[Aaron]

Equipment manufacturer sees higher costs associated with not only transporting their goods, but is absorbing higher prices from their primary suppliers and so forth up & down the chain.

It's an insidious relationship.

From the toothbrush their employees used this morning, to the cost of insuring their assets, taxes... you name it. The cumulative effect is to raise oil production costs by a difficult to quantify, but non-trivial amount.

[threadbear]

$this->bbcode_second_pass_quote('cube', '')$this->bbcode_second_pass_quote('threadbear', '.')..
A little subtlety please. We all know it's finite, that the low hanging fruit has been picked. Does that excuse the rapacious greed that has made the problems far worse? Does it?

[cube]

$this->bbcode_second_pass_quote('threadbear', '.')..
Ultimately, greed is has to be tempered with restraint, or business fails. A CEO has to understand the proper pricing point or his corporation goes under, is bought up and restructured.
...

[threadbear]

Cube, I'm talking about excessive greed, not simple ambition.

[yesplease]

$this->bbcode_second_pass_quote('Aaron', 'E')quipment manufacturer sees higher costs associated with not only transporting their goods, but is absorbing higher prices from their primary suppliers and so forth up & down the chain.

[cube]

$this->bbcode_second_pass_quote('threadbear', 'C')ube, I'm talking about excessive greed, not simple ambition.

[Tanada]

$this->bbcode_second_pass_quote('cube', '')$this->bbcode_second_pass_quote('threadbear', 'C')ube, I'm talking about excessive greed, not simple ambition.

[Twilight]

Good thread.

It's not just oil though.

Any infrastructure project priced last year at last year's prices will have had finished hardware costs come in 20-30% over budget this year on average. Some materials less so (aluminium), some more so (steel). Manpower is a large component and is far less volatile, and some costs are fixed far ahead of time, but overall you could take a 10% hit, a few mistakes on top of that and profitability on anything becomes marginal. The effect is real. Anyone in construction right now knows full well what kind of crop they are reaping this season. And they know that everyone aims further ahead of the curve next time if they missed it this time. This isn't sticker shock yet. The little guys are still absorbing most of the pain, actually.

Greed... greed was not spending the money back then. At this rate, the next couple of years could see a lot of outfits conclude they simply missed the boat and postpone their capex until the recession deepens and crushes consumer/commercial demand in enough places to let the air out. And they would probably be right, not greedy.

This is as true of "mitigation", which will die if every year you can afford to do less with what you have. We are only seeing the progress we are seeing because money is being thrown faster at efficiency and renewables than energy/commodity price inflation can eat it. On a fixed budget, we would see the reality. We saw one example today.

In my opinion, the way things are shaping up, in a couple more years if you want a new railroad you are going to need a deflationary depression to get one.

[MrBill]

"The practical reality … is that this crude oil will find a home. Crude oil is a worldwide commodity and there is a world price."

$this->bbcode_second_pass_quote('', '
')Canadian oil sands producers can develop the resource responsibly, he insisted. Suncor itself has reduced emissions, per unit of production, by 44 per cent since 1990, and its use of water is down 40 per cent over the last five years.

Still, when the increase in oil sands production is taken into account, Suncor's overall emissions have risen sharply and will continue to do so.

"There are no silver bullets" to stop this trend, Mr. George said, although the industry's move to invest in carbon capture and storage technologies will help over the long term.

Their vision is a large pipeline that will carry carbon dioxide from Fort McMurray, Alta., past Edmonton to central Alberta, where the gas will be pumped into deep underground reservoirs. But that is not likely to come to fruition for several years, and will be very costly.

In the meantime, a carbon tax makes some sense, Mr. George said, as long as it is applied across all sectors and to all forms of carbon emissions, including the consumption of fuel as well as its production.

Anything that looks like a "tax grab" from industry players just won't work, he said. "If this is another National Energy Program where you're shifting money from the West to the East, then I'll tell you that in the West it will not sell."

Suncor has also been investing in clean alternative energy, such as wind power and ethanol, but Mr. George said none of these individually has the potential to displace fossil fuels on a large scale. To deal with increasing demand, particularly from the fast-growing middle class in Asia, "you've got to pull on all levers here. You've got to pull on nuclear, you've got to pull on renewables, you've got to pull on sustainable oil development."

[cube]

$this->bbcode_second_pass_quote('MrBill', '.')..

sustainable oil development sounds like an oxymoron to me?

[MrBill]

There is no joy in Mudville's used truck lot tonight!
$this->bbcode_second_pass_quote('', 'R')ecord fuel prices have ended America's love affair with the SUV.

But the break-up is proving to be more painful than anyone anticipated. Some U.S dealers have stopped buying used trucks. Lenders are bracing for losses. Automakers have slashed output, and Americans have seen the value of their big rides drop by thousands of dollars in recent weeks.

The decline in sales of the heavy sports utility vehicles and trucks favored by Americans for more than a decade has gathered momentum in the last month, leading to a glut on dealer lots and sharply lower trade-in values.

But unlike the last recession in 2001, discounting from Detroit is not showing signs of reviving demand.

"The auto downturn appears to be entering a problematic second phase," Lehman Brothers analyst Brian Johnson said in a recent note for clients. "In this phase, with gas prices remaining stubbornly high, demand for both new and used large pickups and large SUVs is falling precipitously."

For years, North America's truck market has been an outsized anomaly. Cars outsell trucks by a 5-to-1 margin in Europe and by 2-to-1 in Asia Pacific. But in North America, the popularity of SUVs and trucks made that ratio almost 1-to-1 last year, according to Automotive News.

[mobil1]

>There is no joy in Mudville's used truck lot tonight!

[dohboi]

Now Mr.Bill is a poet, too!! Very apt. Mighty Casey has indeed struck out.

Thank you, Aaron, for starting this thread. It seems to me there are a number of positive feedback loops that are now coming into play, driving prices higher at ever-steeper rates.

If I follow your point, your feed back might be called Production Cost Feed Back. Cube mentioned various Substitution Feedbacks.

I would add a few others to these, and I'm sure that other posters can think of more. First, we are engaged in at least two oil wars and heading into at least one other==causing what might be called a Conflict Feedback. These wars feed back to increase prices not only because they use and waste massive quantities of oil in their execution (not to mention wasted lives, infrastructure, ecologies...), but because they add to uncertainty, destabilize entire regions, and disrupt efficient extraction and shipment.

The higher the price goes, the higher the urge to go to war to get more of our oil that somehow ended up under their sand (or jungle, or ocean...)

And then there is the broader Export Land Model Feedback. As exporting countries realize just what a limited resource they have, they will start thinking about saving it for their grandkids (as a Saudi official recently put it)--in other words sitting on it till it is worth even more, and using it to keep their own populations from revolting.

I don't think that the recent run up has much to do with speculation, but certainly as people start to fully realize that they are dealing with a rapidly diminishing essential resource, if becomes quite rational to price future contracts quite high, and such pricing can of course feed off itself--Speculation (or Anticipation of Ever Higher Prices) Feedback.

I could go on, but its getting late and this is already too long a post. Do chime in as you think of others, critique the ones I posted, and suggest negative feedbacks (beyond the obvious, boring and depressing one--Demand Destruction--and the one that hasn't been working very well so far--investment in further exploration and extraction).

[Duende]

dohboi wrote:
$this->bbcode_second_pass_quote('', 'A')nd then there is the broader Export Land Model Feedback. As exporting countries realize just what a limited resource they have, they will start thinking about saving it for their grandkids (as a Saudi official recently put it)--in other words sitting on it till it is worth even more, and using it to keep their own populations from revolting.

[MrBill]

"It's a slow-motion recession," said Ethan Harris, chief United States economist for Lehman Brothers. "In a normal recession, things kind of collapse and get so weak that you have nowhere to go but up. But we're not getting the classic two or three negative quarters. Instead, we're expecting two years of sub-par growth. Growth that's not enough to generate jobs. It's kind of a chronic rather than an acute pain."

$this->bbcode_second_pass_quote('', '
') Harris expects tepid economic growth and a shrinking labor market to persist through the fall of 2009.

The national unemployment rate climbed a full percentage point over the last year to 5.5 percent in May, according to the Labor Department. That does not include people who are jobless and have given up looking for work, or people who have been bumped to part-time jobs from full-time. Add in those people and the so-called underemployment rate rises to 9.7 percent, up from 8.3 percent in May 2007, according to the Labor Department.

Goldman Sachs forecasts that the unemployment rate will peak at 6.4 percent late in 2009 before the picture improves, meaning that the painful process of shedding jobs may be only half-way complete.

[ReducedToZero]

Its very interesting as well how market speculators are in the blame right now. I might also add that it is very 'expected' that speculators are in the blame right now.

I think market analysts have pinned the issue of EROIE without even realizing it. Right now it seems we are blaming the positive feedback looping of oil prices on the speculators, when it fact the speculators are mearly investing in what has been made obvious by the topic discussed in this thread.

[bodigami]

More than feedback price loops, I think that simply the fundamentals (supply and demand) are so strong that the price can only go up. Sometimes drastically up, so much that feedback loops may be blamed.

However, there are external variables of how our civilization reacts to peak oil. These can be called positive and negative feedback loops, but IMO they're not that loopy (changing over time, becoming weaker or stronger).

[Peleg]

We can try to hammer that out a little further.

Something is profitable if my cost is less than what I can sell it for. for the primary producer who has upfront costs to get facilities up and running they may have some loans to pay on or something, but basically as long as the price supports labor and those basic financing costs with a nice little margin they are golden. Say 10%, although the mark-up in some industries is well over 100%. So, for the primary producer all is well as long as price supports their debt structure. They don't really need to produce more. So when the Saud's say there is plenty of oil in some sense they are telling the truth. They are making a fortune because their fixed costs of production are probably not increasing, they have the oil they need to get more oil out.....now if they need to ship their own oil away to have it turned into liquid fuels which they must buy on the global market then their own production is getting more expensive and that cost rise has to be passed on to the next link in the chain at some point. So, it would be very smart practice for a primary producer to own and maintain the technology and intellectual capital needed to have a completely closed supply chain for primary production. My understanding is that few oil producing nations have this, they have tended to rely on the multinationals for almost everything.

Pretend we have that loop closed. As scarcity sets in they still have to raise prices to cover their own fixed costs as production declines because revenue is price times widgets, and they are selling fewer widgets. But they are not having to pay more to produce another barrel (all other things remaining constant.)

So the primary producer once they have hermetically sealed their production life cycle they really do not need to care about the global price except to guard against excessive demand destruction. In fact once the expertise is in house they could probably finance their own maintenance.

But where does the feedback come in? Anyone not in primary production, or any primary producer exposed to the downstream global market is paying more for what they do. The question is what constitutes economic viability of Discovery and Development?

There is an unknown upfront cost to go out and look for oil, rigs, personnel, fees,... That cost is by no means a guaranteed recoverable. If you understand the geology of oil you know that discoveries have been dropping since the 60's not simply because oil was too cheap, but because most likely areas have been searched or the easily accessible areas have been searched. So, you have a risk premium on discovery right up front that reaches a peak and then declines, since in the early days we did not understand wlel the chances and in fact few places were researched so you had a good chance of big gains. That exponential decay in discoveries is probably proportional to the risk of recouping your initial investment and it is being driven as much by geology as economics. The risk of not getting back you investment is growing but it has probably reached a sill.

That is assuming that price was constant. But for increasing price you have it being a greater and greater up front investment in looking for new oil so that the potential loss is greater. I think Aaron is right on the ball here that the risk,

The technical definition of risk is magnitude times probability.

The risk of loss here is the cost of R&D times the probability of not finding oil (that is simplified of course.)

So we have a rising probability of not finding anything significant, or of finding something that does not justifiy the cost of development, and we have the price of everything that goes into development increasing.

Therefore the risk premium on R&D is increasing in both factors, with the caveats being technological and geologic.

I see that as it's own mechanism only loosely coupled to world production peaking, because there are many scenarios for how that could have played out. We are in one possible future, and relative scarcity of oil driving up price could make it so that the only way to get new oil to market is at a loss (ie we subsidize it.) well subisidies can work as methods for levelling the playing field and the invisible foot has used them before under the guise of the invisible glove. But when the thing you are trying to subsidize is a primary and unparalleled energy source which has already created an overshoot in the demand you cannot really subsidize it. Because you could only do it in this system by simply rpinting more money. Wealth is not entirely an illusion. It has a connection to the exploitation of physical resources and the most fundamental of which is energy. Energy and technology define the carrying capacity within limits set by nature. You can build a city in the desert if you have technology and energy. If one of them fails your city will look much different than you may want it to.

A bit long winded but I am trying to flesh out the connections there a bit.

Great point Aaron. How close do you think we are to a price where we start actually shutting down all other options? And, do you think that this process is detached from peak in such a way that it is not correlated? What I mean is, is it indepedent of peak, or is it linked economically so that in a wierd sort of way the market is saying that the paths to the future do not make it efficient to get that oil. I do not subscribe, neither does Warren Buffet to the efficient market theorom, saying that all markets are always efficient, but I think that they do tend to be relatively so. Is the thing you point out a trailing indicator of peak or could relative scarcity produce it even if there were 10 more Ghawars to be found?

The reason I think it is in this circumstance proof of peak is that demand growth in the 3rd world is so high. Meaning if someone could find more oil the market is there calling for it. So the only real reason for failure to find more is that there really is'nt that much more. Every other incentive, even very advanced technology is there. The world wants more oil. Price is telling us not only that scarcity is real, but it is is also showing us the inelasticity of demand. It is showing us there was a lot of user value in the oil that is already being supplied. Suppliers should want to extract that value because it is a market signal. Price has to continue to rise (even if it shuts out alternatives) until demand and supply are brought closer together otherwise shortages have to be the result. This is an causal relationship now driven by thermodynamics. It's not, 'How fashionable is a blood diamond?' scarcity makes the connection between energy and money less fuzzy. All the diamonds in the world won't nourish me if there is no market which values them in trade for food. But there is no food to be bartered for without energy to produce it.

That's enough rambling. Things are going to turn ugly here in the next nine months friends. I hope you have prepared well.

[DantesPeak]

Interesting energy price/availability feedback example with aluminum:

$this->bbcode_second_pass_quote('', 'A')luminum hit record prices as China slashes output

By Joyce Koh, MarketWatch

Last update: 6:40 p.m. EDT July 10, 2008

(MarketWatch) -- Aluminum prices shot up to their highest-ever level after China's top 20 aluminum producers said they will cut output by up to 10% in order to save energy and help the country cope with power outages and higher costs.

Aluminum for delivery in three months rose as high as $3380 a metric ton a new record high. The metal closed at 3,222.50, up 6%, on the London Metal Exchange. Aluminum already rallied 39% so far this year due to earlier supply disruptions in China and South Africa.

[yesplease]

$this->bbcode_second_pass_quote('DantesPeak', 'I')nteresting energy price/availability feedback example with aluminum: