Posted by: graemebird | May 22, 2008

Oil Breaks 135USD Per Barrel/Breathing Space/ Indian Summer/Time To Get Serious.

I predicted this incredibly harsh new era of high energy prices well in advance and have been mocked for my reasoning by committed irrationalists, economists who don’t understand economics, and by some who do understand economics a little bit, but who prefer to take the tribal view nonetheless.

But the good news for me is that we finally are at a price range that we can sustain for awhile.

You guys thought that this was some short-term problem. This is not the case. We will be in an expensive energy era for at least the next 30 years. This is not going away at all.

You see the rest of you thought that things might get better pretty soon. Whereas I thought things would likely get worse right away. So its bad news for most people because their expectations were ridiculously optimistic. But its good news for me because we have signs that the onslaught of higher prices will finally pause for some breathing space.

Finally we have the news that we have hit a price wherein inventories are beginning to build. But the logic of peak oil (which predicts ONLY the inner core of traditional wells), and the nasty work the environmentalists have done going back 30 or 40 years…… these two factors will mean that this buildup will be reversed again, the inventories will finally clear, and the relentless onslaught of price rises will begin-again.

What we face now is an inventories buildup that ought to continue until there is nowhere left to store the stuff. Yet if the market understands whats going on we ought not expect much in the way of price reductions.

I was thinking that prices might crank up to about 160 USD by next February. But I wasn’t going to lock in a prediction at more than 140 USD.

So it looks like we might get prices staying within the region of 115-150 USD for perhaps a year or two.

IF YOU DON’T THINK THIS IS GOOD NEWS YOU PROBABLY DON’T UNDERSTAND THE SITUATION. We are really in trouble. We have to use this Indian Summer to get our collective act together.

WE HAVE TO GET USED TO THE URGENCY OF THE SITUATION. MASS-SACKINGS AND TAKING CARE OF OUR RETIREES. GETTING OUR ENERGY PRODUCTION SORTED. OUR ABILITY TO SUBSTITUTE AWAY FROM OIL TO NUCLEAR AND LIQUIFIED COAL. OUR NEED TO DISSOLVE GOVERNMENT DEPARTMENTS BY THE BUSHEL. AND THE DESPERATE NEED TO IMPROVE OUR SAVINGS AND REINVESTMENT RATES.

This is just a stay-at-execution. This aint any sort of deliverance.

ADDITIONAL COMMENTS 25/5/08

Some people are beginning to misread the situation already. Noting that finally, after all this time, we are getting an inventories buildup, the denial of the very powerful predictive model of peak oil (powerful only for the inner core of traditional wells) is being rubbished again.

Ludicrously the situation has been likened to a BUBBLE. This is the one time when we would welcome a bubble. But to claim that there is a bubble going on at the first sign of inventorites buildup is a bit rich to say the least. The last time we had a buildup like this was when the price was about 60 USD from memory. People were blaming the price on speculators, saying it ought to fall back to 40 USD. It did take some time for inentories to finally start heading down, and some time thereafter for the price onslaught to resume. But thats all thats happening here also. Here’s an article in the Australian which typifies this terminal denial that we are in trouble:

http://www.theaustralian.news.com.au/story/0,25197,23739755-20142,00.html

“They’re wrong about China and oil.” says the article. But there’s nothing in the article to show that anyone is wrong except perhaps for those who are saying that the price will continue on to 200USD right away. Which it will do of course but not immediately.

“The present commodity and oil boom shows all the classic symptoms of a financial bubble, such as Japan in the 1980s, technology stocks in the 1990s and, most recently, housing and mortgages in the US.”

A totally ridiculous statement. Since the inventory buildup has only just begun.

” All these fundamental points are perfectly valid, but they tell us nothing about whether the oil price will soon jump to $200, stay at $130 or fall back to $60 next month…”

Yes I think they DO tell us this. I think the fundamentals tell us that there will be a pause in prices because this is the first time in years supply has exceeded demand.

“To see that these “fundamentals” are all irrelevant…”

Now this fellows just being an idiot..

“…….we have merely to ask which of them has changed in the past nine months. The answer is none. The oil markets didn’t suddenly discover China’s oil demand nine months ago so this cannot explain the doubling of prices since last August……”

The explanation is that oil was underpriced and now its price is about right. With a bit of excess price reflecting how things are likely to tighten down the track.

“…… In fact, China’s “insatiable” demand growth has decelerated…..”

This means that Chinas oil demand is still growing. Still growing when even maintaining daily oil production is a bit of a neat trick.

“….In 2004 it was consuming an extra 0.9 million barrels a day; in 2007 it was consuming just an extra 0.3 mbd. In the same period global demand growth has slowed from 3.6 mbd to 0.7 mbd. As a result, the increase in global demand growth is now well below last year’s increase of 0.8 mbd in non-Opec production, according to Mike Rothman, of ISI, a leading New York consulting group….”

How they try to change reality with mere words!!!!. What we get from this is that World demand for oil is still growing last time we had any figures. Whether the current price will lead World demand growth to level off and fall is another matter.

“But oil is the commodity that really matters and surely the latest jump in prices proves that demand really does exceed supply? Not at all. In the late stages of financial bubbles, it is quite normal for prices to become completely detached from economic fundamentals.”

What a dummy hey? Now we are in the “LAST STAGES OF A FINANCIAL BUBBLE”. This assumption is ludicrous make-believe when the fact is this is the very first time in years we’ve had an inventories buildup. And bear in mind this dope was just claiming that the fundamentals don’t matter. We simply have to conclude that oil was underpriced before and has become a little overpriced for the very first time. Which will not last.

If this is a financial bubble then its at its FIRST STAGE. Not at its late stage. And in the end high inventory levels are only akin to having a full tank of gas.

Here’s some information from another link:

“The world’s finely balanced market for crude has been creeping into surplus for several weeks. Opec’s monthly report says that demand this quarter will average 85.75m bpd. Supply was 86.8m bpd in April. The fresh output from Nigeria, Iraq and Saudi Arabia may push it significantly further into surplus.

The signs are already surfacing in global inventories. Opec says that stocks held by the OECD club of rich countries are above their five-year average, with “comfortable” cover for 53 days’ use. US stocks have edged up for the last four months, though they fell last week.”

Well for quite a long time the demand was about 87 million barrels and the supply was only about 85 million barrels. So a shortfall of 2 million barrels per day has finally been turned around to a surplus of 1 million barrels per day. And its only just happened. This is no bubble. Or at least not yet it isn’t. Or if its a bubble its only in the very first stage. But a bubble would be magnificent. The fundamental logic of peak oil means that any such alleged bubble would validate itself if you just wait a year or two. If the speculators know what they are about, and if we are lucky, they will keep the price up pretty near the current high prices. Better than the prices falling back to 80USD only to power ahead up to 200 USD a short time later.

Notice for all this talk of a bubble the actual supply has barely moved. I’d like to have the actual figures here. But my understanding is that traditional oil wells hit a peak in early 2005. Since then they dropped about 2 million barrels per day. But the Canadian tar sands kept growing to roughly replace what was lost. Now it looks like traditional well oil production has managed to squeeze out about 1 million extra barrels per day after all this time and all these price rises. With about another million per day in the pipeline. Hence from traditional wells it doesn’t really look like we’ve been able to do much else but stay in the same place and the price rising 5 times in the last several years.

This looks very consistent with the peak oil thesis. And if we want to buck that logic we ought to be pleading with the Americans to open up the rest of their continental shelf, and ANWAR for drilling.

The best good news story of all this week was that the Italians were finally going to go after nuclear energy in a serious way. If the rest of us could do that, and crowd out coal from electricty generation, then we could liquify the coal and we would be in a cheap energy era again.

I’m saying it will be thirty years before we finally get this together. So can we start NOW!!!!

Just imagine how cheap oil would be if all the coal electricity was replaced by nuclear and that coal liquified to diesel. Which would have happened by now under totally capitalistic conditions. We would be fair swimming in cheap diesel and oil by now.

POSTSCRIPT….

This thread was predicated on the basis of news stories that claimed that there was (FINALLY) a buildup in inventories.  Since then I’ve read contrary claims and also claims that the May buildup was a seasonal matter. I don’t really know who to believe. The idea that we had an Indian Summer and that we had reached a sort of natural price range for the next year or two is solely dependent on the idea of an inventories buildup. If there is no inventories buildup as reported we will see shortly a new set of price hikes. If not we will likely get a year or two of grace. It is a far far better thing that the speculative market keeps the prices high and builds the inventories, for the time being, to the maximum they can be sustained. If this doesn’t happen any substantial price pullback will only lead to a horrendous runup in prices later on.

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Responses

  1. Bird are you running some sort of gay sauna here? look at the quality of these comments

  2. Yeah well we can always erase the anally-obsessed comments.

    This may not be a family site, but we will keep it hygenic at least.


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