Wednesday, September 14, 2011

The Price of Oil Has Gone Down Since the Year 1950, in Gold 1950, it took 2.5 grams of gold to buy a barrel of oil. Today, 2 grams of gold will buy you a barrel of oil. Thus, if you take the loss of the dollar’s purchasing power out of the equation, you’ll find that the price of oil has remained very flat.
As the US dollar declines in value, the price of oil appears to rise. But if you compare the price of oil to currencies which hold their value fairly well -- such as gold or the Swiss Franc -- compared to the cost in US dollars, oil prices in gold or francs hold more steady over the decades.

Oil prices are volatile even in US dollars. This volatility is a reflection of the many geopolitical and economic factors which influence oil pricing. But over time one can see that the price of oil in gold tends to return to the same range.
TER: But the cost to extract the oil is increasing. We don’t have “easy oil” anymore.

PS: No, that’s not true. Just as with any other economic activity, the more experience we have in oil extraction, the more efficient we become at it. In fact, the real price of oil would go up considerably if the true costs of extraction were going up as well, and as I explained, the real price of oil has been flat.

Let’s be very clear—you can’t measure these things in dollars because the dollar has lost 90% of its purchasing power since 1971. It’s lost 50% of its purchasing power since 1990. Measuring the oil industry in dollars gives you a very warped view. Pick a sound currency such as Swiss francs or gold grams and look at the oil business through that lens.

I believe that what’s happened with the U.S. dollar over the last three years has resulted in an enormous mis-pricing of oil. Speculators are rushing into oil and fleeing the dollar, which is producing an unsustainable demand for oil. Because this demand is investment-based and not economy-based, it is stimulating production that exceeds real demand by a wide margin.

...PS: What’s happening onshore in the U.S. with oil and gas production is amazing. We’re setting new records for hydrocarbon production in the U.S. this year. Obviously, you can’t have record levels of hydrocarbon production if you’re supposedly running out of oil, so serious proponents of peak oil have their heads in the sand. _PorterStansberry
North American oil production has begun to climb again -- despite Obama's de facto offshore and Arctic drilling embargo. When the US breaks free from its current suicidal spell of energy starvation, its oil production will also break free from any semblance to a Hubbert Peak production curve.

As you can see from the table below, Saudi Arabia and Russia are the world's largest oil producers, followed by the US in 3rd place. Remember that the US has been explored about 1,000 times more thoroughly than Saudi Arabia, and much more thoroughly than Russia's wild Siberia as well. Oil production technology used in the US is top grade, and maintenance operations are superior to those in either of the top 2 producers. In other words, if the US has a lot of room to grow, think how much more production Saudi Arabia and Russia could be cranking out if their governments opened the fields up to world class producers who were motivated to truly pump some oil. Something to think about.

Here is some data on recent oil production by nation from Wikipedia:
# Producing Nation 103bbl/d (2006) 103bbl/d (2007) 103bbl/d (2008) 103bbl/d (2009) Present Share
1 Saudi Arabia (OPEC) 10,665 10,234 10,782 9,760 11.8%
2 Russia 1 9,677 9,876 9,789 9,934 12.0%
3 United States 1 8,331 8,481 8,514 9,141 11.1%
4 Iran (OPEC) 4,148 4,043 4,174 4,177 5.1%
5 China 3,845 3,901 3,973 3,996 4.8%
6 Canada 2 3,288 3,358 3,350 3,294 4.0%
7 Mexico 1 3,707 3,501 3,185 3,001 3.6%
8 United Arab Emirates (OPEC) 2,945 2,948 3,046 2,795 3.4%
9 Kuwait (OPEC) 2,675 2,613 2,742 2,496 3.0%
10 Venezuela (OPEC) 1 2,803 2,667 2,643 2,471 3.0%
11 Norway 1 2,786 2,565 2,466 2,350 2.8%
12 Brazil 2,166 2,279 2,401 2,577 3.1%
13 Iraq (OPEC) 3 2,008 2,094 2,385 2,400 2.9%
14 Algeria (OPEC) 2,122 2,173 2,179 2,126 2.6%
15 Nigeria (OPEC) 2,443 2,352 2,169 2,211 2.7%
16 Angola (OPEC) 1,435 1,769 2,014 1,948 2.4%
17 Libya (OPEC) 1,809 1,845 1,875 1,789 2.2%
18 United Kingdom 1,689 1,690 1,584 1,422 1.7%
19 Kazakhstan 1,388 1,445 1,429 1,540 1.9%
20 Qatar (OPEC) 1,141 1,136 1,207 1,213 1.5%

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