PeakOil is You
What Happened to Peak Oil?
Re: What Happened to Peak Oil?
by smallpoxgirl » Tue 02 Sep 2008, 01:33:52
$this->bbcode_second_pass_quote('threadbear', 'W')ho's a naysayer? Peak oil is a reality that simply doesn't fully explain the recent run up.
There are only three possibilities:
1. If the price is correct, supply and demand are balanced. This is most easily reflected in inventories.
2. If price is too high this boosts supply relative to demand and inventories go up.
3. If price is too low this boosts demand relative to supply and inventories go down.
As has been elaborated at length here, the supply and demand curves for oil are very steep. It takes a lot of change in price to either bring an extra barrel of supply on line or to curb demand by a barrel.
Supply and demand do not correct instantaneously to price. It takes time for usage patterns to adjust, new supplies to become available, etc. Furthermore, the exact state of supply and demand can never be fully understood at any given moment. Only when things like inventories begin to change does it become apparent. This is why it's called a price discovery process. Sometimes the markets set the price to low. We discover this out because we end up with a shortage. Likewise, sometimes the market sets the price too high and we end up with an oversupply.
We are running into the steep part of the price curve. Demand outstripped supply and it took very high prices to rebalance things. Once the demand destruction from $140 oil finally caught up, we ended up with a brief over supply and prices have fallen. Because of the steepness of the curve, a small amount of oversupply equates to a large drop in price. This is a temporary situation. Demand will resume. When it does, prices will again need to rise to bring equilibrium.
"We were standing on the edges
Of a thousand burning bridges
Sifting through the ashes every day
What we thought would never end
Now is nothing more than a memory
The way things were before
I lost my way" - OCMS
Of a thousand burning bridges
Sifting through the ashes every day
What we thought would never end
Now is nothing more than a memory
The way things were before
I lost my way" - OCMS
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smallpoxgirl - Expert
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Re: What Happened to Peak Oil?
by threadbear » Tue 02 Sep 2008, 02:44:27
$this->bbcode_second_pass_quote('smallpoxgirl', '')$this->bbcode_second_pass_quote('threadbear', 'W')ho's a naysayer? Peak oil is a reality that simply doesn't fully explain the recent run up.
We are running into the steep part of the price curve. Demand outstripped supply and it took very high prices to rebalance things. You see a steep price curve due mainly to diminished supply. I see a steep price curve based on perceptions extrapolated from any number of factors, not the least of which is a fundamental drop in supply, granted. Investors are sensitive mainly to other's perceptions of reality, not necessarily the fundamental reality. It's a game.
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threadbear - Expert
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Re: What Happened to Peak Oil?
by ReverseEngineer » Tue 02 Sep 2008, 03:54:26
$this->bbcode_second_pass_quote('smallpoxgirl', 'T')here are only three possibilities:
1. If the price is correct, supply and demand are balanced. This is most easily reflected in inventories.
2. If price is too high this boosts supply relative to demand and inventories go up.
3. If price is too low this boosts demand relative to supply and inventories go down.
1. If the price is correct, supply and demand are balanced. This is most easily reflected in inventories.
2. If price is too high this boosts supply relative to demand and inventories go up.
3. If price is too low this boosts demand relative to supply and inventories go down.
This is a nice straightforward analysis of the supply demand equation, and of course we are seeing it played out in the commodities markets.
With runaway growth and profligate use of oil, what once was a seemingly inexaustible supply became scarce, relatively speaking. So up goes the price, along with it up goes the price of food. Problem being it spiked up higher than what the people actually using the commodities can pay, we have a global slowdown as a result with less oil being consumed since so many businesses which use oil fundamentally are going out of business. Automobile production which consumes a lot of oil is down, auto inventories are up people aren't buying the cars. Home building, which utilizes just tons of oil in insulation material and the various parts of a house, is also way down because people can't afford to heat the homes or commute from the homes.
It became obvious to all players at the top end that once passed about $120/gal, demand destruction was taking place at a rapid pace. And so in concert the central banks and the sovereign wealth funds put the brakes on this. They aren't precisely fixing the prices, but they are manipulating the currency markets by propping up the dollar which has the effect of putting a damper on the oil prices.
The problem lies in the fact that there isn't actual production of wealth sufficient to make good on the debt involved in propping up the dollar. Nevertheless, you still see the sovereign wealth funds buying up bad debt, now Lehman is selling off to the state owned Korea Development Bank to try to cover more of their losses. Why would ANYONE buy part of an obviously money losing proposition like Lehman? Because of course its all part of the money-shuffling game being played to try to keep the whole economic house of cards standing.
At some point however, the other nations involved in propping up the dollar are going to run out of their own ability to do so, its of course draining their wealth without gaining any productivity in return. Return on investment in all sectors is negative in a shrinking economy, and you can't make it grow without using more oil, driving the price up again. You slide down the hill inexorably here, but the demand destruction does slow it down, at least as far as oil consumption is concerned.
What you will run out of here long before you run out of oil is money, as in real money represented by real production. What is an open question is how much real wealth is out there on a global level and how long the debt can be shuffled around? Even OPEC doesn't want to see the economic system crash, without it they can't trade the oil they have efficiently in any way. It all works together to fundamentally try to fix prices at a level where the economic engine can keep turning its wheels.
It could last a while, the predictions here of 2036 aren't out of the question. However, more big write downs are coming, more bank failures are coming, and a BIG tax shortfall here in the US is coming. Masking all of this and papering it over is a Herculean job, you have to admire the skill with which it has been done so far. Still, I think Ben and Henry are running out of cards to play here, and I don't think we make it to 2036. Check in again after April 15th, 2009.
Reverse Engineer
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