Tuesday, June 27, 2006

$100 Oil Bet Update

Things aren't looking good for the Duck:

The Energy Department just announced that crude oil supplies rose 1.4 million barrels to 347.1 million for the week ended June 16. Analysts had been expecting a drawdown, so this news caught them by surprise. More, crude oil supplies in the U.S. are now at their highest levels since May 1998, when oil was trading around $15 a barrel. Add in the fact that Canadian oil inventories are fully stocked, and the more imminent reality is of a sizable oil-price decrease — not a huge increase.

Recently I interviewed four oil-tanker executives who control a combined 85 percent of the oil coming into the United States. They confirmed market rumors that the amount of oil being stored on large carriers on the high seas is abnormally high. One of the CEOs even predicted the possibility of $40 to $50 oil in the next 6 to 12 months. In another interview, Chevron CEO David O’Reilly suggested that gasoline and energy demands have flattened in the U.S., and may be showing signs of decline.

Prince Turki can threaten $200 oil all he wants, but we may instead be looking at a downward correction that will have oil prices dropping more than anyone imagines possible. Supplies are at their highest levels in eight years, while demand appears to be falling, or at least leveling off. Should a significant price correction be in the offing, stock markets and the economy will cheer.

The economic principles at work here are very simple: Markets work. Supply and demand works. Higher prices are gradually slowing consumption. At the same time, those high prices continue to stimulate outsized profits and investment returns. So capital is pouring into all the energy sectors, providing a strong foundation for new energy production. Chevron, for example, is reinvesting virtually all its profits in new oil-and-gas exploration and drilling. The drilling industry, meanwhile, has recovered from last year’s Hurricane Katrina shock and is once again producing near peak capacity.

We still have the worst of the hurricane season ahead of us, but Oroborous' chances for a new book for Christmas are looking better.

NYMEX light, sweet crude is at $72.18, up .38.

23 Comments:

Blogger Peter Kirk said...

I don't know much about oil prices. But I read that just this month oil from Azerbaijan (which I visit for work twice a year) has come on stream, from a new pipeline which is delivering a million barrels per day towards western markets. Could this by any chance be the reason for the reported increase in supplies? This analyst doesn't seem to have considered this factor. Duck, did you consider it when you made your bet?

June 27, 2006 9:11 AM  
Blogger Duck said...

Peter,
I knew about all the new sources for oil, like the Alberta tar sands and new fields in central Asia and Russia. But balance that by declining production from many existing fields, such as the North Sea, and Kuwait, where the world's second largest oil field reached peak production last year. On top of that is expanding worldwide demand and you have the ingredients for a price boom in oil.

Which we have seen over the past four years. The current price is more than double the most recent low price in the last decade. The price may have reached a medium term peak for now, but these factors will remain. Oil will reach $100, it is just a matter of how soon.

June 27, 2006 12:56 PM  
Blogger joe shropshire said...

Well, sure. $72, or even $40, will eventually reach $100, it's just the same question.

June 27, 2006 1:03 PM  
Blogger Oroborous said...

I'm not so sure that the price of oil ever will stabilize at over $ 99/bbl.

Despite rising worldwide demand for petroleum, (which is, after all, A Very Good Thing, since it's an effect of rising standards of living for billions of people, and I certainly hope that demand for energy continues to strongly rise for decades), the currently-known worldwide deposits of petroleum are enough to supply the world for many decades, possibly a century, even if demand were to, say, triple.
We just haven't developed much of it, since Middle Eastern oil is so much cheaper to produce.

The vast majority of Earth's known reserves are in North America, by the way, so I expect the center of world oil production to shift over the next few decades, away from nutty and unstable nations and cultures, and towards Mexico, the U.S., and Canada, which is another Very Good Thing.

Those North American reserves can be developed for less than $ 50/bbl.

Further, North America has ginormous reserves of coal, which can be easily turned into oil for less than $ 100/bbl.

Also, cellulose ethanol can replace some gasoline, and that will be produced for less than the equivalent of $ 100/bbl of petroleum, for the same energy output.

So, while the price of oil might eventually fluctuate around $ 80/bbl, I don't see how it can go much higher for long, since America alone could supply the entire world with $ 100/bbl oil for a century, assuming that the infrastructure were in place to develop all resources.

June 27, 2006 8:06 PM  
Blogger Duck said...

assuming that the infrastructure were in place to develop all resources.

Aye, there's the rub. I think that you are totally ignoring the difficulties in ramping up production of these oil resources. Converting oil shale, coal and tar sands to crude oil takes considerably more infrastructure than tapping land-based oil deposits, or even offshore oil fields.

However, when the production at existing oil fields peaks, production drops off very quickly. The agressive use of techniques such as steam injection to boost production delays the arrival of the peak, but makes the subsequent drop off in production more precipitous. Production peaks are real. The Saudi fields will peak in the near future, it is only a matter of when.

June 28, 2006 8:12 AM  
Blogger Oroborous said...

I think that you are totally ignoring the difficulties in ramping up production of these oil resources.

Well, I'm certainly assuming that prices at or above $ 100/bbl will cause enormous amounts of money and other resources to be used to increase oil production in less-prime places.

Counting ANWR, the deep-water Gulf deposits, the 2 billion bbl in Utah, and assuming another 2 billion in Nevada, Wyoming, and Montana, (which is a very conservative estimate), America alone could bring at least another 20 billion barrels of liquid, in-ground, organic petroleum on-line within ten years.

I do assume that the political impediments to us doing just that will fall away as Middle Eastern production begins to wane further.

Canada is planning to have doubled their tar-sand-derived oil exports by 2010, and they're already one of America's top two sources for oil.

All of that, without even addressing oil shale, coal-to-oil, thermal depolymerization, or gasoline substitutes such as alcohol.

There are so many sources of energy that can be had for under $ 100/bbl that I do think that whatever the technical or political difficulties are, they will be overcome one way or another.

June 28, 2006 9:04 AM  
Blogger Duck said...

To ramp up production of these sources very quickly will require massive investments, and the diversion of that much capital from other investment opportunites would require a substantial guaranteed return on investment premium over those other opportunities. Building infrastructure is like changing course for a supertanker, it doesn't happen quickly.

June 28, 2006 9:28 AM  
Blogger Harry Eagar said...

Hmmm. Blogger accepted but never showed the post I posted yesterday. It said:

Spot ethanol yesterday was $5.50.

That's equivalent to $287 oil.

June 28, 2006 9:42 AM  
Blogger Oroborous said...

But that's political ethanol, not market-driven ethanol.

Corn isn't a great feed stock for vehicle-moving alcohol, although it's great for recreational alcohol.

If we ever decide that we're serious about producing transportation ethanol, we'll squeeze out a lot more BTUs for the same bucks.

June 28, 2006 10:21 AM  
Blogger Peter Kirk said...

The problem with Oroborous' scenario of indefinitely increasing oil consumption is not so much when the oil might run out as in the environmental effects of continuing to burn fossil fuels. Well, the good news is that there is likely to be some negative feedback on oil consumption as demand for heating oil will decline with global warming - or maybe not if it also increases use of air conditioning, which is less efficient. The bad news is that any of you who live in low lying areas will need prepare to move home, as when the ice caps melt sea level will rise by 100 feet or more.

June 28, 2006 2:46 PM  
Blogger Harry Eagar said...

The globe isn't warming. Australia is now having the coldest winter in history, with many places reporting the lowest temperatures ever observed.

Not ever observed for a particular date -- lowest ever measured.

June 28, 2006 6:29 PM  
Blogger Peter Kirk said...

One of the predicted consequences of general global warming is increasingly extreme weather conditions, including sometimes, paradoxically, extra cold. Actually it isn't always all that paradoxical: here in England the last winter was colder than usual because a lot of cold water flowed into the North Atlantic from melting ice in Greenland. But, if you look at global averages rather than extremes, the data are clear: the world is warming. Even George W Bush's advisers accept that, although they deny any link to the vast amounts of oil they are selling for burning.

June 29, 2006 12:27 PM  
Blogger Duck said...

Yes, measured as the global average over the past 150 years or so, Peter is correct to say that we are in a global warming trend. The $64,000 question is whether this is as a result of carbon emissions related to the exploitation of fossil fuels, or whether there are other factors involved that have nothing to do with fossil fuels.

June 29, 2006 12:34 PM  
Blogger Harry Eagar said...

And if you pick some other starting point, it's not warming.

It was entirely coincidental that when people started gathering worldwide temperature data -- which didn't happen until 1979 -- the temperature for the next couple of decades was warming.

Had thermometers and people to read them gotten started around 1325, at the end of 150 years, there would have been a clear and unmistakeble worldwide cooling trend, and it would have continued that way for another couple centuries.

Heck, if the start point had been 1940, and we were 27 years on (1967), the trend would have been cooling all the way. And all the Chicken Littles would have been clucking about the coming Ice Age.

Come to think of it, they were.

June 29, 2006 4:38 PM  
Blogger Duck said...

Coincidence? Maybe, maybe not. We really don't know, do we? Whether the ice caps melting is our fault or not, it is our problem. If they keep melting, that is.

June 30, 2006 8:13 AM  
Blogger Harry Eagar said...

It's unquestionably a coincidence. The question is whether it was a lucky one.

June 30, 2006 2:42 PM  
Blogger Peter Kirk said...

Come on, Harry. I can allow you some scepticism, that it MIGHT be a coincidence that the massive burning of fossil fuels in the last century is accompanying a rise in global average temperatures (which by the way have been measured since much longer ago than 1979, and can be reconstructed quite accurately from all sorts of sources). But to claim that this is "unquestionably a coincidence" is quite indefensible, given the strong scientific evidence that it is not. Your insistence that this is a coincidence reminds me of the insistence of some (not me) in the face of the scientific evidence that a previous worldwide flood happened, Noah's one. Your position seems to be based as much as theirs on faith. The difference is that yours is not in the Judeo-Christian God but seems to be in the materialistic god of unlimited economic growth.

July 01, 2006 5:19 AM  
Blogger M Ali said...

Peter:

http://www.cei.org/pdf/5331.pdf

July 01, 2006 7:18 AM  
Blogger Peter Kirk said...

M Ali, thank you for the link. Who funds CEI? Does it receive any money from the oil industry? Anyway, let's read the document as it stands.

The second sentence states "Global warming is happening and man is responsible for at least some of it.. (Well, I'm sure woman is also partly responsible.) And then, according to the National Academy of Sciences, "a causal linkage between the buildup of greenhouse gases in the atmosphere and the observed climate changes during the 20th century cannot be unequivocally established." So no support there for Harry's "It's unquestionably a coincidence." It's more a matter of: It's not unquestionably not a coincidence.

As for "The Earth experienced a sea-level rise of 0.2m over the past century with no noticeable ill effects.", tell that to those who lost family members in the 1953 floods in eastern England and the Netherlands, and those of us who are still having to pay for massive flood defences, which keep having to be heightened to keep further flooding out.

And then even if we take the lower end of the Oxford paper's predicted global warming, "in the 2°C to 4°C range", the consequences of that would be disastrous in many parts of the world (even if they are beneficial to the USA as later reported!) - as well as leading to much faster melting of ice caps than has so far been observed.

So, it seems that these people agree with me that, although some of the hype is unjustified, there is a good chance that human activities are causing a small amount of global warming, which may not be disastrous for the USA but is likely to have undesirable consequences elsewhere.

July 02, 2006 3:27 PM  
Blogger Harry Eagar said...

For some reason, that file won't load for me, although I get press releases from the Competitive Enterprise Institute every day.

CEI is a debating/lobbying group and not the kind of source I would trust for an analysis of anything -- especially not trade treaties.

On the other hand, the sea level is always going to be going up or down, so live with it. You live in England, Peter. Which of the Cinque Ports is still a working port?

July 02, 2006 7:11 PM  
Blogger Oroborous said...

...even if we take the lower end of the Oxford paper's predicted global warming...

Why should we take anyone's guess about how much the globe will warm, especially since we don't know what's causing it ?

The equations and models are window-dressing for completely arbitrary assumptions about the many variables.

Humans can't predict the weather one year in advance, but we're supposed to take at face value some politically-biased guess at what the climate will be like in 100 years ??

The problem demands continued attention and study, but we're FAR from being able to make any serious conclusions about what should, if anything, be done.

July 02, 2006 10:07 PM  
Blogger Peter Kirk said...

Harry, of the original five Cinque Ports, Dover is still very much a working port, and Hastings and Hythe still have fishing fleets. Folkestone and Ramsgate, corporate members of the confederation, are also important ports. Some of these ports have silted up not because of changes in sea level, but because of large scale changes in the coastline as it has recovered from the opening up of the Straits of Dover about 10,000 years ago. There was a large island in the Straits as recently as 1100 AD, where the Goodwin Sands now are, and the material washed away from this island had to go somewhere. In fact there were huge changes in relative land and sea level in this region during and since the Ice Ages, including some very rapid changes. The levels have now almost stabilised, but that stability could come to an end if there is major ice cap melting.

July 04, 2006 8:44 AM  
Blogger Harry Eagar said...

I haven't seen the study but heard a report just yesterday that the sinking (or covering) of Tuvalu, about which the premier has been making hysterical (but perhaps understandable) demands for many years now, may not be the responsibility of global warming at all but of US Navy dredging during World War II.

Who knew you could dredge out an entire voting member of the United Nations?

O tempora, or mores. Practically the entire population of Tuvalu was kidnapped and murdered by Peruvian slavers in the 19th century. In the 21st, they can all move to New Zealand, which most of them are doing anyway.

The Low Archipelago was underwater 800 years ago and is above today.

If the glaciers won't melt, they'll get bigger, as they are doing in Greenland.

Better get used to it.

July 04, 2006 10:27 AM  

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