Oil price: where next? - and thoughts for 2010



Figure 1 Oil supply - demand - price chart, Jan. 2002 to Nov. 2009. See text for explanation. Click to enlarge and open in separate browser window.

In February this year, global oil production / demand hit an interim low of 84.0 million barrels per day (mmbpd) and the average price of West Texas Intermediate (WTI) that month was $39.16 / bbl. Since then, demand has recovered to 85.9 mmbpd in November and the average price was $78.08 / bbl. A rise in demand of 2.3% has led to an oil price rise of 99.4%.

Full explanation of the chart and a discussion of what 2010 might have in store is below the fold.

Every year about this time I meet with an old university friend, who is also a geologist, and we make a bet on where the oil price will be in a year's time. My "forecast" from a year ago:


My forecast is $80, based more on hope than anything else.

My friend bet $55 and so, with Brent on $71.50 (17 Dec 2009) it looks like I will win that pint of beer this year, based more on luck than anything else. It has always been near impossible to forecast the oil price, but since 2002 we have entered a supply constrained situation where the relationship between supply, demand and price seems to allow a more informed approach to predicting the future. So what does that chart up top tell us?

Supply, demand and price

The chart up top is based on this simple model presented by Phil Hart in this rather excellent post.




Figure 2 Phil Hart's oil price, supply, demand model.

It remains a source of great surprise for me that the monthly average production and price data for the last 8 years still fits this model. There are a number of wild card variables that one might expect to produce significant deviations, such as variable OPEC spare capacity, changes to global productive capacity, speculation and currency fluctuations. And yet the data fit this simple model remarkably well.



Figure 3 Oil price and supply. Oil price data from Economagic.

The chart up top (Figure 1) is a simple cross plot of the data plotted above (Figure 3). Figure 1 is a time series of monthly average oil price and production volume figures from the IEA (kindly provided to me by Rembrandt). The story starts in January 2002 (bottom left) and wanders a month at a time up to July 2008 (top right) which was the peak. At first the trend is quite flat since below 82 mmbpd supply is quite elastic, i.e. there was ample new low cost supply to meet rising demand. But then, above 82 mmbpd price began to rise with rising production / demand and at 84 mmbpd OPEC spare capacity fell to effectively zero late 2004 (Figure 3). At that time new capacity had to be built to replace production lost by decline, that is roughly 5% of 84 mmbpd = 4.2 mmbpd new capacity per annum just to stand still. The oil industry was working flat out, and with an oil service sector unable to meet demand, rates went through the roof together with the oil price as supply became inelastic.

Eventually in July 2008 the Olympic peak was reached, Lehman Brothers went bust, the credit crunch consumed the world economy and the oil price retraced its upwards path (pale blue line) settling on $39 / bbl and 84 mmbpd in February 2009 as demand fell 4 mmbpd as recession set in.

Since February, the oil price has made a strong recovery to around $80, retracing about half of the losses of last winter. All of this activity can be explained by inelastic demand interacting with inelastic supply, albeit that OPEC spare capacity may be switched on and off at the will of OPEC countries, mainly Saudi Arabia.

So how can this help predict what the future might hold? In simple terms, should the relationship in Figure 1 continue to hold, then the future oil price will be determined by demand and the problem is reduced to forecasting global oil demand - no simple task. Note that from the current position of 86 mmbpd, an increase in demand of 2 mmbpd will take the oil price back up towards last summer's peak whilst a fall in demand of 2 mmbpd will take the oil price back down towards $50 / bbl. The task boils down to understanding the outlook for the global economy.

Outlook for 2010

The only thing I feel I know for sure about the future right now is that it is uncertain. There is a large degree of sureality here in Aberdeen. The UK is in the midst of the longest and deepest recession for many decades. And yet life seems to be continuing pretty much as normal. The shops are busy and the streets are still lined with Porsches, Mercedes and Audis. But all is far from well. The School where my younger boy is just completing his final year has lost several teachers in the last two years with more cuts to come. My wife works at the University where her salary is now effectively frozen. News of cuts to public spending and capital projects abound. The UK has run up mind boggling debt in the blink of an eye and is printing money like there is no tomorrow (Box 1). While growth has returned to most major economies, the UK is the sick man of the bunch, suffering badly from being top heavy in phantom GDP provided by a terminally ill financial sector.

Box 1 - Basket Case Britain




UK Government chart. I'm uncertain what the left chart shows, apart from the post August 2009 data are off scale. Right side shows net cumulative debt as % of GDP. As GDP has fallen by 4.75% and borrowing has grown out of control to support social programs, the UK debt:GDP ratio has increased exponentially. Symbols show the default situation, line shows actual situation that includes government lending to banks.




UK Government chart. Left side shows annual government deficit as % of GDP. The 2009 / 10 situation will be much worse. Right side, cumulative debt as % of GDP. 2009 / 10 will show deterioration. 60% line is EU target limit.

Certain events will take place in 2010, all of which are likely to have a negative impact upon the prospects for the UK.

  • There will be a general election in May, and leading up to that the full significance of our perilous finances will be on show for the population and the world to see
  • Cash for clunkers will end in January, it is hard not to see that this will send the motor industry and all the industries it supports back into a tail spin.
  • VAT (sales tax) reduced from 17.5 to 15% in a desperate attempt to stimulate the economy will be raised back to 17.5% shortly.
  • The banks, who now seem to run the country, are introducing draconian charges for short term consumer borrowing - £1 per day for overdrafts up to £2500 - that works out at effective interest of 15% for an annual requirement of £2499. Poor people, who have not understood the implications of this will be fleeced, with the blessing of our socialist government.
  • UK government spending must fall. This will squeeze wages, raise unemployment, and this will filter down to the retail sector and housing market. The tax take from government spending will fall.
  • At some point quantitative easing (QE) must end, and my understanding is that this will send long term bond yields upwards with consequences for the broader market.

You may gather that I am not optimistic about the prospects for the UK in the year ahead. The current stock market rally and resumption of growth in OECD economies has been manufactured to large degree by QE, currently running at around £200 billion in the UK. This is relative to GDP of around £1.5 trillion. QE is like a sticking plaster over a gaping hole in a grossly over inflated credit bubble.

The chart below which shows the relationship between earnings (PE ratios) and the value of the S&P500 is one of the more sobering charts I have seen. Unless there are reasons to believe that the US economy will make a robust recovery next year then some form of equilibrium must surely be restored to the market. Sharply lower stock markets will likely trigger a new round of deep woes for global finance markets. Stoneleigh eloquently summarised the case for a deflationary bust in this interview / post.




Figure 4 S&P 500 PE ratio history, courtesy of Decisionpoint.com. The chart was lifted from an email article by Brian Bloom, author of Beyond Neanderthal. The recent fall in PE curves reflects Q2 2009 GAAP adjusted PE ratio of 148 as reported by Brian Bloom. I cannot vouch for the veracity of this information, perhaps some posters would care to comment?

I believe 2010 will be a year of high volatility, and this makes it difficult to predict where we might be at year's end. But since I have to stick my neck out, I will predict an oil price of $40 / bbl one year from now with global production / demand running at around 82 mmbpd. This is little better than a wild guess, and there are a multitude of alternative outcomes. In the near term, the oil price may go higher, but the higher it goes, the more stress will be placed on an ailing global economy and this will hasten the next stage of economic contraction. This oil accordion (credit to Nate) was well illustrated in this comic strip by John Kinhart.

If readers wish to post their own analysis and prediction then I will summarise these predictions at the end of this post and we can revisit this a year from now. The prize for the nearest prediction, Brent Blend spot price at the close of 17 December 2010, will be kudos.

Wishing all readers a merry Christmas or whatever festival you chose to celebrate. And its worth recalling the sound advice of Nate - there is a lot more to life than money. Make friends and build social capital.

Euan Mearns
December 2009

shox My guess is that the overall average for 2010 will be $95 a barrel.

goghgoner $67

porg $67.01

Zaphod42 More like $120 and $60 for a range in USD. IMO $40 is a tad low and $80 seems way below probabilities.

steve from Virginia I think prices will be lower in a year $55 - 60

Perk Earl Price will rise to the 85-99 range as depletion continues and increasing US debt lowers value of the dollar.

garyp So say $38 if people haven't come to terms with the hard oil limit, or $152 if they have and have started to price oil according to a post peak reality.

Noutram I will opt for $95.

Massagran landing us at $100 in a year

Mamba $50 Deflation and high inventory.

Polytropos I am saying we will hit 200 in 2010

P. Coyle I'll say $75, as depletion struggles with a bleak economy to produce little net change.

mididoctors run up followed by 2nd price collapse $50 avg

Gergyl My prediction: $US125

paganx For 2010 an average of 80$

ngass My forecast is a $95 - $100 price for crude oil. The reason is that increasing inflation worries (and hedging against it) will drive up the oil price.

myfriend $69

WNC Observer I'd go with something more like $60 by year end, with a short panic-shock-driven spike up to triple digit territory mid-year.

Buster cagney On December 17, 2010 WTI will be above US$130 per barrel in nominal terms and the global economy will still be growing (no double-dip recession).

wallstreetexpress $115

mule man Donn End of 2010, I guess $80.

turchin 10 dollars as mininmum price in the year . Economy will collapse.

phoenix My best guess is we will see a mid 2010 spike of US$160 followed by a fall to US$110 by the end of the year.

Thanks Euan.

Here are the TOD threads from year end 2007 and 2008 discussing oil price forecasts etc.

In sympathy with your last comment, I have decided that, other than perhaps for policy purposes, focusing on oil price is a micro-example of tragedy of the commons - so I'll not be in the running for your kudos but instead will endeavor to find more friends...;-)

(but as you know my thinking is similar to yours...oil price will not be driver of world events for some time yet - 2010 Year of Currency Crises)

Nate, I think you have gotten too far ahead of the game. If my scenario unfolds, then the impact on Aberdeen, North Sea oil production and broader investment in the energy industry will be devastating. Maybe you have already discounted all of this? But some of us are dragging along behind still trying to come to terms with what might unfold.

If we do see $40 again in near future then the likelihood that July 2008 was peak is increased raising the question why then? Was it the cross over point of ascending eastern and waning OECD power?

The bottom line is how high of an aggregate EROI is required to fuel a particular socio-economic design - global turbo-capitalsim needs something around 20:1+ - this is higher than we have access to - a decent % of 20:1 is still extant, but the energy input costs have long been paid for and we are living off the back tail flows. We should already be below the intersection of the line of affordability and profitable extraction but governments chose to borrow more from thin air (~the future) delaying and deepening the eventual shortfall.

Perhaps an 'energy vice' would be more apt than accordion... though I do think we have a large amount of high energy gain potentially available (NG, wind, etc.), just not a high enough EROI to run the current system of claims, which means those claims are going to be reshuffled and many will disappear.

ascending eastern and waning OECD power?

I thought it was interesting that if we look at 2006-2008 net oil imports for the US (which showed a cumulative decline relative to our 2005 rate) and China (which showed a cumulative increase relative to its 2005 rate), China bought every barrel of oil that the US did not import (relative to 2005), plus some.

On the supply side, here are US annual oil prices versus net oil exports from the combined (2005) top five net oil exporters:

Sam's best case is that the (2005) top five net oil exporters are currently depleting their post-2005 Cumulative Net Oil Exports (CNOE) at about 9% per year, so a plausible estimate, IMO, for the global post-2005 CNOE depletion rate is about 5% to 7% per year, which suggests that oil importers worldwide have burned through 20% to 25% of post-2005 CNOE in the past four years, 2006-2009.

Note that the initial post-1996 CNOE depletion rate for the combined output from Indonesia, the UK and Egypt (IUKE) was 25% per year from 1996-1999, while the annual volume of their net oil exports fell at only about 3%/year over this time frame.

I think that the recent US and China case histories are examples of what we can probably expect for the next several years, to-wit, non-OECD countries taking a bigger share of declining net oil exports, with OECD countries being forced to take a smaller share of declining net oil exports.

This discussion seems to assume a constant USD. Having marvelled at the anti-gravitational forces that seem to hold the USD way above where the US economy indicates at should be (a small fraction of its current value), I too am loath to make predictions. The USD could "tank" at any time. The level of debt across all levels of society will never be repaid. The US will not default, most of the debt is USD denominated anyway and the USD is already being printed with gay abandon. Hyperinflation seems the only way out.

If this all begins to unravel as Nate seems to suggest in 2010 I have absolutely no idea what the price will be. Low I suspect, but then I probably won't have a job, so it won't matter.

Also, I note Copenhagen has fallen apart. No surprise there, but tensions were evident and the hope of a global accord to address our energy crisis will plainly never happen. Descent is going to be painful and bloody.

I think the USD will unravel however I think currency collapse is a surprsingly orderly process taking out the weakest ones first then going up the tree if you will.

Iceland -> Some small country in Asia -> Africa -> Eastern Europe -> South America -> Greece/ Southern Europe.

The overall order could be anything but I just can see the USD collapsing before the Eastern European currencies do. Also given the nature of Europe and the Euro a sort of partial or semi collapse of say Greece or Italy or Spain. Or ??

Also of course all kinds of potential candidates Mexico, Argentinia etc. The list of good candidates to suffer a currency collapse is endless and all are strong contenders. The USD is not in the first round. Even after thant the Yen and the Pound could go first.

Its much easier to pick potential winners. The Norwegian Kroner is the slam dunk followed say by the Australian dollar then maybe the Canadian dollar perhaps. Notice I picked stable western energy exporters Canadian is less clear. And of course silver and gold are good choices. As far as money goes gold as as good as anything except perhaps the Norwegian Kroner.

Given we have yet to have a collapse of the weaker currencies and I'd argue the USD collapse must come later simply from the way currency systems work we won't see the USD collapse in the next few months. When no telling just depends on when the weaker currencies start falling. Everytime one blows up it will strengthen the USD in a flight to safety. But its rats simply climbing from one sinking ship to another.

Perhaps despite the massive US budget deficits if it holds long enough its relative strength could well keep it afloat for a surprisingly long time as its better than anything else.

One has to think however that a flight to gold or anything but fiat currencies will eventually cause problems regardless.

Overall I'd say we just will have to wait and see I'm pretty certain someone is going to go down before the USD however until they do what happens next is unkown. Depends on who it is. Whats the real impact on the USD if mexico collapses for example ? Strengthening sure at first but obviously the US would be drawn into an very nasty and very expensive situation and whatever left of Mexican oil exports would be disrupted potentially for years.

Now the USD vs commodities esp oil should weaken no matter what if demand outstrips supply and this is pretty universal all the fiat currencies are going to be devalued vs critical commodities over time depending on the supply demand graph. The money supply dwarfs the commodities.

So the real question is not about the USD but who is next ?

My bet is on the Philippines or Pakistan.

http://www.gmanews.tv/story/152474/%28Updated%29-Philippine-debt-rises-a...

http://english.alrroya.com/content/philippine-peso-weakens-amid-maguinda...

Current government debt is equal to 56.3 percent of local output or the gross domestic product (GDP), one of the highest in the region, Finance undersecretary Gil S. Beltran said.

These are in foreign currencies. I'd argue that they are teetering on the edge of collapse.

In fact the Daubi situation could easily result in serious problem there as remittances fall.

http://www.roubini.com/asia-monitor/255789/how_far_will_remittances_to_t...

Given their reliance on global growth and the resulting remittances. And high foreign currency debt and large oil imports they are at the top of my list of most likely to fail next.

So the real question is not about the USD but who is next ?

Greece might have been the obvious guess if it wasn't in the EU, which is a useful reminder the the Euro has weaknesses as well.

Currency changes are always relative, not absolute. It is pretty easy to speculate that the dollar will crash. TOD has been full of these predictions for over four years and, I would guess, most come from people who have no idea what they are talking about.

But if the dollar crashes, it basically has to drop relative to either the Euro or the Yuan, which would cause huge problems for the EU and China respectively.

I agree that almost all traditional indicators point to continued dollar weakness, but I don't see a collapse as very likely. The future is also very difficult to pin down, and it is not impossible that the dollar actually gains strength.

I am essentially short dollars, but don't think it is a one way bet. If I lived in the US, I might be inclined to shift my portfolio to include a higher percentage of European and Asian assets, but wouldn't bet the house on it.

I'm no fan of the dollar I assure you. But despite or because of the position of the US it has the ability to be amongst the last ones standing on financial grounds.

If the dollar weakens international company earning improve and the stock market soars. Flight to safety plus our license to print without worrying about interest rates keeps bonds in check. Its a perfect setup regardless of how the dollar moves the US wins.

Two things pierce this perfect con.

1.) Bond vigilantes forcing up interest rates and or the printing becoming so blatant it cannot be ignored i.e the chances of actually getting paid back without massive inflation go to zero.

2.) Spiraling oil prices

One of those or probably both are the only two ways I see to break the preferred position of the dollar. In particular rising oil prices lead to a steady cash outflow and since the US has a imbalanced trade situation this means selling more debt. This of course is the petro dollar cycle. As long as interest rates where falling we where able to steadily issue debt to cover the outflow of petrodollars. As long as competition for oil from dollars sent overseas from other trades was weak the game worked. In my opinion its important to realize that two things are needed a bull bond market and lack of competition for oil from other dollar holders.

Its not a coincidence that both blow up at the same time. The bull market for bonds end and interest rates start rising and dollars are increasingly converted to commodities and not treasuries.

In my opinion when the bear treasury market is finally in full swing and oil prices are rising rapidly is when the dollar fails as the world finds itself with way way to many dollars and not enough hard assets to buy.

Note that China and the ME oil producers maintain a dollar peg at least to date so they are effectively locked into the US. Obviously they will be forced to unpeg along of course with Japans implicit peg. These pegs and the resulting recycling of dollars into treasuries are other aspects of the cycle.

The intrinsic problem is of course unpaid debt has steadily been backstopped by the full faith and credit of the government of the United States until no one believes them.

My guess is that the overall average for 2010 will be $95 a barrel.

I have a few question for which I haven't really been able to find answers anywhere:

1) Are NGL's also used in the production of gasoline and jet fuel, and to what extent?
2) Is each barrel of NGL similar in energy content to crude oil, and has this been factored into all the production graphs which I have seen around here?

Any help appreciated.

$67.

1) Probably, not sure if it makes a significant difference. Any production number should subtract energy input but none do.

2)Energy content of fuels. No it is not usually factored in unless the graph units are boe (barrel of oil equivalent) or btu.

67.01
Where is Bob Barker when you need him!?

Where is Baghdad Bob when you need him?

If 2010 sees a hot weather year (per UK Met Office predictions) the interaction with the oil price could be interesting. With $90 oil food production will take a double hit ie weather + input costs. There will be little political will to impose tougher carbon taxes. With $40 oil carbon taxes seem more affordable but that implies a very sluggish economy.

I wonder if a possibility is $40-80 oil all the way til the last drop. That is in the Phil Hart graph both supply and demand shift so as to intersect at roughly the same height. Demand shifts left because of reduced income and supply shifts up because of depletion.

I see things similarly. More like $120 and $60 for a range in USD. IMO $40 is a tad low and $80 seems way below probabilities.

Having said that, I agree that the fluxuation between sluggish economy whenever price hits $120, and drops to $60 being limited by experience from 2009. Unless, of course, the economy totally tanks for any reason. Then, all bets are off!

On December 17, 2010 WTI will be above US$130 per barrel in nominal terms and the global economy will still be growing (no double-dip recession).

At last, someone who understands how to follow instructions:-)

I think when the numbers are in that you will find that the global economy did not grow in 2009, the first time that will have happened since records began, or at least since WWII. But it is very helpful to get this range of views.

Have you seen Paul Mobbs recent submission to the Peak Oil committee of Parliament - very good.

I agree that the future is uncertain 4/5ths of UK government bonds are inflation proofed so destruction of wages and deflation is the only option to effectively default.
Unless we all just go our separate ways.

Yes, the courts are also becoming increasingly partisan in interpreting the law.
Tube journeys down by 6% over last year.
Just submitted a post for publication given your interest in getting under governments skin you might find it interesting.
Latest document added here:
http://groups.google.com/group/olney-transition

No idea on future oil price up and down again no doubt.

The graph "Figure 1 Oil supply - demand - price chart, Jan. 2002 to Nov. 2009" Looks like it is following a fairly predictable demand curve. Note that a demand curve is a curve, not a straight line, and it looks like this one curves upward quite sharply as demand approaches 90 million barrels per day.

The implications for the UK are rather negative, because British North Sea oil production peaked in 1999 and is now going into a rather steep decline. Rather than being a net oil exporter, the UK will be a net oil importer and will be at the mercy of international demand.

Because China, and to a lesser extent India and other rapidly developing nations, are increasing their oil demand significantly, it looks like oil demand will again be approaching 90 million bpd. That implies that oil prices will again be going over the $100/bbl level in the near future.

The UK (and the rest of the world) should be taking steps to conserve oil because if they don't, oil products will likely become unaffordable for a lot of consumers in the near future.

Economics textbooks always show a curved demand curve, but for oil, demand may be closer to a straight line, especially in the short term. At a very cheap price, would we drive that much more? A little, perhaps.

Economics textbooks always show a curved demand curve, but for oil, demand may be closer to a straight line, especially in the short term

The curve looks like an hyperbole, asymptotically approaching a limit of around 90 million barrels per day. Of course, that implies supply will never exceed 90 million bpd no matter how much people are willing to pay. They don't have infinite amounts of money and inevitably will run out before oil supply reaches 90 million bpd.

We are testing the limits of what people are willing to pay. It's probably not as high as the $147/bbl it reached last year, but we're not sure how close to that it is. Certainly it's higher than the $80/bbl level it's been near recently

Note that the upward curving shape shown by the date in figure 1 is actually the SUPPLY curve not the demand curve - i.e. in order to produce more oil, a higher price is required (as illustrated in Fig 2). The DEMAND curve slopes down to the right - i.e. at higher prices, less oil is demanded. It's illustrated by the near-vertical lines but can't otherwise be directly seen by the data (and it is assumed that it has a very steep slope)

The seeming limit at around 90million is in the supply curve - i.e. suppliers can't seem to produce more than that even at astronomical prices.

Of course, this graph needs to be taken with a grain of salt - the assumption behind that 'curve' is that the production parameters about price / volume have remained pretty constant since 2002. Over 7 years that may be true but over longer time frames production capacity can be increased (or decreased).

Its possible that the QE recovery has enough momentum to take us back to $100, but then common folks are using much income to buy energy and lose discretionary spending on all else and we repeat what just happened. Very hard to call the right timing on this.

I am just very gloomy about the prospects for the UK, and if finance crisis returns then governments will be impotent next time to intervene.

Euan, couldn't agree more with your outlook. I have first hand evidence of the impact of high domestic energy prices on the wider consumer economy. A good buddy of mine was under paying on his elec and gas for a year resulting in over £1000 debt. He told me straight up that his family needs to be warm etc so the luxuries will have to go instead.

What is equally frightening is that most mortgages are at record monthly payment lows and still retail sales are dropping. When rates go up next year - as they surely most - combined with wage freezes and a continued lack of consumer borrowing, the 'recovery' is toast.

You are supported re UK pretty well by Martin Wolfe of the FT (free registration) http://www.ft.com/cms/s/0/f693b6a4-e9af-11de-9f1f-00144feab49a,s01=1.htm...

... Indeed, the fiscal deterioration in the UK has been far bigger than in any other member of the Group of Seven leading high-income countries.

The proximate explanation has been the collapse in government revenues. ... Yet the UK’s recession has not been more severe than that of other high-income countries. As Alistair Darling, the chancellor of the exchequer, noted in his speech on the pre-Budget report, the cumulative contraction in this recession, up to the third quarter of 2009, has been 3.2 per cent in the US, 5.6 per cent in Germany, 5.9 per cent in Italy, 7.7 per cent in Japan and only 4.75 per cent in the UK. The reason this not particularly dramatic decline in output, by the standards of this “Great Recession”, has had an exceptionally big impact on revenues is that, in the UK, the financial sector played a huge role in supporting consumer expenditure, property transactions and corporate profits.

Regarding our price structure in UK we seem to have followed the USA, at least in terms of Stock Market fall and rally, and (?) pricking of housing and commercial property 'bubbles'.
Respective currency re-valuations have made significant changes in the shorter term in 'real' price of oil in UK as well as USA? Sterling has devalued against Euro, (albeit not as low as the all-time low at €1.0219 this time last year), and compared with 2007, significantly against the dollar (peaked April 2007 at 1GBP = 2$USD;now around 1.65USD). In the longer term falling UK government revenues from lower production North Sea gas and oil must trump even the falling / failing financial industry?

In the longer term falling UK government revenues from lower production North Sea gas and oil must trump even the falling / failing financial industry?

yes, but the double-whammy here is that at the same time that tax revenue from North Sea is falling year-over-year the current account deficit is being forced up by importing our energy deficit. By 2015 we are expected to be importing as much as 65% of our total energy in one form or another. We are also predicted to be importing a full 50% of all our food, including staples. And it is a long term plan of both Labour and Tory to build more houses - on arable land. This is 'necessary' because we are short of housing at the moment but are expecting the population to be 70+ million by 2030.

I really can't understand why this is not being taken seriously.

Seems like a recipe for anti-immigrant fervor -- no work, no fuel, no food = too many people. Who must go first? The immigrants, of course.

The British National Party already have a European Member of Parliament and plenty of local councillors. This in spite of them being a very disreputable bunch of very limited academic achievement (To use TOD acceptable language).

One of their target groups (apart from the obvious Muslims) are recent (legal) economic migrants from Poland. One of their election posters showed a WWII spitfire with a slogan about needing to fight to keep out the enemy (or sentiments to that effect).

It had to be pointed out to them that the spitfire was from a squadron piloted entirely by Polish immigrants.

I think it's time to set up an Intergovernmental Panel on Migrant Movement (IPMM), as part of the environmental degradation mitigation efforts. What is needed is a plan to make sure that migrants, voluntary and otherwise, are sent back to their original stomping ground. Brain scans should allow us to separate the tribes.

As a Celt, I'm not sure whether the expulsion from the pretender 'United Kingdom' should work backwards, starting with the poles, in the middle, starting with the Normans, or at the beginning starting with the Angles, Saxons and Jutes.

And as a line has to be drawn somewhere, I say draw it between civilization and barbarism, so pay no attention to those surviving savages to whom my folks tried to bring civilization a few millenia back.

Happy rebirth of the sun.

OK! Put'em all on cattle cars and send them through the chunnel.

Yes it does. And no one seems to be taking it seriously which is why Britain needs an immediate pause in immigration. Our combined communities need to be able to pause for breath and think our way through the next two decades. We Britons are perhaps the most welcoming and tolerant people going – which is why the BNP is still thankfully a Mickey-Mouse party but there is a limit to our collective tolerance and we are rapidly approaching that point. It would be lunacy in the extreme to allow immigration at the current trend of around 200,000 net coming every year. This is not a colour of skin or creed issue. It is just plain common sense. We need time to assimilate and take stock otherwise there will be a snapping point and God only help us if Griffin’s bunch start frog marching down Pall Mall to the cheers of the workers.

In 2008 for UK http://www.statistics.gov.uk/CCI/nugget.asp?id=260

Net migration, the difference between immigration and emigration, decreased from 233,000 in 2007 to 163,000 as a result of increased emigration.

Huge numbers still on the move though; record 427,000 left, 590,000 came "Of all immigrants 505,000 (86 per cent) were non-British citizens in 2008."
A lot of people moving for job reasons, including a lot of post-2004 legal EU Poles et al (~40,000) going home.
Refugees ('asylum seekers') less than 1% of incomers.
Will be interesting to see 2009 numbers. My guess is many more people leaving as conditions change.


This lies at the heart of UK problems. The fact it is never discussed is a mystery to me. Amongst other things Sterling has lost its petro currency satus. You just need to look at the NOK / £ exchange since we started importing tons of gas from Norway. Of course weak Sterling helps our exports - but of what?

Of course weak Sterling helps our exports - but of what?

exactly. of what? And how many of our exports contain imported raw materials or component parts?

The old economic theories and paradigms are rapidly losing credibility. The old export-import model (not the ELM!) is broken.

Exports of what? Well, bonds and complex derivatives contracts. Just like the US. You can see how well this is working for the United States.

Britain's import reliance on not just energy but also food puts it in a far more vulnerable position than the United States WTSHTF. Britain needs to adopt a number of strategies to prepare (not that I think it will of course):

- Halt all but the most skilled immigration and get some immigrants to leave. Get the population closer to the carrying capacity of the land.
- Build nukes.
- Insulate buildings and install ground sink heat pumps.
- Zone the most productive land for farming only.
- Shift education toward engineering and other productive occupations.

The full list is of course much longer.

We won't see real preparations until it is clear to the world that global oil production is on a one way trip downward.

I am just very gloomy about the prospects for the UK, and if finance crisis returns then governments will be impotent next time to intervene.

I would say that the UK government needs to readjust its planning to take into account the fact that North Sea oil and gas production have peaked. The UK needs to avoid following the example of the US at all costs because the US has quite clearly gone a long way in the wrong direction. You need to think about alternatives.

You might talk to the French for ideas because they seem to have done a lot of things right, notably their nuclear reactor program. I realize that the British and French get along like cats and dogs, but, while the French can be extremely annoying, they do have a lot of good ideas.

Disclaimer: I'm speaking from the Canadian perspective, and Canada has lots of oil and gas left, not to mention every other energy resource you care to name, so these problems are not our problems. We don't even have a financial crisis because all our banks are extremely sound. But, I think that countries that are not in this situation need to focus on the economic realities: oil is running out - what are you going to do about it?

The Canadian solution to the oil supply problem will be to sell more oil to the Americans for more money, but that will no longer work for the UK.

I agree. But the UK is in denial, a decade of New Labor spin has meant no one is interested in facts any more, gloss, pap and sentiment is all that is keeping things going.

Rocky,

My guess is that we will be so hard up in a decade that some of the border states up your way will invite you to annex and Washington will be glad to get rid of them if you are dumb enough to accept. ;)

Mac:
You are one whacky, rule-of-law kind of guy. Long before that could happen you will annex us. And we won't be given any say in the matter.

Good question, where to from here?

Saudi Arabia has indicated that they will not allow prices to rise much further than $75 - 80/bbl. In the current constrained consumption environment there is modest pressure on Saudia's spare capacity (more on that, later).

I don't think the current inventory is a price issue. Another opinion Jim Puplava's site. There is no reason for the inventories to hit the market, oil doesn't spoil. At the same time, the crack spread is constraining overall demand. Truckers aren't truckin' because of poor business and aren't buying diesel.

Saudia's de facto dollar peg makes the dollar a hard currency. Oil use is ubiquitous and required. Pegging the dollar to oil is clever, perhaps too clever by half (or dumb, depending on viewpoint). Saudi oil minister Ali al- Naimi does not want prices to leap upward. This would cause a crash and kill demand. A dollar being worth one- half gallon of crude oil makes it more valuable than the US government suggests. Uncle Sam pitches a worthless dollar. The world's current recovery has been supported by a declining dollar. The dollar is held down as a consequence of short selling, central bank gold buying and balance sheet expansions, securities purchases and other tactics.

The US Fed has other reasons for depressing dollar value but that is not part of this discussion.

A dollar that is worth real oil is too valuable to short and the consequences of the new, hard dollar are starting to be felt. To prevent a crash caused by high prices, the Saudis are triggering a crash caused by low prices.

The low oil/dollar ratio set against the background of short- dollar trading equals a strong dollar. Just as central banks coordinate exchange rates by buying and selling currencies, the Saudis have set the dollar exchange rate. Essentially, Saudia is buying dollars with oil. It is exactly the same as a central bank buying gold at a fixed price.

Take that, Ben Bernanke! Welcome to 1931. Ali al- Naimi has invented a time machine!

Which gets to the heart of the matter; what will the real price of oil be in the next few months? With the hard dollar the central bank credit support for finance will decline. There will be more defaults starting to take place. the burden of default will shift from 'insured' finance to 'insurer' sovereigns. Excess credit which allows demand to bid oil prices higher will decline. I expect the nominal price to decline while the real price will increase. $80 is the new $135. The world has gotten that much poorer in the past year. It will get poorer, still.

Max Keiser gave an interesting interview a few days ago where he discusses oil:

http://www.youtube.com/watch?v=LUVedkKtCIo

He suggests that Saudi production has fallen; "10% over three years." This follows along the arguments made here by Jeffrey Brown and others regarding the questionable quantity of Saudi reserves as well as spare capacity. If this is true then Saudi spare capacity is a wasting asset. They will lose control of prices and demand spikes will be unavoidable, regardless of what Riyadh pegs to the dollar. In this case, the dollar might be very 'strong' against other currencies but oil prices might still be as high or higher than they are now. Stoneleigh has discussed this also; in deflation, currency is scarce and scarce oil will also be scarce.

Get it?

I think prices will be lower in a year $55 - 60 with real prices ... unaffordable for a lot of folks.

Hmm the problem with this argument is its tied to the Saudi's having spare capacity and having actually significantly changed their oil production levels.

Obviously with oil at even 60 a barrel demand exists for all the oil produced.

I'd argue it makes more sense to assume that the marginal conditions required for a sharp spike in prices are not yet present i.e see my long post below. Full blown bidding wars have not yet broken out.

If we have not seen a sharp increase in prices and the above is true this means that storage is playing or has played a key role in keeping prices in check. As each price increase causes one or more potential buyers to pass on purchasing oil till next bidding round.

Its like a poker game basically as long as enough players are comfortable losing their initial stake your not going to see sharp price increases. In this case a winning hand is low storage. However whats important is not the winner but the ability of other players to fold and wait for perhaps a better hand if you will.

However eventually this results in a fairly nasty failure mode. By taking this sort of round robin approach prices increased slowly but steadily at the expense of everyone draining their storage levels at a fairly constant rate.

Think of it as a race where everyone averages the same speed and started off with a full tank letting others take the lead in turn. Obviously they tend to run out of gas at about the same time. Thus soon after one runs low the other follow in quick succession.

Not only does the bidding war for the marginal barrel start again but it also heats up rapidly. In a sense all we did was trade off a steady but slow rise in prices in exchange for a certain sharp escalation at a later date.

Regardless of if this was intentional or simply a result of the way the market acted over the last year it matters not. If this is whats actually happened then sooner or later its a mad rush at the end.

Now of course if the Saudi's really have spare capacity then as this pressure mounts they can readily introduce more and more oil back onto the market and head off a spike.

However if the above scenario is correct then the time is rapidly approaching where they will have to do so and in sufficient quantities to keep the price in check. One can guess if the Saudi's surged if the rest of OPEC has spare capacity then they too will open the taps. No way are they going to let saudi alone take market share. This means of course the Saudi's will then be forced to moderate their output till they alone are the last remaining swing producer.
Only after pricing pressure returns again and the rest of OPEC is full blast could the finally open the taps as they desire.

Regardless if we have played the round robin game then we are approaching the point where part of moderating prices will be fairly significant real surges in oil production. Talking about what you claimed too do simply won't do any good as it did no good last time prices spiked.

I expect the Saudi's to do a awful lot of talking.

We can see in my article that a slight up-tick in crude production of the growing group was canceled out by decline elsewhere

Oil crunch delayed by 11 days since Oilympic peak in July 2008
http://www.crudeoilpeak.com/?p=812

Also, use the option "Latest Crude Oil Graphs"

Hmm the problem with this argument is its tied to the Saudi's having spare capacity and having actually significantly changed their oil production levels.

Obviously with oil at even 60 a barrel demand exists for all the oil produced.

I'd argue it makes more sense to assume that the marginal conditions required for a sharp spike in prices are not yet present i.e see my long post below. Full blown bidding wars have not yet broken out.

My father used to say, "There's many a slip between cup and lip," meaning there are lots of greedy and conniving middlemen between the oil at the well and the oil terminal in the Gulf of Mexico.

I personally think (believe) that the Saudi spare capacity is a myth. Just like the 'reserves' on deposit @ the Federal Reserve. So ... what to do? The Saudis are going to support the myth. This leaves a space for Saudia itself and others with some spare $billion$ to buy some oil, lease some tankers and become 'virtual Saudi Arabias'. By manipulating the futures small quantities of physical oil added or taken off the markets can shift the price a few dollars each way.

Oil in floating storage represents oil that can flood the cash market and drop prices. Oil in floating storage represents an idea that floating storage can be expanded exponentially. Where oil can be taken off the cash market, put into tankers and held there indefinitely. Spare capacity = idea of spare capacity.

Welcome to the 'Sitzkreig', the 'Phony War' phase of the great Global Economic Meltdown (GEM). A few dollars here and there on various exchanges represent narrow upper and lower bounds. The world is holding its breath.

The divergence between oil/dollar and gold/dollar is real, I didn't make it up :) Gold, of course, is the 'Niewe World Reserve Currency!' The metric of currency devaluation has been the increase of dollars purchasable by gold. The gold bugs have been scammed by the central banks - which own most of the world's gold, btw - the end is to purge the world of cash dollars. The Saudi royals and oil ministry have both announced support for an oil/dollar peg.

I cannot believe the Fed and Treasury approve of Saudia doing this, both would prefer +$100 oil and a weakening dollar. At the same time, they are hogtied. They cannot even mention oil for to do so would call attention to the de facto peg and - by extension - their own irrelevance!

The Saudis have taken complete control of US monetary policy away from the Fed. Bernanke has been bluffing, implying that the dollar is falling worthless, best to dump it in exchange for stocks, gold, 'developing nations' and whatnot. His bluff is that Wall Street's securities are real money. He wants the cash dollars to 'come to mama' and thence be traded to finance insiders for otherwise worthless derivatives and garbage stocks. Ali al- Naimi has just called Bernake's bluff. By acting, he makes the dollar valuable. Al- Naimi has oil, Beranke has nothing, so Bernanke loses.

The 'King of America', the most powerful man in the world is not the Chairman of the Federal Reserve, it is the oil minister of Saudi Arabia. Welcome to the New World Order! Oil is so easy: all it takes to manipulate prices is to drive a couple of tanks and put up a flagpole! An Israeli air strike on Iran would create a lot more risk. Prices might double as the entire Persian Gulf's output would be reachable by combatants' missiles and mines. At the same time, dollar value would increase in a 'flight to safety'. The wealth of US production - such as it is - would flow to the Middle East.

There is still jockeying for market share among producers, too, this also restrains prices but the high real price level does not require pumping everything. The US and Europe might be oblivious to and in denial about Peak Oil but the OPEC folks aren't. They have the oil, all we have are promises.

But ... for now, the Saudis have decided to play along with the promises. I propose the Saudia traders have a better grasp of dollar flows and value than does the average Wall Street lifer. They also have a unique amount of leverage; their oil has our 'blessed way of life' by the testicles.

All this is peripheral to the question of price over time; absent any 'munitions stimulus' or similar manipulation, nominal oil prices will decline. Stoneleigh's deflation scenario will continue to unfold,a deflation accelerated by a dollar peg to the one thing modernity cannot exist without.

Well floating storage is the new swing producer I agree. Coupled with positions in the futures market at a large enough scale its a potent force.

Now what this new swing producers plans are is open to question. I've called this set up a oil bank along the lines of the Federal Reserve but in this case its a oil backed currency if you will used to hedge against futures positions.
And these positions can take on a lot of leverage if needed.

Only a fraction of the futures contracts end with a demand for delivery.

As and example assuming you have 10 million barrels of physical crude and are willing to use it to short the market at a 10:1 paper trade to your physical reserves. Thats a 100 million paper short position. Force the market down and you can hedge the calls by buying up the opposite side of your trade and dumping them on the certain bounce back.

Its a money making machine. I've got no idea how many variations of this game are possible depending on how you play it. But as long as you don't get caught having to make physical delivery to often you can play it forever.

Add in floating storage at some unkown level and you can do all kinds of interesting things.

The signature is of course a very volatile market as this short position comes on and off or changes strategy.

However if the fundamentals are tightening for real its being played against a rising baseline and of course this Oil Bank has no choice but to front run its customers in the futures market forcing other real oil sellers to deliver periodically to refill its base position.

Regardless of what the real storage levels are at Cushing given they have not changed much over time its pretty clear that the oil is there to back someone taking large positions in the market.

Where the Saudi's fit is interesting. Assuming they have little real spare capacity and perhaps always some surge capacity. ( Given their infrastructure they can always run for a bit at long term field damaging rates)

Then I think they are not opposed to the creation of a new swing producer leveraging storage so I disagree to some extent with this. However I have to think its not a simple relationship.

@Steve

I think that there has been something else going on in the market since 2005 when Shell realised that it is possible to monetise oil in the ground - where it is stored for free - by leasing it to ETF Securities.

The outcome is that $ are borrowed from the fund, and oil is lent/leased by Shell in return.

Introducing Oil Leasing

This was a smart move because it allowed Shell to monetise oil production, and investors to 'hedge' oil price risk without getting pillaged on exchanges by what is essentially a volatility tax by middlemen.

The problem has been that one or two producers - in addition to leasing oil in this way - have also IMHO been indulging in market support operations in the BFOE/Brent complex which isn't too difficult when you consider that only around $3bn to $4bn of benchmark oil cargoes are produced each month at current prices.

The WTI market has been almost entirely irrelevant to global oil market price formation for almost ten years, and the Saudis - who are in all probability implicated (for which there is only circumstantial evidence), although I doubt the 'macro' market manipulation was their idea - have just put WTI out of its misery by moving to the ACSI benchmark.

For as long as interest rates remain at the zero bound - or producers generally come to their senses and re-architect the market - we will see bubbles periodically inflated and then collapsing, rinse and repeat. Judging by the amount of products in storage we are probably not far away from a collapse to a market clearing price.

That clearing price - denominated in dollars - to which the oil price will periodically revert (which is a sort of lower bound on the market price, the upper bound being that which destroys demand) will gradually rise as the dollar declines in value.

Also this discussion on ET

To sum up the winners and losers at the moment:

Producers - short term gains, but medium and long term problems due to the negative effect of massive volatility on budgeting and investment;

Consumers - big transfer of wealth out.

Investors

(a) Hedge Funds - zero sum game less the casino's take;

(b) ETFs genuinely hedging inflation - the casino's take.

The Casino - market-makers, investment banks, oil traders and others - who are making out like bandits.

Thanks, Chris, that is a good one.

The problem has been that one or two producers - in addition to leasing oil in this way - have also IMHO been indulging in market support operations in the BFOE/Brent complex which isn't too difficult when you consider that only around $3bn to $4bn of benchmark oil cargoes are produced each month at current prices.

I bet it happened last week! You have high inventories and a wide crack spread and Russia pumping flat out and the prices held up well. I'd suggest the Saudis, being easy for them to leverage some of their reserves long just as you reported. Works well in the other markets ...

I have to agree about the producers having to offload volatility or suppress it. This must be hard to calculate on the fly. Oil represents both a flow and a stock. Both states carry different values. The high price 'prize' equals inflation in the producers' countries so the upper bound is the inflation inflection point. That is one of those fiendish algebra problems. 2 + 2 = 22. I got it!

Past the inflection point there is little added real return since outside of the USA/Canada there is little for the oil revenues to be invested in outside of oil production infrastructure. Clearly the desert- indoor ski slopes and billion- storey high rises don't represent much more than extravagant (hubristic) defaults. This is why I don't see super- expensive prices. Aside from killing the golden goose/demand, the extra income just rents social unrest and discontent.

The Royals are probably buying gold. The strong dollar helps out the producers as they get more bang for the dollar buck while avoiding inflation.

I read your ET article:

I think that some producers came to realize that oil is more valuable in the ground, and that it may be good business to support the price by influencing the BFOE price in a not dissimilar way to that in which the International Tin Council supported the tin price pre- 1985 by buying in stocks of tin.

Same as how the Fed is holding up the stock and bond markets by buying ... everything in sight!

This works until it doesn't. :)

I don't think there is much chance of a market collapse or panic. I'm more in the deflation camp, where the nominal price declines alongside other assets. Since the real price of oil - relative to less productive assets - will continue to be high I can't see oil washing out of storage ... what I see is the small storage operators selling out to larger groups with deeper pockets.

On the other hand, I figure the precipitous decline in the Spring really was largely a market phenomenon; there was such a tremendous long position in all the exchanges as the 'spike' grew that this formed a de facto 'corner'. With everyone being long the sell side became limited to the exchanges themselves (and their banks). The sell side really did have a corner as the longs bought out all the bears. When fundamentals reversed and the market turned the longs wanted or needed to close their positions. There was only one buyer available ... Goldman Something or Other. Same thing is happening in gold. There is more 'paper gold' than there is physical, the 'sell' side of the gold trade is the exchanges. Once the last seller is gone, the market turns. The only buyer is the exchange: the traders are wagering with tiddly amounts of gold against central banks with large gold reserves backing the exchanges via the exchanges' bankers.

The oil traders are speculating against OPEC which can make as much money not pumping as by pumping and can outpump anyone if they choose to.

If the exchanges want to limit volatility they need to eliminate the conflicts of interest that lie between the exchange banks who are also market makers/participants.

I agree with the baleful effect of zero interest rates. They support carry trades and what else? What can you do?

Saudi Arabia has indicated that they will not allow prices to rise much further than $75 - 80/bbl. In the current constrained consumption environment there is modest pressure on Saudia's spare capacity (more on that, later).

Well, it seems to me, as a basic starting point, that the KSA is as able to control an upward shift in prices about as much as the U.S. or Mexico. The evidence for that is stark, and we need only look a year and a half in the rearview mirror to see it - prices rose steadily to 145 and the KSA did not produce appreciably more oil than they did when prices were at 40.

From this one can derive either that the chose not to pump more or they were unable to pump more.

Certainly oil at 145 was becoming a major problem for them. The KSA, for being, de facto, one of the most important players on the world stage, is amazingly unofficious, unobtrusive, and innocuous. Why? Not because they value their privacy. Because the family recognizes that the light focused on them is bad for their longevity. The last thing they want to see is a headline in the U.S. that reads, "Saudi Arabia sitting on gobs of oil but won't pump more to reduce prices."

It's the damned if you do, or don't, situation.

Admit you don't have the oil - internal revolution.
Admit that you do have the oil but won't pump it - get Iraqed.

So it doesn't really matter why they didn't pump back in 07 08. If they didn't have it, well then they clearly can't control prices, and we're well beyond the period of the oil age when the KSA was a "swing" producer.

Or they had it but didn't pump it, which, while very unlikely because it means they are crazy, is possible, but if they didn't want to control prices, when they could, back when oil was breaching 140, then why would it be reasonable to assume that they would want to do so now, if oil leaves an 80-something band?

So it's, to me, moot. KSA talk of "controlling prices" is some mixture of wishful thinking based on historical momentum, hubris, or feckless political posturing.

Finally, here is my thesis - - -

Peak Oil will not be allowed to be revealed to the world as the cause of our energy problems. That knowledge, if widespread, leads to utter chaos in very short order. A matter of months.

Remember that scene from the movie with Tom Cruise and the redhead when they're racing across the earth to be the first to put their stakes in a plot they want? That's what it is, but with weapons and killing and such.

Months from widespread broadcast of "peak oil" and hence "peak energy" to worldwide pandemonium.

Consequently, there must be a cover story.

The cover story will likely involve the demonization of one or more countries that have oil.

My best guess is that Iran will be blamed for a false flag op that severely affects oil output in the KSA.

Think about that.

Bombs go off in a major KSA facility - Iran ops are blamed, world oil exports drop 50% in a week, and, perfectly for major interests, the headlines read, "Radical Shia/Iranian terrorist group attacks friendly oil producer and causes spike in oil prices."

Gas goes to 10 bucks a gallon. Takes what? A month? Or two? Before the West is ready to go to war to right this wrong?

And Joseph half-a-dozen Pack believes that the reason gas is so expensive is because those ----ing Arab (sic) bastards are insane and need to be stopped.

And peak oil is never mentioned.

Oh yeah, and the casus belli for the next 10 years of war just falls in the lap of the Western powers.

Peak Oil will only be seen 50-100 years down the road.

That's my best guess.

The worst part is, it would be ridiculously simple to pull off.

Just read this morning that Iran "crossed the border and seized well in Iraq."

Yeah sure. That would work, in any case.

P/E is a brain-dead measure. The P/E is clear evidence that most financial types are not very good at math.

What you should look at is E/P, expressed as a percentage. For example, P/E of 20 corresponds to E/P of 5%. That makes stocks look like a bond, their main competition. And while P/E goes haywire when E goes to zero or negative, E/P is nice and linear and meaningful when E is zero or negative.

Then, rather than saying "OMG, P/E is over 100 when historically it is under 20", use the so-called Fed Model and compare E/P against the yield on Treasuries. Yes, P/E is high, E/P is low, but treasuries yields are correspondingly low. The earth isn't falling off its axis just yet.

So re-badge the coloured lines E/P 5%, E/P 7% and E/P 10%. Nothing at all changes; we're still far from anything in the three-quarter century history.

This is presumably a plot of trailing P/Es. What the market is maybe doing then is forecasting a strong rebound in corporate profits. So what if it doesn't happen?

"...treasury yields are correspondingly low" Yep, they are, but for how long? Do ya reckon this is a buyer's or a seller's market? 'Cause if it's a buyer's market, yields may soon rise. I seem to see one* mega-huge seller of treasuries, and, er, the biggest buyer for anything moderately long-dated looks to be the same guy.

(* maybe soon two, counting China?)

I seem to see one mega-huge seller, and, er, the biggest buyer for anything moderately long-dated looks to be the same guy...

LOL !

Now that was funny. Seriously though anyone that does not think its the end game is ignoring the obvious once the worlds primary economy starts playing games like this not only is it not going to end well its not going to end well soon.

Adding in China just enlarges the game of print and pass the buck to include making cheap plastic crap to appease the masses on both sides of the big pond.

Now if China depegged from the dollar its a different game however it just means the final inning was played with China depegging at the top of the ninth.
They just decided they could survive the crash of the US.

Of course eventually they will be force to eat massive losses but I suspect China will hang in there until we take them down with us and the decouple to late to save themselves. They are greedy and arrogant enough to try and play to long the US does not have a monopoly on playing with monopoly money :)

PE of 148 is an earnings yield of 0.7%, any dividend yield will be substantially below that. That chart (Fig 4) is just displaying data for 1/4 in that plunge and it does have to be viewed with caution. Full year figures may be better as economy has recovered. Long dated treasury yields are very low, and there is a view that they are about to get higher. So what impact might higher interest rates have on the broader economy and equity valuations?

You can not compare debt (especially treasury debt) to equity apples to apples.
The principle on debt is much more secure than equity and therefore debt yields should be expected to be lower.
Because of the much greater risk of losing your initial investment, equity should yield a much higher return than debt. Just look at the order of liquidation in a bankruptcy.
All equity gets completely wiped out before one penny of debt gets forgiven.
The equity market in the US is a joke and will never ever justify the outrageous multiples no matter how they are calculated.
It is completely driven by the foolish money printing and handing out to the criminal big banks who are stuffing into something they think is real.
This has to be the end of this nonsense.

The S&P 500 PE rose with the credit crisis of Q4 2008.

You can not compare debt (especially treasury debt) to equity apples to apples.
The principle on debt is much more secure than equity

You can lose a lot of money making that assumption. Debt should be much more secure than equity, but the recent financial meltdown demonstrated that you have to pay attention to what kind of debt you are buying. Bad debt is worse than good equity. Really bad debt is worth less than nothing.

I understand.
The point you are making is a distinction between the issuers of the debt and equity in other words the company to company comparison.
From the same issuer debt has claims on assets after accounts payable but before ALL equity in the event of a bankruptcy.
What has happened in the last debacle is called fraud and has nothing to do with investment analysis.
Bad information can't be analyzed.

Hmm a challenge.

I think we are on the verge of hitting the big one. I.e the start of the real end game leading to absolute economic collapse.

However the presents a interesting challenge depending on how things go.

If it is the big kauna the it depends one what fails first.

We could perhaps see a banking failure and follow on economic collapse with oil playing a secondary role.

We could see a massive spike in oil prices then economic collapse with follow on collapse of the global markets and currencies making a "market" price for oil difficult to even guess.

Given this predicting the price of oil is difficult. However I'd argue that most routes to collapse would involve one more spike in oil prices as part of the collapse process.

The only one that I can see actually resulting in economic collapse with low oil prices is for other factors such as financials to collapse first while oil supply was greater than dwindling demand and also production was relatively unaffected.

This would mean oil producers would both be the last countries to collapse and able and willing to keep supplying oil at ever lower prices even as their customers collapsed and their fiat currencies became effectively worthless.

Not impossible but also made of a chain of increasingly improbable events.

One has to imagine at some point in this chain of events that prices for oil in our current fiat currencies would skyrocket.

Most other scenarios would have BAU last for a bit longer given the choice between economic collapse and allowing countries to take unheard of actions to avoid it in general one would think that anything will be allowed to stave off collapse for just a bit longer. To day the phrase kick the can down the road is becoming common place. I'd argue that its going to reach ridiculous levels of gall and even outright fraud before we collapse.

What this means of course is we are in a catch 22 situation any attempt to allow demand to contract naturally and allow the economy to heal would almost certainly result in collapse as the system is already past the point of no return. Further attempts to stave off collapse will keep demand relatively high despite the increasing frenetic nature of central bank moves.

This suggests that if oil supply and esp exports is actually declining at any reasonably high percentage that supply and demand will become a big problem sooner than later and high oil prices will again become entangled in the messed up economic situation.

The paradox is that if it seems things have stabilized via the taking of ever more extra ordinary actions on the part of the worlds government then we can pretty much bet we are going to get a high oil price collapse scenario.

If however the situation changes and debt deflation is allowed to run its course and the world effectively defaults and tries a fresh start then its more likely that we take a lower priced oil transition. This is probably the least traumatic collapse scenario.

Personally I just don't see cheap oil as happening. The intrinsic problem is pretty simple lets say oil fell to 10 dollars a barrel. Assuming our financial system is intact it seems to me this super cheap oil could easily spur regrowth and stabilization i.e cheap oil is in itself sufficient to avert economic collapse. I'd argue if oil was still 30 a barrel our economy would be in much much better shape now than it is. The relatively brief drop in oil price and speed of the economic shock followed by the massive intervention kept the economy afloat. Weakened sure but not yet the end of the world.

Even this brief period of cheap oil in my opinion played a vital role in staving off systematic collapse. Therefore its difficult to consider collapse scenarios that include cheap oil as valid.

Non Collapse:

Scenarios that have us drifting in and out of recession with oil prices rising and falling simply don't fit with the precarious state of the world financial system. I.e someone will collapse before we even went down this path. I think thats the wish i.e we do sort of stumble along with nothing really bad happening and the banks balance sheets are repaired and we sort of go into a moribund jobless recovery.

I've read several articles covering the financial aspect of the South American sovereign debt defaults esp Argentia's and also the Asian crises. The cure seems to have been to keep the system together and hide insolvency and provide liquidity until time eventually solved the problem. A striking counter example is of course Japan which never healed and has simply stumbled forward unable to die and unable to save itself sort of like a zombie economy neither dead nor alive.

The world economy in my opinion simply cannot take these two roads its can't stumble along and allow time to eventually heal the large losses and we can't become a global zombie ala Japan. The reasons that it worked in the past is simply because other parts of the world economy where growing robustly and able to help heal the regionally sick economies. If everyone is in bad shape I just don't see who is going to provide the robust economy to heal the rest.

China certainly can't become the worlds great importer and replace the US I'm sorry I doubt they can even grow domestic demand fast enough to offset falling exports. Heck you would have to have the entire world turn a blind eye to the US sending every single citizen 100k gratis and not devaluing its currency on bit to pull this off and then everyone would need to do something similar with zero ill effects.

And last but not least all of this has to happen without major war breaking out anywhere perhaps for decades even as oil production declined.

Timing:

Now we get to timing and this gets into what I think is really going on right now. First and foremost I take as a fact that during the second half of 2008 and first half of 2009 as we had the financial crisis and hurricanes that something in the range of 100-200 million barrels of oil was stored offshore in floating storage and on land. Next at least some of this oil was refined into distillates that where also stored with the gasoline in general being sold. In the US we certainly had distillate demand used for commercial trade impacted more than gasoline demand so excess distillates make sense even on the demand side for the US. Outside of the US perhaps it was not so lopsided but still at least to some extent distillate demand seems to have generally dropped vs gasoline.

So at least at one time the world had plenty of oil and next it at least had plenty of distillates for a bit after that.

Notice the use of past tense :)

Next I don't think the extreme financial moves made by the worlds governments are restricted to simply doing illegal financial moves with banks I also think similar but more covert games have been played in the oil market. Obviously if your getting away with printing money then you can certainly short the hell out of the oil market if your able to lose with impunity.

Now of course financial games are just that games and as long as your dealing with a huge market the games are not able to keep a market in and unnatural condition forever. Certainly they can keep things going longer than many though possible aka the housing bubble. But they do that at the expense of eventually destroying the market. For commodities that are freely traded and subject to daily supply and demand issues along with healthy spot markets attempts to control price fail sooner than later.

All of these factors are in my opinion winding down right now. The real glut in oil is either used up or very close to gone. The follow on glut in distillates is probably in similar if slightly better shape. Globally the US probably benefited the most from strategically getting the lions share of the glut thus they rest of the world is in general in worse shape than we are.

And my spidey senses tell me the US is itself on the brink of shortages.

So end the end all I can say is my gut is telling me the game is now up and oil is going to become a serious issue fairly rapidly.

I will say that it took me a while to understand what happened in 2008-2009 however thats because until recently I did not know exactly where we where on the post peak oil production curve. Now that I have a firm handle on it using data thats still not recieved comments from some of my trusted reviewers. They know who they are..

In any case everything clicked and I realized we are actually in the end game.
From a really really big picture I think complex system crash when all the parts become synchronized and rigid if you will then they simply shatter.

So when we can no longer play financial games an games with oil prices and all kinds of other tricks to keep things afloat then we fail. Thus from my big model of the collapse of complex systems the result is all key variables turn red or go to hell finally at the same time not just one. The reasoning is that if there is still room to escape collapse then that path would be taken i.e collapse will be averted.

However we are past that point we took the last way out via semi-collapse now all doors are closed and all key economic variables are going to go red together. The system thus crystallizes and shatters all possible moves result in checkmate.

To some extent this is a inverse view of a black swan event. Events are black swans and dangerous if they occur when the system itself has no flexibility left. Obviously I think the so called black swans are simply one of many possible triggers for collapsing a system that has no other mode to evolve.
They are the extreme of all manner of bad events from predictable to unpredictable that can collapse a strained complex system. Thus its the move of the complex system to this final crystalline like state with no options thats the key not the trigger that causes it to shatter.

Time will of course tell but when I try and put everything together esp the fact we are almost a decade past peak oil then I'm comfortable in saying we are at the point of final collapse and further more one key part of that will be another spike in oil prices. Afterwards or perhaps during the collapse I expect war to break out so beyond that point no one can know what happens as our fortunes will be tied to the ebb and flow of conflict not functional economies.

I think we are on the verge of hitting the big one. I.e the start of the real end game leading to absolute economic collapse.

IMO there is no such thing as absolute economic collapse. Individuals and companies can go bankrupt but are born again after the bankruptcies. I can not imagine an absolute economic collapse since it implies the death of everyone. Some individuals and companies may die, but for an economy to reach the state of say Zimbabwe for example implies near zero oil and no alternatives.

We are nowhere near that situation and are unlikely to get there anytime soon. High oil prices and recession are not the end of the world or the economy as we saw in 2008. The imperative of life is to continue no matter what. We have seen that in the former Soviet Union and in Zimbabwe. Remember there is still an Italy even though the Roman Empire collapsed. And Italians live quite well today.

There is no end game. Life goes on for most no matter whatever calamity. An economic collapse if it does occur is merely the prelude to rebirth albeit in a different, more modest form. The birth may be very painful and a struggle but it will happen.

I tend to agree with this. The greatest casualties I see are pensions, reduced health care and education - a general lowering of expectations set against a backdrop of more effort to survive. Very high unemployment for a long while until some new model for the future emerges. We may see life expectancy start to fall in the OECD.

The era of less will be quite a contrast to the era of more.

Euan I won't say your wrong in a sense. However see my other post I think the assumption that we are having a monetary problem is simply wrong. Its a population/resource issue. Changes in the monetary system are secondary.

As and example consider what happens as the OECD develops a growing class of increasingly poor and disfranchised population. These people will demand support from their governments from financial to food. As OECD governments are forced under threat of riots to deal with their own growing poverty the largess now given out to third world countries will by necessity fall. Nothing you can really do about it. This of course forces the third world countries into even more squalor. On the trade side demand for cheap products lessen dropping exports out of these countries. Thus the formation of a new poverty stricken class in the OECD ripply throughout the entire world its not a localized event.

Now all of these steadily poorer people are going to continue to demand some amount of fossil fuels to live. Exactly how much is open to debate of course but the competition for resources will continue even as overall wealth falls.

Indeed attempts to bolster economies via government intervention will probably keep oil demand artificially high even as the economy shrinks. In general however it will be increasingly from misguided government programs that add little to true wealth creation.

Given this basically direct feedback the question is simple is our current system resilient to decline ? I just don't see it. The world is not going to peacefully allow this sort of steady impoverishment forever. We know how the Great Depression ended. The assumption that we will simply see some survivable monetary poverty seems the least likely outcome.

No one knows how things will pan out. Whilst I am feeling more gloomy now than previously I think that ultra doomers tend to underestimate adaptation and individual resilience. But I admit I live a rather sheltered existence in a nice neighborhood. I am more in tune with Walter Youngquist, small incremental changes over time take us to a place in 20 or 30 years that is unrecognisable from today. But Walter also said he could not exclude a catastrophic change, and neither can I.

http://europe.theoildrum.com/node/5974

Then you simply have not come to terms with the population problem.

Your free to have a rosy outlook but even attempting to extrapolate historical events forward to a world with six billion plus people easily results in a horror on the scale never before seen.

Ignoring it does not make it go away. I don't even care about financial issues any longer for example thats how concerned I am. They don't even matter. Financial issues are the least of our problems.

A while back I wrote a post where I said I expect that eventually we will see the gloves come off globally. I.e the problems between countries and fight over resources will quickly degenerate out of sheer desperation. I'd argue we are just now starting to see this happen. If we don't wake up and realize accept and work on our true fundamental problems then I fully expect things to worsen rapidly.

Of course if someone posts a realistic and doable way to transition six billion people to a declining energy world then I'm all ears. Certainly solutions are possible and will probably continue to be for some time but they will require a serious sacrifice on the part of the entire world to implement.
The cure is only slightly better than the disease of over population at least at first. Of course I could easily have missed something however you have to start with how that problem is solved not how your going to live in a OECD country if your impoverished. Its not your poverty thats the issue. Its the five billion other people that realize we took everything and they not only have nothing now but never will thats the problem and worse probably will lose what little they do have.

OECD issues are like a powder keg setting on top of an atomic bomb.

"Then you simply have not come to terms with the population problem."

Yup, that's always the conversation stopper.

:)

Thanks for the lift :)

Seriously though if you simply assume 1 ton per year per capita for C02 emissions excluding fossil fuels you get the effect of population alone on the same order of magnitude as any one of our fossil fuel sources. Just our existence is impacting the earth as much as our use of fossil fuels. That does not go away no matter what happens to fossil fuels. Population alone is large enough to have its very own climate/weather ecosystem altering effects. We literally have enough people in the world that our simple presence is a issue even discounting fossil fuels entirely.

I'm not sure its enough to cause C02 levels to rise albeit at a lower rate than with inclusion of fossil fuels but its close enough to consider its possible.

This is observation is what made me finally realize the shear number of people is its own problem not just fossil fuels our simple existence at a our current numbers is a serious problem for our planet. Even if we suddenly stop using any fossil fuels we still have a serious problem. We are now close to a locust hoard devouring everything in our path simply because of the number of people.

As a individual thinking human being realizing I'm also not only part of the hoard but one that uses far more resources then most is ummm not pleasant.

Collectively our species is its own special blight on the planet. I know people know this theoretically but internalizing it and really understanding it is difficult or was for me. And of course we have other problems on top of this serious basic one so ....

To be honest its probably not a surprise that our leaders are desperately trying to connive their way out and attempt to side step our problems. Even if they don't understand the intrinsic problem it bubbles up coloring all our choices and decisions. Perhaps the constant knowledge of the hoards of people that have very little is a sort of basic force underlying the conspicuous consumption at the top of the pyramid. We take all we can because it keeps us different from the teeming masses. Population pressure alone could perhaps be sufficient to distort our social system to one that focus on material wealth.

Needless to say as a species we are seriously ill with a systemic terminal or almost terminal disease along with a number of serious opportunistic infections on top. Only when you give up on happy endings and consider the only solution is to ensure that the patient lives his last bit of life comfortably can you really solve our problems. All most of us can do for the foreseeable future is die with dignity. Done with compassion and forethought I see no reason why we all can't live out our natural lives in reasonable comfort and still allow population to fall at a steady rate but thats our only real choice and only answer. Hopefully you see that if we addressed our real population problem head on then it solves for the most part all our other problems this in itself shows they are secondary side issues.

Heck if population was falling every year and also working hard to reduce its footprint I'd argue that almost none of our current problems continue to exist under this assumption. Obviously we would not even have the debt issue at all as the shrinking population would inherent more value add wealth than its preceding population. Housing needs would steadily shrink for example. Across the board in the falling population case resource requirements would actually fall faster as only a much smaller replacement economy for consumables need exist. Durable goods that are still serviceable would be in excess. Oil consumption would be moderating quite possibly as fast if not faster than the natural decline rate esp if we moved to and electrified infrastructure.

I just don't see how I'm wrong given you almost solve all our problems simply by aggressively stopping population growth. At worst you have younger people caring for more older people but they are doing it as and ever more wealthy population. If I was twice as rich I could readily care for twice as many older people. Given my cost for infrastructure i.e durable goods would be close to zero as they would be in excess perhaps even more. In fact since working would be more to pay for simply staying alive I'd even have time to care for the elderly not just wealth.

If I had a home that was paid for a car that was paid for etc etc and was just staying alive then I could easily care directly for my own parents. My child or other relative or even a stranger would have my parents house or mine when they passed away can can return the favor. After that you have a empty house that can be recycled as you go into the next generation. With the poorest or most environmentally sensitive ones removes. Say my parents have a car and I do then one could be used for parts or recycled for components to keep the other one refurbished etc etc. At each stage you would literally be returning uneeded accumulations of "wealth" back to its natural state.

I can't see how my position can be wrong as simply assuming a declining population truly solves way to many problems.

mammel,
surely you know that the role you play here is that of Dr. Strangelove. i don't mean that in a critical way. always enjoy your stuff. Forgive my ignorance, but sometimes you reframe too quickly for mere mortals. hope you have a wonderful holiday season.

Thanks for your compassionate expansion on the subject.

I was especially struck by your first paragraph. The implications are astounding. I haven't seen it expressed that way before:

"Seriously though if you simply assume 1 ton per year per capita for C02 emissions excluding fossil fuels you get the effect of population alone on the same order of magnitude as any one of our fossil fuel sources. Just our existence is impacting the earth as much as our use of fossil fuels. That does not go away no matter what happens to fossil fuels. Population alone is large enough to have its very own climate/weather ecosystem altering effects. We literally have enough people in the world that our simple presence is a issue even discounting fossil fuels entirely."

Hi Memmel,

We are now close to a locust hoard devouring everything in our path simply because of the number of people.

100% agree

All most of us can do for the foreseeable future is die with dignity. Done with compassion and forethought I see no reason why we all can't live out our natural lives in reasonable comfort and still allow population to fall at a steady rate but thats our only real choice and only answer. Hopefully you see that if we addressed our real population problem head on then it solves for the most part all our other problems this in itself shows they are secondary side issues.

Perhaps we can do more to achieve "it solves for the most part all our other problems" by being more proactive about this issue. Please support Population Connection:

http://www.populationconnection.org/site/PageServer

Well given this is the first time we have tried collapse with six billion people on the planet dependent on a dwindling resource I'd argue the chances of a collapse of civilizations resulting in the death of billions is fairly high.

Of course we have never been in these circumstances before where a global civilization tied together with and intricate web of commerce but I'd argue that attempting to compare this with past collapses of regional civilizations simply is not correct.

Of course if their were intelligent dinosaurs perhaps we could ask there opinion of course we don't really know how smart they where in the end as there are non around to ask.

Thats not to say that we perhaps won't manage to have or Italy's after Rome falls who knows. However the odds are that most of the current six billion inhabitants of this world right now probably won't make it through the horror this implies makes the survival of a few a very small factor in the big scheme of things. If the world population even fell a few hundred million thats a scale of death and certainly destruction never witnessed in the history of man.
Billions is simply beyond both our comprehension and far beyond any historical comparison. Any situation less then this is effectively and assertion of something very close to the current status quo.

For all intents and purposes to maintain the current situation implies no conflict sufficient to generate death on a large scale. Without this demand will not change much if demand does not change then supply must meet demand.
Anything else leads us into a widening problem that almost certainly would escalate as I mentioned above beyond anything we have ever seen.

Thus I'd argue is effectively all or nothing either we keep six billion and growing numbers of people living at least some sort of stable life or it all unravels there simply is not room for a intermediate answer at the worlds current population levels is and all or nothing affair.

Over the last couple of months I've managed to really grok the population problem and its energy implications the US's games with fiat money pale in comparison with our real problem. The financial drama with toy money is not even in the same ballpark as the problem of every growing population chasing a shrinking energy supply. In fact its practically a side show or circus to keep us from really grasping how poor the basic fundamentals are.

Its taken me a bit to understand how unimportant our financial issues are but thats because I just recently grasped in a fundamental sense the true scale of the problem of six billion people. Its not and easy thing to really grok.

Needless to say I fully understand why we chose to inflate fiat currencies at a steady then faster pace as population grew faster than oil supplies any other approach would have lead quickly to collapse. Our choice was to either control or population or try to run as fast as we could hoping for a miracle or silver bullet or something before we hit the wall. Any other saner solution simply fails as long as population growth remained uncontrolled. Running as fast as we could has failed and not only that we managed to stay afloat until we had stripped the world of resources ensuring when we did fail it would be far harder.

The Western Roman Empire was replaced by the Gothic Kingdom of Italy run by a Germanic King
Theodoric with the Romans and their Senate being reduced to second class citizens. Officially it was a Gothic-Roman 'hybrid' but such partnerships are never equal. 100 years later the Eastern Roman Emperor Justinian defeated the Goths and brought Byzantine rule to Italy and then 60 years later the pagan, savage Lombards conquered Italy and Italy didn't regain self rule again until 1861.

X,

Happy Cornucopian Christmas,

and lay off the 'spoiled turkey sandwiches' which creates this dreamstuff of your posts.

Airdale

See the timetable of converging events up to 2020 in my slide show (PDF)

Emergency Planning after peak oil 2005-2008: 3rd and final oil crisis:
http://www.crudeoilpeak.com/pdfs/1

Predictions for 2010; demand worldwide will remain the same at about 84 mbd, but China will use more and the West will use less as more people become disenfranchised, i.e. bandruptcies, layoffs and residential foreclosures.

Price will rise to the 85-99 range as depletion continues and increasing US debt lowers value of the dollar.

What concerns me is when oil went to 147, it plummeted back down into the 30's quite suddenly, and this drop in price helped stabilize the economic situation. But this period of price increases seems to be on a much more solid footing. If price goes up to a high enough amount to cause a recession, could the demand destruction in the US just get replaced by higher demand in China, Russia & India?

Yes.

Earl -- Saw an interesting chart a month ago that emphasizes your question. When oil prices ran up global consumption dropped. Even after prices fell the collapse kept consumption down. Except for China. From around Jan 09 their oil purchase started an upward climb. But makes sense given how the Chinese gov't essentially runs their oil indistry: oil prices are cheap and China has the cash reserve = buy as much as you can as fast as you can before prices recover. They took the same approach buying oil/NG reserves in the ground during the same period. A big advantage when a communist gov't can exercise such complete control. Difficult for the US free market to compete on that playing field IMHO.

Predictions?

Well from that graph is pretty obvious. Real supply capability has been pretty flat and with the 'recovery' in the economy we will see $120+ by the summer. That rolls into the general economy at the same time interest rates have to start rising and QE ends.

The result is another crash, or 'double dip' as the finance bods will misinterpret, but this time without the capability to print money to stave of the worst effects. It will hit hard and fast with the weaklings being killed off and a greater understanding of how oil is ruling the game.

One way or the other the market will probably be in the throws of change as we reach Dec. So say $38 if people haven't come to terms with the hard oil limit, or $152 if they have and have started to price oil according to a post peak reality.

"Our socialist government" Euan? What, Nulabour? Surely you mean our 'socialist' government.

We haven't had much in the way of the real -- if rather mild -- socialist policies which the common people always prefer for - well, for how long?

Estimates vary, but most would suggest not for a long time. And meanwhile, those majority-preferred socialist public provisions which we did manage to achieve, such as the universal public health service, universal public guarantees of sufficient basic income in time of personal hardship, free (at point-of-need) universal education up to tertiary level, etc., which the common tax-paying citizens still very much want (in the US as much as here if repeated opinion-poll results are to be believed) have been under constant attack from the gics*, the entrenched, privilege-defending enemies of democratic, principled socialism absolutely since the first serious steps in that direction were begun here after WW2.

By now, those attacks have had some delapidating effect on what public social provision we have achieved, of course, with Tweedledum Nulab and Tweedledee Conservatives vying to outdo each other to continue the destruction, both striving to please their real masters.

That's not the mere electorate, of course. Many of us have been pretty well disenfranchised by now even of the limited democratic enfranchisement that we might arguably have had previously, since there's only Twee X 2 allowed as a de facto choice in our alleged 'democracy', and each as bad as the other: As they say of the US Demo and Repub gangs in the US - rival wings of the one Bigbiz Party.

A commenter on the hallowed Medialens Message Board put it very well recently: "Politics [in USuk now] is just a squabble within the oligarchy."

So, with our constitutional 'democratic' machinery comprehensively stitched up, and the corporate media wholly integrated into the public-perception-manipulation machine in USuk, what chance within the Western empire for intelligent understanding of what's really happening, with intelligent real-world responses to address the Synergising Global Crises effectively?

At least in places like TOD, common-citizen outsiders like us-all get a chance to have a stab at that first step of intelligent understanding, which has put us consistently ahead of the high-profile orthodoxy-defending 'experts' over the past few years in our awareness of what's happening and where it's pointing. But of course as mere common citizens we have virtually zero power to push forward the vital second step of effective response.

I've been concluding, regretfully, for some time now that that sort of serious constitutional re-enfranchisement of us mere commoners can't happen this side of some kind of widespread revolution and deposing of the current gic-class in the Western empire. Historically, revolution is always destructive, bloody and very dangerous, but now, sadly, it seems inevitable as general system-collapse comes on inexorably. (What grisly -- and futile -- struggles the gics and their wholly-owned pocket-politicians must be having in Kobenhavn right now, eh?)

* GIC = 'Gangsters-In-Charge' -- the various faction famiglie within the super-rich point-nought-something percent ruling 'elites'.

Whilst I agree with a lot of what you say, I personally do not believe that the electorate actually wants outright socialism as such. My view is that the centre of gravity of the populace is actually somewhere around the centre line - sort of "no wing" as opposed to left or right wing. That is a balance between collectivist and individualist policies, or a balance between social services and individual provision.

Overlaid on this is the pendulum of politics, which historically has swung backwards and forwards. As the swing gets towards the end of its travel and slows down, the country rejects the current politics and embraces the alternative end of the spectrum, and the swing starts to speed in the other direction for the next swing.

However this natural process has been somewhat interrupted by the current New Labour period, which has been an extension of the policies of Thatcherism with a slight socialist flavour (increased expenditure on health infrastructure in particular). This is why the electorate as a whole is not demonstrating as strong a desire to see a Conservative government as you would expect at this point in the cycle.

Obviously this is a somewhat oversimplified picture, but I do think it has some significant merit. The key thing, though, is that there is no appetite in the populace for any form of revolution. There's no appetite for anything really right now, more a collective disappointment with politics and politicians and the policies they espouse. Most people are resigned to a long slow collapse and don't think that a simple change of government will change anything much, unless they are blinkered by their blind support for one party or the other into thinking that they have the answers and the other side are all stupid - however grossly naive and ill-informed this view may be.

there is no appetite in the populace for any form of revolution. There's no appetite for anything really right now, more a collective disappointment

Just wait. Living under a corrupt system isn't so bad as long as the living is good. When the living gets bad, well that's a different story.

Most people are resigned to a long slow collapse

Most people on TOD maybe, but most people in general definitely not. The general consensus, as far as I can tell, is that the economy will recover slowly after a long recession, energy and climate problems are going to be difficult and unpleasant, but ultimately solvable. A vanishingly small percentage of the population have a vision of the future which could be described by the word collapse, fast or slow.

Should a long slow collapse come to pass the pendulum of politics is going to pick up speed. In the UK I expect the pendulum to swing to the right. My guess is that the UK will probably go fascist within a decade. And the US will probably dissolve along the lines of the USSR, but with a much greater chance of civil war.

On an amusing note, if it happens that way then V for Vendetta will turn out to be oddly prophetic, virtually guaranteeing that a guy in a Guy Fawkes mask will blow up the Parliament.

Our useless 646 MPs in what will surely become known as the Rotten Parliament have made a complete pigs ear of the UK.

There is no willingness to make any attempt to curb UK population growth, and no sign of any sustainable business to replace the petroleum and casino/"financial setor" revenues. No serious attempt to address the balance of payments problem. UK is as bust as Barings, and only the life support of Quantitative Easing is keeping the Government afloat. Default is inevitable in the medium term. East European level incomes in real terms is likely to be the end result in a decade or so time. Businesses domiciled in the UK are likely to up sticks once the IMF tax rises start to bite, further hitting the spiral into default.

The near unlimited exectutive powers possessed by the elected dicatorship mean that fascism is already here. Just look at some of the High Court decisions of late, the outcome in the Trafigura case. The UK is currently governed in a manner that would shame a banana republic. There is corruption at every level in the political system. The bureaucracy in the UK is now so malignant that the simplest of actions will take a ream of correspondance and permits to achieve. Political patronage is required for any success. The professions have been brought under the thumb by draconian regulators, where even thought-crime could result in the loss of a medical license for example. Oppose the elite: you will be crushed by a judiciary who owe their allegiance to the elite.

What a total mess. Communist Russia or Nazi Germany spring to mind.

Still, I and my family are emigrating on January 7th. It has been great spending the last of my soon to be worthless sterling. Hopefully my selling of sterling will be yet another cut in the corpse of the government. I am looking forward to moving to a country with a real written constitution, a written bill of rights, and a commitment to being neutral, boring and stable.

So long my fellow Brits, the sensible are getting out while they still can. I have more than done my bit in the last few years to try and make UK great again, but there is no use swimming against a stinking tide. If that makes me another rat leaving the sinking ship, then so be it. It makes me sad to leave, but I will not bring up my kids in a 1984 state that taxes to hilt and offers nothing but moat cleaning in return. Stay on the island and you can enjoy sinking with NuLiebore's debts and corruption...

I am looking forward to moving to a country with a real written constitution, a written bill of rights, and a commitment to being neutral, boring and stable.

And so my friend where are you headed?

My younger boy is just finnishing school (just in time) and we too consider abandoning this stinking ship where bankers have become the new feudal lords. Our first choice is liekly Norway where we lived for 8 years before and we both speak the lingo. Nice people and 3 mmboe / day (or there abouts) to provide some security.

Germany. Not perhaps the ideal choice form a peak oil perspective (I cant speak Norwegian!), but I speak the lingo after a fashion (having lived previously in Austria for a period), and most of my customers are in the German heartland. Plus property is way more affordable, and land is in better supply. The traditional values of German culture are a plus, as are the excellent school system.

It is primarily a move driven by business, (and a little adventure!), but political events/corruption in the UK since Sept 11 have been a big push factor in my decision. I am aware Germany is not perfect but at least I wont feel shit on by the elite every time I read a paper... Of course that means my tax domicile will change, but depriving McBroon or Etonian Dave is a positive pleasure...

Germany. Not perhaps the ideal choice form a peak oil perspective (I cant speak Norwegian!), but I speak the lingo after a fashion (having lived previously in Austria for a period), and most of my customers are in the German heartland. Plus property is way more affordable, and land is in better supply. The traditional values of German culture are a plus, as are the excellent school system.

It is primarily a move driven by business, (and a little adventure!), but political events/corruption in the UK since Sept 11 have been a big push factor in my decision. I am aware Germany is not perfect but at least I wont feel shit on by the elite every time I read a paper... Of course that means my tax domicile will change, but depriving McBroon or Etonian Dave is a positive pleasure...

Noutram: I will opt for $95.

I think we have a Western bias on TOD and the current 'crisis' is the Western world maxing out on debt.

In other parts of the world huge infrastructure projects have been spent into existance along with a re-engineering of society around a more consumption oriented model. I'm thinking China here especially where -just this year- they have surpassed US car purchases and have 4-5x more people who want in on the dream...

I don't think demand is going away, even at these prices. I think the Saudias probably still have some spare capacity and it may go briefly over $100 before being reined back at some point. On the downside we might see some more financial panic caused by withdrawal of life support interest rates, energy is already working its wonders on US Inflation rate. I expect Gold to shine as the FED continues to keep low rates in the face of mounting inflationary pressures. It will again be a case of too little (tightening) too late IMO. The Asset Bubble continues to grow ready for the next pop in 2012? (At some point ALL and any excess capacity will have been bought to market and the price will spiral up again).

Nick.

Thanks Euan.
I see the following contradiction:
#There will be a general election in May
X
# Cash for clunkers will end in January

Resolution:
# Cash for clunkers will end in May

Reason:
The government wants to win the next election. So they'll keep CfC up until the election in order to keep the Recovery Illusion alive. The bill for this (an "unexpected budget gap") will be paid later.

Background:
The same happened this year in Germany (e.g. with the famous scrapping premium).

Recommendation:
Enjoy the coming six months :-)
And buy plenty of warm clothing, food and seeds for the time after.

WRT Matt Simmons $10,000 bet that oil will average $200 in 2010:
(and this was in 2005 dollars, so thats $220 next year)

I think Matt was thinking in linear terms, which is the first mistake when forcasting oil prices

are there any side bets on this wager?

Personally I think there is a good chance it will touch $200, maybe for a month, as it passes thru either way

You may be right, but I can't seriously understand anyone wanting to win the next election. If Brown wants to win he must be seriously more deranged than I already think he is.

Don't forget, in a great crisis there is a great opportunity for whoever is in power to push through huge reforms that normally wouldn't stand a chance.

Good post, Euan.
Your thoughts match my own solidifying conclusions precisely. (Nothing like a little self re-enforcement first thing in the morning.)

As near as I can tell, everything at this moment in time is looking either fairly priced (gold, oil), or slightly over priced (stocks, bonds). I'm not seeing any obvious places to put money. My own thinking is that it's getting very near time to take some profits out of my crude oil position, hold on gold, prepare to pare down more on equities a bit later in the spring or summer of '10. Cash won't be safe once we get higher inflation (it'll happen, just not soon). This is going to be a complicated juggling act; lots of land mines down the road for sure and in the end, it's all about just making the best guesses possible.

About Figure 2:

It remains a source of great surprise for me that the monthly average production and price data for the last 8 years still fits this model. There are a number of wild card variables that one might expect to produce significant deviations, such as variable OPEC spare capacity, changes to global productive capacity, speculation and currency fluctuations. And yet the data fit this simple model remarkably well.

It fits the model becase the model takes into consideration varying spare capacity, changes on global productivity, speculation, and currency flutuation. Supply and demand is a quite robust model*, quite well tested, and oil is a textbook example of finite good.

What to expect: If we are post peak (what I think we are), the supply curve will translate into the left**, that curve seems to be an exponential divided by a linear function***, so with inelastic demand prices will rise exponendtialy for an indefinite amount of time. In other words, we'll soon discover how expensive oil must be so that demand starts to behave in an elastic way.

* Not a very usefull model, but the little information it provides is quite robust.
** f(t, x) = f(0, x + at) where 'a' is a positive constant.
*** Price to extract is near linear to number of weels, productivity decreases exponentualy as good fields are gone. That seems to be (from data gathered around TOD) a good enough simplification. I know it will turn hyperbolic at some price, it just doesn't seem to be on any practical price.

Here's, just for fun, a graphical wild guesstimate, ... pulled out of my ... sleeve:

Defaults and deleveraging Dubai-style bring the price down in the next months. Then Asian infrastructure and transport growth + ELM shakes awareness about shrinking spare capacity. Slowly scarcity enters the equation ... landing us at $100 in a year.

I'm with Massagran. The defaults are not over yet. People may still be driving when they shouldn't be because they just stopped paying their mortgage and haven't been kicked out of their homes yet. Banks are staring a cash flow chasm in the face, and deciding it's more profitable in the short run to gamble on commodities (because the dollar's biting the dust).

Oil supply will win out in the long term, but it's a two-sided equation and credit == demand. If credit -> 0, the dive may be bigger than people expect. $20-30/b may seem cheap now, but what if my income is $0?

Oil supply will win out in the long term, but it's a two-sided equation and credit == demand. If credit -> 0, the dive may be bigger than people expect. $20-30/b may seem cheap now, but what if my income is $0?

This is what I'd say the majority of people believe to be true. The assumption is that tightening credit will lead to lower oil consumption.

However this link between credit and oil consumption is simply not proven its been assumed.

In fact as far as I can tell its a false assumption and their is no tie between credit and oil consumption.

Its far better to assume that oil consumption is tied to cash flow not credit.
Defaulting on credit increases cash flow therefore as long as credit is available to be defaulted on cash flow can be maintained and thus oil consumption maintained.

I can use myself as and example I'm now laid off. Being peak oil aware I have already cut my energy consumption to a low but still convenient level. Until I absolutely run very low on cash my consumption will remain constant or increase depending on circumstances.

I'd argue that many people in different circumstances have already done similar actions if they had taken on too much debt and attempted to service the debt they already cut consumption. VMT has been falling for years the fat in the system has been cut. I'm not the only one. As people give up on debt service and default they simply are not going to cut oil consumption until cash flow becomes a serious issue.

Of course actual consumption depends if you where driving 50 miles to work and got laid off sure your consumption will drop but for every person with a 50 mile commute that stopped you have another that say had a five mile commute that took a low paying job say 20 miles away. Until you reach the point that cash flow is a issue and its food or gasoline you can and will use what you need to get buy whatever that level is and it simply varies depending on how your circumstances change.

If credit was such a powerful force then how come per capita oil usage in the poorest states such as Mississippi is not all that different from the wealthy states ?

http://www.statemaster.com/graph/ene_pet_con_percap-energy-oil-consumpti...

I think this graph might be somewhat distorted by oil refining and production still its obvious that despite the wide variation in median income per capita consumption is not all that different. And since access to credit is tied fairly closely to income levels even larger variations in credit are not even seen. Many of these states such as the rust belt region have been in long term depressions.

Thus their is little or no support for assuming that changes in the credit markets have any bearing on changes in overall oil consumption.

Indeed one big reason I claim the Saudi's cut basically nothing as far as production goes after the collapse is the conclusion that oil consumption was not being driven by credit changes. Now thats not to say the financial crisis did not literally freeze the world economy as letters of credit where rejected etc. But that was a brief event. The swiftness and severity of the credit crises almost certainly managed to effectively jam the world economy my estimate is to the point that the entire world basically took two days vacation.

Other than this one time sharp effect over any longer length of time assuming no crisis the tie is weak to non-existent between credit flows and oil consumption.

But of course I guess everyone will continue to assume that the credit markets are critical for the daily oil using economy and never consider that the daily economy is based on cash flow and credit is used for growth and development.

As far as allocation of cash flow goes I know exactly what my last four payments will be. gasoline, food, water, and electricity. I have NG for heat but I can always ditch that and go with a space heater if needed.

And at least for myself if needed I'll move in with my parents and munge their food water and electricity so the last thing I'll actually spend whatever money I have personally on is drumroll ...

Gasoline

However this link between credit and oil consumption is simply not proven its been assumed

Credit is money. In fact most money is credit. Oil is bought with money, -> oil is bought with credit. If there is more money, there is more money available to buy gasoline. Clearly there are more things at play here than just amount of credit available, but if I can buy gas with a credit card and also with a $20 dollar bill, what is the difference?

But of course I guess everyone will continue to assume that the credit markets are critical for the daily oil using economy and never consider that the daily economy is based on cash flow and credit is used for growth and development.

I believe our economy is based on growth and development, therefore it is predicated on credit being available. Without credit, JP Morgan wouldn't be able to park ships full of fuel oil off the NE coast. Without credit, coal or NG or nuclear power plants would never be built. Or they'd be much more expensive. When was the last time someone ponied up $1,000,000,000 in cash for a 500MW coal station? (in the USA).

In the long run, it is about cash flow, but I'd be willing to bet that in the short run credit losses will outweigh supply imbalances.

Great model! I think it is spot on, and I am so glad to see this. I see a lot of wrong-headed thinking about oil supply, demand, and prices, so I hope this article will prove to be a necessary corrective.

As for my 2010 predictions: I am anticipating another step down the stairs rather than a recovery. I suspect to see a wave of retail store closings and corporate bankruptcies in January, and a lot of CRE defaults throughout the first half of the year. I also expect to see a lot more bank closings and a worsening of the credit crunch. Governments and central banks have about maxed out what they can do, so this time things are going to have to just be allowed to take their course. It is not going to be a happy new year, I'm afraid.

Given all that, one would think that the pressure on demand would be downward, and per your model that would suggest that the pressure on prices would be downward as well. However, that assumes quiet geopolitics, which is a very, very iffy assumption. There might very well be thinking amongst top decision makers that if a move has to be made against Iran, a year when global demand and oil prices are declining might be the best time to make it. I would have to rate the probability as greater than 50% that something will happen in 2010 to knock a piece out of supply, which in turn suggests that a re-calc of your model would call for higher prices. Thus, if forced to make a specific call I would suspect that your $40 is too low, I'd go with something more like $60 by year end, with a short panic-shock-driven spike up to triple digit territory mid-year.

Iran's trump card is that any serious trouble there will instantly stop any production investment in neighboring Iraq. Militants sneaking over the border or firing rockets could probably prevent much supply growth.

In fact, protecting Iraq fields from Iran may actually be part of the calculus to "go early, go far" with Iran.

$50
Deflation and high inventory.

FWIW I posted on the oil accordian here in 2008. Another time I referred to the effect as a giant bungee. But there are a lot of ideas floating around the 'drums'

I'll project $65 for 2010 by way of $110. Recession for the sovereign bankrupt, (US, UK, Greece, Spain) coupled with increased influence of the new wealth economies (BRIC) against a backgound or increasing desperation from all parties to gain access to producers by any means avaliable.

If there was a lot of cushion or shock absorbtion in the system then we wouldn't see a $2 price swing every time news of the Nigerian rebels attacking a pipeline (which conflict seems to be on the back burner this year) or the Iranians take an oil well in the disputed territory (an area which may be heating up) hits the wires.

For every large potential swing producer we have a swing consumer of at least equal weight. The US who can rear up and take 21mbpd and Russia and the Saudi's who combined have produced that amount. I'm paying particular attention to those large oil consumers who are undergoing the credit downgrading process for their demand is likely to be weaker, while countries like China with high positive current accounts are sopping up the 'excess'.

In the US ultilization is down at 80% with distilate and crude stocks getting drawn down to low forward supply. With the holiday driving looking active that should bring gasoline along and that will probably bump the accordian pretty good. If the spare capacity is as tight as we think and someting untword happens to a supplier during one of these pushes we'll get a pretty good spike.

My guess is that 2010 is going to be a year for these above ground factors to intensify the price swings because of the added awarenes of the presence of the large pacaderm of ELM in the ever more crowded living room. Meanwhile the obvious conversation stays concentrated on failing mortgages and unemployment. As well it should.

Euan - 3 questions - 2 analytical the 3rd more philosophical:

1) Is there any one doing analysis of 'affordability elasticity' impacting oil decline %? IOW, if we average $40, $50, $60, $80 for oil price in perpetuity, what does each $1 down in price suggest for future decline rate? (e.g. at $50 average for coming 5 years, what does decline curve look like from 2015-2025 compared to if we average $70 for coming 5 years?)

2) What would average oil price be if we had a debt/leverage level in financial system that could reasonably be repaid by the lower (but still high) energy gain of the future?

3) Everything else being equal, what difference will oil at $40 or oil at $80 for coming 12 months make on likely future social trajectories? What would you or anyone reading this post do differently if oil was $40 or $80 in coming few years? Just curious what you think..

Nate 4 pints of Guinness and some wine later I'll; answer your question in the morning. But we had a very entertaining evening. He works as consultant for BIG oil. After pressing him all night, he eventually made his prediction based on a discussion with 2 very nice girls at the bar. $69 :-))

"TWO very nice girls at the bar", Euan? I thought you were married.......

As a wild, amateur guess: oil production to remain flatish around the 85mmbd level, price at 80 dollars but with a reduction of maybe 15 percent in "western" oil consumption countered by increases in Chindian consumption.

To Nate's questions, I think in (3), assuming you're talking about people in general not TOD readers, the worrying thing is that people won't notice if new "average price" of x asserts itself until at least two or maybe three years have passed. Until then, there's plenty of pundits who'll say price will come down "real soon now" due to y (or as devils advocate peak oil people who will say a low price will rise RSN) who one could choose to believe. So I'd expect that business that are making a significant operating loss at oil price x, but I wouldn't have much hopes for those businesses where oil price x makes for no profit/minor loss to do much about it. Likewise I suspect most citizens who can will "hang on" to as much of their current lifestyle as they can in the hope that the economy will get return to at least 2005 levels.

Personally, I don't have enough savings to do anything dramatic like buy a piece of farmland, so my actions are somewhat limited. Likewise, I've structured my life to avoid needing to use cars from a belief that regardless of oil car usage is unsustainable in the UK from a congestion point of view. So oil at 40, 80 or 120 dollars won't change what I'll be doing. If I had (say) 60 thousand pounds I could liquidate then what I thought the oil price would be might affect my behaviour.

I'm too old to worry about it and we have a small working farm that will serve well eniugh as a homestead in the event of a collapse.

For those who are worried but unable to afford farm land which is a big nvestment I suggest they get hopping and find some rentable land in an area where the population is falling off and there are lots of empty houses due to thr recession.

Serious farmers aren't interested in one and two acre tracts or even five acre tracts for the most part except for the guys who do labor intensive truck farming/gardening.I expect I could get VERY cheap long term leases on lots of such small tracts around here right now.I know of several nice small fields that are given rent free as hay fields just to keep the ground cleared and looking nice rather than going to a thicket and eventually back to forest land.

House rents are also very reasonable compared to most parts of the country but there are not a lot of vacant houses for sale cheap and none to be bought dirt cheap because we are plagued with prosperous outsiders determined to get rich by investing in mountian property.

But I think that there are plenty of places in the southeast in and around small towns where the house can be bought cheap or rented cheap and the land rented dirt cheap long term.There are lots of old folks who simply will not sell little pieces of land that have come down thru the family but are either unable or unwilling to work these little pieces of land.

So it might be very feasible to sell a house with only a lot in a place land for farming is in very short supply and buy a house cheap in or near one of these little towns and rent five acres adjacent to the house for the next twenty years for little more than the property taxes.

I would bet a large sum that I could acccomplish this in a couple of months looking around in the Carolinas or southside Va.

But this warning MUST be taken to heart: do not expect to sell veggies and honey in such places at premium prices.If you get half to two thirds the supermarket price selling at retail during the main part of the season you will be doing as well as can be expected. The kind of places I'm talking about are not located adjacent to places where a few million well to do people live,such as northern Virginia.

But for someone with some savings or a pension and maybe a specialized skill such as debugging and setting up home computers or repairing appliances life could be pretty good in such a place.

to q3,

If we see $40 again in 2010 then I sense that OECD oil cos will baton down the hatches, lay off more staff, shelve more projects. This will increase decline and bring forward the day that supply cannot meet "basic demand".

If we bump along at $80, then OECD and non-OECD investment in expensive oil will continue.

I sense you are really asking "why is the oil price relevant?" - well as a proxy for global energy prices I think it is very important. In our multidimensional global economy, what price can we pay for energy now and in the future? Energy price in a sense distills all the variables into one. Capturing past behavior, as well as the future.

In answer to your question. If we breeze through 2010 at $80 average (2008 was $97) then this will be a signal that a robust global economy can access future energy supplies at a price it can afford. If we hit $40, this will be a signal that a sick global economy, burdened with debt, has run out of steam (energy) and the future will be very very different to the past. A future of less rather than a future of more.

If we see $40 again in 2010 then I sense that OECD oil cos will baton down the hatches, lay off more staff, shelve more projects.

Price decline is a given IMO - sorry to be cryptic upthread. GDP likely peaked for all time in 2008 in real terms and maybe even in nominal terms- and without government spending it would have peaked in 2007. We are headed for era where private debt deflates and govt tries to offset that drop by adding govt guarantees/spending etc. That will continue until a currency reset when everything starts (hopefully) afresh. There could be some short term price spikes based on geopolitics, disasters etc but lack of demand will offset those losses within months. China is now the biggest bubble which I expect will burst badly in coming years -take that demand offline and supply excess will be large.

This will increase decline and bring forward the day that supply cannot meet "basic demand".

Here I disagree - energy supply can meet "basic demand" for a very long time - it just can't meet demand and debt service in growth based economy for much longer.

I was hoping you'd take a stab at my questions #1 and #2 - as such sensitivity analysis on decline might be relevant for policy..

What? are you some sort of agent for the new powers that be?

porge - for the record, unless you include my girlfriend, I know none of the current powers that be, (so by definition I couldn't be their agent).

I am a free agent, for now and hopefully into the future.

Do you ever read George Mobus' blog?
He has a great rant about life at the present.... that I think indirectly refers to you.........and others........
I think his blog is going to be a spin-off from the TOD.
What is the name of that TV survey that was used to determine the popularity of programs?

edit:
Nielsen

2) What would average oil price be if we had a debt/leverage level in financial system that could reasonably be repaid by the lower (but still high) energy gain of the future?

Nate,i'm visiting the country right now, sitting in my car on a pirate wi fi connection. Snow everywhere and my fingers are begining to go numb with cold.

I forgot to bring my slide rule, so the answer to your quetion will have to wait - probably until 2051:-))

So when do you think the Chinese bubble will pop?

chinese stock mkt soon (in 2010). their economy within 24 months.
just like everywhere else it depends how long people in aggregate allow government debt/spending to substitute for private/public activity.

"Since February, the oil price has made a strong recovery to around $80, retracing about half of the losses of last winter. All of this activity can be explained by inelastic demand interacting with inelastic supply, albeit that OPEC spare capacity may be switched on and off at the will of OPEC countries, mainly Saudi Arabia."

I take issue with this statement. At the same time that crude oil prices increased, the dollar has dropped in value so I would argue that the drop in the dollar was a significant cause for the increased crude oil prices. This is confirmed by observing daily changes in the crude oil price. As the dollar changed in value, the crude oil price changed inversely.

Retsel

Conversely, you could say that OPEC sets a trading range for the value of the dollar, at $80 per barrel. Much less than that, they reduce supply; much more and they expand. Is it possible that the price of oil "tail" actually wags the dollar "dog"?

If this is the case, moving from dollars to a currency basket would be very interesting to watch.

There are many comments saying that people might not want to pay $4/gallon. Why is this when Germans and other Europeans pay $8/right now? And we know how well they live. It has been discussed herein that the accustomed easy-going, careless US lifestyle and habits must change but it also was mentioned that this will be extremely difficult. Not surprising then people will complain about a $4/gallon oil price because they are unwilling to downsize other expenditures.

My forecast is a $95 - $100 price for crude oil. The reason is that increasing inflation worries (and hedging against it) will drive up the oil price.

I believe that the central problem, ngass, is that our transportation infrastructure and needs are very different from the european model. We drive longer distances (North America is a bigger place), we are still more rural, and we don't have a very good alternative public transportation system to rely upon. So comparing the U.S. to Europe is a bit like comparing apples to oranges. Our system has evolved in a way that makes us overly dependent upon the private auto. And lastly, it might be worth noting that "culturally" we are more resistant to taxes and the idea that government will actually do any good with the money. The Europeans seem to have more confidence in the whole idea of sharing social costs than we do.

I am surprised by the average low price estimates given here. I would guess the estimates are 80-100 range overall, so basically people are saying the price will be flat with slight upward curve

this has not happened in the past 8 years

I am saying we will hit 200 in 2010, for how long I dont know

I think 2011 will hit Matt Simmons bet of average over 200

I'll say $75, as depletion struggles with a bleak economy to produce little net change.

Not far off my original position, but then I got very gloomy about prospects for the UK and believe we will be the first big domino to fall.

I have to go out now and meet a friend to place a bet on the oil price next year. I'll be back tomorrow a.m. - in 12 hours.

For 2010 an average of 80$.

2012 the first serious peak oil crunch with a peak price of 170$.

According to The Guardian, today UK debt as percentage of GDP jumped to 60.2%, not less than 60% as in the graphs.
Nevertheless still way to go !

Debt as percentage of GDP:
USA 60.8%
UK 60.2%
Germany 62%
France 67%
Israel 75.7%
Italy 103.7%
Japan 170.4%
source: IMF

And how exactly are you calculating GDP ?

For example if a car is assembled in the US then its sale price is added to the GDP despite most of its parts having been imported. Most of the productivity gains are based on incorrect accounting of globalization.
Primarly exporting economies are probably about right. Net importers could well have their GDP overestimated by 50-100%. Thats not even including questionable accounting for financial services.

Far more likely is that real Debt/GDP rations are all in the 100-200% range if not higher.

If we assume that the real GDP is now much closer to say 1995 then.

http://www.measuringworth.org/datasets/usgdp/result.php

Then you could easily aruge US GDP is overstated by 50% and our debt/GDP ratio is at least twice what is advertised. With a bit of work 3X is not unreasonable. ( We import a lot more oil now for example) This loss of recirculation of wealth based on buying local oil has some effect.

I'd have to guess if we used GDP calculations closer to what was done in the 1930's and correctly discounted imports and financial then our real GDP situation is pretty bad.

In any case distortions after distortions and attempts to massage the data over decades has probably resulted in the real true situation diverging significantly from reported numbers and adjustments required more adjustments and the truth became ever more distant.

http://www.marktaw.com/culture_and_media/TheNationalDebt.html

Personally I think calculating Debt/GDP ratios on top of ever rising debt simply has no meaning. If Debt was rising and falling in regular cycles being successfully retired without default then its a useful number as it stands it literally means nothing as debt service based on taking on ever more debt is less than nothing its negative. The intrinsic value of goods and services created in this way are probably a fraction of their current values literally pennies on the dollar. My own more draconian approach puts what I call true GDP at about 10% of its current value and true Debt/GDP ratios closer to 600% for the US.

A simple way to consider this is what would the price of a home be if no more debt was allowed to be created ? Existing debt would either be paid off or default how its disposed is irrelevant. I'd argue if you had to pay cash for homes then your average house would be at best 20-30k if you include falling incomes even lower say 5-10k. Thus if we simply stop expanding debt then the true value of almost everything is a tiny fraction of its current price based on the ability to expand debt. This is how you get the draconian "true" value.
You can look at Detroit as and example of a city pricing things without a lot of debt and its still has serious problems with debt so its not even a perfect example.

Over the top is and understatement the amount of true real wealth created in the last 40 years is pathetic. And that does not even consider the quality issues of existing goods such as homes paper houses for paper money.

Hi Memmel,

"And how exactly are you calculating gdp?"

There could hardly be a more relevant question asked.

As far as I am concerned , there should be a fine for saying "gdp" starting at ten dollars and costs and doubling with every public offense."

This incredible MISMEASURE of our collective well being needs a stake thru it's heart and the sooner the better.

There are altogether too many similarities between religion and economics.

Thats simple the cash price of everything we produce with no debt.

Given how much cash people have what could they afford to buy.

Thus if you completely removed debt from the system you have the real worth of all our assets and how much we have actually earned to date.

Given on average most people are negative i.e have more debt then savings then the real price for most stuff is vanishingly small.

The problem is that the debt keeps growing and very little is ever actually paid for i.e you never clear your debt. So all I did was simply clear the debt if you will or settled all accounts using cash on hand and our real earning are pitiful.

Many people would think this is insane but up till even the 1960's if you performed such a procedure the cash or clearing price would have been close to the market price with debt i.e the amount of goods produced beyond the real wealth or savings was small.

Thats not to say you can't use debt but if you can't balance the books and or you lose substantially in clearing the books then you have done nothing but speculated on your future ability to pay.

Do that for a while and you have nothing as no one has any cash its all debt and grows.

Its not all that crazy for example in housing we are rapidly approaching the point the the supporting debt system regardless of how its rigged can no longer keep prices inflated. Intrinsically this is because via using debt rampant over production occured at inflated prices. Nothing can stop the market from eventually realizing we simply have way to many houses at way to high a price for the remaining buyers. The market can and will clear.

My opinion is this is and intrinsic problem with debt as over time asset prices become based on credit availability and diverge from their true cash price which we would call the liquidation price. This leads to debt itself being issued on the basis of the previous debt prices. I.e the asset is valued not by its intrinsic value but primarily by credit availability.

Another market I'm familiar with is Harley Davidson motorcycles which are a fairly expensive toy. Many are bought using credit during the good years and when money gets tight people liquidate to either get rid of the loan or get cash. So the prices cycle up and down with the economy. Often tied to a very local economy as the first round of buyers and sellers are generally local.
This clears and settles the system and keeps it from diverging to far from the true market which is cash buyers when the economy is poor. I.e the intrinsic price. In general for the US we have not really cleared or settled our debts for decades which has allowed the market price to be defined not by this settlement price but by previous credit expansion.

Thus real price discovery now assuming no debt results in almost no intrinsic value. Not surprising since not only have we produced goods for a long time based on credit expansion but we did so even in excess of this fraudulent market. Our bubble is like three stages removed from reality as producers factories and builders etc also followed the credit markets using previous lending to justify new loans for expansion. Thus a factory that was producing goods who's price was held up by debt was valued based on this and used as collateral for new loans.

Obviously this only works if you can keep rolling the debt i.e borrowing money to pay off old loans with new loans.

Cash or savings or real purchasing power becomes such a small part of the overall economy the concept of clearing is considered absurd.

Until it happens.

According to zFacts.com, the US Federal debt is Presently $12.228 trillion. The debt extension to $12.4 trillion confirms the ZFacts number. GDP is around $13.9 trillion. 88% of GDP is closer to reality in this Country. Added to the debt is the Freddie and Fanny debt and losses that result because banks will not hold risky mortgage debt, only the Federal Government on yours and mine behalf does so. Believe me when I say that these unrecorded Federal debts and losses will be in the trillions.
Apples to apple comparison would require comparing Japan in 1989 to the US in 2009. Japan has a favorable trade balance now and has had a plus account for a long time. Most others countries listed are close to balanced. The US, on the other hand, has been running negative trade balances for many years and globalization and oil will ensure that negative balance for years to come. The IMF is a US controlled institution so its spin is suspect. The data is public knowledge, GAO, Treasury, and other sources are easy to find. We will never get on top of the debt issue if we don not deal with reality.
Japan did not start off with a 170% of GDP debt. But the popping of the Japanese real estate bubble started an endless stream of socializing bank losses and other loss hiding schemes, combined with absurdly low interest rates to achieve its notoriety in debt to GDP discussions

According to zFacts.com, the US Federal debt is Presently $12.228 trillion. The debt extension to $12.4 trillion confirms the ZFacts number. GDP is around $13.9 trillion. 88% of GDP is closer to reality in this Country. Added to the debt is the Freddie and Fanny debt and losses that result because banks will not hold risky mortgage debt, only the Federal Government on yours and mine behalf does so. Believe me when I say that these unrecorded Federal debts and losses will be in the trillions.
Apples to apple comparison would require comparing Japan in 1989 to the US in 2009. Japan has a favorable trade balance now and has had a plus account for a long time. Most others countries listed are close to balanced. The US, on the other hand, has been running negative trade balances for many years and globalization and oil will ensure that negative balance for years to come. The IMF is a US controlled institution so its spin is suspect. The data is public knowledge. GAO, Treasury, and other sources are easy to find. We will never get on top of the debt issue if we do not deal with reality.
Japan did not start off with a 170% of GDP debt. But the popping of the Japanese real estate bubble started an endless stream of socializing bank losses and other loss hiding schemes, combined with absurdly low interest rates to achieve its notoriety in debt to GDP discussions

you need to add: federal, public, private, financial, household, stock market, bond market etc. the number is over 500% of GDP for US - you can use FRB flow of funds and add on the others - that doesn't include unfunded medicare etc. my own database has world at about ~220-250 trillion of debt - around 450% of GDP - most countries in Europe are as high or higher than US if you include the broader definition of debt. (I suspect the european satellites is where the first blowups will be - indeed Greece already w/ rumblings this week)

A 1% real rate of return with 500% debt to GDP means 5% required GDP growth rate just to service the debt - not gonna happen with current claim structures..

Now thats funny I did it a completely different way and got about 600%.

Why on earth would assuming the liquidation value of real goods with zero debt result in anything close to your approach ?

Weird ...

Somehow I don't think unrelated although I simply don't see it.

I might as well add if you used either your approach or mine and tried it back in say 1940 or so you would get a much better result. I.e the true value without debt was not all that much lower than the market price. So assuming zero debt would not have as large and affect. Exactly the same with your approach removing unfunded debt obligations then would not amount to much.

It shows how distorted our economy is you can't even get real cash values or calculate true wealth creation. Its so wacked now I'd argue attempting to get a real number simply results in a sort of big number thats almost nonsense itself.

Given your growth number of 5% and assuming that this would have to happen without expanding debt i.e contracting it its simply not possible you literally can't do it as contracting debt itself blows out the calculation.

At best I'd say you would need real true debt free growth on the order of 10-20% to really retire the debt the excess growth would support the withdrawal of debt inflated pricing as you moved towards contracting debt.

Thats just a guess but even then I don't see how it would really work so I'm not even sure thats valid. Real incomes would have to at least double with no inflation perhaps to get enough real growth to retire the existing debt.

In any case actually retiring the debt requires not only growth but growth without further debt expansion which is some number larger than 5% by at least quite a bit :)

What I find really funny is China has given us lots and lots of stuff in exchange for dollars that have no long term value. They either convert them to stuff while they can or they lose. Along of course with Japan and most other exporting countries including the ME. We literally have paid for nothing for years. For personal transactions debtors always win over creditors as the always get something for nothing.

The irony is of course this is probably true even on the global scale with the debtors having a intrinsic advantage over the creditors as default approaches.
Thus the US is pretty much assured of doing better than its creditor nations unless they can convert their dollar holdings to anything of real value as fast as possible but without collapsing the dollar. What a fascinating game of chicken.

run up followed by 2nd price collapse

$50 avg

When I buy gas, the price I must pay is on the pump, there is no market except the speculative market of oil tankers stuffed with oil.
The whole thing is a set up.

My prediction: $US125

That is straight from ace's November update. His predictions have been pretty stable, and have faired better than most. Some history:

Prediction date End 2010 price
Aug 2007 $140
Feb 2008 $150
May 2009 $120
Nov 2009 $125

If oil stays lower than the 2008 price from now on i.e. indefinitely, I wonder if this is something like struggling in quicksand. That is, more effort doesn't pay. See also
http://en.wikipedia.org/wiki/Red_Queen
The mechanism is that to get ahead we are initially prepared to pay more for oil but our incomes decrease anyway. Then we have less ability to pay for higher priced oil.

The quicksand analogy could get carried too far but it goes further. They when you get stuck in quicksand stop trying to run and crawl out on your stomach. You have to find some other way of getting where you want; for the economy that could be something besides oil.

How does NG enter into this equation - perhaps not for the next year - but, say over the next 5 or 10 years? On one hand, we read that new technologies and discoveries have paved the way for a century or two of abundant NG. On the other hand, critics say that the NG hype is greatly exaggerated.

If the abundance folks are even half right, then Pickens Plan http://www.pickensplan.com/ would seem to have considerable impact on moderating oil prices over the next couple of decades.

I still see human population overshoot as issue number one so I'm not implying this is a solution to all of our problems. But, I do look for ways to achieve a more graceful powerdown scenario. If I was convinced that NG was as abundant as some claim, I'd spend some time writing my representatives about this, supporting the Pickens Plan, etc.

But, I really can't sort this out with the info I've seen so far. I know that TOD has had some essays on NG, but I don't recall any predictions as to how the current NG situation could affect oil prices. Can some of you energy experts shed some light on this? And, yes, I understand the huge issues with financing and building out an expanded NG infrastructure - but, question number one is whether or not NG is abundant enough (at reasonable cost) to warrant such an undertaking. Thanks for any insights.

dave -- both your statements are correct: we have enough NG recoverable with current technology to last us for many decades. And yes, the NG hype is greatly exaggerated IMHO. The trick part of the answer: how much NG we can recover is a function of price. If NG prices run back up to $10-$14 per mcf you'll see the NG rig count shoot up. If prices drop to less then $3.50/mcf much of that recoverable NG won't get produced.

Anyone's estimate on the amount of oil/NG recoverable is totally meaningless unless they include the pricing assumptions. I know there are lots of details you can apply to the situation as far as capital availablity, etc. But in the end it really is that simple: the amount of NG we can develop is a functon of how much we can pay for it.

Hi Rockman,

Thanks for the comment. I've read somewhere that NG has about 1/6 the BTU content of oil on a basis of mcf to barrel. Transition costs aside, at $6/mcf = $36/barrel (and given "we have enough NG recoverable with current technology to last us for many decades") this would suggest that the Pickens Plan has merit - that we could us NG for some transportation needs and also have enough NG for the industrial processes of building out a Wind/Solar/Transmission infrastructure.

At $12/mcf or $72/barrel it would still seem feasible if global demand was driving the price of oil over $100.

This all sounds to easy. I know that Pickens has run into major problems because the price of oil and gasoline dropped and we are all now enjoying "happy motoring and all you can eat" (per another TODer). But, if all the folks here who see at least $80 oil are correct, does not expanded use of NG seem to be a key ingredient in the next few decades? Might it not give some hope for a more graceful powerdown (assuming we are smart enough to use the opportunity). Or, am I missing some major factor?

dave -- yep...seems simple at first. But there are so many "what ifs". Assume we can have enough NG at affordable prices to supply our motoring needs. But who's going to spend the trillions of dollars to build the distribution system and the auto conversion/new cars? Then add to that problem the question of predicting NG prices/availability 10 to 20 years out. If there's not confidence in cost effective NG prices in the future then who will make the investment even if the money is there?

The there's that old paradox: NG prices are low now because demand is down. What happens to NG prices if the conversion drives demand way up? Higher prices for sure. But then that will make more NG drilling viable. But what if higher NG prices drive us into another recession just like last year's high oil prices? Lots of folks have models predicting both good and bad scenarios. I have zero confidence in either view. Not a comforting answer but some times the correct answer is: we don't know

Thanks Rockman - better to get a realistic comment than one driven by bias. BTW, I do remember the impact on our family budget when NG for home heating went up to around $13 - was not fun.

This year, my home energy costs are the least they have been ever in this house, and the one before that. I'd have to go back to the 90's to have a lower yearly expense.

Some of that was due to some modest energy savings initiatives, which I am continuing month by month. Total consumption is the least ever in my house....but dropping costs have made a much larger contribution.

There are a few other things that make price prediction next year very tricky.

Gas prices in a lot of countries is managed - either subsidized or heavily taxed. Consumers in those countries can all be sheltered from real market price of oil. So even as market price goes up - the consumption in those countries will go up. I've not seen much analysis of oil price taking this into consideration.

The next oil peak in price may put US into a recession - but may be not BRIC countries. That might push the oil prices higher than they were in 2008.

"Recommendation:
Enjoy the coming six months :-)
And buy plenty of warm clothing, food and seeds for the time after."

Now that is seriously good advice, though you could perhaps omit the warm clothing if your Winters average above freezing. Right now it's 5 below here, and I have on five layers of good insulating clothes as I write this.

Add to the above recommendations a close-by source of heating. Behind me right now, the wood-stove is charring wood collected from my local woodlands. Oh, yeah, and I can recommend Muscovy ducks in addition to the seeds; not phased by the cold at all, and almost self-maintaining with foraged food, even in Winter.

But when asking how much and when for oil, don't you also have to ask: does it really matter? Wouldn't all of us on this forum agree that the only way for energy supply from here is down, with across-the-board dire consequences, and soon? Getting prepared for when it really hits, as in the quoted recommendation above, is what counts. My own experience is that it takes several years to become even minimally self-maintaining, and in the process you realise just how deeply dependent you have been, and to some extent still are, on the now-dying paradigm of BAU.

Entrenched membership of a mutual-aid community is also vital, and that takes time to grow too. Without the CSA scheme to which I belong, my efforts at self-sufficiency would be fragile in the extreme. With it, my chances are multiplied, at the same time that I'm making a contribution to multiplying the chances of the other members.

Just a WAG, but I would submit US$127 BBL. I am predicitng that the dollar will weaken significantly and the oil price will follow. The rest of the world may se lower real prices with the US taking all the hits.

What happens to this type of model if only Crude Oil, and not All Liquids, is used? Here is my latest chart of Non-OPEC crude oil.
http://gregor.us/oil/exxon-faces-reality/attachment/non-opec-supply-2001...

The reason I ask is because 2004 figures importantly into the remarks you make in the post, and yet that is the year in which Crude Oil and All Liquids really start to diverge more greatly. (though the chart of total Crude Oil does not decline as clearly as Non-OPEC).

G

So what's your forecast for price end 2010?

$115

End of 2010, I guess $80. On the first graph at the top I see this happening. Up and left to 84 mbd and $100, then up and right to 85 mbd and $120. Followed by a crash to 82 mbd and 40$. I just don't know if it takes 6 months, 12 months, or 18 months to make the whole trip. So, just a guess.

FOR ALL: Now that many have made their bets I'll offer what the professionals in the U.S. oil patch are using in current economic analysis of drilling projects. This doesn't argue for or against anyone’s prediction...everyone has an equal vote IMHO. For the most part we don't really try to predict future oil/NG. The price decks utilized essentially reflect current prices. If oil is selling for $70/bbl when the analysis is done then that's the number they base the PD on. But it's typically not $70. Most will use around $50-60. And with little or no price escalation over time. Same thing with NG. A couple of months ago $3.75 was the norm. Now it's been bumped up to around $4.50 - 5.00 (actual prices are starting to push towards $6.

And back in mid '08 many companies were using $9-10/mcf but many were actually using lower prices ($1-2 less) for out years. On the inside few expected the shale gas hype to run too much longer. They were right but not nearly pessimistic enough as it turned out.

These price decks were greatly influenced by the bankers. Any company is free to use whatever PD internally it chooses. But when it comes to dealing with their bankers the money guys set the rules. As far as the reserve value of current assets of public company the SEC requires the use of oil/NG prices at the end of the last business day in December each year. But that rule has now been changed. Not sure how the new formula works exactly but it's suppose to reflect a more representative value over the course of the year.

There is a class of oil companies that will use much higher prices in their forecasts. These are the promoters trying to lure in unsophisticated investors. My cohorts might have their own thoughts about future prices that aren't representative of the PD's their companies use. But the reality is that I seldom ever hear any of the other oil patch folks speculating about future prices. Just my opinion but I think we just collectively accept that any of our guesses aren't worth crap. You can only be so wrong so many times before you stop listening to your own BS.

In the North Sea at least, companies set budgets in the autumn - September / October time. So the price then and direction are important. Last year, price was down and in free fall. This has been a very lean year in the North Sea with drilling way down. Next year will be much better, so long as oil price holds up. Budgets are easily cut, rarely increased.

Euan - Any guess on that side of the Pond as to the cause of the slashed budgets: capital restrictions vs. lack of pricing confidence. In the U.S. many more companies would be ramping up drilling right now if the money was there. Activity is rising a bit thanks to a few more operators with the resources. It's the same paradox we see in other aspect of the energy picture: oil/NG development is much more profitable now then when prices were peaking back in '08. Thanks to much lower drilling costs many projects are much more attractive today. As a great offshore example we just moved a rig onto a shallow water 18,000' well on the La. coast. The dry hole cost in '08 was $23 million. The current estimate is $12 million. With regards to pricing, the way oil patch economics are calculated a 50% reduction in capex is worth a good bit more than a doubling of prices. It's that net present value aspect.

But the paradox again: a significant increase in drilling costs could offset any incentive generated by future oil/NG price increases. Then add the recession (supply/demand) and political aspects to the mix. I think predicting the winner of the 2012 Super Bowl might be easier then predicting oil/NG prices that year.

10 dollars as mininmum price in the year . Economy will collapse.

Bingo !!! (you get the prize)

Price as a raw number is meaningless.

We have to normalize price ($$) against the mean disposal income of the average prole.

Even $10/barrel might be unaffordable (not "cheap") if no one has a job.

The problem is trying to predict the price on a particular date given that the next spike will largely follow a similar pattern to the 2008 spike. So the question is, will it occur in June 2010 in which case we will be riding down the other side by the end of the year, or will the world be able to hold the wolf from the door until mid 2011 when the ride both up and down will be more severe.

My best guess is we will see a mid 2010 spike of US$160 followed by a fall to US$110 by the end of the year.

This is based on a number of inputs:
- incresaed general awareness of PO will tend to prevent the drive to the lows we saw this year
- increased consumer tolerance of the higher price will make the ramp up and ramp down a little less steep
- significant devaluation of the USD