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Countdown to 100$ oil

by Jerome a Paris Tue Jun 21st, 2005 at 12:36:06 AM EST

With oil prices again at record (nominal) levels, and more to come, I think it's only fair that I go on the record publicly with a prediction I have made elsewhere, i.e. that oil prices will reach 100$ pretty soon, in fact before the end of the year.

My reasoning is that, quite simply, supply is constrained at a time when demand, pulled by China and by the US, is growing at a record pace. Supply is constrained because:

  • non-OPEC oil is about to peak, as acknowledged even by ExxonMobil in this slide:

    Source: The outlook for World Energy - a 2030 view

  • OPEC seems unwilling or unable (it is hard to know, as they are quite secretive about what they are doing) to increase production much beyond their current levels.

    Source: CGES Monthly Oil Report

The outcome of these trends is that the oil market is unbelievably tight (of the above 1.5 mb/d of Saudi "spare" capacity, most is in the form of poor quality heavy crudes that few refineries can work with and which is for most instances and purposes useless for today's needs). In such conditions, any disruption on production, even for the most harmless and frequent reasons like weather, creates a very real - if temporary - unbalance in the market which pushes prices up.

Two days ago, there were worries about disruptions in Nigeria. Yesterday, the story was about a possible strike in Norway, the third largest oil exporter. Tomorrow it will be something else. And meanwhile, demand keeps on rising, despite the five fold increase in oil prices in the last 6 years.

So, anyway, I am on the record. Expect this to be an occasional series...


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Jerome, we know the American press's reaction to all this:  oil problem?  huh?  Nah!  

Europe can't be quite so sublimely uninformed, one would hope.  What to you read there on this looming crisis?  

Only connect.

by Maurice Hall on Tue Jun 21st, 2005 at 02:00:05 AM EST
To be honest, I don't think it's much better. I watch little TV and my main source of news in France is Le Monde, a high brow paper. They do cover it once in a while, but probably less than the Financial Times. From what little I see of it, I'd say that the French business press covers it very little.

Altogether, but I'll be happy to be corrected by other readers, awareness is pretty low. "We have nuclear and drive small diesel cars anyway" would probably sum it up.

At least, at the EU level, there has been a major push to develop renewable energy and, in the context of the Kyoto Treaty, carbon trading and this has a major impact on the nergy generetors, at least on the electricity side (which, of course, has only little to do with oil, but somewhat more with natural gas)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jun 21st, 2005 at 02:38:29 AM EST
[ Parent ]
There just a few people screaming in blogs for 100USD oil. I think that the "awareness" isn't right word but preparedness is on European level.

Having read EU documents lately it is fairly clear that oil supply is believed to be ultimately constrained.  However, these concerns are more directed towards geo-strategic concerns. Middle-East oil supply is thought to be unreliable due political concerns. The European solution is diversification of importers on short term while searching for alternative solutions in longer term. However, having said this the current energy papers still keep the fossile fuels as cornerstone of energy policy.

Renewable energy sources and various oil substitutes are being developed but they are not yet cheap nor practical to replace oil per se. The main impetus with them is pollution control and climate change, not strategic decision to decrease dependance on oil or fossile fuels.

There are several major renewable energy concepts that are functional in energy production (wind is now proven method and biogas has real potential on local level at least). Renewable energy production is rapidly rising (although from low base) and it is gaining some importance. The current biofuels are effectively used to reduce pollution not substitute oil. Energy conservation is given a lot of thought and there is legal framework necessary to support it.

My own take is that in shorter term the most thought out oil substitute is natural gas and in longer term hydrogen might be used (at least in aircraft). These technologies already exist and they work fairly well. Alternatively you might also produce necessary amount of oil from coal (although very expensively). This has historically been solution in supply crises. I seem to remember a Finnish Defence Forces calculation that this kind of expensive coal gasification became "profitable" when oil cost was something like 120 USD/barrel which makes coal another short term solution while looking for better long term solutions.

by Nikita on Tue Jun 21st, 2005 at 04:40:27 AM EST
[ Parent ]
Aren't you overdoing the hype a bit here?

Oil prices haven't risen 5 fold at the consumer level in the last 6 years.  It's about double at my pump (bad enough).  And crude prices are still below the last peak in 1981 correcting for inflation.  Cherry picking a brief excursion below $10/bbl when Saudi was flooding the market to spank the OPEC cheaters (1998) isn't the right point to start basing comparisons from.  

At least look at the average from 1990 to 2000 which I is more like $18 using refiner inputs (see
http://www.eia.doe.gov/emeu/aer/txt/ptb0521.html ).  WTI would be higher (guessing more like $20).  So far this year we are averaging about $50 so up about 2.5X in nominal terms and less given inflation.

Mogas hasn't been below $4/gallon in Europe since 1985 and yet I've never seen Paris, London, Rome, Madrid or any other European capital without the same traffic jams we have here in the US.  No doubt oil production is peaking.  No doubt oil price is going up.  We're likely to have a recession a la 1980 but the world isn't going to end if the US has to pay $3.50 for gas.

Oil could very well touch $100 at any time  but is that a fair question?  Shouldn't we be concerned if it's going to stay there instead of ramping up and then crashing back down to $40?  I'm much more a believer in a series of ever higher waves rather than a straight move to $100 and no retracement.

The rubber band is very tight especially given all that hedge fund money chasing a play in the futures market.  Forward diesel/heat is where the big bets seem to be being placed.  One real shortfall in a big producer due to strikes or politics or war and up up and away.  $100 is only a 65% increase from here.  But I lived through the last excursion up to that price level and got by.  My V-8 gas guzzler just didn't go out as much as before the price spiked.  And as soon as I had a real paycheck, it went to the junkyard where it belonged after being replaced by a 25 MPG Mazda 626.

Also Saudi Arab Heavy isn't all that much worse than Arab Light.  I can give you the yield curves if you want.  Since virtually every refinery is running full out at these margins, producing more AL is no more useful than producing more AH.  There's already plenty of crude out there relative to capacity to refine and capacity to hoard.  Otherwise, crude prices would be in backwardation rather than the shallow contango you see on the screen.  

There is no real shortage right now.  Only a palpable fear that there will be one.  This could end up very very ugly for the longs if we have a warm winter and/or a Chinese recession for some reason.  The one thing I experienced over and over trading oil is that when everybody thinks they see a sure thing, it prices in instantly and you can get your ass handed to you very quickly.

by HiD on Tue Jun 21st, 2005 at 05:08:44 AM EST
Well, I certainly did not say that gasoline prices increased 4 or 6 fold. With taxes being what they are, the increase has been over here a barely noticeable 20/30% (especially when taking place at the same time as we switched to euros, thus blurring references).

On the crude side, prices were in the 10-12$/bl range for a couple of months, so I am technically right but I will agree to the cherry picking qualification. Still, taking 15$ or so as a low level seen in 98-99 does mean that we have seen a fourfold increase in the price of crude since then.

As to whether oil will stay above 100$ immediately or will swing down, I honestly cannot tell, although I think that it soon be durably above that level. For the time being, I am only betting on a spike if necessary - a one second three digit price for any crude oil index will be enough (and symbolically it will be pretty significant as well).

I am putting a fairly close deadline, so we can all be there together to celebrate my predictive powers or not! Maybe we should start a diary to give suggestions for my penance if I lose the wager!

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jun 21st, 2005 at 11:53:42 AM EST
[ Parent ]
Oil futures are still in the $60 range as far as the eye can see. If you believe your theory, then you should sell everything you have and put it into oil futures, thus doubling your money in only a few months.

Or, much more likely, losing it!

True, there's only a fixed amount of oil. However, there's a lot of it still there, and the demand curve is quite elastic. If prices go up, demand can drop quite easily--because oil is mostly used for transportation and there are plenty of ways to reduce consumption with almost zero lifestyle impact. As you know.

A doubling in oil price will take years or decades. We had an artificially low price for the last few years because of the slowdown in the economy, and we needed to make that up, but at this point the cost of oil is pretty stable.

by asdf on Tue Jun 21st, 2005 at 05:17:11 AM EST
There will probably be a short retreat back to $50-55.  Buy futures then.  Given what OPEC has said, their floor is $48.  If you saw $53, the risk would be somewhat less than right now, and even a spike into the low $60's would be extremely valuable.

Do you feel lucky, punk?

Happy little moron, lucky little man. I wish I was a moron, my God, perhaps I am! -- Spike Milligan

by polecat on Tue Jun 21st, 2005 at 06:31:54 AM EST
[ Parent ]
There is a legitimate question as to whether the rise in prices of oil will be gradual but inexorable (good) or be a series of speculation driven spikes (bad). There are some early indications that China's economy is starting to slow its growth rate (not the least because of consumer resistance in the US and Europe). Add to that the anoucement of a large number of coal burning power stations and we may see China's increase in demand for oil starting to slow.

US pump prices have a bit of a disconnect with world oil prices as the refineries are near capacity and demand exceeds this capacity in peak use seasons. Storage and production swithching (so that relative amounts of heating oil and petroleum are stored or produced in relation to demand) helps a little but the price mechanism stkll kicks in and this year could kick in badly as the barrell price is used as an excuse for pump price increases.

A inexorable price rise with the long term prospect of  constinual rises would be good for the enviroment as it would encourage changing from oil based fuels to sustainables and renewables. Investment decisions for these are based on the oil price with $50 often being seen as the point at which these alternatives become economically advantageous. Long term changes like these would of course threaten the producers' economies so it is in their interests for low based but unstable prices.  

by Londonbear on Tue Jun 21st, 2005 at 08:13:09 AM EST
Here's an interesting chart that shows the price of oil for its entire commercial history.
http://bioage.typepad.com/.shared/image.html?/photos/uncategorized/bp_oil_price_chart.jpg

It's got a "bathtub" shape that reflects the initial lack of extraction technology, then a long period of gradually declining price (in constant dollars), and then a sharp increase that starts in about 1970. Even ignoring the wild price swings in the 1970s caused by OPEC price manipulation, it looks pretty clear that by then the costs were starting to increase.

by asdf on Tue Jun 21st, 2005 at 10:07:29 AM EST
Nice graph.

Really, I'm clueless with this stuff, so a nice little basic graph like that is where it's at :)

by Meandering Fox on Tue Jun 21st, 2005 at 12:05:50 PM EST
[ Parent ]
The main problem is not the price, it's the energy. If you need 1 barrel to extract, crack and transport 1 barrel of raw oil, oil is simply not a source of energy anymore. It is still a valuable raw material for the petrochemical industry and maybe a profitable business.
by Hansvon on Tue Jun 21st, 2005 at 11:17:28 AM EST
You mentioned the possible strike in Norway and disruptions in Nigeria which is why I'm posting this link for anyone interested in Iraq's oil production.

http://www.iags.org/iraqpipelinewatch.htm-just kinda interesting to check every few days. There have been over 200 sabotages to oil pipelines in Iraq since US invaded. And I think that only a few times have these attacks on the pipllines even been mentioned in the news when talking about Iraq.

As for the 100 dollars, well as bush would say-I'm going with my gut(although I think my gut is a bit more well read than bush's gut on this subject) and agreeing with Jerome on this.

"People never do evil so throughly and happily as when they do it from moral conviction."-Blaise Pascal

by chocolate ink on Tue Jun 21st, 2005 at 12:22:58 PM EST
Thanks for the link - just repasting it here as it's been mixed up with your text:

http://www.iags.org/iraqpipelinewatch.htm-just

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jun 21st, 2005 at 12:35:10 PM EST
[ Parent ]
one more time
by jam on Wed Jun 22nd, 2005 at 02:03:17 PM EST
[ Parent ]
I've really got to get this link thing figured out better.(just screwed up link today on bootrib)  Thanks for the help.  I think that site is interesting as I said to check on several times a week or more.

"People never do evil so throughly and happily as when they do it from moral conviction."-Blaise Pascal
by chocolate ink on Wed Jun 22nd, 2005 at 08:57:21 PM EST
[ Parent ]


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