Saturday, July 23, 2011

High Oil Prices are Not as High as Predicted

A number of reputable analysts predicted that oil would be over $150 a barrel this year or early next, including Jim Rogers, Barrons, etc etc etc. And yet oil prices seem reluctant to go too far above $100 a barrel despite severe production cutbacks in Yemen and Libya. Perhaps someone learned a lesson from the great demand destruction of 2008?

Geoffrey Styles takes a penetrating look at the recent decision to release oil from strategic reserves. Worth a look:
The market's tepid response to the SPR release suggests that oil prices have been driven up by more than just speculators. Speculation may be playing a role, but it's more like the head on a glass of beer. [Al Fin comment: The froth on a glass of beer can occupy as much or more than 1/3 the total volume depending on how the beer is poured...] Beneath that froth lies the robust demand growth in the developing world, which has pushed global oil consumption to a record level of 89 million bbl/day this year. On the supply side, some point to incipient Peak Oil, but characterizing the crisis we're in doesn't require a grand theory. In addition to the curtailment of production from places like Libya and Yemen, and OPEC's desire to keep a lid on output to preserve their revenues, there's a fundamental mismatch between the companies that have the capital and the desire to invest in new production, and the willingness of some governments to grant access to the resources, whether in the Middle East or the US. All of this is compounded by the inherent time lags in resource development, which can range from 5-10 years, depending on the technology and permits required.

As different as the causes and symptoms of this crisis are from those of the 1970s, the broad outline of solutions remains quite similar: Reduce demand, increase supplies, and diversify our sources of energy. We have more and better options than in 1979, but still no miracle cures. _GS
Styles makes some important points in this short article. It takes from 5-10 years for the production side to respond to rapid runups in prices. The 2007-2008 runup in oil prices would have brought a much stronger response by now if the floor hadn't dropped out from under prices at the end of 2008. For a sustained response, you need a sustained price plateau.

Styles also points out that it is demand for oil which is in the price driver's seat. A lot of things can happen to alter demand for oil.

OPEC is greedy and needy, as is Russia. It is not beyond Saudi Arabia to drag its heels on expensive upgrades in production capacity, in order to enjoy higher oil prices today. Russia is certainly dragging its heels on production upgrades and oil field maintenance, but that is due as much to malignant Oblomovism and corruption as it is out of a need for higher oil prices to balance the budget.

Political corruption and greed are causing oil prices to be higher, as is political turmoil in Yemen and Libya. But lefty-Luddite Green dieoff.orgiasm in the US and Europe are likewise causing a political hike in oil and energy prices. Obama's ill-advised moratorium and slowdown of Gulf of Mexico exploration and drilling, is just one of many examples of an overall policy of energy starvation coming from the US and European governments. Anti nuclear policies are another example of the destructive influence of faux environmental politics on energy supplies.

MJPerry provides a couple of quotations which are apropos to the current situation.

The only peak oil you will likely see is political peak oil caused by government policy, greed, corruption, and war. The only true scarcity that exists in the human world is the scarcity of human intelligence, creativity, inventiveness, ingenuity, and vision.

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Blogger Benjamin Cole said...

Peak Oil?

I think we hit Peak demand at $100 a barrel. Yet at that price the incentives to produce, conserve and come up with alternatives is strong.

I totally agree that Us and Obam's energy policy is stupid, although what we have today is "Thug State Oil." Venezuela, Iraq, Iran, Nigeria, Mexico, Russia and others are sitting a huge amounts of oil, but all are so corrupt and backward and venal that getting the stuff out may be a trick.

Even so, at $100 a barrel demand flatlines.

This is not a problem--the debt of Western governments is a problem, and a Japan-style monetary policy by the Fed.

8:18 PM  

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