New Downbeat Tone on Oil

One robin does not make a spring, but I was struck by the subtext of this article at Bloomberg, “OPEC Failure Foretells Decline 10 Years After $10 Oil.”

The mention of $10 oil is an odd bit of anchoring. And the general tone is surprisingly pessimistic. Key excerpts:

A decade after OPEC failed to prevent oil from collapsing to $10 a barrel, the world’s biggest producers are delaying actions needed to arrest the steepest slide in energy prices…

“They are riding the economic wave just like the rest of us,” Adam Sieminski, Deutsche Bank AG’s chief energy economist, said in a telephone interview in Washington…..

Merrill Lynch & Co., forecasting the first contraction in global demand in a quarter century, sees crude bottoming at an average $43 a barrel in the first quarter….

“Prices are coming down because demand is,” said Robert Ebel, a senior adviser on energy and national security at the Center for Strategic and International Studies in Washington. “There’s no way of knowing how long this will continue.”

U.S. crude-oil supplies rose for a ninth week, the longest stretch since April 2005, the Energy Department said Nov. 26. U.S. fuel demand declined the most in 27 years in the first 10 months of this year, the American Petroleum Institute reported Nov. 18….

Oil prices may fall more as world growth slows, Fatih Birol, the IEA’s chief economist in Paris, said in an interview Nov. 27.

Note the information was strikingly on the downbeat side (f you are long oil or oil stocks). The one genuinely positive viewpoint:
Barclays Plc says crude will trade at $72.10 next quarter and average $100.50 for 2009, according to a report Nov. 21.

Oil exporting nations WANT higher prices, but that does not mean they will GET higher prices near term:

Oil producers are depending on crude prices to support spending programs. Venezuela, the largest oil exporter in the Western Hemisphere, estimated an average price of $60 a barrel for its 2009 budget. The Latin American country depends on oil for half its public spending and more than 90 percent of exports.

Russia‘s 2009 spending plans are based on a forecast of $95 a barrel of Urals crude, and Finance Minister Alexei Kudrin said Sept. 16 the budget will break even next year if the price of oil averages $70 a barrel. Urals crude, Russia’s benchmark blend, was last priced at $49.60.

The reason this article stuck out was that I got the sense of an undertone of funk, which is unusual in a Bloomberg piece (the Reuters report, by contrast, were predictably anodyne). That may simply be a post-OPEC-dud-meeting overreaction by some of the sources,

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  1. Anonymous

    These oil producing countries has no financial discipline. They went on a spending binge when oil is at $145 now they can’t pay back the debt they racked up. At the current price, I think OPEC countries will each pump out more oil and hope the others will stand by their collective agreement. So the net result will be a downward spiral on oil price.

  2. mxq

    Spare capacity stats:

    “OPEC capacity has indeed risen in the face of falling demand. In fact, OPEC capacity will have risen by roughly one million barrels per day in 2008, and OPEC appears to have boosted capacity by over one million barrels per day on average in each of the past three years. Thus spare capacity will likely recover to over five million bpd by the end of 2008 (capacity fell to below two million bpd in 2005)…Average OPEC spare capacity was less than four million barrels per day (bpd) from 1996 to 2007, according to the International Monetary Fund using data from the International Energy Agency. Therefore, oil demand would need to rise by more than two million bpd to take us back to a position of tight OPEC capacity, assuming no net additions to OPEC capacity and no additional supply from non-OPEC producers.”

  3. Anonymous

    Oil prices are dropping because Bush is leaving office. No other reason. Depression, repression, ..yada ya. All irrelevant.

    Oil futures dropped when they began investigating futures manipulation. Under-reporting of inventories by refiners, etc. The oil boom was a hoax like the housing boom. It was held aloft by Cheney and pals. Coordination by Bush and oil companies was the motive force behind the commodities boom.


    So I’d say, $30-40 bucks is reasonable for a barrel.

  4. esb

    I suspect that OPEC has decided to run down the price (to the extent that it has control) in order to swat the Alberta projects and make investment in “clean” technology excessively expensive.

    In this game, “my friends,” you are simply the yo-yo at the end of the string.

  5. Viv

    It’s going to be a disaster if oil falls any further, for the long run, this means that when the economy recovers oil will reach 1000 dollars a barrel due to all the excessive monetary inflation that will happen after this deflationary period is over. Key investments vital to our future are being scaled back and even alternatives have taken a hit such as T Boone Picken’s wind plan. Cheap gas might be good now, but it’s very very bad for the future.

  6. Anonymous

    Nuclear energy is the only threat to Oil.

    Until I hear about 200 Nuclear Plants being built tomorrow, I am long oil.

    The US has never reduced energy usage, only moved it.

    I think that is all they required of Obama, just don’t even say the word.

  7. Anonymous

    What does an “undertone of funk” mean? I’d like to keep an eye out for it the next time I read a Bloomberg article.

  8. Christian

    In my view the price of oil is reflecting what the world i able to pay right now. It never discounts that it if a finite source of energy. In the long run the price of oil will rise since there is no natural resource that can replace the importance of oil in our society.

  9. Anonymous

    Without real knowledge of global economic growth, oil price estimates are fairly useless. You can count on one thing, the slower the economy gets, the lower the price of oil.

  10. mdf

    Viv: "T Boone Picken's wind plan."

    T Boone Picken's "wind plan" is better referred to as the "T Boone Picken's wind subsidy mining operation".

    He probably goes to bed laughing at all the money he is about to receive from the suckers^H^H^H^H^Henvironmentalists via their State proxy.

    Anonymous: "Until I hear about 200 Nuclear Plants being built tomorrow, I am long oil."

    Are you sure you know what you are doing?

    North America could cut its oil consumption by 20-30% by moving to PHEV (or similar) vehicles.

    And this would not require a single nuclear power plant being built.

    Also, only an itty bitty fraction of oil is used for electrical energy production. Maybe 2-3%, if even that.

    Our host loathes financial advice in these forums, so I'll only say this: if I had a portfolio in oil (which I do not), I would be seriously concerned upon news that (a) electric vehicle deployment on a large scale and/or (b) methanol production facilities being installed at coal-fired power plants (see book, below).

    Item (a) is fast approaching.

    Christian: "In the long run the price of oil will rise since there is no natural resource that can replace the importance of oil in our society."

    Absolute, complete, total, 100% pure, unadulterated, peak-oil-esque nonsense. So much so, I'm beginning to wonder if financial people read books:

    As for any argument based on (either wittingly or unwittingly) peak-oil, you can read:

    I'm not even finished this one — still in Chapter 3 — and Mills has already destroyed the foundations of the "Peak Oil" position.

  11. Anonymous


    Spot on.

    T Boone Picken’s “wind plan” is better referred to as the “T Boone Picken’s wind subsidy mining operation”.

    Don’t forget T. Boone Picken’s natural gas subsidy. That’s the second part of his plan. You have to look at the average producer prices per million btu’s for coal, n-g and oil.

    Coal is cheapest, n-g is in the middle and oil is highest. In recent decades n-g has run about 4x to 6x of coal for the same amount of heat. Oil’s been “best” with a multiple of 8x to 12x of coal per million btu’s.

    By making n-g a vehicle fuel T Bone hopes to raise n-g’s price multiple up closer to oil’s. He also wants permanently higher Kw/h prices.

    The amusing part is watching our modern idiocracy crats

    a) condemning the late r.e. and consumer credit bubble while

    b) hallucinating they can base a recovery on a Globaloney Warming green energy bubble that will double and triple end user fuel and energy prices

  12. Anonymous

    mdf —

    Nice rant. I love the irony of when the know-it-alls don’t even understand the basics. “Peak oil” is not the theory that there are no replacement alternative energies. “Peak oil” is the idea that oil *production* has peaked (or will soon peak). Please take the time to consider that you are not the ultimate arbiter of the truth in the world and that everyone who has a difference of opinion is not necessarily an idiot (though they may be wrong, they are surely not all idiots).

  13. mxq

    “By making n-g a vehicle fuel T Bone hopes to raise n-g’s price multiple up closer to oil’s. He also wants permanently higher Kw/h prices.”

    So true.

    Nat gas co’s are just as content to shut-in production capacity as is OPEC.

    And congrats to CA residents for shooting down prop 10. What a scam that was. I have a feeling they’re not the only ones that are sick of oil barrons running the country.

  14. Christian


    Def of peak oil:

    “The term Peak Oil refers to the maximum rate of the production of oil in any area under consideration, recognising that it is a finite natural resource, subject to depletion.”

    –Colin Campbell

    1. In 1982, the State Department released its own report which stated:
    . . . world petroleum production will peak in the 1990-2010 interval at 80-105 million barrels per day, with ultimate resources estimated at 2,100 billion barrels.

    2. Net energy:

    “Net energy is the energy available to society to do work after you remove the costs to obtain the energy.”

    3. Technology (Jevrons paradox):

    “How can you double something and still have ten times less than you started with?”

    4. Oil in food production. Approximately 10 caories of fossil fuels are required to produce 1 calorie of food eaten in the US.

    To feed an average family of four in the developed world uses up the equivalent of 930 gallons of gasoline a year – just shy of the 1,070 gallons that same family would use up each year to power their cars.

    5. Cars/electrical cars:

    As of 2002, there were 590 million passenger cars worldwide (roughly one car per eleven people ( is probably closer to 700 billion cars on the planet right now. Between 10% and 20% of the fossilfuel used in a cars lifespan is used in production.

    I agree that electrical car is a great way to go, I cannot see how it is goig to make an impact dealing with peak oil (to litte to late)

    6. Electricity:

    “Because coal is a finite resource, and cannot be replenished once it is extracted and burned, it cannot be considered a renewable resource. The nation’s fleet of over 100 coal plants is responsible for 57 percent of the electricity generated in the U.S., more than any other single electricity fuel source.”

    7. Hydrogen economy:

    As of 2003, the average hydrogen fuel cell costs close to $1,000,000. Unlike other alternatives, hydrogen fuel cells have shown little sign of coming down in price. ( Unfortunately, hydrogen and/or hydrogen fuel cells will never power more than a handful of cars due to the following reasons:

    – Astronomical cost of fuel cells
    – Platinum supply and cost
    – Inability to store massive quantities at low cost
    – Massive cost of hydrogen infrastructure
    – Hydrogen’s “Energy Sink” factor


    The ironi is that economists focus on unending growth while our world is finite. It is just not possible to continue the current paradigm.

  15. Anonymous

    We all see the world through the lenses of our biases. I don’t want peak oil. Presto. I can support that quite easily. “The paradigm is different this time.” “The free market is the (insert superlative)”. Until more of us can perceive what is real, we are doomed to repeat mistakes over and over. A group works fulltime in the area of human perception, ISHK.
    My crystal ball is sometimes a bit hazy, but this is as clear as anything I have seen lately. Within two or three years, we will have whiplash from changes in the oil market. Not only is the price going a whole lot higher, but we will experience permanent nationwide shortages of gasoline. Look at the IEA projection for 2010 production, down over 9%, and look at the projections for exports from producers, down over 50% in 4 years, for verification. The future is nature linked low energy lifestyles. Check out EntropyPawsed

  16. Christian

    "As for any argument based on (either wittingly or unwittingly) peak-oil, you can read:

    I'm not even finished this one — still in Chapter 3 — and Mills has already destroyed the foundations of the "Peak Oil" position."

    Robin Mills:

    Petroleum Economics Manager at Emirates National Oil Company; author of 'The Myth of the Oil Crisis'


    – Senior Evaluation Manager at Dubai Energy
    – Economist at Norske Shell
    – Economist at Shell International

    Enough said for his credibility and agenda :)

  17. Anonymous

    In response to the poster who said OPEC is trying to put pressure on the Alberta oil sands projecs, I think you’re missing a more critical point.

    The US is more likely working with the Saudis to squeeze Iran and Russia.

    Saudi Sunnis vs Iranian Shiites.

    The US benefits by weakening foes.

    Note that the Israelis are all of a sudden saying they have no issue with the US entering talks with Tehran.

    Odd, no?

  18. Anonymous

    “”Peak oil” is not the theory that there are no replacement alternative energies. “Peak oil” is the idea that oil *production* has peaked (or will soon peak)”

    This is not correct- what “peak oil” refers to is production as it relates to proven reserves – it is measure of how many years of oil reserves are left.

  19. mxq

    Schork on OPEC:

    “They might say that they will cut 1 million barrels but in reality the market knows maybe they’ll cut 500,000 to 600,000 barrels,” Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania, said in a Bloomberg Television interview. “And that’s simply not enough to exorcise the surplus out of the market.”

  20. Juan

    anon 3;43,

    reserves is not some singular and definitively know quantity but an unknown relating to both economics and changes in E&P tech.

  21. Anonymous

    I was the one who wrote that until I see 200 nukes I am long oil.

    Oil is part of energy, not all of it. The change to natural gas cars and trucks will benefit oil. They own most any large production and distribution. Not that different to run a liquid or Gas through a pipe. Most of the higher tech Natural gas Pipelines could be considered liquids pipelines, they are operating at over 1000psi. One I saw in the Northeast was over 1300.

    Oil is only one that can currently be transported easily outside of the existing infrastructure system.

    Oil is, in my estimation, responsible for 80% of the cost of anything in this country. We move both oil and goods extremely well here, just not that efficiently, especially on the goods side.

    Energy returned on energy invested will hopefully begin to be looked at in a real way. It is the only way.

    All of these infrastructure heavy plans for ‘an independent energy future’ are all completely dependent on oil for construction. Without oil, what do you do? Run a NG pipeline to each job site?

    NG, Coal, Nuculear at first, and electrictiy in every sense are completely dependant on oil for building and maintaining and infrastructure.

    Working in Heavy Civil construction for years, you begin to realize that oil is responsible for everything they do.

    How does coal get moved? How do the pipelines from the middle of nowhere get built, and maintained?

    As I said before, ENERGY use in the US has never gone down, just been moved to other things.

    On the NG as car/truck fuel, that will reach an equilibrium above where it is now, but does anyone really think that they can just shift demand like that without a considerable price change?

    Using Oil, now while it is still cheap, to build nukes is the only answer, long and short term. Once electricity production is availiable, and distribution has been upgraded (all oil), the electric car would be good. This would be best case, if we decided tomorrow, 10-15 years off.

    Trucks as with airplanes will never, never, never, be able to run on electricity.

    This doesn’t even get at the more pressing problems with food distrubution being completely oil dependent.

    Long oil.

  22. Anonymous

    On the electric car….

    Frontline, at the beginning of October, did a climate change show. Part of it looked at alternatives. One was the Chevy volt.

    This should be watched by everyone. The car, in is debut performance in front of the media, could not even make it up a slight incline. It ended up being towed away.

    Did you see that story? Neither did I…

    Frontline was the only place I saw any mention of this. An electric car is possible, but a lot more work has to be done.

    Hybrids are the wrong path. How much more energy goes into producing the seperate engine, batteries, control systems, etc.
    Been looking for those numbers for years. Still haven’t found any that I believe.

    The Hybrid is an auto company wet dream. You want two engines in your car? Twice as much equipment and maintenance. What was it that Henry Ford said, I’d give the cars away if I were the only one selling the replacement parts. I bet those Hybrid parts are all very proprietary, and very high margin for the car companies making them. Again, the numbers on this stuff are all vaporous.

    Two engines in a car- Detroit really seems to have underestimated the stupidity of the american public by not delivering more of them. This would be a first.

  23. Anonymous


    Lots of numbers. No Barrels.

    All energy usage, Oil included, has an energy unit attached to it. It is not the Barrel. Oil has more than 120% of the energy of any of the other current replacements.

    That’s how the figures get distorted. A barrel of ethanol has 80% of the energy that the same barrel of gasoline has. Methanol is even less.

    That 15% ethanol gas that you put in your tank does not have the same energy as 100% gas would. You are paying the same for less energy.

    PHEV’s- NO. First, show me one. Second, show me one that works. Third, what happens when everyone plugs in their cars to an electrical system that was built in the 50’s?

    We could begin to move toward that goal, as stated above, if we start burning a whole lot more oil to build the infrastructure that plug in cars would require.

    But it just comes out of the wall…..

    The electrical system in the US is barely able to keep up as it is. Move the largest single energy sink in this country (cars) to electricity and watch it burst into flames. The energy conversion on this point is very clear. Do the math, figure how many more MW’s of base load we would need to change over just 10% of the cars to electricity.

    California is a prefect example, they have grid problems already. They also have a lot of cars. What happens when electricity usage goes up even 10%? Where does that electricity come from, and how does it get to where it needs to be used? Oil will be building all of that.

    Pie in the sky thinking does not get rid of the real engineering numbers that we are being faced with. Look at them.

    The real reality is that there will be/should be rationing of oil based fuels. Oil should be used for the things that cannot use anything else, and things that will reduce oil usage/demand over the long term.

  24. Anonymous

    Electric car math

    We would need to Build 21 Nukes to get just 10% of the cars onto electricity.

    3.35TW (2004 total)

    Transportation 28%

    .9 TW Transportation usage

    Gasoline as percent of transportion usage 61%

    .54 TW in gasoline used

    Assuming no loss from transmission of the electricity, which is hardly true- 10% of gas usage being replaced with electricity would mean .054TW (54 MW)more base load capacity. That is more than half of the electricity we get from Hydro electricity now, .09TW

    Remember that is 10% of cars plugging in. Transportation of electricity is on average, less than 70% efficient. 10 goes in at the plant, 7 comes out of the wall.

    We currently (and in 2004) have 104 reactors operating in the US producing .27 TW in 2004. That works out to, quick and dirty, 2.5 MW a piece, or .0025 TW a piece.

    We would need to Build 21 Nukes to get just 10% of the cars onto electricity. As said above, really 7%.

    You could build coal and Gas too, but nukes were used because of their scale.

    This is an analysis which will be picked apart based on efficiency. I have been very conservative and given electrical vehicles equal energy usage efficiency. This is far from the truth. It would be much less in practice. The charger would usually only be about 80% efficient. This is if such a car can even be built.

    Yes, gasoline engines are not that efficient, but, they do the conversion at the point of use, or very close. To be honest you should also count the distribution of the gasoline, mostly in electricity. No idea on that number.

  25. Anonymous

    Replace MW with GW in the above.

    Working with english units of late. Love metric, much easier, but you have to remember to keep you M-G-T straight.

    Looked up Natural Gas Plant capacity after the fact and realized my mistake.

    Nukes are about 2.5 GW of elec. Big Natural Gas burners are in the 1 to 1.8 GW range. The majority are in the sub G (less than 1000 MW) range, and placed a lot closer to where the electricity is needed. Most (as in numers of plants) are in the 500 and below range.

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