June 21, 2006
Oil market predictions
Cambridge Energy Research Associates seems to be substantially less optimistic than they were a year ago.
CERA received a lot of publicity last summer with their predictions of a coming glut on world oil markets. On June 21, 2005, CERA advised:
[S]upply could exceed demand by as much as 6 to 7.5 million barrels per day (mbd) later in the decade, a marked contrast to the razor-sharp balance between strong demand growth and tight supply that is currently reflected in high oil prices hovering around $60 a barrel....
If demand growth averages a relatively strong 2.2% through 2010, prices could weaken from recent record highs and slip well below $40/bbl as 2007-08 nears. If demand growth were notably weaker, a steeper price fall would be conceivable...
Global oil consumption in fact grew by a more modest 1.6% in 2005, and yet oil prices have risen since CERA made these predictions to a current value near $70 a barrel.
"Incremental additions to refining capacity over the next 2 years [will] be insufficient to meet new global demand," CERA predicts.
For the short term, CERA expects the US industry to use "innovative" methods this summer to overcome logistical hurdles involving the switch to ethanol from methyl tertiary butyl ether (MTBE) in gasoline. More than 10% of gasoline volumes in some areas are affected.
If the US Environmental Protection Agency grants waivers already authorized by the Bush administration for deliveries of nonreformulated gasoline to shortage-prone areas, supplies could be increased through imports as well.
CERA says it also expects US refiners to ramp up to full production as maintenance programs are complete and hurricane-damaged refineries come back on stream.
Nevertheless, such measures may not be enough to lower gasoline prices significantly this summer, CERA says, because of the "continued susceptibility of crude oil prices to geopolitically upward pressure" and because refining capacity additions will lag incremental demand growth, causing global refining tightness. CERA analysts expect global markets to remain tight "with exposure to potentially sharp price upswings-- even in response to small, unexpected disruptions in refinery operations."
CERA's new-found pessimism in part recognizes the interaction between refining capabilities and the deteriorating quality of crude that is available to increase global production. On this theme, I have been wondering what accounts for the 400,000 barrel a day drop in Saudi production that apparently occurred in April and May, and came across this explanation from Reuters for at least part of the answer:
China will extend a 50,000 barrel per day (bpd) cut in Saudi crude oil imports into July and August after some refiners struggled to cope with new higher-sulphur supplies, industry officials said.
China contracted to buy 500,000 bpd of Saudi crude in 2006, but cut that back by 10 percent in the second quarter after refiners ill-equipped to handle the kingdom's mainly heavy-sour oil were forced to slow production after running the grades, the officials said.
That is consistent with the conjecture that the 9.5 million barrels per day the Saudis were producing in 2005 can really only be maintained with additional investing in capacity to refine the lower-quality crude they are trying to sell.
It's also consistent with another perspective that I've been advocating for quite a while. Many have articulated a vision of "peak oil" as akin to a cliff that we suddenly wake up to find ourselves to have driven off. I instead envision it as a more gradual process in which we continually pay more for oil, trying to extract lower quality stuff from harder-to-get-at locations and with increasing geopolitical risks. When asked, "what will peak oil look like?", my answer has been, "perhaps a lot like the last two years".
Elsewhere in the news, Green Car Congress noted the release yesterday of the Energy Information Administration's new report on long-term energy prospects. The EIA's benchmark forecast calls for global petroleum consumption to grow by 1.4% per year through 2030.
And where's all that new oil supposed to come from? EIA is counting on Saudi Arabia, for example, to increase its capacity to 14.4 mbd by 2010 and 17.1 mbd by 2030.
I wonder if that's another forecast that we'll see get revised.
Posted by James Hamilton at June 21, 2006 06:26 AMdigg this | reddit
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» Gas Prices and the Declining Quality of Oil from Heritage Tidbits
A year ago we referenced a prediction by Cambridge Energy Research Associates (CERA) that an oil supply glut is likely to occur later this decade. James Hamilton at Econobrowser notes that CERA just released a substantially more moderate view of... [Read More]
Tracked on June 22, 2006 02:50 AM
This is what I imagine peak oil to look like. With the addition of a few shocks of some sort and magnitude that are a natural outcome of a tight supply/demand, rising price environment, in particular supply shocks for political or natural disaster reasons.
The fact that the market, including government intervention, e.g. strategic petroleum reserve and international support, was able to handle Katrina is encouraging. But more shocks lie ahead and a global rebalancing to put trade and capital flows onto a sustainable basis has to be outcome of rising energy prices (e.g. rising interest rates to deal with inflation).
Perhaps the economy got a fortuitous boost in the past twenty years because of falling and low energy prices, allowing some sins to be handled more gracefully (e.g. stock market bubbles, etc).
Probably less fortuitousness in the future.
Posted by: T.R. Elliott at June 21, 2006 07:09 AM
I have a question. Isn't declining quality of crude exactly what you'd expect as oil prices rise? Let's say you have two wells, A and B. A produces light, sweet crude. B produces sourer oil. You can sell A any time. B is easier to sell when prices are high. Consequently, if your objective is to maintain sales when prices rise you'll hold back A in favor of B.
Posted by: Dave Schuler at June 21, 2006 07:48 AM
CERA's predictions of yore fall, to my perceptions, somewhere between unremittingly optimistic to wilfully dishonest. Given CERA's income depends on payments from large oil companies, whose executives are remunerated in part by company stock, I normally think the latter is true. Not inconsistent with this, CERA's change of heart focusses on "refining," not depletion. But as you say JDH, our refining problems arise from the natural depletion cycle. God forbid CERA ever say the word "peak."
Posted by: Thomas James at June 21, 2006 08:50 AM
Extacts from Saudi Arabia's Oil Minister comments 3 weeks ago:
In an interview after a meeting here of the Organization of Petroleum Exporting Countries, Ali Naimi said other cartel members are having trouble finding buyers for all the crude they are producing, [...]
"It's not just heavy oil. Even light oil is having problems" finding buyers, Mr. Naimi said [...]
Posted by: dhatz at June 21, 2006 10:51 AM
"Many have articulated a vision of 'peak oil' as akin to a cliff that we suddenly wake up to find ourselves to have driven off."
Could you please provide a list of citations for this claim?
I find it quite distressing that economists in general, and JDH in particulr, seem to have the stubborn belief that those who have warned of the danger of peak oil for the past few years are largely ignoramuses who do not understand basic economics. Yet it is the economists, such as CERA, whose recent predictions keep being proved wrong.
Posted by: Avo at June 21, 2006 11:09 AM
I don't agree at all that what we are seeing today is consistent with peak oil - not unless you believe that a price of $65/bbl in 2010 (as the markets are forecasting) is going to bring supply and demand into balance. If in fact we are peaking now, its hard to imagine that we can hold demand to near present levels with prices that are lower than what we see today. Nor are these prices sufficient to bring about vast increases in supply in this time frame, due to the long lead times necessary and the relatively modest investment response we have seen so far.
I think any realistic near-term or present-day peak oil scenario has to expect much higher oil prices in the next five years. At this point the markets still don't agree. If peak oil is really here and is visible to anyone who looks around with open eyes, the markets are leaving huge fortunes on the table, available free to anyone who has the slightest desire to get rich. That's not how markets usually work.
Posted by: Hal at June 21, 2006 11:52 AM
If peak oil is really here and is visible to anyone who looks around with open eyes, the markets are leaving huge fortunes on the table, available free to anyone who has the slightest desire to get rich. That's not how markets usually work.
Right. This point is made often, it seems so obvious and powerful, and yet I have never seen a peakist reply. Is there one?
There are really two points here: why is it that smart people generally aren't stampeding into oil futures, and, perhaps more cruelly, why is that you so seldom read a peakist boasting about how much he personally has managed to bet on this most certain of outcomes?
Are these fair questions?
Posted by: Fred Hapgood at June 21, 2006 12:18 PM
Saudi Aramco (SA's national oil company) CEO speech last week:
"Certainly today's prices cannot be justified simply on the basis of supply-demand fundamentals. As we all know, supplies are secure, demand is being met, and global inventory levels are comfortable. So, why are we continuing to see prices in the seventy-dollar range?"
" Our efforts begin with a stepped up oil and gas exploration program. We currently manage approximately 260 billion barrels of oil, or roughly a quarter of the global total. But we continue to expand our reserve base, and conservatively estimate our additional potential of recoverable oil to be in the range of 200 billion barrels. At Saudi Aramco's present production levels, that means we will have well over a century's worth of oil to produce."
Posted by: dhatz at June 21, 2006 12:25 PM
Generally peakoil folks don't want to be rich and could care less about how they can make a "quick buck".
Furthermore why would someone who worries about the decline of oil production and a partial collapse of our current society, want pieces of paper that say they own oil?
Why wouldn't they invest their dollars in new technology and energy production at a local level?
Why wouldn't they invest their money in using less energy, which in my view is a much better pay-off over the long-run than flipping papers around?
Posted by: THartill at June 21, 2006 12:38 PM
Dave-- excellent question. For the U.S. at least (not sure where to find the global data), the trend of increasing sulfur content and increasing viscosity began in 1995, despite the low level of prices then and the huge price drops in 1997 and 1998.
Dhatz-- "light" oil is not the same as "sweet", which is what the Chinese article refers to. Also, I'm not willing to put 100% faith in Naimi's statement.
Avo-- The view articulated in the Hirsch report is an example of what I am referring to. Hirsch's basic view is that action must be taken now to avert a future calamity. My basic view is that prices will respond today to assessments of the future, and that will cause the desired changes on the part of both consumers and producers to begin today, so that the adjustment process begins well before the peak. I know that you participated in many of our discussions here on this topic, and observed the ferociousness with which people have attacked my claims about gradualism.
Hal, I'm not claiming that peak oil is here now, nor am I confident it's arriving in the near term. But I am claiming that, when it comes, it may look quite a bit like the last two years.
All-- The Oil Drum today has much more on the new EIA projections.
Posted by: JDH at June 21, 2006 12:45 PM
THartill is right - my wife and I, for instance, bought a Toyota Prius and installed a ground-source heat pump HVAC system. Each is is about twice as energy-efficient as what it replaced. We have many more plans to decrease our on-grid energy consumption.
In addition, it's a piece of investing conventional wisdom that novices should avoid the futures markets. The fact that you're going to be proven right within 10 years won't prevent you from being wiped out six months from now.
Posted by: PianoGuy at June 21, 2006 01:24 PM
> Generally peakoil folks don't want to be rich
and could care less about how they can make
a "quick buck".
All of them? It wouldn't take many. Anyway, putting that claim to one side, it remains the case that virtually none of the many people who do want to be rich, and don't care how they get there, have been convinced by the peak oil case.
This is pretty damaging to the thesis. Those guys might be predators but they are smart, and if peak oil was just one degree more convincing than the average garden variety commodity investment vision, the price of oil would look very different. But it isn't, at least not to the people who do this for a living. Why not?
> The fact that you're going to be proven right within 10 years won't prevent you from being
wiped out six months from now.
Of course. Nothing in the concept contemplates buying six month futures. The game is buying seven year futures.
Posted by: Fred Hapgood at June 21, 2006 03:41 PM
Well actually there are quite a few funds which are investing based on a peak oil thesis, for just one example see www.sprott.com/peakoil.php.
And what is the Canadian Oil Sands play if not a bet on peak oil? If you can stick a pipe in the ground and produce oil in Saudi or Nigeria for $1 per barrel you have to be insane to invest billions of dollars and years of effort to extract oil from bitumen at $20 per barrel unless you believe that the cheap stuff is going to run out, and pretty soon.
As a professional in the invesment industry I believe that it is impossible to know how much money hedge funds and private equity managers have bet on a peak oil strategy, but I would be very surprised if it is under $100 billion. Just because they don't talk about it much doesn't mean it isn't happening. If they get really rich, they'll tell you.
Posted by: David Baskin at June 21, 2006 04:13 PM
Hal and I have had this debate on a couple of occasions over at The Oil Drum. My view is that current price levels are consistent with a near term peak-oil hypothesis. Global oil production has been approximately flat (neither increasing or decreasing) for the last eighteen months at an average a little over 84mbpd (all liquids). Prices in the range of $60-$75 have caused the market to clear during that time. Clearly, those prices are high enough to cause demand to stop rising over time, at least based on recent history. Therefore my view is that non-rising production is now priced in. Those prices are high enough to support profitability of unconventional sources, which are now being accelerated. Futures prices are more or less flat out to the latest contracts within the same band that spot prices have been fluctuating in.
If we start to see evidence of declining production, rather than just plateaued production, more price rises might be required to enforce the necessary conservation. But since there are lots of uncertainties about the decline rate, and lots of uncertainties on the demand side (housing bubble bursting, structural problems with trade deficits), which could potentially cause demand to decline faster than supply, the market prices are consistent with a near term plateau/peak in my opinion.
As to rich investors convinced of the peak oil case:
Posted by: Stuart Staniford at June 21, 2006 04:14 PM
And while we're discussing scenarios, can someone offer one why investment banks have been into storing oil since 2004?
A LARGE WAREHOUSE in Amsterdam may seem an unusual place to attract the City�s top traders and hedge funds. But, in the past few months, Morgan Stanley has been accumulating warehouse space in the Netherlands to store its hottest new property � oil.
This and the tankers that have been hired by the investment bank illustrate just how important oil is now becoming in the City of London and Wall Street.
Morgan Stanley may be among the most advanced of the new breed of oil speculators, but, over the past year, many banks and hedge funds have joined the �black gold rush�. With the stock market proving lacklustre, the oil market has been a godsend for the banks, which describe it as the �new Nasdaq�
What good is it to hoard a commodity so voluminous as oil? Were they betting in price appreciation?
Posted by: dhatz at June 21, 2006 04:16 PM
Oh, and as to
THartill> The fact that you're going to be proven right within 10 years won't prevent you from being
wiped out six months from now.
and Fred's response:
Fred> Of course. Nothing in the concept contemplates buying six month futures. The game is buying seven year futures.
Futures contracts have margin requirements. If the market moves too much against your bet in the near term you can be wiped out even if you prove to be right in the end. As the Wikipedia puts it:
> The positions held by the clients of the exchange are marked-to-market daily. Clients hold a margin account with the exchange, and every day the swings in the value of their positions is added to or deducted from their margin account. If the margin account gets too low, they have to replenish it. In this way it is highly unlikely that the client will not be able to fulfil his obligations arising from the contracts.
Posted by: Stuart Staniford at June 21, 2006 04:24 PM
Does anyone have and leads on quantitative data on how much oil has been delivered to financial institutions?
Posted by: Stuart Staniford at June 21, 2006 04:27 PM
A couple of comments.
WTI-Brent oil is most surely peaking; prime high yield oil is getting premium prices at the very limited refineries' production of gasoline.
This is one of the reasons WTI prices are not buckling under inventory pressure. True, a geopolitical response mandates higher inventory accumulation too.
But, there's still plenty of supply of the lower grade cousins like Dubai oil. There are plenty of oil sands in Canada; you cand add to the oil blend ethanol, you can add biofuels, butanol...
So, oils have not peaked, only the high grade ones; this tends to confuse the situation.
Be very careful with futures. In a bad day (black swans) you could lose you're life's savings. My eyes are glued to the screen when I have a contract in play.
Posted by: Joe Rotger at June 21, 2006 04:45 PM
Total liquids production has been flat at 84 (+- 0.5 or so) for the last 18 months. See:
Posted by: Stuart Staniford at June 21, 2006 04:55 PM
Stuart, yes they're flat, because there is no demand for physical "wet barrels". Producers have been saying that market is "oversupplied by 1-2 Mbpd" since early 2005. And more recently, Apr-06, Saudi Arabia cut 400 Kbpd citing lack of buyers.
Otherwise, pump it above ground and do what with it? Build above-ground tanks to store it?
Now, since noone offered a theory on investment banks hoarding of oil, my theory is that they built those tanks to store the relatively few spare barrels of WTI and Brent (0.4% and 1% of world production respectively AFAIK) in order to prevent arbitrage physical-futures.
Posted by: dhatz at June 21, 2006 05:42 PM
Dhatz, how in the world can investment banks or anyone else prevent arbitrage between the physical and the "paper" futures price when the settlement terms for the latter equals by definition cash payment for the dollar price on the former?
I discussed how this arbitrage functions in my most recent post on contango.
Posted by: JDH at June 21, 2006 06:13 PM
JDH, do you have any sources that describe the mechanics of arbitrage between spot and futures of oil contracts?
Because all my info -e.g. here- suggests that (unlike many other markets, like stock index futures - spot) in oil there is a very illiquid spot (practically non-existent and fragmented among different types of oil) market and the 2 liquid futures markets (NYMEX and ICE).
Posted by: dhatz at June 21, 2006 06:48 PM
Take a look at the prices by grade at:
If we are swimming in unarbitragable wet barrels -- so much so that the Saudis and Iranians just need to stop production because nobody wants their oil -- how come most grades there are over $60, and even heavy less desirable grades like Maya 22 or Canadian Lloyd 22 are over $50? Somebody's got to be buying the stuff to keep the prices that high, right?
Posted by: Stuart Staniford at June 21, 2006 08:27 PM
Hal: I recognised that peak oil was sometime in the not too distant future about a year and a half ago.
I moved most of my investments into various oil companies and precious metals (as an inflation play) and I've done very well out of this strategy. On those investments I have made more than 100% return.
I also managed to time precious metals very well and sold gold at $700.
My total portfolio returned exactly 50% last year because it is diversified amongst other companies in my local market (New Zealand) which have also done well, but not spectacularly well like oil.
I always feel bemused when I read arguments like yours. You make an assertion based on the supposition of a perfect market with perfect market knowledge available to all players and expect people to provide proof of why you are wrong.
Why on earth should any of us bother? It should be up to you to prove to us why anyone would pay attention to your theories. They certainly don't have any relevance when applied to past market movements so why should anyone have any faith in their prediction of the future. Do people like you ever examine the real world market or do you only deal with them in the abstract?
Anyway I guess you should go back to buying government bonds or whatever it is that people like you do. People who believe that the futures market is an accurate prediction of the real future.
As a homework assignment: Why don't you go and investigate what the prices of tech stock futures were in 1998. Then come and report back to us with a comparison between what the market thought they would be worth and what they are worth now.
I will wait patiently for the results.
Hansel, a peakist (your term) and an investor.
Posted by: Hansel at June 21, 2006 08:38 PM
You read a lot of people talking about how market forces will solve the oil crisis. Even assuming that there will be a gradual shortage of oil how does that translate to producers and consumers sorting this out? Is there another industry you can point to where market forces gently managed such a massive transition?
Auto, oil and energy executives are all out their lobbying the government to go there way in its policy decision. Obviously our current transportation system is the result of government policy (ie build roads) not "market forces".
We can all debate when oil demand will exceed supply, on this point it is very difficult to predict even to within a decade. But I think arguing that this event will pass smoothly, business as usual, is escapist.
Posted by: David at June 21, 2006 08:49 PM
David, "market" indissolubly includes "government," so market-government (state-capitalist) forces *will* solve the oil depletion problem. I'm assuming enough time exists for them to do so.
Nobody knows might be the best theory around.
Posted by: Thomas James at June 21, 2006 09:07 PM
Well put Hansel. Touche! Alas, it appears that for many contributors to this debate, "expertise" trumps all commonsense!
Posted by: Tony at June 21, 2006 11:50 PM
"Many have articluated a vision of "peak oil" as akin to a cliff..."
More words of wisdom from an economics "expert" who does not seem to understand anything about the economics of oil today, so please take note as the lessons are being played out right now for all with eyes to see. Simply put, the economics of oil today is dominated by our proximity to the peak of world oil production. This being the case the peak will not present itself in the form of a clear turning point. Rather, as production begins to slow down (as we have been witnessing these past 18 months or so) prices will begin to accelerate (again, as we are witnessing) suppressing demand (as we are currently witnessing) thus slowing down the rate of growth in production (again as witnessed). The market will go into contango (here we go again). Feisty buyers will want to purchase more oil today, since it will be cheaper than oil in the future, whilst canny sellers will have an incentive to hold back supply since that oil which remains in the ground is rising in value. Sounding vaguely familiar now does it?
This increase in demand for today's oil, combined with limited supply, will tend to raise its price. Whilst the expectation that oil in the future will be still more expensive will tend to increase the price of future oil too, though not as quickly. Eventually the price of oil today will catch up with that of future oil returning the market to order and a new equlibrium - but at a much higher price (yes, as we are plainly witnessing).
Now here comes the kicker - production will flatten off towards a plateau for a time (hey, this is getting creepy) followed by a relatively abrupt downturn onto the path of total depletion. All are welcome to the unfolding spectacle. In fact attendance is mandatory!
So endeth the lesson.
Posted by: Rory Anand at June 22, 2006 12:58 AM
Hansel, if you bought gold as an inflation play, what led you to sell at $700, before the inflation you evidently anticipate has ever shown up? Or, are you defining "inflation" to be an "increase in the price of commodities"?
And what's your recommended investment strategy right now?
I believe you are misunderstanding Hal's point, if you think he or anyone else has claimed that "the futures market is an accurate prediction of the real future".
Posted by: JDH at June 22, 2006 06:09 AM
Dhatz, I'm afraid I'm still not following the interpretation that you or Mabro are trying to give.
As Stuart observes, oil gets traded at a variety of prices depending on such factors as viscosity, sulfur content, and physical location, some at spot and some at contracts of varying length. Although these prices differ, they all move together on a daily basis with each other and with the various "paper" contracts that you refer to. It is that comovement among the various prices that I interpret as the effect of arbitrage.
Now, let's consider a particular price for "physical" oil, say the delivery of a particular grade to a particular refinery in Houston. Either you are claiming that this will never change in response to the "paper" price in New York, or you are claiming that it will change in response to the paper price in New York.
If you are claiming that it will never change, (1) you will be immediately talked out of that view by examining the data on the two prices for any length of time, and (2) that view would imply that the New York paper price is completely irrelevant for what real-world people pay for real-world oil, so why should anybody care about it anyway?
If you are claiming that the Houston price does change, then what would it mean if the physical price changed in a way that was unrelated to the fundamentals of the actual physical demand and supply of this particular grade? There is a physical demand curve that reflects what people who actually use the oil are actually paying, and a physical supply curve that reflects the quantity of product that's actually shipped. There is some price at which demand and supply so defined are equal. If you claim that somehow machinations in New York result in a Houston price other than this, then the physical inventories of this commodity must either be increasing or decreasing.
The inventories can and do change all the time, and this is indeed the mechanism whereby speculation in New York gets reconciled with the facts on the ground. But, as I argued in my earlier post, inventories cannot accumulate to infinity, which is the mechanism whereby the facts on the ground are the ultimate check on what the boys in New York can accomplish.
Markets through arbitrage are assimilating all the information together-- what Hansel or other speculators think is in store for the future, how much product this refinery is actually able to sell at the current price, how much its suppliers are able to deliver-- and coming up with a single, reconciled vector of prices for oil.
Posted by: JDH at June 22, 2006 08:11 AM
What a curious comment, Rory! I am saying that peak oil will not be like a cliff we suddenly find ourselves to have driven off, but instead will be much like what we are observing right now. I interpret you to be saying, "you idiot, peak oil will not be like a cliff we suddenly find ourselves to have driven off, but instead will be much like what we are observing right now."
Evidently one of us must be misunderstanding what the other is trying to say. If you are interested in trying to clarify your viewpoint, please be sure you do so in a way that is respectful. Comments here that do not move the discussion forward in a constructive way get deleted, and although I have a more tolerant standard for insults against me compared to insults against other commenters, there is a limit to what I am willing to allow to be posted here.
Posted by: JDH at June 22, 2006 08:21 AM
I think that everyone who agrees that current prices in the ~$70/bar range are somehow "justified", IMPLICITLY assumes that OPEC and other producers are LYING. It's as simple as that.
Because producers (not just Saudis) have been INSISTING for the past 3+ years (even when price was still in the $40 range) that those prices were not in line with their picture of the "wet barrel" physical market.
And this is also what the peakoilers assume, that producers are lying. Why would they do it anyway?
Whereas I'm willing to give producers the benefit of the doubt, assume for argument's sake that they're NOT lying and think of scenarios which might explain the current situation.
Posted by: dhatz at June 22, 2006 10:09 AM
I think it was Goldsmith who said something like ...the true use of speech is not so much to express our wants as to conceal them.
I think perhaps oil producers tend to talk this way because it lessens the pressure on them to increase production to succor the poor complaining consumer. Oil mavens may well come up with better reasons why they are less than honest.
That the market has been proving the producers'statements incorrect for THREE years strikes me as evidence of systematic lying.
Posted by: algernon at June 22, 2006 11:08 AM
You are correct that I (at least) have a low opinion of the integrity of OPEC producer spokespeople. The reason for this is that the history of their claims about their reserves cannot possibly have been truthful at all points (the time series are completely implausible), and they still haven't come clean about what the real situation is. So I assume that present statements could well be a cover-up for past misleading statements. "Oh what a tangled web we weave, when first we practice to deceive".
for the history of reserves claims by selected OPEC countries according to the BP energy report. There were no major fields discovered in the 1980s, but OPEC production quotas depended in part on proved reserves.
It's of great interest that this is now an open controversy in Kuwait, with the parliamentary opposition apparently convinced that indeed the country's reserves are considerably overstated and resisting the government's planned production increases on that basis.
No doubt many in OPEC are watching how this plays out in Kuwait, looking to develop their own strategy for coping with the same problem.
Posted by: stuart Staniford at June 22, 2006 11:09 AM
Dhatz, the question "what would the current price of oil be if there were no speculative buying on the basis of geopolitical risk" is a judgment assessment. Saying that somebody is wrong in this judgment assessment is not the same thing as saying they are a liar.
I personally happen to share the judgment assessment that the current price of oil would be significantly lower in the absence of speculative buying on the basis of geopolitical risk, so not only am I not calling people who've been saying this liars, I am saying that I think they are correct.
These speculations translate directly into the spot price by the mechanisms I have outlined.
Now, as for the particular recent statements by Naimi (as well as the reserve figures noted by Stuart), I admit that I am receiving them with a bit of skepticism. If we take Naimi's statement at face value, I think what it must mean is that there are not buyers for the particular type of oil that Saudi Arabia is trying to sell at the particular price for which they are trying to sell it. The inference I draw from that is the one I give in the post above, namely, that the quality of crude available is interacting with the current refinery capabilities.
As for why the Saudis don't then try to drop the price rather than issue these odd statements to the press, I cannot give a satisfactory explanation.
Posted by: JDH at June 22, 2006 11:32 AM
"That the market has been proving the producers'statements incorrect for THREE years strikes me as evidence of systematic lying."
Either that, OR evidence of a BROKEN price discovery mechanism and that scenario would explain a LOT of other things.
There are many ways to see if this is the case or not, one would be to start futures contracts on a physical crude type which has much bigger market share (in the physical market).
Or go back to selling crude via country-to-country contracts.
Posted by: dhatz at June 22, 2006 12:07 PM
Hal - Why don't you argue with T. Boone Pickens or Richard Rainwater about making money on oil futures. Both have made several billion in the last few years on this.
Thomas James - the Saudis are being disingenuous. The Chinese just announced that they had to cut a Saudi contract by 10% because the oil was too high in sulphur. What the Saudis are calling "light oil" is NOT light "sweet" oil. It's light sour oil and requires more expensive and different processing. That's all that Saudi Arabia has in excess at the moment and mind you, there's not alot of excess anyway.
Posted by: Greyzone at June 22, 2006 12:45 PM
"What a curious comment, Rory! I am saying that peak oil will not be like a cliff we suddenly find ourselves to have driven off, but instead will be much like what we are observing right now."
What I was implying is that you seem to feel that the majority of those in the early peak oil camp suppose that the turning point in oil production will be a spike, when common sense would suggest to anyone who is even mildly versed in the Hubbert Theory, that the event is more likely to resemble a rollover before the general and inexorable decline sets in. The chain of events which is unfolding at the moment would appear to be supporting this view. Nonetheless point taken about the tone of my delivery and will respect your wishes by posting more politely in future.
Posted by: Rory Anand at June 22, 2006 05:11 PM
JDH:Hansel, if you bought gold as an inflation play, what led you to sell at $700, before the inflation you evidently anticipate has ever shown up? Or, are you defining "inflation" to be an "increase in the price of commodities"?
I was thinking of inflation in the Austrian sense, an expansion of money and credit. However I also think that oil price increases cause massive CPI increases. Which is what most people consider inflation to be. In a way it doesn't really matter because it is the perception of increasing future inflation that seems to help gold prices and is what I think causes the current correlation between oil and gold.
As to why I sold? Mostly luck. I had set a profit target for myself and that was to sell at $700. I was feeling quite uncomfortable with the rapid rise of the metal as well. It had completely shot away from it's trend line. Nothing really changed in regards to my opinion on inflation.
JDH: And what's your recommended investment strategy right now?
To be honest I'm not sure. I'm personally long oil for hurricane season (though will probably sell before the first one hits, sell the rumour - buy the fact) but after that who knows. Over the long term I have no concerns. I think it fairly certain that the second half of global oil production will be considerably more valuable than the first half. But in the short term oil may very well be over valued.
Some of you might also want to consider investing in the New Zealand market. Most of our companies pay huge (by international standards) dividends and solid operations. Try HLG, listed on the NZX for example. Fantastic business that pays 10% annual dividend.
JDH: I believe you are misunderstanding Hal's point, if you think he or anyone else has claimed that "the futures market is an accurate prediction of the real future".
I don't think I misunderstood it. I just wanted to point out that the futures market is a very stupid place to look for information on the future production of world oil. It's never been right in the past. However The Oil Drum - and many of the other places where geological scientists and oil industry insiders have gathered to openly discussion what limited, publically available, information we have - are.
Anyway JDH, you are my favourite economist commenting on these issues. Quite a bit higher than most... because the rest are appalling.
Posted by: Anonymous at June 22, 2006 05:40 PM
For those interested, I have just written a much longer discussion of some issues raised in this comment thread here:
Posted by: Stuart Staniford at June 23, 2006 12:40 AM
"My basic view is that prices will respond today to assessments of the future, and that will cause the desired changes on the part of both consumers and producers to begin today, so that the adjustment process begins well before the peak."
This seems straightforwards enough but I have a question about transparency. How can these assessments be made accurately when govts, such as most notably the Saudi govt, are not open about the state of their reserves? This seems to me to be the place where the potential for major and disruptive shocks creeps in.
Posted by: Anonymous at June 23, 2006 12:06 PM
'peak' oil may shortly exist - but 'finite' oil has existed all along. peak oil would lead on to declining oil production and declining oil prices.
peak oilers tend to believe that declining production plus soaring demand = peak prices for oil. but what will fuel this soaring demand ? the entry of india and china into the global industrial growth economy ? and what will fuel that ? if there are oil substitutes available - oil demand can fall. if there are no substitutes (as in much road transport) - then the global economy will contract. either way oil production can fall and the oil price can fall with it. oil will be cheaper - and you will nevertheless be less able to afford it.
that is the economic contraction paradigm. peak oilers are stuck in an economic 'growth' paradigm.
Posted by: gillies at June 27, 2006 12:45 PM
Certainly, conservation will help, as will alternate energy sources. And certainly we will see oil prices fluctuate.
But until we fashion a different kind of world, oil prices will, in the long run, rise.
Since pictures are worth a thousand words, check out Matt Simmons' picture of just some of the products that oil makes possible:
"The Energy Crisis Has Arrived" at
Additionally oil (as energy) is the nexus of our global supply lines, which now criss-cross the world. England gets its apples from New Zealand; Brazil sends it walnuts to India to be pealed.
Economies of scale depend upon cheap energy. Look inside your home; take stock of where things came from.
I see prices exorably rising as we attempt to hold onto our old ways of doing things. Only when oil no longer occupies a pivotal role in the economies of the world will its price finally become a bit more stable.
By the way, there are many different definitions of "peak oil."
Posted by: Stormy at June 27, 2006 03:44 PM
Stuart Staniford - My view is that current price levels are consistent with a near term peak-oil hypothesis.
You don't know what you're talking about.
Stuart Staniford - If we are swimming in unarbitragable wet barrels -- so much so that the Saudis and Iranians just need to stop production because nobody wants their oil -- how come most grades there are over $60, and even heavy less desirable grades like Maya 22 or Canadian Lloyd 22 are over $50?
We are swimming in wet barrels.
Again, kid, you don't know what you're talking.
Posted by: an oil man at June 27, 2006 05:35 PM
Oil Man, it's certainly clear that you at least don't know who you're talking about, since the second point you attributed to Stuart was made by someone else.
As for whether you know what you're talking about, it's hard to say, since you provide no substance. I like your moniker, though.
Posted by: JDH at June 28, 2006 07:31 AM
Jim, Stuart did post the second comment.
See Stuart Staniford at June 21, 2006 08:27 PM
Posted by: Anonymous at June 28, 2006 09:09 AM
My mistake. I thought Oil Man was attributing the statement "we are swimming in wet barrels," to Stuart, but I now see that's intended to be his refutation of Stuart's analysis.
Posted by: JDH at June 28, 2006 09:46 AM
I'll have to agree with this article from Cambridge Energy Research Associates. Please also check http://www.oil-price.net for more oil market predictions. According to Oil-price.net , Saudi Arabia stopped investing in any research pertaining to sweet crude oil extraction, and instead are investing in research on extracting oil from tar sands using pressurized water. This is a proof that their reserves of sweet crude oil will become insignificant in the near future, despite their high price. All that's left is tar sands, of which the low-grade high sulfur content oil is extracted.
Posted by: Todd Hogue at July 8, 2006 08:46 PM