[Cyrus]

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')The current crash (oil below $50 and onto $40) might even worsen the effects of PO.

[lper100km]

It doesn’t really. PO is a geological story and is a function of the reserves remaining against the total of consumed plus reserves. The effect of PO on the economy is another story. Price is a corollary of the economic overlay. Of course, both stories are intertwined as price, theoretically and inversely influences the rate of consumption providing the overall economy remains roughly the same. But of course it doesn’t and in a slowing economy, a lower oil price may not even steady, let alone raise, the consumption level.

So, reduced consumption may allow for the plateau to continue a while longer or for the peak to be delayed, depending on where we are. However, once we are past peak, any consumption at any price will have the effect of reducing reserves. Even then, unless the demand curve outstrips the supply, there will be no price increase. Once demand increases or supply decreases to the point where there is a crossover, all bets on pricing are off.

Add in effects such as rogue trading, hoarding, reserves build up etc., and there seem to be too many permutations and too little information to gauge exactly where we are and to coin a phrase, the future will become clear only in hindsight.

I don’t doubt that in the longer term, whatever that might be, the price has nowhere to go but up. The market may be allowed to function normally for a while, but I think that eventually national interests will start to supersede and various government interventionist strategies will come to pass world wide as the total world reserves are seen to be in obvious decline. Free markets are OK when commodities are in adequate or abundant supply. The reverse is surely the case when commodities are limited and/or in decline. Protectionism is a powerful and emotional response, but is a harbinger of economic distress, at least before general self sufficiency can be established.

[dohboi]

Very well put.

My only quibbles would be:

a) "the future will become clear only in hindsight." Even future historians may not be able to ever see clearly what elements came into play to explain particular price gyrations.

b) "before general self sufficiency can be established" And IF it ever is established. The very wealthy are taking most of the cookies, and whatever vanishing crumbs are left will likely be fought over furiously.

But what you are saying generally is spot on. Recently demand has been shrinking while supply is still plateauing. As both start their free fall, it is anyones guess which one will out pace the other at any moment. It is clear now that whenever the price gets much above $100, demand destruction kicks in with a vengeance, and prices plummet back down. But there are many feed back loops, as you mention, and they could temporarily push things much further in either direction.

If market systems won't work well on the way down the slope (a claim I agree with), what kind of system would be best (or least bad) for managing the collapse?

[ROCKMAN]

As most here have described, in one fashion or another, PO is now being viewed through the recent fog of economic downturn. Not that the view was explicitly clear to most to begin with but the conversation is now all the more convoluted.

My personal effort to make the chat even more complex is to add another concept: Peak Supply. Related to PO, it represents a combination of factors aligning themselves (I don't think we've reached this stage yet but we'll know in a few months). OPEC is presently negotiating internally how to respond to the price collapse. They make public statements regarding reducing export volumes. What will matter, though, is the export volumes we can validate over the next 6 months or so. When the global economy collapsed in the early 80's it drove prices down to $10/bbl. OPEC members constantly undercut each other to retain market share. The KSA continued reducing production to keep prices up. Eventually they gave up and opened their valves full blast.

But this isn't 1986. Demand destruction has certainly set in but so has the near term production limitations. Mexico probably represents the extreme position. The gov't receives 40% of it operating capital from oil exports. The sudden and rapid decline of Cantarell Field has very dire potential. Other exporters now also acknowledge they have, or will soon, reached their PO. Internal consumption (the ELM) continues to increase in most to OPEC including the KSA. I think it will take several more months to see if OPEC can truly master enough discipline to become a functional cartel. If they do then PO per se won’t be a critical issue…Peak Supply will. At some point (a few months or a few years+ from now) the exporters may not be producing at the max rate regardless of global demand. They’ll call it conservation while the importing nations call it hoarding. At such time the above ground political/military aspects will loom even larger in the big picture. If such a time comes to pass it won’t matter how much the exporters CAN export but how much they WILL export IMO.