Tuesday, August 14, 2012

Is $115 / b Oil an Overcooked Price?

Oil prices hit a staggering $115/b yesterday, an amazing number given Chinese growth fears, abject German failures in the euro zone, and flat-lining growth in the US. The core reason prices hit a three month high, is not because of fundamentals, but because oil traders erroneously believe that Israel will go to war with Iran in October to choreograph its ‘nuclear putsch’ in time for US presidential elections. _Forbes

It looks as if big international traders are once again grasping at straws in order to move oil markets. Economic news is almost universally bad -- signalling reduced demand on virtually all fronts. Sometimes big traders have to make things happen, even if nothing wants to happen on its own.
$115/b oil is a one way bet on Israeli strikes on Iran. It plainly has nothing to do with US oil consumption down by 1.1%, unemployment rates above 8%, and more importantly, six consecutive quarters of dampened Chinese growth. The upshot; when the fuse doesn’t light in Iran...it’s only going to be a matter of time before fundamentals kick back in and prices correct. That raises the thorny question for producer states of how far prices could plummet.

...The lower prices go, the more likely political unrest creates serious supply disruptions affecting physical supplies as producers go offline. That would obviously put a radically new spin on what ‘cyclical’ means as far as price and political instability is concerned, but when we look across producer states, it’s hard to find any major players not sitting on a powder keg of political risk these days. That applies to some of the core producers in the Middle East, Eurasia and Latin America, as well as some of the smaller players that are likely to get caught in the cross-fire first.

...traders willing to fly much above $115/b will get burnt at the top of the market right now... _Matthew Hulbert in Forbes
An artificial inflation of oil prices does nothing to help demand for oil, which is what will drive oil production in the long term.

Like most mainstream media analysts, Hulbert says nothing in this analysis about the active political suppression of energy production in the US, Australia, and several nations of Europe. He says nothing about the incompetent negligence of oil fields in Russia, Mexico, Venezuela, and several other nations where oil production is nationalised. He says nothing about the disruptive conditions in Africa and parts of the Middle East which artificially suppress oil production far below potential levels.

All of those things -- and much more -- should figure into any elementary analysis of current oil prices.

Such basic omissions and oversights provide a vague hint as to why more an dmore people are beginning to think of the "mainstream media" as the "skankstream media." I am not pointing a finger at Hulbert, so much as at the general milieu in which mainstream analysis is floating.

The technology which would make most of this discussion moot -- advanced generation high temperature gas reactors -- is being stalled in all phases of research, development, and potential production.

This technology has the capacity to speed the transition to "the electrical age" by providing the essential energy bridge which will allow such a large-scale transition to occur with minimal economic disruption.

With high temperature gas cooled reactors, several trillion boe from unconventionals become available in an affordable fashion -- competitive with conventional oil. This is important, if a society is in the middle of an important infrastructure transformation such as a large-scale conversion from a hydrocarbon economy to an electrical economy.

Big wind and big solar -- the intermittent unreliables -- cannot survive without massive government supports. They are destructive of any society which chooses to depend upon them, as Germany is soon to discover.

Only advanced nuclear is able to support advanced societies over the long run. But a transition to newer generations of safer, cleaner, cheaper nuclear power will take decades. The key to the transition is to use high temperature gas cooled reactors as an intermediary between the hydrocarbon age and the electrical age.

As soon as Matthew Hulbert and his colleagues in the mainstream begin to catch on to these deeper currents of transition, the sooner their readers will understand what is at stake.

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