Posted by: graemebird | May 30, 2008

Terminal Stupidity In Oil Price Projections/Exhibit A: The Dallas Fed.

What’s the bottom line? Absent supply disruptions, it will be difficult to sustain oil prices above $100 (in 2008 dollars) over the next 10 years.” 

This is stupidity of a level that we would have to call DELUSIONAL.  Its funny what we are allowed to be wild-assed crazy about. If it was something else these people would be put away. They seem to be acting as if we live in perfect capitalism and hundreds of nuclear plants were already being commissioned.

There’s a bit going on where they are talking AROUND the subject. But there is just nothing that could justify their take-home-story.

If we were under a capitalist system going back 40 years then oil prices simply could never have gone above about 60USD in current dollars. But in the world we actually live in massive damage has been done. No-ones turning the incredibly malign US Congress (Americans are great. But Washington is enemy-occupied-territory) around at breakneck pace.

And because of all the damage thats been done the concept of peak oil, which otherwise would be an interesting anomaly that did not need to concern the public, has become a vital month-in-month-out reality to all of us.

If the price dips below 100USD it will do so very briefly and never again for a very long time. The way things are going it will not dip below 100USD more than once only for perhaps 30 years.

Now I got the link off JC at Catallaxy.      And the amazing thing is that all these Catallaxy types have heaped great praise on this article that is almost totally delusional, with almost no relevant information for the totally wrong conclusion that the article made.

Lets have a look of this roll-call of fantastic praise heaped on the Dallas Feds “analysis.”

 As I always say, Its more Anal than Lysis.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

THE ROLL-CALL OF GREAT PRAISE AND THANKS FOR THE DALLAS FED ARTICLE: 

  • 147

    JC. Says:
    May 30th, 2008 at 12:26 pm Thanks nanu. Always there to help.

    ————————–

    Great piece by the Dallas Fed on the subject of oil: what’s happening and what things look like going forward.

    In sum, they see it’s difficult for oil prices to hold above 100 bucks a barrel in 2008 dollars over the long term.

    Dallas Fed is a terrific organization.
    http://dallasfed.org/research/eclett/2008/el0805.html

  • 148

    Kodjo Says:
    May 30th, 2008 at 12:58 pm JC [147]

    Best piece of read on oil in a v long time.

    Much appreciate the link.

  • 149

    Nanuestalker Says:
    May 30th, 2008 at 2:48 pm I think one of the interesting thing about oil isn’t so much the price (actually that article briefly addressed the price on historical terms to wages as in “[…]how high is it really?”), it is the 21st century demand. Even at half the current price the real cost is high. Every consumer item has a oil cost be it the gas guzzling SUV or a pint of milk.

  • pommygranate Says:
    May 30th, 2008 at 6:44 pm

    that is indeed a good oil article. thanks, JC. are they normally that good?

    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

    Now what do you make of that hey? I wouldn’t expect to get such great praise and thanks unless I’d just written, produced and directed KING LEAR for the very first audience to see that play.

    So whats going on here?

    I guess there is nothing for it but to go through the entire article and show why its conclusion in no way is justified by its rambling and irrelevant analysis.

    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

    NOW SINCE THE CONCLUSION IS NOT SUPPORTED BY THE ARTICLE IN ANY WAY WE WILL HAVE TO READ CLEARLY FOR CLUES AS TO WHERE THE AUTHORS HAVE LIKELY COME RIGHT OFF THE BEAM.

    “The first few months of 2008 saw crude oil prices breach one barrier after another. They topped $100 a barrel for the first time on Feb. 19, then rose past $103.76 about two weeks later, surpassing the previous inflation-adjusted peak, established in 1980. In April and early May, oil prices pushed past $110 and then $120 a barrel and beyond.[1]

    These milestones reflect a new era in oil markets. After the tumult of the early 1980s, prices remained relatively tame for two decades—in both real and nominal terms (Chart 1). This long stretch of stability ended in 2004, when oil topped $40 a barrel for the first time, then embarked on a steep climb that continued into this year.”

    SO FAR SO GOOD. WE ARE STILL LOOKING FOR THE DEAD GIVEAWAY AS TO WHERE THESE GUYS ARE STOOGING THEMSELVES. 

    “Modern economies run on oil, so it’s important to understand how recent years—with their surging prices—differ from the preceding two decades. A good starting point is strong demand, which has pushed world oil markets close to capacity. New supplies haven’t kept up with this demand, fueling expectations that oil markets will remain tight for the foreseeable future. A weakening dollar has put upward pressure on the price of a commodity that trades in the U.S. currency. And because a large share of oil production takes place in politically unstable regions, fears of supply disruptions loom over markets.”

    ALL GOOD EXCEPT WE HAVE A CLUE HERE IN THAT LAST SENTENCE TO THE SOURCE OF THE DELUSION. FEARS OF SUPPLY DISRUPTIONS CANNOT SPOOK MARKETS FOREVER AND A DAY. ONLY UNTIL THE DECISION IS MADE THAT THE CUSTOMER CANNOT POSSIBLY HOLD HIGHER INVENTORIES. I’M SURE WE WILL SEE MORE RATIONALISATIONS LIKE THIS AS WE PROCEED.

    “These factors have fed the steady, sometimes swift rise of oil prices in recent years….”

    SURE BUT THEY ARE A CATALYST. THEY ARE A CATALYST TO PRICE RISES. SUCH FEARS CANNOT MAINTAIN A HIGH PRICE. THEY RATHER DETERMINE THE INVENTORY LEVELS. THEY CAN ONLY SUSTAIN A HIGH PRICE TO THE POINT WHERE INVENTORIES STOP BUILDING.

    “….. Their persistence suggests the days of relatively cheap oil are over and the global economy faces a future of high energy prices. …..”

    DO YOU SEE THAT TOTAL DELUSION? “Their persistence” REFERS TO THE PERSISTENCE OF FEARS OF SUPPLY DISRUPTIONS. AND IT IS THESE FEARS OF SUPPLY DISRUPTIONS THAT THE AUTHORS ARE BLAIMING ON A PROJECTED FUTURE OF HIGH ENERGY PRICES. HENCE THESE ECONOMICS-MYSTICS ARE CLAIMING THAT ITS NOT ABOUT THE BRUTE FORCE OF SUPPLY AND DEMAND. BUT INSTEAD THEY RECKON ITS ABOUT THE EMOTIONS AND FEARS OF THE INVESTORS. SUBTLE IDIOCY HIDING BEHIND PLAUSIBLE-SOUNDING FAUX-ANALYSIS.

    “How they play out will shape oil markets—and determine prices—for years to come.”

    HOW “they” PLAY OUT? SO THE DUMB BASTARDS ARE STILL TALKING ABOUT THE FEARS OF SUPPLY DISRUPTIONS DETERMINING THINGS AS OPPOSED TO FUCKING SUPPLY AND DEMAND.

    “Supply and Demand
    As incomes rise, economies use more energy for transport, heating and cooling and producing goods and services. A broad cross section of nearly 180 countries shows that doubling per capita income more than doubles per capita oil consumption (Chart 2). How much each country contributes to increases in global energy demand depends on its population and rate of income growth. Big nations moving quickly up the income ladder have huge implications for oil markets….”

    Right. Now normally you would think “so far so good” again. They’ve finally mentioned supply and demand. But this goes back to the Keynesian idiocy where you effectively say “I’m aware of that” and then feel quite entitled to ignore the implications of those facts which you have haughtily shown that you have an awareness of. “THATS BEEN COVERED” is what you are saying. Like Climate Alarmists saying “WE’VE DEALT WITH THAT QUESTION” and laying down some idiotic link. “THATS BEEN DEALT WITH” and its all just a strategy to ignore and inconvenient reality.

    But these dummies from Dallas use this brief excursion into the realities of supply and demand as double-duty. Because in their very next paragraph they are trying to turn a long-term trend that still lies before us, into some short-term deal thats now in the past. Some sort of short-term deal that, when coupled with these emotional fears by sensitive and effeminate investors, just drove the price up in some bizzare experience unrelated to old oil-well depletion rates.

    “China and India, two giants with a combined population of nearly 2.4 billion, shook themselves out of a long economic slumber and began growing rapidly in the 1990s. Adjusted for inflation and purchasing power parity, China’s per capita GDP rose from $1,103 in 1990 to $4,088 in 2005; India’s went from $1,202 to $2,222. In this decade, new energy demand from China, India and other emerging countries has added to continued growth from the U.S., Europe and other parts of the world.

    As economic activity in the U.S., the world’s largest oil consumer, began accelerating in 2003, markets began feeling the full force of the world’s increased appetite for oil. Global consumption rose from 82.6 million barrels a day in 2004 to 85.6 million in 2007. Since the beginning of the oil era, prices had ebbed and flowed around the U.S. economy’s ups and downs. Now, markets view demand increases as a fact of life that won’t be blunted much by a slowing U.S. economy.

    With consumption on the rise, oil markets grew tighter as suppliers neared productive capacity. The Organization of Petroleum Exporting Countries (OPEC), a 13-member group that produces more than a third of the world’s oil, has maintained excess capacity of only 1 million to 2 million barrels a day since 2004, down from 4 million in 2001 and 5.6 million in 2002 (Chart 3).”

    You see. Now they are framing these fundamental supply and demand realities into the historical context. So they can dismiss them in their future forecast. As if they are just saying. “Shit happened. And the investors got the fear.” 

     

     

    “Although OPEC’s excess capacity has rebounded from its 2005 low, the gains are largely in heavy crude oils that can only be processed in specialized refineries. Those facilities are running full bore, so the added supplies aren’t relieving a tight market. The latest evidence also suggests OPEC is now restraining its output.”

    All good stuff. But relevant more to what was happening in the recent past. Rather than to any future forecast.

    “While some warn that oil production has peaked—or will soon—most industry experts contend that oil resources are plentiful; it just takes time and money to get them out of the ground and into the market.”

    NOW THE ABOVE REALLY SHITS ME. BECAUSE IT CONTAINS A LIE ABOUT THE PEAK OIL ANALYSTS. AND IT CONTAINS A CONFUSION BETWEEN THE STOCK OF RESOURCES AND THE RATE AT WHICH THEY ARE BEING PULLED OUT OF THE GROUND. AS WELL AS THE RATE AT WHICH WE WILL FIND OURSELVES PULLING THIS STUFF OUT OF THE GROUND OVER THE NEXT TWO OR THREE DECADES.

    ALL SENSIBLE PEOPLE REALISE THERE IS AWESOME RESOURCES STILL IN THE GROUND. BUT THATS NOT THE ISSUE WHEN WE ARE TALKING HIGH PRICES FOR THE NEXT 30 YEARS OR SO.

    “Higher prices have done what economics would predict—stimulated efforts to increase supply.”

    Exactly. But nowhere is it mentioned here that what it will take to maintain and increase production IS CONSTANTLY INCREASING EFFORTS. So its not enough to stimulate just a little bit more effort. Because its going to take more and more effort just to maintain the daily output we have. And more effort AGAIN to increase that output.

    “Companies have expanded their exploration budgets. Oil-producing nations have announced new projects. Drilling activity is at a high level, both offshore and on land. Wages and oilfield services costs are being bid up, while shortages persist for some key skills and equipment.”

    ALL TRUE.

    “So far, new supplies haven’t materialized quickly enough to keep up with growth in world demand, largely because various hurdles have slowed their development. Oil resources, for example, are concentrated in countries with state-run oil companies or little economic freedom. Where market signals aren’t allowed to work, incentives to boost production may be muted.[2]”

    NO MENTION FROM THESE DELUSIONAL TWITS ABOUT THE BASIC NATURE OF OIL-WELLS. THE FUNDAMENTAL TENDENCY FOR THEIR PRODUCTION RATES TO START FALLING AFTER THEY HAVE PEAKED.

    “Oil demand is inelastic in the short run—that is, it doesn’t react quickly to changing prices. Consumers adjust their spending to maintain consumption as prices rise, even if they have to pay more for it.[3] Most likely, this reflects businesses’ commitment to keep up production and individuals’ need to drive to work, run errands and heat homes.”

    Right. No mention of the basic nature of oil wells.

    “When demand is inelastic, even modest tightening in markets translates into strong price movements. In recent years, this inelasticity has magnified tight markets’ impact on prices.”

    RIGHT.

    “The Role of Expectations
    The fundamentals of supply and demand not only led to higher crude oil prices but also fed expectations that world demand will continue to grow faster than supply. The result is escalated price expectations, which show up in futures markets. The anticipated price for 2011 crude oil has moved steadily upward—from around $60 in January 2007 to more than $120 in the first week of May 2008.”

    EXPECTATIONS HAVE NO LONG-TERM ROLE WITH REGARDS TO THIS MATTER. OR RATHER THEY ONLY HAVE A ROLE IN REGARDS TO WHETHER INVENTORIES WILL BUILD OR FALL. THIS IS MORE ECONOMICS-MYSTICISM GOING ON HERE.

    “Futures prices reveal oil traders’ expectations, but they also feed back into current prices.”

    NO THEY DON’T. OR THEY DON’T DO SO EXCEPT AS THEY RELATE TO BUILDING OR FALLING INVENTORIES.

    “As a market efficiency condition, spot prices have to increase with futures prices to keep investors equally willing to hold or sell the marginal barrel of oil.”

    OH FOR FUCKSAKES. THEY’VE GOT THINGS TOTALLY ASS-BACKWARDS. REVERSING CAUSE AND EFFECT. IT DOESN’T MATTER A DAMN WHAT THE GAMBLERS ARE DOING. YOU DON’T NEED TO LOOK AT THEM TO MAKE A PREDICTION. YOU ONLY NEED TO LOOK AT INVENTORIES.

    “If current and futures prices get out of sync, traders taking advantage of arbitrage opportunities bring prices back in line.”

    TRUE ENOUGH. BUT IT CANNOT EXPLAIN THINGS OUTSIDE THE LIMITS OF THE INCREASING AND FALLING OF INVENTORIES. THESE GUYS ARE JUST CONFUSING PEOPLE LIKE KODJO WITH THIS SILLY-TALK.

    “Forecasters offer another window on expectations. Their outlooks can provide additional information about possible price scenarios because they incorporate data beyond traders’ sentiments. Each year, the Energy Information Administration (EIA) presents a mainstream forecast, which incorporates projections on the supply and demand forces expected to shape the marketplace.”

    THEY ALWAYS FUCKING GET IT WRONG. THEY ARE UTTERLY USELESS.

    “As the realities of higher oil prices have sunk in, EIA forecasts have marched steadily upward (Chart 5). The 2004 projection, for example, saw prices relatively flat in the $30 range through 2025. The latest forecast, issued in 2007, anticipates a price decline in upcoming years, with oil settling above $60 for the long haul out to 2030.”

    YOU SEE WHAT THESE ECONOMICS MYSTICS ARE TRYING TO DO? THEY ARE SAILING FURTHER AWAY FROM SUPPLY AND DEMAND AND HERE THEY BLAME THE FUTURES MARKETS, THERE THEY BLAME HUMAN FEARS, AND OVER HERE THEY ARE GOING TO BLAME THE FUCKING FORECASTERS. BUT ITS REALLY ABOUT SUPPLY AND DEMAND. 

     

     

    “While $60 oil looks good in today’s markets, it’s worth noting that the EIA’s best guess for long-term prices doubled in just four years. It did so because the EIA decided its earlier demand projections were too low and supply projections were too high.”

    THIS IS JUST ANOTHER STUPID BUREAUCRACY THAT NEEDS TO BE AXED. THE MORE THEY PUT LIES ABOUT THE LESS WE WILL SEE THE URGENCY OF ADAPTING TO THE SITUATION. IF IDIOTS LIKE THE EIA WEREN’T STOOGING EVERYONE WE WOULD COME TO THE REALISATION THAT WE NEED TO SCRAMBLE FOR NUCLEAR AND LIQUIFIED COAL AS A MATTER OF NATIONAL SURVIVAL.

    “Consider the projected market for 2025 (Chart 6). It can be inferred that the EIA’s projected demand curve moved significantly to the right between 2003 and 2007, signaling the expectation that consumers will want more oil at all prices. It can also be inferred that the projected supply curve moved significantly to the left, reflecting a more pessimistic view about future production. The market-clearing price ends up considerably higher.”

    NO FELLAS. THE MARKET CLEARING PRICE GOT HIGHER BECAUSE PEOPLE WERE MUGGED BY REALITY WHEN THEIR INVENTORIES HAD FALLEN. NOW IT LOOKS LIKE THEY HAVE BRIEFLY OVERSHOT. AND INVENTORIES ARE BUILDING AGAIN. BUT THE REALITY OF WHAT HAPPENS TO WELLS WHEN THEY ARE BEYOND THEIR PEAK WILL SORT THIS OUT AFTER SOME TIME.

    “Dollar’s Weakening
    Oil has long traded in U.S. dollars. Having a single-currency system lowers transaction costs for a commodity that trades globally. In recent years—while oil prices were rising on supply and demand fundamentals—the dollar has weakened against the currencies of the nation’s trading partners, particularly the European Union’s. The dollar has fallen 46 percent from its mid-2001 peak against the euro and 21 percent since 2004.”

    FINE. THE DOLLAR WEAKENING AFFECTS THE PRICE OF OIL AS EXPRESSED IN USD. BUT THE NEXT RATIONALISATION IS JUST MORE MYSTICISM.

    “A declining dollar makes oil cheaper for Europeans and other foreign consumers, propping up their demand.”

    NOT IT DOESN’T. WILL YOU STOP BEING SO FUCKING STUPID. IF THE DOLLAR WEAKENS THIS DOES NOTHING TO THE PRICE OF OIL EXCEPT AS DENOMINATED IN USD. WILL THE IDIOCY NEVER END? OH LORD HOW LONG?

    “A weakening U.S. currency also reduces the dollar-denominated supply from foreign producers. Together, these two factors exert additional upward pressure on prices.”

    IN USD ALONE YOU NUMBSKULLS. EACH CURRENCY MUST DEAL WITH ITS OWN DEBASEMENT ISSUES.

    “Daniel Yergin, chairman of Cambridge Energy Research Associates, adds a third element in arguing that some investors have used oil as a hedge against the dollar’s decline.”

    YES AND THATS GREAT. BUT IT EXPLAINS NOTHING SEPERATE OF THE BUILDING OF INVENTORIES.

    “How much has the weakening dollar added to oil prices? If the U.S. currency had held its 2001 value against the euro, oil would have traded at about $80 a barrel in early 2008, about $21 below its actual price (Chart 7). Put another way, exchange rate movements accounted for roughly a third of the $60 increase in oil prices from 2003 to 2007.”

    FINE.

    “Most of the dollar’s price impact occurred toward the end of the period. When it comes to adjustments in oil consumption and production, a declining dollar takes time to reshape crude oil prices because expectations don’t shift quickly. “

    IRRELEVANT OUTSIDE THE BUILDING OF INVENTORIES.

    “Factors that push up expectations of future prices, however, also put upward pressure on spot prices because markets will adjust until investors are indifferent between holding and selling the marginal barrel of crude oil on the spot market.”

    ASSBACKWARDS AND IRRELEVANT OUTSIDE THE BUILDING OF INVENTORIES.

    “Would it matter if oil were priced in euros or a basket of consuming countries’ currencies? The headlines might be somewhat less alarming, but little would change in real terms.”

    RIGHT. THANKYOU. BUT THATS NOT WHAT YOU HAD BEEN ARGUING. THIS IS LIKE THE KEYNESIAN ASS-COVERING I POINTED OUT BEFORE.

    ” As the dollar’s value declined, U.S. consumers would still be paying more for oil. It would take more dollars to acquire the euros needed to buy oil. In a world where the dollar is weakening, the burden of higher oil prices would still fall more heavily on the U.S. than Europe.”

    EVERY COUNTRY MUST DEAL WITH ITS OWN DEBASEMENT CONSEQUENCES.

    “Geopolitical Risks
    The geopolitics of oil is a brew for sleepless nights.”

    CRIKEY. HERE WE GO AGAIN WITH THE FEAR EXCUSE.

    “The Middle East sits atop two-thirds of the world’s reserves. The region pumps oil amid a war in Iraq, potential conflicts elsewhere and terrorists prowling for targets. Russia, a major non-OPEC producer, has expanded state control over the oil sector, pulling more of it into the realm of dicey internal politics tinged with nationalism. In recent years, violence has cut production by a quarter in Nigeria, Africa’s top oil producer. Venezuela, South America’s largest producer, is under the sway of the quixotic Hugo Chavez, who has threatened to cut off sales to the U.S.”

    FINE.

    “Tight oil markets don’t have the luxury of spare capacity to offset supply interruptions resulting from trouble in important oil-producing countries or regions. Because oil demand is inelastic, even the temporary or partial loss of significant production capacity can strongly impact prices. Wars, political intervention or unexpected breakdowns send shock waves through oil markets. Just the fear of a supply disruption is itself enough to prompt price spikes.”

    FINE. IF THERE IS A SUPPLY CUT AND LOW INVENTORIES PRICES WILL MOVE UP FAST. FINE.

    “Fears of disruptions are reflected more in short-term price movements than in longer-term ones.”

    MORE ASS-COVERING. SINCE PRIOR TO THIS THEY WERE ACTING AS IF THIS WASN’T THE CASE. TYPICAL MAYNARD-LIKE ASS-COVERING.

    “The increases can prove temporary, particularly when rumored troubles fail to materialize. However, the persistent threat from some disputes—for example, Iran’s long-simmering conflict with the U.S.—are likely to keep upward pressure on oil prices for longer periods.”

    RIGHT. SO ITS AN EACHWAY BET. AN ATTEMPT TO RATIONALISE A WAY THE RECENT PRICE RISES. TO TRY AND SMOOTH OVER THEIR EARLIER IRRATIONALITY. TO BASICALLY CONFUSE THE ISSUE. WHICH IS A CONFUSED ISSUE IN THEIR OWN LITTLE MINDS. NO WONDER JC WAS TAKEN IN. AFTER HE TURNED 50 HE WENT SOFT-HEADED AND EASY TO BEFUDDLE.

    “Fear is hard to measure, but the futures market offers some help. We usually expect futures prices to slope upward from the spot price, a pattern the financial markets call “contango.” However, prices for future delivery sometimes dip below the spot prices, creating a phenomenon called “backwardation.” This can occur because of sudden shortages or a jolt of uncertainty.”

    ASSBACKWARDS. OR PERHAPS AMBIGUOUSLY WORDED. BUT I WON’T DWELL ON THEM. BY THIS STAGE THESE GUYS HAVE SO CONFUSED THEMSELVES AND THEIR READERS THAT NO-ONE KNOWS WHICH WAY IS UP.

    “It’s in this phenomenon that we find indirect evidence of fears of oil supply disruptions. When fear spreads, refiners bid aggressively for short-term oil supplies because they face extremely high costs for shutting down operations. Not enough oil can be brought to market quickly, and spot prices rise above futures prices, putting the market into backwardation.”

    HERE THEY PORTRAY LIVING REALITY AS AN IRRATIONAL FEAR. THEY DON’T EVEN KNOW WHATS A FEAR AND WHAT IS REALITY ANY MORE.

    “Oil markets have been in the grip of backwardation lately, with futures prices declining. As spot prices climbed toward $120 a barrel in early 2008, for example, futures prices stood at $102 a year out and $100 two years out—a clear backwardation (Chart 8).”

    MAYBE THE BUYERS JUST COULDN’T GET HOLD OF THE SHIT AND THE GAMBLERS MIGHT BE TAKING AN IRRATIONAL OR RATIONAL BET ON THINGS DEPENDING ON CIRCUMSTANCES. IF THE BOTTLEKNECK IS DESTINED TO CLEAR THEN THE FUTURES GUYS ARE RIGHT TO REFLECT THIS IN THEIR BETS. OR THE FUTURES GUYS COULD BE LISTENING TO DOPEY FORECASTERS AND THEY MIGHT HAVE IT WRONG. THESE GUYS HAVE TOTALLY MISREAD THINGS EITHER WAY.

    “Most of the dollar’s price impact occurred toward the end of the period.”

    RIGHT. FAIR ENOUGH.

    “When it comes to adjustments in oil consumption and production, a declining dollar takes time to reshape crude oil prices because expectations don’t shift quickly.”

    ALL IRRELEVANT OUTSIDE IMMEDIATE CURRENCY AND INVENTORY EFFECTS.

    “Factors that push up expectations of future prices, however, also put upward pressure on spot prices because markets will adjust until investors are indifferent between holding and selling the marginal barrel of crude oil on the spot market.”

    THATS CRAP. REVERSAL OF CAUSE AND EFFECT.

    “Would it matter if oil were priced in euros or a basket of consuming countries’ currencies? The headlines might be somewhat less alarming, but little would change in real terms. As the dollar’s value declined, U.S. consumers would still be paying more for oil. It would take more dollars to acquire the euros needed to buy oil. In a world where the dollar is weakening, the burden of higher oil prices would still fall more heavily on the U.S. than Europe.”

    YES. SURE. SAME OLD SAME OLD.

    Geopolitical Risks
    The geopolitics of oil is a brew for sleepless nights. The Middle East sits atop two-thirds of the world’s reserves. The region pumps oil amid a war in Iraq, potential conflicts elsewhere and terrorists prowling for targets. Russia, a major non-OPEC producer, has expanded state control over the oil sector, pulling more of it into the realm of dicey internal politics tinged with nationalism. In recent years, violence has cut production by a quarter in Nigeria, Africa’s top oil producer. Venezuela, South America’s largest producer, is under the sway of the quixotic Hugo Chavez, who has threatened to cut off sales to the U.S.

    Tight oil markets don’t have the luxury of spare capacity to offset supply interruptions resulting from trouble in important oil-producing countries or regions. Because oil demand is inelastic, even the temporary or partial loss of significant production capacity can strongly impact prices. Wars, political intervention or unexpected breakdowns send shock waves through oil markets. Just the fear of a supply disruption is itself enough to prompt price spikes.

    Fears of disruptions are reflected more in short-term price movements than in longer-term ones. The increases can prove temporary, particularly when rumored troubles fail to materialize. However, the persistent threat from some disputes—for example, Iran’s long-simmering conflict with the U.S.—are likely to keep upward pressure on oil prices for longer periods.

    Fear is hard to measure, but the futures market offers some help. We usually expect futures prices to slope upward from the spot price, a pattern the financial markets call “contango.” However, prices for future delivery sometimes dip below the spot prices, creating a phenomenon called “backwardation.” This can occur because of sudden shortages or a jolt of uncertainty.

    It’s in this phenomenon that we find indirect evidence of fears of oil supply disruptions. When fear spreads, refiners bid aggressively for short-term oil supplies because they face extremely high costs for shutting down operations. Not enough oil can be brought to market quickly, and spot prices rise above futures prices, putting the market into backwardation.

    Oil markets have been in the grip of backwardation lately, with futures prices declining. As spot prices climbed toward $120 a barrel in early 2008, for example, futures prices stood at $102 a year out and $100 two years out—a clear backwardation (Chart 8).

    “Oil Price Prospects
    What happens with oil prices will be determined by the same four factors that have shaped the market in recent years—global demand, expectations about future market tightness, the value of the dollar and fear of supply interruptions. If these factors stay on their present course, prices are likely to be pushed higher. If one or more factors change, markets could see some easing of price pressures.

    At first blush, crude oil demand doesn’t offer much hope for lower prices. It is likely to grow with an expanding world economy. Higher oil prices will prompt some conservation and take some of the edge off prices—but not much. “

    RIGHT. SOME SHORT-TERMISM GOING ON HERE BUT FAIR ENOUGH.

    “The past response of U.S. oil consumption to rising prices suggests the quadrupling of oil prices since 2003 might reduce U.S. consumption by 10 to 20 percent over the next decade. Europe might see similar declines. However, these reductions won’t be sufficient to relieve pressures on prices, given the projected demand growth from China, the Middle East, India and other rapidly expanding economies. Only a dramatic, worldwide move toward energy conservation or a much stronger U.S. and European response to higher oil prices could substantially alter the outlook.”

    RIGHT BUT CONTRARY TO THE CONCLUSION OF THE SCREED. AND ITS SUBSTITUTION AND NOT CONSERVATION THAT IS THE MAIN DEAL HERE.

    “Geopolitical factors affecting supply disruptions aren’t likely to change much, either. The Middle East’s heavy concentration of conventional oil resources suggests the region will become an even more important source of world oil production.”

    VERY DOUBTFUL.

    “Given the region’s historical instability, episodic fears of supply disruptions could remain part of oil pricing well into the future.”

    FEARS CANNOT DO ANYTHING TO PRICE OUTSIDE THE BUILDING OF INVENTORIES.

    “The dollar might offer some relief. Forecasting exchange rate movements is fraught with difficulty, but the currency is likely to strengthen with the U.S. economy. An appreciating dollar would lower oil prices for U.S. consumers. Further dollar weakening, however, would lead to higher prices.”

    YES. THIS APPEARS TO BE A SORT OF ROLLING THUNDER OF ASS-COVERING.

    “Geopolitics and exchange rates aside, long-term oil prices will largely be set by supply and demand..”

    SO THATS COVERED HUH FELLAS.

    “….. which will affect prices directly and influence the expectations that shape futures markets. The key lies in how much new oil reaches markets. Four scenarios for conventional oil resources show a range of outcomes and impacts for the trajectory of prices:

    • Oil production reaches a plateau or peak—prices likely to rise further.
    • Oil nationalism continues to slow the development of new resources—prices likely to remain relatively high.
    • In a shift of strategy, OPEC increases its output sharply—prices likely to fall.
    • Aggressive exploration activities pay off with the quick development of significant new resources—prices likely to fall….”

    All good. But there is unlikely to be quick development that can much overide the natural slow-down from long established wells.

    “Both the futures markets and EIA forecasts currently anticipate some softening of oil prices over the next few years….”

    IDIOTS. YOU MAY AS WELL BE GETTING YOUR INFORMATION FROM THE TOOTH FAIRY OR THE IPCC.

    “…… suggesting markets expect supplies to gain ground on demand. International Strategy and Investment, an energy consulting business, has documented a substantial number of projects under way that would boost world oil supplies….”

    SO NO NET THINKING HERE. THEY’VE CONVENIENTLY BLOCKED OUT THE SLOWING PRODUCTION IN THE OLDER WELLS. THEY HAVE BLOCKED IT OUT MENTALLY BY ZEN THOUGHT CONTROL TECHNIQUES.

    “The development of these resources could undermine the expectations underlying the higher oil price scenarios—even those of oil nationalism.”

    AS IF EXPECTATIONS MATTER A DAMN OVER THE LONGER HAUL. ALL HIGH EXPECTATIONS CAN DO IS BOOST THE PRICE LONG ENOUGH TO BUILD THE INVENTORIES. 

    “Supplies could be bolstered by nonconventional oil sources—tar sands, oil shale, coal-to-liquids. Industry experts regard these resources as plentiful, with development and production costs well below current oil prices. Tar sands and oil shale are already in production. Biofuels are too limited in scale and currently too costly to make much difference to crude oil pricing.”

    ALL VERY TRUE. BUT WE’VE GOT TO GET MOVING. AND BULLSHIT FORECASTS LIKE THIS DALLAS FED ESSAY ARE NOT HELPING IN CONVEYING THE URGENCY OF GETTING GOING WITH THESE ALTERNATIVES TO THE POLITICIANS AND THE PUBLIC.

    “The substantial development of these nonconventional oil resources could mean downward pressure on crude oil prices in future years.”

    NOT IF WE DON’T GET MOVING. AND HOW MANY FUTURE YEARS. LOOKS LIKE ABOUT 30 FUTURE YEARS.

    ” Actual and expected costs of nonconventional resources suggest it might be difficult to sustain oil prices above $70 a barrel.”

    RIGHT. IT IS THIS IDIOTIC PROJECTION THAT THIS WHOLE CONFUSED ESSAY IS TRYING TO JUSTIFY.

    “However, the relatively high costs of these nonconventional oil sources could inhibit development because producers fear losses during a price collapse.”

    ONLY THE STUPIDITY OF FORECASTERS SUCH AS THESE PEOPLE IS HOLDING UP THE NEEDED INVESTMENTS.

    ” The production and use of nonconventional resources would also generate more pollution, which could mean conventional oil could command a premium.”

    RELEVANT TO TAR SANDS ALONE UNLESS THESE GUYS ARE COMPOUNDING THEIR IDIOCY BY CALLING CO2 POLLUTION.

    “What’s the bottom line? Absent supply disruptions, it will be difficult to sustain oil prices above $100 (in 2008 dollars) over the next 10 years.”

     

    SO THERE YOU HAVE IT. TOTALLY CONFUSED REASONING SUPPORTING A STUPID CONCLUSION.

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