Are the worlds economies too reliant on oil?

[Misthos]

Quote from Ed Breen:

Misthos, I watched the video. It was very good even though it was a little long...but I went short oil when I started watching...buying DUG at $69 and then sold DUG when it was over at $72.50. So, really thank you.

Two minor citicisms of the presentation. 1. He fluffs over the significance of the shift from production by the Seven Sisters until the 1980's and then to nationalised production thereafter. You will note that 1980 marks a significant date of change on a number of his production charts. I would suggest that the move from private mineral rights to public mineral rights itself reduced discovery and exploration. Consider how many wells have been drilled by national oil companies post 1980 and where they have been drilled compared to private drilling and where they were drilled. I realize there is a lot going on with this point in terms of total production and the cost of production and the yield per well, but you have to admit that there is something strange when even today the overwhelming prepoderance of new wells is drilled in the U.S. where the prospects are fully explored. Mexcio, right next door doesn't drill hardly at all. 2. He also fluffs over technological efficiency of consumption, just hinting at it at the end in question section.

So, given the video, and going back to my point about demand peak to which you responded in this discussion...So what? You keep talking about supply limits and you have me watch a movie about supply limits...what about demand? I was talking about demand.

There is a relationship between supply and demand that is moderated by price...as the supply declines so will the demand...if it fact we did reach (just for the sake of this demand discussion) peak world oil supply in 2005, then that supports my suggestion that 2008 will mark peak oil demand.

I'm not hear to promote Yergin but I find it distasteful that you dismissed him with a personal slur and did not engage any of his ideas even though you imply that you know them. That's not argument, its evasion.

Fair enough, I'll just need some time to go over some old materials and write a decent response for you regarding CERA and the new peak demand theory. Colin Campbell has asserted a similar theory recently. Colin Campbell is the geologist that many have followd after M. King Hubbert re peak oil.

But anyway, the fact that you killed an hour on the video obligates me to respond thoroughly. Just need a day.

 

[nitro]

Just to be clear, peak oil to me means we are running out of oil and it may take dozens of years for it to be obvious (if it isn't already). Peak demand? No chance.

 

[heypa]

You're far too serious Nitro.
There is absolutely nothing that anyone at ET can ever do about it.
The major governments of the world fully believe that their citizens are KNOW NOTHING DIP SHITS!!!!!!!!
Even if you figure out how to profit from the situation how do you get through the inevitable collapse if the whole thing craters?

 

[nitro]

Quote from heypa:

You're far too serious Nitro.
There is absolutely nothing that anyone at ET can ever do about it.
The major governments of the world fully believe that their citizens are KNOW NOTHING DIP SHITS!!!!!!!!
Even if you figure out how to profit from the situation how do you get through the inevitable collapse if the whole thing craters?

My motivation isn't profit. I am hopeful that if we all raise our consciousness together, we are able to shape our futures instead of the other way around.

As far as being too serious, I am just being the man I am. If something requires a frontal attack, then logic demands it. Otherwise I try to unwind in other ways, like exercising, walking on the beach, playing with my dog, etc. But what is not serious about the consequences of too little oil? I have said elsewhere but it is worth repeating, low probability events carry lots of information, if we are only willing to listen. The BP spill is being called a black swan event. I strongly disagree.

I realize that my personality does not fit well with this site, seeing that nothing is more capitalistic and short term thinking than traders. If I may be forgiven this one flaw...

 

[heypa]

Fair enough.
I personally believe we are being inexorably led toward a one world government without any place for private capitalism.
At my age it doesn't matter but I don't envy my Kids,grand kids and great grand kids future.
I fully believe that I have lived through the United States' golden age.
The easily manipulated inmates in our system now seem to be puppets thinking they are running the asylum.
If it's gonna be turned around it better be soon.
We all are too interdependent and a minor interruption can be catastrophic.
The amazon hunter gatherers will survive but not the overspecialized
civilized people who are too removed from food sources. There are way too many of them anyway.
Almost didn't send this but what the hell it's one mans opinion that I'm entitled to however wrong it may be.

 

[test_user]

Quote from heypa:

Fair enough.
I personally believe we are being inexorably led toward a one world government without any place for private capitalism.
At my age it doesn't matter but I don't envy my Kids,grand kids and great grand kids future.
I fully believe that I have lived through the United States' golden age.
The easily manipulated inmates in our system now seem to be puppets thinking they are running the asylum.
If it's gonna be turned around it better be soon.
We all are too interdependent and a minor interruption can be catastrophic.
The amazon hunter gatherers will survive but not the overspecialized
civilized people who are too removed from food sources. There are way too many of them anyway.
Almost didn't send this but what the hell it's one mans opinion that I'm entitled to however wrong it may be.

You know, the world had to end oh-so-many times. But it never happened. Whatever happens, the condition is always temporary. Be it a world war, famine, plague, cold war, soviet union, NWO (?) - everything has its end. It's not like everything's going to end with one world government for good.

Furthermore, globalized world is not necessarily evil thing. The transition to it may be rough. Like the decline of the standard of living in developed countries (while the rise of SoL in developing countries). I may be thinking ahead of my time, but my belief is that the concept of a sovereign state and national identity is inevitably going to be the thing of the past. And it's all good, the borders are artificial, unnecessary and irrational things (in the long-term). If 100-200 years from now the humanity still lives divided itself into arbitrary territories, then I would consider it as a failure.

 

[Misthos]

Quote from Ed Breen:

Misthos, I watched the video. It was very good even though it was a little long...but I went short oil when I started watching...buying DUG at $69 and then sold DUG when it was over at $72.50. So, really thank you.

Two minor citicisms of the presentation. 1. He fluffs over the significance of the shift from production by the Seven Sisters until the 1980's and then to nationalised production thereafter. You will note that 1980 marks a significant date of change on a number of his production charts. I would suggest that the move from private mineral rights to public mineral rights itself reduced discovery and exploration. Consider how many wells have been drilled by national oil companies post 1980 and where they have been drilled compared to private drilling and where they were drilled. I realize there is a lot going on with this point in terms of total production and the cost of production and the yield per well, but you have to admit that there is something strange when even today the overwhelming prepoderance of new wells is drilled in the U.S. where the prospects are fully explored. Mexcio, right next door doesn't drill hardly at all. 2. He also fluffs over technological efficiency of consumption, just hinting at it at the end in question section.

So, given the video, and going back to my point about demand peak to which you responded in this discussion...So what? You keep talking about supply limits and you have me watch a movie about supply limits...what about demand? I was talking about demand.

There is a relationship between supply and demand that is moderated by price...as the supply declines so will the demand...if it fact we did reach (just for the sake of this demand discussion) peak world oil supply in 2005, then that supports my suggestion that 2008 will mark peak oil demand.

I'm not hear to promote Yergin but I find it distasteful that you dismissed him with a personal slur and did not engage any of his ideas even though you imply that you know them. That's not argument, its evasion.

Ed- I hope you made money on that trade, but you do realize that short term trends are irrelevant? I know you were joking.

As for Yergin, I agree about his points of insufficient exploration. But your argument here is that we're not exploring and drilling fast enough. But that only goes to current production. And don't forget, as the presenter in the video mentions, OPEC has the luxury of controlling flows for profit motives.

But all this does not change the fact that one day, we will reach the halfway point of oil extraction and oil supply. Think of it as a checking account. You withdraw (consume) and you deposit (explore/drill). You cannot compare the past finds up until the 1960s with today's finds. One of the reasons I thought that video was important is that it gives one a frame of reference. Too many people read a headline such as "BP finds a Giant Oil find in the gulf of 3 billion barrels" and people think, wow, we're in good shape. Yet they don't realize that the 3 billion amount involved an inadequate amount of test wells, and that maybe not all of that oil is extractable. As for the 3 billion barrels: barely 45 days worth of global demand. People lack the context of these figures.

Same with natural gas - they see figures of 1-2 trillion cubic feet and think wow - that could last centuries. But they don't realize that natural gas is consumed in the millions of cubic feet in very short periods of time. And they don't take into consideration the long term measurement of a resource as usage increases. For instance, if you have 100 years of a resource, and consumption increases 2% a year - well, you really have about 55 years of it, not a hundred.

Back to oil:

Simply put, there is so much of a resource available, and the easily extracted amount; the amount that gives us more energy than the energy it takes to extract, will diminish. There will always be oil in the ground, we just may reach a point where that oil is not economically viable.

And let's forget about peak oil dates. The bottom line is it will not last forever. As for peak demand in the OECD - on a per capita basis, yes, demand has peaked - quite some time ago. But there are other dynamics. Population growth in the OECD countries such as the US and Canada, and demand growth in the emerging economies.

Keep in mind. That up until about twenty years ago, the only real consumers of oil were the OECD countries, parts of South America, and the USSR.

Today, you have Africa and Asia coming into the mix. Whereas China was a net oil exporter 20 years ago, today China is the 2nd largest consumer and importer of oil. China plans to increase their "industrialized" population by an additional 295 million people by 2025. That's about the population of the US! And China still has 3/4 of a billion people to go. They are also the largest auto market in the world now.

We must separate current supply constraints and look at broad trends. Oil is in everything - it takes about 6 gallons of oil to make a tire, its in roofing shingles, vinyl siding, everything plastic, petrochemicals, paints, asphalt roads, etc....

The world population has exploded the past 100 years to 6.8 billion, yet only a FRACTION have a modern, oil-based industrial lifestyle. So even with the OECD experiencing peak demand, you cannot ignore the remaining billions on this planet that want the same thing.

One more thing to peak demand: In the 1970s, oil demand crashed, yet resumed again. Economics and oil are intertwined. Our monetary system and oil are intertwined. Are we getting that much more efficient, or is the current economic climate affecting oil consumption?

I don't want to debate the date of peak oil - that's impossible to know until well after it happens - just the concept. I'm not saying that the downside of peak oil will be an immediate armaggedon either. To me, it will reflect a changed world that will greatly limit economic growth for vociferous users of oil. Today, oil consumption in the world is extremely uneven - most barely use oil compared to US levels. It's Incomparable. But even at 200 dollars a barrel, if possible, imagine a world where 3 billion people that barely use oil today, can economically use just a liter or a half a liter of gasoline a day each. What does that mean for lifestyles of the rest of us in the West?

Simply put, the world will never produce enough oil on a sustained basis, to support an American lifestyle for every person on this planet. And guess what? That's not stopping the rest of the world from trying to live that American dream.

Just in:

Global oil demand is revised up by 60 kb/d to 86.4 mb/d in 2010 on stronger-than-expected preliminary OECD data, albeit downside risks remain. With 2009 readings largely unchanged, yearly global demand growth in 2010 is now seen at +1.7 mb/d (+2.0%), deriving almost entirely from the non-OECD.
http://omrpublic.iea.org/currentissues/high.pdf

 

[Ed Breen]

Mishos, thank you for the thoughtful reply. I agree with most of the points you make...at least the facts; if not the conclusions. But you respond to me like a politician on TV who does not address the point of the questions but goes on to recite his own talking points.

MY main point of comment in this discussion is that we reached peak demand in 2008 and, more importantly, that there is a dynamic relationship between supply and demand that is in the end regulated by price. We use price in the real economy to manage imbalance between supply and demand and suppliers use price information to plan production and buyers use price information to plan consumption or seek substitutes. This is all basic stuff, and you keep ignoring how this will empact how the use of oil plays out. Its not linear.

To address your metephore of a checking account...consider a non linear checking account...which is more like the use of oil really is...every time you make a withdrawal you increase the value of what is left on deposit...no matter how hard it is to get out...and you increase the value of the tangible goods you purchase with the withdrawn oil.

Consider how the price of oil consumed by the U.S. has changed when expressed in the aggregate as percent of GDP over time. Oil has a diminishing role in our economy. When you look at the growth of non OECD country demand for oil...consider how much of that demand was transferred from the OECD to the non OECD...you have to net some of it out. And as I suggested previously the use of oil in the non-OECD will not revert back to the historical efficiency curve of the OECD experience, but will pick up at current efficiency and benefit from new technological advancement in the use of oil.

Your concern about OECD populaton growth is misplaced...OECD is losing population as aggregate OECD birth rates are below replacement....Russia and Japan will not exist ethnically in three generations...the change of population in OECD is entirrely dependant on immigration from non-OECD countries, so your population demand issues are as conflated as your energy demand issues.

The issue really isn't the supply of oil during the next 100 years its really the supply of oil at what cost. The issue of cost must be adjusted to cost in use relative to benefit...which continues to improve by technology. I'm not betting on oil shortage armeggeddon...but it does concern me that one day the Sun will burn out.

And by the way, I did make that trade; I wasn't kidding....of course it was short term trade that does mean anything in the time frame of armeggeddon...but this is a trading site forum isn't it?

 

[Misthos]

Quote from Ed Breen:

Mishos, thank you for the thoughtful reply. I agree with most of the points you make...at least the facts; if not the conclusions. But you respond to me like a politician on TV who does not address the point of the questions but goes on to recite his own talking points.

MY main point of comment in this discussion is that we reached peak demand in 2008 and, more importantly, that there is a dynamic relationship between supply and demand that is in the end regulated by price. We use price in the real economy to manage imbalance between supply and demand and suppliers use price information to plan production and buyers use price information to plan consumption or seek substitutes. This is all basic stuff, and you keep ignoring how this will empact how the use of oil plays out. Its not linear.

To address your metephore of a checking account...consider a non linear checking account...which is more like the use of oil really is...every time you make a withdrawal you increase the value of what is left on deposit...no matter how hard it is to get out...and you increase the value of the tangible goods you purchase with the withdrawn oil.

Consider how the price of oil consumed by the U.S. has changed when expressed in the aggregate as percent of GDP over time. Oil has a diminishing role in our economy. When you look at the growth of non OECD country demand for oil...consider how much of that demand was transferred from the OECD to the non OECD...you have to net some of it out. And as I suggested previously the use of oil in the non-OECD will not revert back to the historical efficiency curve of the OECD experience, but will pick up at current efficiency and benefit from new technological advancement in the use of oil.

Your concern about OECD populaton growth is misplaced...OECD is losing population as aggregate OECD birth rates are below replacement....Russia and Japan will not exist ethnically in three generations...the change of population in OECD is entirrely dependant on immigration from non-OECD countries, so your population demand issues are as conflated as your energy demand issues.

The issue really isn't the supply of oil during the next 100 years its really the supply of oil at what cost. The issue of cost must be adjusted to cost in use relative to benefit...which continues to improve by technology. I'm not betting on oil shortage armeggeddon...but it does concern me that one day the Sun will burn out.

And by the way, I did make that trade; I wasn't kidding....of course it was short term trade that does mean anything in the time frame of armeggeddon...but this is a trading site forum isn't it?

How can you say we reached peak demand in 2008? Isn't that a tad premature? And I'm assuming here, that you mean peak demand globally - OECD and the rest of the world.

You do recall a global shock to international trade in 2008, no? A similar "peak demand" argument could have been made in the 1970s:

Recessions tend to dampen oil demand. We will not know anything about peak oil or peak demand for a decade or two after it happens. But there will be symptoms. Increased costs for one. De-complexification of econmies, and society in general, as well.

And keep in mind, there is a lot of cost shifting when it comes to oil. Having the world's reserve currency and exporting inflation is one factor. The cost of oil is not only in extraction, refinement, and transport to market. It's also in defense, as in military costs. Those costs, since the 1970s, could be in the trillions by now. But you know what? They're part of a growing deficit and have yet to be paid - just rolled over like one credit card to another - all the while we just pay a low price per gallon. Imagine there was a tax on gasoline every time we entered into a Middle Eastern Adventure. All too often we ignore these and say, "oil is cheap for historical standards." I would disagree with that. It's getting more and more expensive. You and I may not be paying it at the pump today, but we will be paying it one way or another.

 

[Ed Breen]

Misthos, I suggest that we reached peak global demand in 2008 because the use in 2008 reached 85+ mbd, OECD GDP grew in 2008 over 2007 as the oil price spiked upt the $140 and with an economic slow down in the Q4 after the Lehman Collapse.

Demand/Use declined in 2009 to about 84- mbd, as OECD GDP declined and as Oil price dropped with volatility back to $60 - $80.

Demand/Use estimate for 2010 has recently be adjusted to 84+ mbd, as oil price remained volatile in a general range from $60 - $80, and as GDP has been increasing.

My suggestion is that we will not ge over the 2008 peak demand of 85+ mbd in the future. Instead I expect the demand/use will decline as the economy declines and that it will not go back to the 2008 level when OECD economy recovers. So, I hope this clear, unhedged, and that you have metrics to see how it goes.

US demand must continue to decline as transportation use will decline by virtue of Obama fleet milage limits alone. As we abandon and or add cost to offshore drilling, price is likely to rise and that also will reduce demand. Emerging markets will implement more efficient technologies and substitutes as their economies grow, so that the increase in oil use there is likely to be overstated.

With regard to your rambling paragraph about oil and monetary inflation...I think that was what it was about...that is the reason I suggested you look at the historical price paid for oil consumed as a percentage of GDP...looking at the price that way deals with the issues of monetary inflation and efficiency of use. You could also look at the cost of oil expressed as a percent of median income to see the same effect.