[EnergyUnlimited]

$this->bbcode_second_pass_quote('AirlinePilot', '
')If paid, high level analysts are making these kinds of errors in factual analysis and then advising large multinational corporations and governments on future outlooks and plans, we are basically doomed.

[Twilight]

$this->bbcode_second_pass_quote('AirlinePilot', 'O')ne respected analyst actually believes OPEC has at it's immediate disposal 4mbpd of "excess supply" and there in lies your problem.

I fail to grasp how they can get it so wrong at this critical juncture.

If paid, high level analysts are making these kinds of errors in factual analysis and then advising large multinational corporations and governments on future outlooks and plans, we are basically doomed.

[roccman]

$this->bbcode_second_pass_quote('Twilight', '')$this->bbcode_second_pass_quote('AirlinePilot', 'O')ne respected analyst actually believes OPEC has at it's immediate disposal 4mbpd of "excess supply" and there in lies your problem.

I fail to grasp how they can get it so wrong at this critical juncture.

If paid, high level analysts are making these kinds of errors in factual analysis and then advising large multinational corporations and governments on future outlooks and plans, we are basically doomed.

[Twilight]

That's my point exactly. What is the time history of their numbers? I don't think they ask.

[Tyler_JC]

The reserves are a mixed bag.

On the one hand, the original estimates were far too low.

On the other hand, the new estimates are probably too high.

Improvements in technology and advanced recovery techniques will probably push the true URR closer to the current estimates but I have a feeling we won't see URR far above the current estimates.

On the other hand, the United States has done an incredible job of maintaining a steady reserve/production ratio over the past hundred years.

But I only have two hands so we can't be sure.

As for the Energy Bubble bursting, a serious global economic downturn would reduce oil demand dramatically.

Similar to the experience of the early 1980s, oil demand would drop far below supply. We could see a return to (inflation adjusted) $50/barrel.

Of course, if the US Dollar continues with its downward trajectory, oil might remain in the triple digits forever.

[MacG]

Well, when the energy bubble (as created by CERA and such) finally bursts, we might see MUCH higher oil prices. Forever. Even at $250 oil is dirt cheap compared to the work it can perform.

[TheDude]

Every day I learn something astounding about energy; my jaw is really sore from hitting the floor, you know.

$this->bbcode_second_pass_quote('Fractional_Flow', 'A')bout a month ago, I had the pleasure of spending 5 hours with the Chairman Emeritus of the most prestigous petroleum engineering consulting firm in the world as part of the SPE Distinguished Lecturer program. His firm has done reserve/ engineering studies in every major producing area of the world.

He spent a lot of time in Russia over the past 12 years. He told me I wouldn't believe the principal reason for the Russian production increase from 1995 to 2005. They didn't have well tubing that had the tensile strength to run below 1,000'!!! As a result, the bottomhole pumps were set to 1,000' or shallower in all their wells. When they started tubing them deeper and pumping them down, here came the oil.

He said the Russian reservoir engineers in terms of waterflooding etc etc were outstanding. It was never a question of them not knowing what to do.... it was just having the kit to do it.

[Starvid]

$this->bbcode_second_pass_quote('pup55', '1'). Are people using any less oil? No, in fact, with the exception of Japan, people are using just as much oil as they ever did even though it is X number of times more expensive than it was a few years ago.

[Graeme]

The Oil Bubble Loses Some Air

$this->bbcode_second_pass_quote('', 'T')he hot money that tested crude oil's highs is staging a rapid retreat. Oil futures have dipped 5.3% over the past two sessions, settling at $91.71 per barrel on Nov. 13, less than a week after hitting a trading high of $98.62 on the New York Mercantile Exchange.

Now those same players are finding compelling reasons to bail out of West Texas crude. On Nov. 13, 30% of the options contracts to buy oil at $100 expired—and hedge funds and other speculators decided to collect their profits.

The IEA predicts global oil demand in 2008 will be 87.69 million daily barrels, down from previous estimates of 100 million per day, owing to slower demand in the developed world.

"The bottom line: more sellers than buyers," says Stephen Schork, an energy consultant in Villanova, Pa., and editor of The Schork Report, a daily energy newsletter. "The question now is whether this is a retracement [or temporary correction] in a longer-term bull market, or if steeper corrections are ahead."

"Oil prices have risen ridiculously high ridiculously fast because of speculation," says Fadel Gheit, senior energy analyst for Oppenheimer Holdings (OPY). "It has nothing to do with fundamentals. It's a bubble, and the question is not if it'll burst—it's when?"

[threadbear]

$this->bbcode_second_pass_quote('Tyler_JC', '
')
Of course, if the US Dollar continues with its downward trajectory, oil might remain in the triple digits forever.

[RedStateGreen]

The fact that they call it a 'bubble' means they don't understand the fundamental problem. Supply is decreasing, demand is increasing. Therefore, higher prices.

Unless we hit the Mother Lode of Oil or something happens to suddenly kill half the earth's population, the long term price of oil is going to steadily rise. I'm not sure why this is some big mystery to otherwise competent economists.

[DantesPeak]

It's somewhat ironic that Fadel Gheit is quoted on a down day, since he appears fairly convinced that we have or soon will reach PO.

I already added my two cents before and stated well, yes, the price of oil could reach unimaginable heights if essentially oil becomes the unit of money and countries, such as the US, China, and Japan, keep inflating their paper money supply to buy oil.

On the other hand, up and down cycles in the price can and will happen.

[static66]

Here is a corny's view of the "bubble" in the world oil markets... a demand destruction coming to a gas pump near you with $60/bbl oil in the next two years!!!!!!!!!!!!!!!

Oil Price Bubble?

Supply is up, demand is down, yet the price is soaring. Here's why.

Ronald Bailey | March 12, 2008

Oil prices climbed to their highest level ever, reaching over $108 per barrel this week. And Americans are feeling this price spike at the pump, with gasoline averaging $3.22 per gallon. An analysis released by the investment firm Goldman Sachs suggested that oil prices might soar to $200 per barrel. Does this make sense?

Not really. Although U.S. crude oil inventories have fallen, gasoline inventories are at their highest since March, 1993, notes Tim Evans, an energy futures analyst at Citigroup's Futures Perspective. World oil production was up 2.5 percent in the first quarter of 2008 over the same period in 2007 while world oil consumption rose by just 2 percent. In fact, world production is projected to be 3.3 percent higher in the second quarter and 4.1 percent higher in the third quarter than the same periods a year ago. On the other hand, world demand is projected to rise by just 1.6 percent over the next six months.

In fact, demand is falling in some countries. According to economist John Kemp at the commodities firm Sempra Metals, the U.S. consumed 4 percent less petroleum in January 2008 than it did the year before. Evans agrees, noting that the U.S. demand for petroleum products began falling off last July. Interestingly, this drop in U.S. oil consumption began before crude prices turned vertical and before we began to see weakness in the broader economy. Even China's thirst for oil is abating somewhat. Its demand for oil, which once rose at 10 percent per year, has now dropped to 6 percent per year. In addition, world surplus oil production capacity has gone from a very tight 1.5 million barrels per day a couple of years ago to more than 3 million barrels today, says petroleum economist Michael Lynch.

So supply is up; relative demand is down and yet, the price of oil is soaring. What's going on? Last week, Exxon Mobil CEO Rex Tillerson blamed a third of the recent run up in oil prices on the weak dollar, another third on geopolitical uncertainty, and the rest on market speculation.

Let's start with geopolitical uncertainties. Last year, oil consumers watched warily as unrest in Nigeria's oil fields, the possibility of war between the U.S. and Iran, and the antics of Venezuela's Hugo Chavez threatened to disrupt oil supplies. That analysis may have once made sense, but most of those tensions have abated in recent months. Nevertheless, it remains true that most of the world's oil is produced in volatile regions and by erratic governments, so the price of crude must still include some kind of political risk premium.

What effect does the falling dollar have on the price of crude? Most oil price contracts are denominated in dollars. The dollar has fallen in value by more than 30 percent against a Federal Reserve index of major currencies since 2002. This means that the price of imports, including oil, have gone up. To some extent, the chief of the Organization of Petroleum Exporting Countries (OPEC) Chakib Khelil was correct when he said earlier this week, "What's happening in the oil market is due to the mismanagement of the U.S. economy." Continuing U.S. trade and fiscal deficits along with lower interest rates are stoking inflationary fears.

That brings us to speculation. Evans observes that since September 2003, the total number of open crude oil futures and options contracts rose by 364 percent. Meanwhile the global demand for petroleum rose by just 8.2 percent. "So the futures and options market has become more important than the physical supplies in driving the price," concludes Evans. "We are seeing investment flows into the oil market that don't have anything to do with the demand and supply of oil."

Investors are treating oil as a hedge against inflation and a falling dollar. Oil markets are part of a negative positive feedback loop in which higher oil prices contribute to higher inflation, which in turn lowers the value of the dollar, which boosts oil prices, and so forth. In other words, the oil market is coming to resemble the gold market (which has also been soaring). Evans notes that most gold traders don't even ask the question of how much gold was mined last year or how much spare gold mining capacity there is.

In the short run, oil prices are very inelastic: A large change in price produces only a small change in demand. If the price of gas goes up a dollar per gallon overnight, you still have to fill your tank to get to work. However, over the long run, consumers and producers respond to higher oil prices. For example, Americans are driving less and have switched to buying more fuel efficient cars.

Higher prices also encourage innovation. Economist Richard Rahn from the Institute for Global Economic Growth believes battery technologies are improving so rapidly that the majority of cars sold in 10 years will be all-electric. This would certainly help drive down the price of oil. Supply is also inelastic—it takes a long time to do the exploration, drilling, and refining necessary to boost production in response to higher prices. This inelasticity of demand and supply means that petroleum prices are very sensitive to relatively small changes in either. This means that prices can fall as steeply has they rose.

Whenever you begin to hear market gurus decree that "this time it's different," as we did during the dot-com bubble and the housing bubble, that's a sure sign of danger in the market. Naturally, proponents of the peak oil theory claim that the recent run up in prices is evidence that the end is nigh. Evans responds, "Fears of peak oil are what this market has in common with the 1980s, not what is different." Recall that during the "oil crisis" of the 1970s when oil prices were as high as they are today, U.S. oil consumption declined by 13 percent between 1973 and 1983. The higher prices of the 1970s led eventually to an oil glut and prices fell to about $10 a barrel by 1986.

So what will happen to oil prices over the next few years? No one is predicting $10 per barrel oil. However, once the current bubble bursts, both Evans and Lynch believe that the price of crude will settle at around $60 to $70 per barrel in the next couple of years. "It's very hard to pinpoint just how long a bubble can expand before it breaks. Getting the timing right is not an easy matter," says Evans. But he adds, "I think that this is the riskiest time to be long in crude oil since 1980."

[TheDude]

Totally rockin' article from last fall by our erstwhile moderator Khebab. Best explanation of how energy markets work I've come across and excellent commentary (on either side of the fundamentals/speculation equation) to boot.

[mefistofeles]

I would argue that it doesn't matter if the oil price run up is caused by speculators.

Think of what markets a method for allocating goods. In a market the price is determined by discovery process between buyers and sellers where they "arrive" at what price each is willing to pay for something based on their current and future expectations.

As individuals they probably have a negligible effect, however as a group they can act as a collective intelligence. This though is more biology than economics the idea that once a certain activity level is reached you begin to see self regulating systems. For example ants in a nest. If there are very few ants the behaviour is very erratic but at some critical point the behaviour becomes much more steady.

The reason I think speculation is irrelevant is that if demand is speculator driven the price of oil will simply crash at some point in the future. Look at internet stocks or California real estate,in a speculative environment prices can't go on forever. In a sense the problem is really self correcting: too much oil will be produced and Americans can go back to driving their SUV's. The only people who really get hurt are speculators and oil producers, oil consumers would ultimately benefit from a massive speculative rush into oil because it would create too much new supply bringing down prices.

Of course I doubt this is true because we haven't seen a huge explosion in oil supply and the supply figures indicate that production growth is stagnant. Massive prices should result in massive investment, and even though we are seeing some very large investment the oil just isn't there. This really is very strong evidence for peak oil or inelastic supply. In other words no matter how much the world wants oil output is fixed, this is good but not perfect evidence for substantiating peak oil.

However the other alternative is much scarier: that the markets are working and telling us that we have a problem. Another way to look at markets is they tell us how scarce goods are relative to one another, i.e. oil versus real estate. If the price of oil is going up relative to other things, in this case it means we are running out of oil vis a vis other resources.

If this is true we have to act accordingly and realize that oil is become scarce and take appropriate steps,i.e. build alot more mass transit,require all new homes to have solar power.

Another problem with the current pricing paradigm is that its denominated in dollars. If an oil buyer and seller want to arrange for a delivery they have to arrive at a price by buying an oil future(denominated in dollars) and tack on a delivery fee. At least that's how I think it works. Of course there are various currency hedges the major players use so they don't get burned by a falling dollar.

The problem here is that if oil producers decide they have too many dollars and want something else the United States is in big trouble. Right now if the US wants to buy oil it just has to print more dollars, end of story.

However if the oil producers get tired of holding dollars we have serious problems because we are actually going to need ALOT of hard currency to pay for the US' basic energy needs. We are talking about 14 million barrels a day of energy that has to be paid for. That's just money the US doesn't have if oil isn't denominated in dollars.

Right now the dollar is inflation period. As various countries begin accumulating dollars they have to let one of two things happen.

1. Allow inflation to go crazy as they keep their currencies low against the dollar. I.e. China and Saudi Arabia.

2. Or let their currencies strengthen against the dollar.

Many the countries that have serious inflation problems also hold large dollar reserves,i.e. Saudi Arabia and China. Just allowing their respective currencies to adjust upward against the dollar can be quite helpful against inflation, since most raw materials are denominated in dollars.

Of course as the dollar continues to fall people will probably put more money into commodities as a hedge against inflation. In a sense its a vicious cycle: lower dollar equals higher inflation and more interest in commodities further pushing down the dollar.

The greatest problem concerning the US isn't the price of oil its making sure that everyone else is willing to take dollars so the US can get its oil for nothing. After all how much does it cost to print money?

The idiots that end up running the United States will probably destroy the country if they forget that its the US that depends upon the world and not the other way around, as the Washington elite so often forget. We depend upon the world to accept our dollars in exchange for crude oil.

Of course if you could buy something with those dollars that would be one thing. But look what happens when large foreign investors try to buy US assets:

Dubai Ports

CNOOC Unocal Bid

What this means is that all these people who hold dollars can't buy anything desirable with those dollars i.e. Microsoft or Intel. They are limited to Treasury Bills,Corporate Bonds and Mortgage Bonds(which I'm sure everyone knows are doing so well in this real estate market). This has got to make anyone holding large dollar reserves extremely angry.

At some point even the Arabs and Russians will understand that this is an idiotic business proposition:selling valuable oil for US dollars that don't buy anything.

Since the dollar really can't buy anything its inevitable that crude will be priced in something that can buy something or may even become the benchmark of a new global currency.

For the oil producers at least pricing oil in dollars is something that can't continue. At some point when oil pricing changes the US is going to have serious problems getting the energy that it needs.

[essex]

excellent post

[kokoda]

Economists know sweet FA about the causes the current surge in prices ... or if they do they don't want to admit it.

I love this video in which Robert Hirsch really puts Joanne Lipman, the Editor of portfolio magazine, in her place. She is talking about surveying economic "experts". The mere fact that these people are so bad at predicting oil prices casts doubt on any claim they have of being "expert" in my opinion.

He has a great quote ... Economist don't understand that we are limited by geology.

http://www.youtube.com/watch?v=bGHpWOSsDZk

[mefistofeles]

$this->bbcode_second_pass_code('', 'I love this video in which Robert Hirsch really puts Joanne Lipman, the Editor of portfolio magazine, in her place. She is talking about surveying economic "experts". The mere fact that these people are so bad at predicting oil prices casts doubt on any claim they have of being "expert" in my opinion. ')

Is it just me or is Becky Quick incredibly hot?

[mrobert]

There are 3 things (sorted in the order of their importance, most important first), that contribute to higher prices:

1. Market conditions (high demand, not enough offer)
2. The decline of the US dollar
3. Market speculation (using commodities as a hedge against the falling US dollar).

Now, if you fix number 2, and prop up the dollar by a decent 20%, this would also fix number 3, which would cause the price of crude to be at around $100, and a gallon of gas at a around $3. We could get along with this just fine.

[mefistofeles]

$this->bbcode_second_pass_quote('', 'N')ow, if you fix number 2, and prop up the dollar by a decent 20%, this would also fix number 3, which would cause the price of crude to be at around $100, and a gallon of gas at a around $3. We could get along with this just fine.