounter challenging technical difficulties operating in extreme environments like deep ocean or freezing Arctic conditions.
Rapid demand growth is often blamed for rising prices – demand growth in developing countries, particularly China and India, and in key oil supplying nations such as Saudi Arabia and Russia. But the decline of mature oil fields throughout the world is an even greater source of demand for new oil supplies than the growth of end user demand. Declining fields are losing 5.2% of total oil production per year thus requiring about 3.5 million barrels/day of new oil each year for the global oil supply to stay the same. (Nobuo Tanaka, International Energy Agency) http://www.iea.org/Textbase/press/pressdetail.asp?PRESS_REL_ID=267. Recent annual growth in end user demand, on the other hand has not exceeded 1.5 million barrels/day.
Folks we are going to $200-$300/barrel one way or another. Fasten your seat belts.
July 3, 2008
The history of oil intensity
for those of you looking for the historical perspective:
Prior to the embargo of 1973-74, total energy expenditures constituted 8 percent of U.S. gross domestic product (GDP), the share of petroleum expenditures was just under 5 percent and natural gas expenditures accounted for 1 percent. The price shocks of the 1970s and early 1980s resulted in these shares rising dramatically to 14 percent, 8 percent, and 2 percent respectively, by 1981. Since that time, the shares have fallen consistently over the last two decades to current levels of about 7 percent for total energy, while petroleum has fallen even further to 3.5 percent and natural gas to just over 1 percent. The shares were lower during 1998, when oil and natural gas prices were lower, but have risen recently in response to higher oil and natural gas prices.
As I noted earlier, the oil intensity is now well over 7% of GDP and growing fast.
July 1, 2008
Global oil chokepoints
64% of the world's oil runs thorugh 10 chokepoints in the distribution chain. Wonder what they are and how vulnerable the global Oil market is? Read this.
Choke points: Straits of Hormuz, Strait of Malacca, Abqaiq processing facility,
Suez Canal, Bab el-Mandab, Bosporus/Turkish Straits, Mina al-Ahmadi terminal
(Kuwait), Al Basrah oil terminal (Iraq), LOOP (United States), Druzhba pipeline
June 24, 2008
Nigeria Oil output lowest in 25 years
Thanks CNN. that is about 900,000 -1.2M bpd out of the market. In a world where tens of thousands of barrels a day change prices double digits, that is alot. The rebels are winning and there is no sign they will back off. I wonder what would happen if restless minorities in other oil producing states turn on their radio and learn that the Rebels in Nigeria are winning?
How long do we have left?
How high can oil go before it drags down the world wide economy? Hummm higher than it is now I guess. Up until 2005, the percentage of world wide GDP taken up by Oil was actually on a steady decline toward below 1% as productivity grew, industries converted to electric, etc. Then the price spike happened, China and India decided to industrialize on the back of oil, and we are now at over 7% of world wide GDP spent on oil. If you include all economic activity around oil (exploration, distribution, etc.) more than 1 out of every 10 dollars in the WORLD are spent on something related to oil. Hummm. What gets cut? When does the weight of this expense make other businesses totally uneconomic. Like pizza delivery, collecting the garbage, flying, etc.?
Kenneth S. Deffeyes says:
How big is the problem? Multiplying production (barrels per year) times the oil price (dollars per barrel) gives a total cost in dollars per year. It's an enormous number; tens of trillions of dollars per year. To put a scale on it, the three thin curves on the graph show the oil cost in contrast to the total world domestic product; the annual value the goods and services added up for all the world's countries. The three curves show the oil cost at one percent, two and a half percent, and five percent of the total world economic output. At $130 this morning, we are at six and a half percent.
Oil production obviously cannot consume 100 percent of the world's income. My intuitive, uninformed guess is that it cannot go above 15 percent. If we see oil at $300 per barrel, we will be looking out over the smoldering ruins of the world's economy. Source
June 20, 2008
china raises gas/diesel prices
Lehman says it was a surprise, but not to me. With these prices, and the skewed demand picture subsidies put on the oil market, these subsidies are not long for this world in non- oil producing states. China follows Indonesia. I expect civil unrest as in Indo. Look out Olympics.
In another surprise move, China's NDRC said that it will adjust ex-refinery benchmark prices of gasoline and diesel by Rmb1,000/tonne and that of kerosene by Rmb1,500/tonne from Friday 20th June. The previous price increase of Rmb500/tonne for these three products was on Nov 1.
The price increase translated to an increase of US$19.4/bbl for gasoline
(+16.7%) and US$17.11/bbl (+18.1%) for diesel and US$28/bbl (+25%) for kerosene. However the price hike is insufficient to alleviate the current refining losses as international crude oil prices have surged even more +52% since Nov 1 07 to a high of US$137/bbl (Jun 12). We estimate that Sinopec's breakeven crude cost is US$105/bbl while Petrochina's crude cost is around US$85/bbl.
According to the government, this step was initiated by the significant losses incurred by the domestic refineries to an unacceptable level whereby most independent refineries had to stop production either fully or partially. The problem had caused a demand/supply imbalance in the domestic market. In order to ensure sufficient domestic oil product supply, the government decided to raise the domestic oil product prices by a "reasonable" level.
Average ex-refinery gasoline and diesel prices are raised from Rmb5,980/tonne and Rmb5,520/tonne to Rmb6,980/tonne and Rmb6,520/tonne respectively. Maximum prices allowable which is + 8% from this benchmark prices will bring domestic gasoline and diesel prices to Rmb7,538/tonne and Rmb7,042/tonne respectively.
The NDRC has decided not to raise the ex-refinery natural gas prices.
We think that this is positive news for both Petrochina and Sinopec since we believe the market expected that there would be no price increases in the near term due to escalating CPI. We believe this is a necessary step as the gap has widened significantly between crude cost and product prices. We expect PTR and SNP share prices to react positively in the very near term to this surprising action by the government. Furthermore, international crude oil prices declined on this news which also helps lower refiners' raw material costs.
However, this price hike would probably only give the stock a temporary boost. An ad hoc price hike is no longer good enough for the market, in our view, because it has been a temporary solution that has been slow to react to changes in cost. For sustainable outperformance, we believe that the market would want permanent deregulation of product prices which could be at least a year away.
We maintain our 2-EW ratings on both Petrochina (857.HK TP HK$11.70) and Sinopec (386.HK TP HK$8.00).
+852 2252 6180
May 8, 2008
Oil prices hold over $124/ barrel
Humm, it is May. Driving season hasn't started for the summer. My prediction earlier of $140/barrel for christmas is looking low.
March 3, 2008
We are over the tipping point on oil prices
I haven't commented on oil prices lately, but I am sure you all know that it is now regularly trading over $100/barrel. Even closing earlier this week over $103. Today it closed at 100.64. While there may have been a $100/barrel psycological barrier before, it is totally shattered and we are off to the races. Well on our way to my prediction of $140 oil for christmas.
This has had the unfortunate side effect of driving up commodities across the board. Soy Oil closed today at $.69.81/lb. Down from over 70 cents per pound. lets see $.70/pound and 7.8 pounds per gallon means the feedstock cost of biodiesel is $5.46/gallon. Hummmm... Huston we have a problem...
January 29, 2008
just bought two new DVDs
from Escapefromsuburbia. Escape from Suburbia and the End of Suburbia. I already own End. A peak oil expose. I am going to have a salon at my house in a couple weeks to show them both and talk about them after. Drinking Ethanol. The only way to go. Oh, and the 58.50 Canadian I spent was translated into 60.71 US by Paypal. Ouch, Canadian worth more than US dollar now. Ouch.
January 26, 2008
Peakniks make the front page of the WSJ
Today's WSJ has a cover story on a middle school teacher in Michigan who is preparing his family for the end of easy oil. Unlike many of the previous end of the world zealots who are forecasting world doom from some cataclysmic (usually religious inspired) event, people concerned about oil depletion come from all backgrounds and base their fears on facing the facts of life today. Oil is running out. The question is when. The other question is will our companies and governments tell us the truth or wait till it is too late? My guess is they wait. They have already done largely nothing as the price of oil went up 75% last year. Where is that money being spent? Oh yea the sovereign wealth funds are buying up American banks and companies with the oil dollars we just shipped them. If American's don't wake up and start innovating our way to real alternatives, in a few short years it will all be over.
January 19, 2008
Remember the Synthetic Fuel Corporation?
I had never heard of it. But thanks to the Heritage Foundation, I found this backgrounder. In 1980 president (big government lacky) Carter formed a federal corporation with an $18B budget to "solve the energy crisis in 5 years". They had targets to be creating over 2M barrels per day by 1987. But of course government stupidity, partnering with the oil companies and the drastic drop in crude in the 80's lead to a huge failure. Regan rightly killed it in 1985. While I agree that the government cant commercialize squat, the part about minimum standards to support the free market was right and should be kept.
Another good piece of history on the energy independence topic is Ronald Bailey's timeline over at Reason.
January 8, 2008
Bloomberg.com: trade in $200 oil options up 10x
Bloomberg reports that futures trading in $200 oil is up significantly. Someone smarter than me believes that it will get there. Wow.
January 3, 2008
Oil breaks $100, closes just below, I toldya so
From Martin Tobias:
"Santa will bring $100 oil for christmas". That is when oil just hit over $80/barrel for the first time. People thought I was crazy then.
Now From Bloomberg:
Jan. 4 (Bloomberg) -- Crude oil was trading above $99 a
barrel after falling from a record in New York on gains in U.S.
gasoline and diesel inventories.
Gasoline supplies climbed 1.99 million barrels to 207.8
million last week, an Energy Department report showed, outpacing
a 1.5 million-barrel increase predicted in a Bloomberg News
survey. Crude futures yesterday touched a record $100.09 before
``The levels of stockpiles indicate markets seem to be
adequately supplied, so there's not too much concern around
about a physical shortage,'' said Gerard Burg, a minerals and
energy economist at National Australia Bank Ltd. in Melbourne.
``There seems to be a continual acceptance of prices at higher
Crude oil for February delivery traded at $99.27 a barrel,
up 9 cents, in after-hours electronic trading on the New York
Mercantile Exchange at 9:53 a.m. in Singapore. Yesterday the
contract fell 44 cents, or 0.4 percent, to $99.18 a barrel.
Prices are up 79 percent from a year ago.
December 14, 2007
Senate passes neutered Energy Bill
Finally. 36B gallons RFS, new CAFE standards and some energy effeciency. All the easy stuff actually. They took out the RPS (renewable electricity) and any money for tax extensions. They also caved to Oil lobby on raising taxes on oil. The bill with the taxes failed by ONE VOTE in the senate early yesterday. Think your vote doesn't matter? Unbelievable that today in these times of $90 oil our Senate can't get the votes to raise taxes on Oil companies. I am embarrassed for America.
December 13, 2007
Marrill Lynch calls up oil another $10 to $82 in 2008
Yet another Wall Street bank moved up their price target for crude in 2008 after last week's EIA report. Merrill Lynch raised their price target from $72 to $82. Read the summary 2008-2010 report here. They are slowly waking up to reality. They still have a reduction in 2009, but I expect that to change too.
November 12, 2007
IEA: Watch out for China and India, thier thirst is transforming global energy system...
Energy developments in China and India are transforming the global
energy system as a result of their sheer size and their growing
importance in international energy markets, according to the International Energy Agency’s (IEA) World Energy Outlook (WEO) 2007.
However, the consequences of unfettered growth in global energy demand are alarming for all countries, the report continues. If governments around the world stick with existing policies—the underlying premise of the WEO Reference Scenario—the world’s primary energy needs would be 55% higher in 2030 than today.
Developing countries contribute 74% of the increase in global
primary energy use in this scenario. China and India together account
for 45% of this increase. increase in global primary energy demand in
this scenario. Both countries’ energy use is set to more than double
between 2005 and 2030.
November 2, 2007
Oh what a difference six weeks makes
on September 20 of this year crude "climbed above $83" on real fears of storms in the gulf of mexico. 28% of US oil production was off line. All that is back online again, but here we are knocking at $100. What is wrong? The fact is that there isn't enough of the stuff and the price will continue to go up until we stop using it or scale up alternatives.
From AGE on 9/20/07
"Crude climbs above $83 as storm forms near GulfCrude oil rose to close at a record high of $83.90 in New York after the U.S. said that production in the Gulf of Mexico was shut because of a storm threat. More than 360,000 barrels, or 28%, of daily oil production was idled according to the U.S. Minerals Management Service. Prices were already higher on signs that U.S. interest rate cuts and a falling dollar will bolster demand. "
Oil hits $96, poised to break $100 next week...
From Opis. This is the real deal baby
Subject: OPIS West Coast Report
11/2 - The runaway train continues to roll along with crude oil settling at a new all time high and RBOB coming with a penny or so of the spring pre-season highs.
Crude oil plowed $2.44 higher and settled at $95.93/bbl after hitting a $96/bbl higher just before the close, with the $96.24/bbl all-time high and key resistance at $96.40/bbl in the cross hairs for Monday. Crude oil does not need any help moving higher, but strength in gasoline helped move the crude oil market today. Earlier today. U.S. Rep. Edward Markey (D-Mass.) called on the Bush administration to release crude oil from the Strategic Petroleum Reserve. Brent crude also saw an all-time high trading up to $92.21/bbl.
RBOB futures jumped by almost 10cts today settling 9.63cts higher at $2.4395/gal and is now within earshot of the pre-season spring highs at $2.455/gal. Some of the spring 2008 contracts are approaching the $2.60/gal level in the futures market. Some of the strength in RBOB today is being attributed to a reallocation of weighting RBOB in the S&P Goldman Sachs Commodity Index to 4.55% in 2008 versus the 1.37% it held in the index in 2007.
Heating oil futures saw big gains as well today, but they were lost in the mix of huge gains in crude oil and RBOB trading rings. Heating oil futures picked up some 6cts in settling at $2.5737/gal. Incidentally, the S&P-GSCI weighting of heating oil isgoing to decrease to 4.68% from the current 5.76%.
Soaring Singapore jet fuel cash prices are expected to trim the monthly spot cargo flow to the U.S. West Coast from Asia by up to 50% in December, some traders said on Friday.
Singapore spot jet fuel surged past the $100/bbl mark earlier this week to about $110.40/bbl, gaining $6.50 on Friday.
The price surge was attributed to the expected demand spike from China and declining stocks in Japan.
The price hike could be extended over the next few months as China is expected to remain a major importer in Asia. China raised its domestic diesel and jet fuel prices for the first time in 17 months.
"Jet fuel imports into the West Coast will definitely be affected by the very strong Asian market," a trader said.
The U.S. West Coast imports an average of about 3-4 spot jet cargoes every month, with December imports possibly falling by 1-2 cargoes.
"As of now, I don't see any jet cargoes fixed for December arrival from Asia," he said.
However, the trader pointed out that the arbitrage economics could change quickly due to the volatile prices in Asia and Los Angeles as well as fluctuating freight rates.
Jet fuel in Los Angeles was trading 19.2-22cts/gal over the NYMEX December heating oil futures contract today.
In other news, Chile has tendered for a total of 49 term gas oil cargoes or
1.862 million tonnes for January-May delivery, traders said on Friday.
Private oil company COPEC has tendered to buy 35 cargoes of 38,000-tonnes each for January-May delivery. This buy tender closes on Friday. State-owned oil company ENAP has tendered to buy 14 cargoes for January-March delivery.
This tender closed on Thursday. Bidders into the ENAP buy tender are Lukoil, ConocoPhillips, Vitol, Exxon Mobil, Chevron, Lukoil and Morgan Stanley. These bidders are expected to win some cargoes each due to the high number of cargoes sought in the tender. ENAP is expected to award the cargoes later today or Monday.
Some traders pointed out that the huge volume sought in two tenders could have a bullish impact on gas oil markets, and both companies may get better prices if the tenders were issued a few weeks apart.
Chile has stepped up its gas oil imports this year due to higher demand and an unstable natural gas supply from Argentina.
"This is a lot of gas oil for two tenders, but the monthly requirements are normal for this year," a trader said.
Both companies have not officially awarded the term contracts as of early Friday.
The winners could supply gas oil to Chile from the U.S. Gulf Coast, the Caribbean, Asia or Europe, depending on the arbitrage economics.
More records were being set today in the West Coast diesel markets on the back of record high heating oil prices as basis differentials are higher than they were at this time last year, but pretty close to the average for CARB diesel over the last year and a half plus.
Los Angeles CARB diesel was seen trading from 21-22.5cts over the futures market which had spot prices up into the $2.7825-2.7975/gal range. Meanwhile there was some separation between L.A. and the Bay as San Francisco CARB diesel was about a half-cent cheaper than L.A. based on morning trading. Jet fuel is also seeing record prices with trades done from 19.25-22cts over the December heating oil screen and flat prices ranging from $2.765-2.7925/gal.
Northwest diesel flat price remains strong, but basis wise is starting to weaken with the market pegged around $2.8625/gal or 29cts over the futures market.
CARBOB trading stayed within Thursday's range trading in a narrow range of 22.5-23cts over the futures market, but with gains of more than 9cts seen in the RBOB ring flat values were up solidly in L.A. into a $2.665-2.67/gal range, prices not seen since the spring. December CARBOB was running at a 16.75cts premium or $2.615/gal. San Francisco CARBOB is roughly a penny over L.A. now. Meanwhile in the Northwest, gasoline traded at a 9cts premium versus the futures market putting spot prices at the $2.53/gal level.
November 1, 2007
Chevron continues the delaying tactics
Does anyone really believe the oil companies want to solve our oil addiction? Monopolists never have an interest in true change. Their only interest is in delaying true change. Witness the Cigarette companies "researching" health effects of smoking. And bringing "low tar" and "filtered" cigarettes to the market. Witness Microsoft saying "all bugs will be solved in the next release". Every time, every release. Witness the blatant greenwashing BP is engaged in. Do you really believe "it is a start"? Now Chevron joins the put off party with a huge bunch of guilt money going to NREL to "Collaborate on research to produce transportation fuels using algae". Wait a minute, isn't this the same NREL that was already paid by the Federal Government for OVER A DECADE to study the VERY SAME PROBLEM? Yessiree it is.
October 23, 2007
LATOC: mexico admits their oil peaked...
President Felipe Calderon is delivering a grim message: The largest oil
producer in Latin America is running out of crude. "Our oil reserves
have been consistently falling," and the decline is "severely
threatening'' government finances, Calderon told a nationwide
television audience in an address last month at the National Palace." continue reading.
October 15, 2007
Oil heads up over $85
can I say I told you so?
October 1, 2007
why oil is going higher
when adjusted for falling value of the dollar, oil is not expensive.
the reality is that the oil producing nations are just barely keeping up with the fall in the dollar with price hikes.
Dow Jones: $100 oil aint so bad, in fact it is "good" for us so expect it soon
Per our conversation last week...
DOW JONES REPRINTS
How Economy Could Survive OilAt $100 a Barrel
Compared to 1980, U.S.Is More Able to Handle Once-Unthinkable Rise
By PETER FRITSCH and KELLY EVANSSeptember 29, 2007;1
The world economy has managed, with some indigestion, to swallow the rise of oil prices past $80 a barrel. How well could it survive $100 a barrel?
The answer is quite well -- so long as several conditions still hold true. The price rise would probably have to be gradual. Inflation couldn't get so bad as to force big interest-rate hikes. Oil-rich nations would need to pump their profits back into U.S. and European economies.
All of this has happened so far. The happy confluence may continue, though fears remain strong that high energy prices will tip the U.S.into recession.
A host of factors, including tight oil supplies and a weak U.S. dollar, suggest that oil prices have further to rise. Some analysts continue to believe that oil is destined to reach an all-time high, as measured in today's dollars, of more than $101 a barrel. The record was set in 1980. On Friday in New York, the benchmark crude-oil futures price closed down $1.22, or 1.5%, to finish at $81.66, a little more than $2 off the all-time high, not adjusting for inflation.
High oil prices could lead to ugly consequences if they hit consumers' pocketbooks -- especially in the U.S., where the housing slump is already hurting the economy. Consumer spending has been the primary engine of growth in the U.S. in recent years.
Target Corp. was among the major retailers in the last week cutting sales forecasts. Target expects September sales at stores open at least a year to rise just 1.5% to 2.5%, down from an earlier expectation of 4% to 6% growth.
For all the concern, the world today is better equipped to swallow expensive oil than it was when Jimmy Carter was installing solar panels and a wood-burning stove in the White House.
The main reason has to do with what some call the Wal-Mart effect. For every extra dollar taken from drivers' pockets at the pump in the form of higher prices in recent years, low-cost exporters from China and elsewhere have put roughly $1.50 back in the form of cheaper retail goods. Even at today's near-record prices, U.S. households today spend less than 4% of their disposable income at the pump, vs. over 6% in 1980.
Current prices are also a reflection of a strong economy, not an oil embargo or war in the Middle East. Since a market-share war between Saudi Arabia and Venezuelaflooded the market with oil and drove prices to below $11 a barrel in 1998, oil prices have risen nearly eight-fold. During that run, the global economy grew roughly 5% each year.
Strong growth in places like China helps take some of the edge off the oil-price blow for U.S. and European companies such as Detroit's Big Three auto makers. Many emerging markets are hitting a "takeoff" stage, where per-capita income reaches a level that sparks serious auto demand, says Ellen Hughes-Cromwick, Ford MotorCo.'s chief economist. Growth in emerging markets is a "structural development" that is "less sensitive to oil-price changes," she says.
"There's a more relaxed attitude now," said Daniel Yergin, a noted oil historian and chairman of Cambridge Energy Research Associates. At a recent event promoting Alan Greenspan's new memoir, Mr. Yergin asked the former Fed chief on stage if $80 oil was a concern. "Hebasically shrugged and said, 'Not so far,'" Mr. Yergin recalls.
Economists see global growth slowing but still chugging along at a relatively healthy 3% this year and next. High oil prices also mean more money for oil-producing nations such as Russia and Saudi Arabiato invest globally. "If resource owners are now getting a bigger piece of the pie to spend and invest, then $100 oil shouldn't be a problem" in the absence of a U.S. recession, says independent energy economist Philip Verleger Jr. "And that investment is happening."
Such sanguine views, while they are far from universal, reflect a fundamental shift in economists' understanding of how energy prices affect the economy.
Historically, oil prices have doubled or trebled in a matter of weeks because of sudden and sharp supply disruptions, such as those in 1980 following the Iranian revolution and the outbreak of the Iran-Iraq war. That prompted the Fed to raise interest rates sharply in an effort to head off a spiral of inflation.
Current Fed chairman Ben Bernanke has spent a lot of time trying to understand such shocks. In 1997, he analyzed the effects of sharp rise in prices during the oil shocks of 1973-75, 1980-1982 and 1990-91 in the Brookings Papers on Economic Activity. His surprising conclusion: The Fed's cure for high oil prices was worse than the disease.
"The majority of the impact of an oil price shock on the real economy is attributable to the central bank's response to the inflationary pressures engendered by the shock," he wrote. Today, that view is fairly mainstream among central bankers.
Mr. Bernanke's Fed recently responded to the subprime mortgage crisis by cutting benchmark interest rates for the first time in four years. By implication, the Fed was saying it was moreworried about the fallout from credit-market gloom than about the risk of inflation. At a time of record energy prices, that's a risky but educated bet.
Growing fuel efficiency could also blunt the blow of higher prices. James Barnes, a Union Pacific Corp. spokesman, says the railroad has bought more fuel-efficient locomotives and trained engineers to operate trains in ways that conserve fuel. "From a macro level, we would anticipate that rising oil costs will make us more competitive [with trucks] and potentially drive more business our way," Mr. Barnes says.
Engine of Growth
In China, the engine of growth on which many are counting, other energy sources can make up for oil. Chinauses oil for only 21% of its energy needs, with most of the rest coming from coal. Unlike in the U.S., where imported oil goes to fill people's gasoline tanks, China mainly uses oil in industrial settings, where coal may be an alternative. Greater coal use, however, would also exacerbate China's already serious pollution problem and speed up emissions of gases that contribute to global warming.
Still, some fear the impact of $100-a-barrel oil would be too powerful for the U.S.to overcome. "If we aren't already headed for a recession, it could push us in that direction," says Bill Zollars, chairman and chief executive officer of YRC Worldwide Inc., a large trucking company based in Overland Park, Kan."With a very fragile economy like we have now, this could be another burden for the consumer and the business community."
Mr. Zollars says shipment volumes at YRC, which serves many retailers and manufacturers, have dropped to 2003 levels. "We are not seeing the kind of volume we would normally expect" ahead of the Christmas retail season, he adds.
Fall in Demand
Higher oil prices could hit the beleaguered auto and airline industries. Detroitis still digging out from the fall in demand for sport-utility vehicles caused by the climb in gasoline prices. Paul Ballew, General MotorsCorp.'s top sales analyst, explained sluggish industry sales earlier this month by citing in part high fuel prices, which he called "effectively a tax on U.S. households."
For now, most economists expect oil prices will stay high through next year. An unexpected hurricane in the Gulf or a sudden disruption to oil flows from a big producer like Iran or Mexico could push oil to $100, they say.
Demand is chugging along. The Paris-based International Energy Agency sees world oil demand in the fourth quarter rising by 2.8%, or 2.3 million barrels a day from a year ago, to nearly 88 million barrels a day.
Of course, those forecasts could go awry if the U.S. economy tanks and brings Europe and Japan along with it. Then demand would likely ease, and oil prices could fall, perhaps significantly. And then, the world would have something else to worry about.
September 17, 2007
Goldman calls oil higher
Goldman energy analyst have a call tomorrow about their new oil forecast. It is VERY bullish. They have raised the top range of thier "super-spike" model and expect the trend to continue thru 2010. Some excerpts:
"We believe oil markets are now in phase 2 of a
multi-year super-spike era. We believe the low
end of our former $50-$105/bbl oil price band and
$8-$15/bbl USGC 3:2:1 refining margin range has
not caused demand to fall. As such, our base-case
forecasts now reflect the upper portion of that
band, including $80/bbl for 2008 and $90/bbl in
2009 for crude oil and a respective $14/bbl and
$16/bbl for USGC 3:2:1 refining. Based on our
updated view of the price that might destroy
demand, we have raised the high side of our
super-spike range to $135/bbl for crude oil and
$25/bbl for refining, or $4.50/g US retail gasoline.
To be clear, prices may not need to go this high to
lower demand, though it is similarly not a ceiling."/font>
former Royal Dutch Shell Chairman: "We are sleepwalking into a crisis"
Ron Oxburgh, former chairman of Royal Dutch Shell, made a forecast over the weekend that oil will reach $150 per barrel in the coming years because drilling for it will become much more expensive.It interesting to note that Oxburgh is also a geologist.
Oxburgh gave an interview printed Sunday in The Independent, in which he said: "We can probably go on extracting oil from the ground for a very long time, but it is going to get very expensive indeed."In other words, even if the oil resource has yet to reach its peak, it may not matter as other forces will press prices higher, perhaps prohibitively higher, helping to fuel demand for "alternatives."
Said Oxburgh, "And once you see oil prices in excess of $100 or $150 a barrel, the alternatives simply become more attractive on price grounds if on no others."
As we know though, there are in fact many others reasons to prefer the alternatives, and for some, price is even the least important of those.But sky-high prices will surely help to make the transition.
He warned that the oil industry seems to be "sleepwalking into a crisis."Fortunately, there are others who are working to create the new energy economy who are wide awake and not dreaming; with eyes open and facing forward they are seizing the opportunity in front of them.
One of the signs that they have succeeded will be when we no longer call clean energy an "alternative" but instead refer to fossil fuels that way.Within the context of our environment and climate, our security and independence, oil may not be cheap at any price.
September 15, 2007
What i think about the current "liquidity crisis"
Rather than dealing with a liquidity crisis, we are dealing with an old fashioned confidence crisis. This is both good news and bad news. The bad news is it may not be alleviated simply with central bank injections of liquidity or easier monetary conditions invoked by lowering the Fed funds or discount rate. If monetary restraint or illiquidity is not causing this crisis, monetary ease alone will not solve it. The good news, however, is we need only alter an attitude or emotion (i.e. confidence), which could happen quickly. Corporate balance sheets and consumer buying power remain strong when you analyze the fundamentals. If the central problem was more balance sheet or income statement oriented, it would be much more serious, it would be more difficult to revive, and it would take longer to improve.
Hummm... What could provide a quick boost of confidence?
- Fed lowering interest rates (while actual financial impact would not be meaningful, the confidence impact would be significant)
- Banking write-offs. Yes write-offs. The fear is that there is ALOT of liability lurking on balance sheets that is somehow hidden. Especially on the AAA credit of guys like Morgan Stanley. I bet there isn't that much bad stuff there. When Morgan Stanley reports their quarter, takes their medicine on write-offs, that will put the fear to bed. The absolute dollar amount will also, I believe, be WAY lower than the fear has baked in. Bingo, instant rally.
- a large debt roll-over getting bids. The buyers of debt are sitting on piles of cash and playing a game of chicken right now with sellers. The bid-ask spread is simply very large. Someone has to blink. I believe the buyers have the upper hand as the sellers need to get debt off the balance sheet. We saw last week a big slice of debt go for 97 cents on the dollar. A loss for the seller, but a great deal for the buyer, raising their returns. These money "losses" are not lost when principal is sold at a discount (unless the offerer defaults on the loan), the money simply is transfered from the seller's balance sheet to buyer's balance sheet. I predict MASSIVE profits in the debt focused funds that are buying now. Remember you make money buying low and selling high. Now is low.
September 12, 2007
The horsemen cometh
1. Humberto threatens Gulf coast oil infrastructure with 80mph winds.
2. Oil hits over $80/barrel for first time in history.
3. Israel hits Syria with air strike.
4. Putin dissolves government.
and he brings $100 oil for Christmas.
September 7, 2007
crude continues to rise (without any real events)
Crude rises for fifth day on supply concerns
Crude oil rose for a fifth day after a government report showed a decline in crude and gasoline inventories. Crude-oil stockpiles dropped for the eighth time in nine weeks, an Energy Department report yesterday showed. OPEC may reject calls to increase supplies at its Sept. 11 meeting on concern energy demand will falter as U.S. economic growth slows. Crude oil futures for October delivery rose 18 cents to $76.48 a barrel at 2:25 p.m. on the New York Mercantile Exchange. Prices are up 14% from a year ago.
imagine what will happen if we actually have a huricane? or a cold snap? or a political event? or OPEC decides it wants a new boat?
September 5, 2007
Required reading/watching "Scientific Challenges in Sustainable Energy Technology": Nate Lewis
Watching Nate Lewis's presentation on world wide energy consumption and how we could (or could not) change over next 50 years. See summary below. Download the presentation. Watch the video. Everyone this is required reading and watching. This is 10X the data richness of Inconvenient Truth. This is not just carbon, but total energy consumption.
This presentation will describe and evaluate the challenges, both
technical, political, and economic, involved with widespread adoption
of renewable energy technologies. First, we estimate the available
fossil fuel resources and reserves based on data from the World Energy
Assessment and World Energy Council. In conjunction with the current
and projected global primary power production rates, we then estimate
the remaining years of supply of oil, gas, and coal for use in primary
power production. We then compare the price per unit of energy of these
sources to those of renewable energy technologies (wind, solar thermal,
solar electric, biomass, hydroelectric, and geothermal) to evaluate the
degree to which supply/demand forces stimulate a transition to
renewable energy technologies in the next 20-50 years. Secondly, we
evaluate the greenhouse gas buildup limitations on carbon-based power
consumption as an unpriced externality to fossil-fuel consumption,
considering global population growth, increased global gross domestic
product, and increased energy efficiency per unit of globally averaged
GDP, as produced by the Intergovernmental Panel on Climate Change
(IPCC). A greenhouse gas constraint on total carbon emissions, in
conjunction with global population growth, is projected to drive the
demand for carbon-free power well beyond that produced by conventional
supply/demand pricing tradeoffs, at potentially daunting levels
relative to current renewable energy demand levels. Thirdly, we
evaluate the level and timescale of R&D investment that is needed
to produce the required quantity of carbon-free power by the 2050
timeframe, to support the expected global energy demand for carbon-free
power. Fourth, we evaluate the energy potential of various renewable
energy resources to ascertain which resources are adequately available
globally to support the projected global carbon-free energy demand
requirements. Fifth, we evaluate the challenges to the chemical
sciences to enable the cost-effective production of carbon-free power
on the needed scale by the 2050 timeframe. Finally, we discuss the
effects of a change in primary power technology on the energy supply
infrastructure and discuss the impact of such a change on the modes of
energy consumption by the energy consumer and additional demands on the
chemical sciences to support such a transition in energy supply.
Post this sticker at your gas station
get it on-line here:
August 28, 2007
Hawaii petroleum assets changing hands
Very interesting. Very low price for 51 stations in Hawaii and half a terminal (Aloha).
Posted on: Friday, August 17, 2007
Mid Pac Petroleum of Hawaii being bought out
Mid Pac Petroleum LLC, a Hawai'i-based petroleum marketer and the licensee of the Union 76 brand, is being purchased by an investment firm that includes retired banker Walter Dods.
Koko'oha Investments Inc. will buy Mid Pac Petroleum from Singapore investment firm K1 Ventures Ltd. for $44 million. The sale is expected to close Sept. 1.
In addition to Dods, Koko'oha Investments includes David Hulihee, Bill Mills and Jim Yates. Hulihee is president of Royal Contracting Ltd. and Mills is the founder and chairman of the Mills Group real estate investment company.
Yates will serve as the new president and chief executive of Mid Pac Petroleum, replacing Richard Parry, who left the company at the end of July. Yates last week resigned as head of The Gas Co., where he had served as president and CEO since 1995.
Mid Pac Petroleum has annual sales of $170 million and Dods said customers and employees should notice very few changes once the acquisition is completed.
"Mid Pac Petroleum has already proven itself as a strong company doing business in Hawai'i, thanks to its employees, dealers, marketers and commercial customers," Dods said. "As a stock transaction, this will be a smooth and virtually transparent transition for our customers and employees," he said.
The purchase will give Koko'oha Investments exclusive rights to use the Union 76 brand for fuel sales in Hawai'i and contracts to supply third-party dealers, marketers and commercial customers. Of the 51 Union 76-branded stations in Hawai'i, 36 are owned by Mid PacPetroleum and the remainder are independent operators that the company supplies fuel to.
Oil is getting harder to get
The largest oil find in decades is 5 years behind production and may never come online. Read about the Kazakstan find in the Caspian sea. Just another example of how the next barrels of oil we get out are going to cost more to get than the last ones. This oil comes with a special complication: potentially lethal, with high concentrations of hydrogen sulfide gas. So workers carry oxygen canisters and gas detectors and do daily evacuation drills. High-tech getaway boats stand ready to whisk them to safety. The place feels more like a hazardous-chemical plant than an oil rig. Fun huh?
July 24, 2007
AGE adds facts to a cry for relief from oil crisis
Thanks Aron for this note from AG Edwards Chief Global Investment Strategist.
You a numbers guy?
Believe in them? Where here are the bare facts in barrels per person and nominal population growth rates. This does not factor in any accelleration in China or India due to increased standards of living (increased average oil usage) over the period.
AGE Chart-Looming Crisis In Crude Oil.pdf
This chart shows that each person in the world consumes an average of 4.7 barrels of oil per person per year. In the United States, we consume 25.2 barrels per person per year. The world currently consumes 83.7 million barrels per day; if the world continues to consume 4.7 barrels per person per year, assuming U.S. Census Bureau estimates of population, by 2020 the world will consume 98 million barrels per day, which would far exceed current OPEC excess capacity. This is the looming crisis in crude oil: the bulk of the worlds reserves (86%) resides in OPEC and the former Soviet Union. Without a global reduction in demand, it will take a massive level of investment in these rather hostile nations to meet trend consumption.
Big oil crys uncle
A picture says a thousand words. The US simply has been sucking down more oil than it can produce for many many years and the trend is only up and to the right for demand and down and to the right for supply. Finally the oil industry mouthpiece the National Petroleum Council is starting to "leak" a report it started working on in 2005 which admits the facts that the rest of us know. Oops, there is not enough oil and we have to develop alternatives. Here is part of the leak from the WSJ:
"World oil and gas supplies from conventional sources are unlikely to keep up with rising global demand over the next 25 years, the U.S. petroleum industry says in a draft report of a study commissioned by the government.
In the draft report, oil-industry leaders acknowledge the world will need to develop all the supplemental sources of energy it can -- ranging from biofuels to nuclear power to oil extracted by unconventional means from the oil sands of Canada -- to meet soaring demand. The surge in demand is expected to arise from rapid economic growth in such fast-developing countries as China and India, as well as mounting consumption in the U.S., the world's biggest energy market.
Tight Times: World oil and natural-gas supplies are unlikely to keep up with rising demand over the next 25 years, the U.S. petroleum industry says in a draft report.
Needed Alternatives: The world will need supplemental sources like biofuels and nuclear power to meet demand, the report says.
Price Pressure: The findings suggest high energy prices are likely for decades to come.
The findings suggest that, far from being temporary, high energy prices are likely for decades to come.
"It is a hard truth that the global supply of oil and natural gas from the conventional sources relied upon historically is unlikely to meet projected 50% to 60% growth in demand over the next 25 years," says the draft report, titled "Facing the Hard Truths About Energy."
"In geoeconomic terms, the biggest impact will come from increasing demand for oil and natural gas from developing countries," said the draft report, a copy of which was reviewed by The Wall Street Journal. "This demand may outpace timely development of new supply sources, thereby pressuring prices to rise."
The study, which was requested by U.S. Energy Secretary Samuel Bodman in October 2005, was conducted by the National Petroleum Council, an industry group that advises the secretary.
The conclusions appear to be the first explicit concession by the petroleum industry that it alone can't meet burgeoning global demand for oil, which may rise to as much as 120 million barrels a day by 2030 from about 84 million barrels a day currently, according to some projections. (U.S. gasoline prices are on the rise. See related article1.)
These conclusions follow hard on the heels of a medium-term outlook by the Paris-based International Energy Agency this month, which suggested a supply squeeze will hit by 2012. The fact that the American petroleum industry is warning of a crunch could have an even greater impact on the debate over energy policy."