Peak Oil?

[HenryTo]

Dear all,

I would like to start a discussion/argument on the validity of the Peak Oil theorists on this board. One of my subscribers had asked me to do this - and I believe it will be a very well worthwhile discussion!

I know there has been a lot of literature written about this - including recent books - but one thing that I find lacking is the fact that many of the commentators talk about the industry in VERY BROAD terms. That is, economists who are working with questionable data - questionable because of the lack of transparency in the oil markets, not because it is their fault.

I feel that Matt Simmons had done a great job in his efforts to focus on the Saudi oil machine. He spent an entire book just writing about the Saudi oil industry, and makes a very good argument which discredits the Saudis' claims that they can ramp up to 15 mm barrels a day in a few years. In all likelihood, he argues, Saudi oil output has peaked or is near peaking. We need similar analyses for the Russian oil industry, the North Sea, Iranian, and Venezuelan oil production.

Going forward, this author is bullish on the price of oil in the long-run, as I believe oil demand growth in both China and India will surpass the ability of the world to pump more oil - given current constraints and the lack of new, impressive discoveries.

I would definitely like everyone to chime in.

Best,

Henry



[[/img]

[rffrydr]

Latest from Simons of TheStreet, printed May 27:


We can summarize the shape of a forward curve in the singular measure of "convenience yield." This can be thought of as the insurance costs buyers are willing to pay to avoid running out of physical inventories; it is also the price increase required to justify holding those inventories. The higher the convenience yield, the more anxious buyers are about the sustainability of a price trend. If convenience yields turn negative, a riskless cash-and-carry arbitrage is possible.

If we map the convenience yields between July and succeeding months of crude oil after the current leg of the rally began on April 2, we see a steady decline from April 25 down to last Wednesday -- May 21 -- marked with the green line. This indicated much of the rally was being propelled not by just-in-time buyers of the front month, but rather by buyers in the deferred months.

http://images.thestreet.com/tsc/common/images/storyimages/052708_simon01.gif

On the surface, this is extremely bullish, as it indicates acceptance of the rally. But if we map the ratio of implied volatility to actual high-low-close volatility, or excess volatility, against the price of West Texas Intermediate crude oil plotted on a semilogarithmic scale -- yes, we have come to this -- we see how this excess volatility, which had been falling between August 2007 and February 2008 as price rose (marked with green trend lines), is now rising. The April 25 and May 23 values of excess volatility are marked with magenta and black columns, respectively.

http://images.thestreet.com/tsc/common/images/storyimages/052708_simon02.gif

This sort of increase in excess volatility often signals an imminent short-term trend reversal. Given the extended technical state of the crude oil market, that reversal could be quite violent, if only temporary. Those old enough to remember the October 1987 stock market crash may wish to use it as an analogy.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Article tries to estimate how much crude oil demand will drop in Asia if energy subsidies are removed:

http://www.iht.com/articles/2008/05/30/opinion/edbowring.php

[dknoester]

"I was interviewed about the oil price again today, this time on BNN. You can watch the segment on BNN's website:

http://watch.bnn.ca/trading-day/may-2008/trading-day-may-30-2008/#clip56474.



All this media attention started with an article called "Sue OPEC” that I sent to my commentary subscribers on May 9th. I have now posted this article on the Samples page of my website so that it is available for anyone to read. Here is a link to it:

http://www.paulvaneeden.com/pebble.asp?relid=34&t=164



Paul van Eeden"

DK
_________________
Be careful while stuffing your pockets not to lose your pants!!

[HenryTo]

Thanks DK for posting the video! Much appreciated.

One thing that was left unsaid in terms of the Euro Zone and the ECB is that M3 in the Euro Zone has been growing at double digits for the last few years now. So liquidity has also been plentiful in the Euro Zone based on that measurement. Coupled with lax lending in Spain, France, etc (not to mention continuing increases in government spending), there really isn't much to be said for monetary discipline in the Euro Zone.

All the best,
Henry

[dknoester]

CNBC invited me to defend my argument that oil is trading above US$130 a barrel because of the Fed's monetary policy. The video segment has been posted on YouTube:

http://www.youtube.com/watch?v=iwAHnpIR8is

Paul van Eeden

DK
_________________
Be careful while stuffing your pockets not to lose your pants!!

[rffrydr]

There's much suffering hidden behind the indicies in the Roger's handbook: Long China, for instance, that should be easy. Not. China just slapped price controls on steel and cement in earthquake's wake:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXK1VaLQ4DrI&refer=home

[wallstreetknowitall]

A lot of analysts and investors are talking about the price of oil right now, and how current demand cannot support the price. Some say oil companies are hiding their supply, others say the last oil inventory data was without the most recent crude shipments.

Anyways, I wrote about this in my blog too, and I included a chart of the supply and demand of oil and other info from reliable sources.

http://www.wallstreetknowitall.com/2008/05/will-money-suddenly-pull-out-of-oil.html
_________________
Check out my new blog @ http://www.wallstreetknowitall.com

[rffrydr]

Water is always sneaking up on us. Like air, it's what we take for granted...liquidity. Markets can't exist of and by themselves.

Dollar turned first. We'll chalk this one up to Soros:

http://biz.yahoo.com/ap/080529/oil_prices.html

Memorial Day...conservation. That would make for a nice irony--and top.
_________________
Today is the Tomorrow you worried about Yesterday!

[BlueDaze]

Ethanol: By the Way, You'll Need Water

http://solveclimate.com/blog/20080311/ethanol-way-youll-need-water

It's a longstanding joke among people who sell land. The closing is over, signatures secured, the deed transferred, and after a final handshake, this off-hand comment is delivered over-the-shoulder
That's become the story of corn ethanol in the US, and it's no laughing matter.

Last year's energy bill requires 36 billion gallons of annual biofuels production by 2022 - probably about half of them from corn. The measure, largely a giant gift to agribusiness interests, appeared to address both environmental and energy security issues, while really doing neither. And now what's surfacing is a threat to the nation's water security.

The question of water, like oil supply, takes us deep underground, where deposits of sand, gravel and silt store water in ancient aquifers. This supply of groundwater, which is what half of the nation relies on for drinking, is not inexhaustible.

Take the Mahomet aquifer in Illinois, for example, which spans 15 counties and supplies 100 million gallons of groundwater a day for public use, industrial supply, and irrigation. Here's what one paper on the web site of the Mahomet Aquifer Consortium had to say:

As with other deep aquifers, the greatest threat to the continued viability of the Mahomet Aquifer comes not from contamination but overpumping; that is, removing water faster than it is replaced. Water consumption from the aquifer now averages 84 million gallons a day.....

Recent studies of the aquifer by scientists from the ISGS and the Illinois State Water Survey indicate that well-water levels around Champaign and Urbana are dropping.....the surplus could vanish with the addition of a few high-demand users.

Like an ethanol plant or two. Or a dozen. Here's a snapshot of the demand a single plant can place on water supply, from the Economist:

http://www.economist.com/world/na/displaystory.cfm?story_id=10766882&CFID=14231797&CFTOKEN=bb64624d0f2f920a-A02D6C06-B27C-BB00-01297CB597365EE8

Officials in Tampa, Florida, got a surprise recently when a local firm building the state's first ethanol-production factory put in a request for 400,000 gallons (1.5m litres) a day of city water. The request by US Envirofuels would make the facility one of the city's top ten water consumers overnight, and the company plans to double its size. Florida is suffering from a prolonged drought. Rivers and lakes are at record lows and residents wonder where the extra water will come from.

In the biofuel heartland, pressure will be even greater. That's why Missouri residents went to court to stop an ethanol plant projected to draw 1.3 million gallons of water a day from the Ozark aquifer, as have residents of other states. And it's not only the ethanol plants that are the water hogs. Increased crop production to feed the ethanol plants consumes even more water resources.

A study on biofuels and water published by the Institute for Agriculture and Trade Policy (IATP) provides the following illustrative estimate:

For Iowa, in the heart of corn production in the U.S., the water use (associated with crop water requirement) for producing a gallon of ethanol has been calculated to be between 1081 and 1121 gallons of water. However in fully irrigated agriculture, crop water use increases substantially.

For example for corn grown in Southwestern part of Nebraska, where it is irrigated, the average water use (associated with crop water requirement) for producing a gallon of ethanol has been estimated to be about 1568 gallons of water.

The Ogallala Aquifer, also known as the High Plains Aquifer, is a vast aquifer located beneath portions of eight states on the Great Plains. It waters one fifth of irrigated land in the US. BBC identifies it as water hot spot:

http://news.bbc.co.uk/2/shared/spl/hi/world/03/world_forum/water/html/ogallala_aquifer.stm

The aquifer was formed over millions of years, but has since been cut off from its original natural sources. It is being depleted at a rate of 12 billion cubic metres a year – amounting to a total depletion to date of a volume equal to the annual flow of 18 Colorado Rivers. Some estimates say it will dry up in as little as 25 years.

It's all enough to drive a person to drink. It's not exactly what Congress had in mind, but if this keeps up, we just might have to start drinking some of all that grain alcohol - instead of putting it in our cars.

[Rubedo]

[rffrydr]

From the Broker, Russian Oil:

[rffrydr]

Pickens said on May 20th that prices could hit $150 by year-end and that speculators had nothing to do with high oil prices. Soros said on May 27th that soaring prices were the result of speculation and that the market had the look of a bubble. That leaves the market with the choice of following the billionaire who’s been right on oil or the billionaire who’s been right on the dollar.
_________________
Today is the Tomorrow you worried about Yesterday!

[chestnutstime]

Cheney & Co's solution for peak oil has been crystal clear since 2000.

The latest development bears attention.

Bush 'plans Iran air strike by August'

http://www.atimes.com/atimes/Middle_East/JE28Ak01.html


Chestnut
[/url]

[BlueDaze]

Commodities, Oil Bubbles Are Reason to Celebrate
Commentary by Matthew Lynn

http://www.bloomberg.com/apps/news?pid=20601072&sid=a0sG1tzq.qQg&refer=energy

May 28 (Bloomberg) - Anyone filling up the tank of their car right now will be cursing oil speculators. Likewise, anyone loading up a shopping cart with food for a family may feel angry with hedge-fund managers pushing the cost of wheat, rice and other basics through the roof.

Prices of oil, commodities and food have exploded in recent months. Although there are some solid foundations to that, the boom has now turned into a bubble. Prices are starting to race far ahead of anything that can be justified by the fundamentals of supply and demand. Predictably, that is creating a backlash against the financial markets that are pushing prices up.

We should all leave the speculators alone. The world needs a massive change in the way it uses raw materials. Politicians are too timid to bring that about. The markets are doing the job for them, and if it takes a bubble to change people's energy consumption, then so be it.

Oil now costs more than $130 a barrel. Nobody expects the price to come down fast anytime soon. Instead, it may go higher. Goldman Sachs Group Inc. analyst Arjun N. Murti has said the price may reach $200. So has Svein Rennemo, the chairman of Norway's StatoilHydro ASA, according to the Finansavisen newspaper. After the increase over the last three years, it would be a brave investor who bets against $200 oil.

What is true of oil is true of many other basic commodities. Copper and iron have soared in the past few years. Wheat, corn, rice and soybeans all peaked this year: At one point, rice was a record $25.07 for 100 pounds. That has sparked riots from Haiti to Egypt. Some people may go hungry.

Indian Ban

Not surprisingly, that has triggered action against speculators. This month, India expanded its ban on trading of food futures, including soybean oil, potatoes and chick peas, in an attempt to curb price increases. In the U.S., Joseph Lieberman, chairman of the Senate Homeland Security and Government Affairs Committee, has said legislation may have to be passed to limit big investors taking positions in commodities.

Plenty of Germans would like to do something similar. ``The biggest cause of the soaring food prices is the financial speculators, and in this case they truly are locusts,'' Gerd Sonnleitner, the president of the German farmers association, said this month. ``The locusts don't care about rice or milk or people. They only care about the fluctuations in the market.''

In one sense they are right. The ``locusts'' -- shorthand for hedge funds -- have been at work. As OPEC Secretary General Abdalla el-Badri pointed out this month, speculators are playing an ``important role'' in surging oil prices. The same is true of commodities and food.

Buying Frenzy

Yet they are wrong in thinking it's a bad thing. Here's why.

First, oil production needs to expand. The International Energy Agency estimates global oil consumption will rise to 98.5 million barrels a day by 2015 from 84.6 million in 2006. By 2030, it will be up to 116.3 million. To get that out of the ground and into the pumps is going to involve more exploration, production, refining and distribution. There is only one way that scale of investment will be mobilized: by causing a price increase that starts a buying frenzy in oil assets.

Next, the developed world has to start making itself more fuel-efficient. If China and India begin using as much oil as Europe and the U.S., we won't just need more supply -- we'll need lower consumption in rich countries. And if we are to combat climate change, we'll need to cut down on pollution as well.

Change of Behavior

To make that happen, behavior must change. That means gas- guzzling sport-utility vehicles will have to be replaced with hybrids. High-speed trains should take over from planes as the standard way of covering distances of as much as 1,000 miles (1,609 kilometers). Our houses have to be redesigned to use less energy, and more of it should come from solar and wind power.

All of that is expensive and hard work. Politicians are too nervous to impose the taxes to bring that about. With oil at $50 or $100 a barrel it wouldn't happen. At $200 a barrel, the only place we'll be driving an SUV is to the scrap-metal merchant.

Lastly, agricultural policies need to change. Again, if India and China are to become as wealthy as Europe and the U.S., the world will need a lot more food. That means modifying the way we run agriculture, which, in Europe at least, has been more about preserving farming jobs, and caring for the landscape, than maximizing output. Countries such as Germany with lots of fertile land and falling populations should be turning themselves into major food exporters. But, again, it's not going to happen unless a massive price increase forces it.

It always takes a big shock to the system to change behavior. That is just what the speculative bubble in commodity prices is delivering. It may not be pretty, or comfortable, but it is the market doing the job - which is why we should celebrate the bubble, and not condemn it.

[rffrydr]

The ABS connection (note reference to Keynes filling college basements with wheat) and the finger pointed to Strategic Reserves:

http://www.pkverlegerllc.com/PKV%20December%20Senate%20Testimony.pdf

Though supposedly this is made available for "loan."

Despite CFTC Harris comments that "speculation" has been neutral to prices this is an artefact of COT reporting (see Simons): net new barrels from China in past five years are nearly matched by net new paper barrels.
_________________
Today is the Tomorrow you worried about Yesterday!