Tuesday, August 07, 2007

Why Oil Will Hit $100/Barrel

Following the recent slide in oil prices, CNN is already jumping on the bandwagon with their story "Why oil won't hit $100." From the article:

"If this market can continue going lower without OPEC disrupting it, it's very possible that by 2010 we could be substantially lower than anyone is imagining," said Peter Beutel, an oil analyst at the consultancy Cameron Hanover. "Four to 8 years from now, we could come down and break $20 a barrel."

Beutel bases his prediction on the fact that oil is historically a cyclical commodity. In the early 1980s it hit $38 a barrel, far higher than today's price when adjusted for inflation, only to fall to $10 a barrel by the late 1990s.

. . .

EIA says by 2010 the amount of oil OPEC can pump should increase by 2 million barrels per day, largely driven by Saudi Arabia. The EIA, like most analysts, does not agree with the view that production has peaked or will soon peak in Saudi Arabia, although a small but growing number of experts say it might.

EIA says more oil from Central Asia and the Gulf of Mexico should offset production declines in the North Sea and and Mexico.

And co-called "non-traditional" fuels, such as oil sands from Canada and corn-based ethanol, are expected to double, going from the current 3 million barrels a day to 6 million barrels a day by 2010.

While demand is expected to continue growing, EIA says conservation measures should slow the rate of growth to 1.3 percent a year from 2 percent.


Let's just ASSUME that all of those assumptions are correct--which, by the way, I strongly question. A quick math exercise: 86 mbpd * (0.013 ^ 3) = 89.4 mbpd in 2010 based on 1.3% increase in demand each year. That's 3.4 mbpd that that needs to appear over the next three years. Where will it come from? The article calls for 3 mbpd to come from increases in "non-traditional" fuels like ethanol and oil sands. The article also expects a 2mbpd increase from OPEC, mostly from Saudi Arabia. IF both of those come true, then there should be 1.6 mbpd more spare capacity than exists today. IF either one of those fails (for example, if Saudi Arabian production has actually peaked), then there will be LESS spare capacity than today.

My opinion is that neither of those projections for new production will pan out. Analysis of Saudi Arabia suggests that they have already peaked, and if anything OPEC production will decrease over the next three years. While it does seem likely that ethanol production will increase--driven by politics and subsidy--when one accounts for the energy needed to produce that ethanol the increase may be meaningless.

There does seem to be good reason for the recent 7% drawback in oil prices. Technical analysis suggests that there will be strong resistance at the prior record level, and this is exactly what happened. The problem with using technical analysis to justify a prediction of the future is that NO ONE understands why, or even IF, technical indicators have meaning--best guess is some combination of group psychology among traders, a kind of self-licking ice cream cone. An economic slowdown--quite likely, in my opinion, in light of the current debt issues--could certainly curb the increase in demand for oil. However, it is my opinion that it would take a major recession to fundamentally change our driving habits, and it is by no means clear that such problems are in the cards in the very near future. In the interim, any savings from energy efficiency will likely be negated by Jevons' Paradox.

So do I think that oil will break $100? Certainly--the only question is whether that happens this year or four years from now, and assumes that we aren't using 2007 dollars to calculate that record. In the absence of a catastrophic economic collapse (which regular readers will know is something that I see as likely in the medium-term), oil prices will keep going up. They will keep oscillating around a steadily increasing supply-demand equilibrium, with a spread of perhaps $20 up or down. So we may hit $55 before we hit $100. But $100 is far, far more likely than $20.

15 comments:

Jeff Vail said...

Quick update: the latest EIA world oil production numbers for May were just released today. They can be found here (.xls file)

They show May 2007 production down slightly to 84.175 mbpd for crude + lease condensate. They also revise the current peak to July 2006 at 85.392 mbpd.

Bottom line: while these optimistic projections of future oil production are great, they aren't showing up in the bottom line. Maybe they will--peak is something that can only be definitively identified in hindsight for a historical period. But, in my opinion, any prediction of the future that assumes the world will ever produce over 90 million barrels per day is highly suspect (much less the estimated peak at 125 mbpd that CERA has floated)

Euthydemos in Athens, GA said...

Jeff,
I know you are an energy analyst, and I enjoy the peak oil posts, but I have been working through some of your older posts regarding the rhizome and The New Map.

I noticed something in today's NY Times that I think applies:

Ancient Nomads Offer Insights to Modern Crises addresses "a geopolitical reality that has important implications for American foreign policy makers: many of the countries that most trouble the West — like Afghanistan, Iraq and Somalia — have government institutions that reflect a nomadic past." The article points at several key misconceptions that are dogging the hierarchy's attempts to control, or even communicate effectively, with the rhizome, or in Newsppeak: "[S]ome of our foreign policy complications derive from our inability to locate a nomadic dynamic within contemporary political structures.”
The key feature of a nomadic, non-hierarchy is that "...nomadic cultures are flexible, switching between transient and more sedentary ways of life, and assimilating and inventing new ideas and technologies. Nomads created durable political cultures that still influence the way those countries interact with outsiders or negotiate internal power struggles.

While the view that tribe and clan — the basic building blocks of nomadic, or semi-transient societies— influence the contemporary politics of some countries is nothing new, specialists in nomadic studies argue that policy makers have overlooked important “cultural intelligence,” like family relationships, when analyzing governments that grew out of tribal traditions." They further stress the need for independence, an epic national mythos and a socialist/communist economic outlook as predicated by the needs of family and tribe over individual. All of these are alien to the hierarchy. In the words of one Kazach politician: “Foreigners talk about these things, but it’s only talk. They don’t understand them.”

Even while accepting the 'nomadic dynamic,' the hierarchy still fumbles with the application of meaning to action. "Yet, despite calls for a deeper appreciation of cultures far from the mainstream, “the United States government hasn’t been willing to pony up the money to educate” policy makers on “these areas with deep nomadic traditions”" The article notes that “It takes a half a million dollars and four or five years to train a specialist in these parts of the world,” the official said. “Even now we hardly have anyone up to speed about the border areas of Pakistan or the tribal politics of Somalia.”

Isn't this a typical response of a hierarcy to the cognitive dissonance presented by the rhizome - hire or train experts in nomadism. Then re-exert hierarchical structures (universities, experts) to reduce nomadism to a phenomenological problem that can be controlled or understood, and in so doing force the rhizome to become compatible with the hierarchical structures (for example, pipelines and airbases)?

As you state in The New Map: "our increasing failure to effectively combat terrorism is not merely a failure of programs and policies, but rather the fundamental failure of the Nation-State paradigm" related to the "coming structural, epochal conflict of hierarchy versus rhizome."

Theo_musher said...

The war on terror is a hoax. There is no way to effectively combat it or ineffectively combat it. Its a war that can never be won. That's the purpose of it.

As far as peak oil, there is enough oil for an elite society of global feudal Lords and will be for a long time.

As long as people's minds are occupied with fear and scarcity the global elites will retain and intensify their control.

Becoming bands of wandering hunter gatherers benefits no one but global elites.

Ryan said...

I need to work on my Component Analysis model, but I'll have the prediction for when oil hits 100 for you in a day or so :)

Ryan said...

There IS a cyclical compenent to oil prices, which I empirically demonstrated in the paper I sent you, but that is in the background with the other fundamental supply and demand factors. Maybe I should see about getting that paper published :)

dawn said...

Economic law dictates reform at some point. But should we wait until the dollar is 1/1,000 of an ounce of gold or 1/2,000 of an ounce of gold? The longer we wait, the more people suffer and the more difficult reforms become. Runaway inflation inevitably leads to political chaos, something numerous countries have suffered throughout the 20th century. The worst example of course was the German inflation of the 1920s that led to the rise of Hitler. Even the communist takeover of China was associated with runaway inflation brought on by Chinese Nationalists. The time for action is now, and it is up to the American people and the U.S. Congress to demand it.

dawn said...

Certainly geo-political events in the Middle East under a gold standard would not alter its price, though they could affect the supply of oil and cause oil prices to rise. Only under conditions created by excessive paper money would one expect all or most prices to rise. This is a mere reflection of the devaluation of the dollar.

I'm asking you, who's saying this?

dawn said...

Rony Pauly !

Anonymous said...

Jeff, I'd like to hear your views on the latest market mishaps and the Fed's unusual injections of credit.

Anonymous said...

Explosions Hit Mexico Oil Pipelines
E-MailPrint Save

By THE ASSOCIATED PRESS
Published: September 10, 2007
Filed at 8:42 a.m. ET

MEXICO CITY (AP) -- Six explosions ripped apart pipelines for Mexico's state oil monopoly early Monday, the company said. The blasts were believed to be sabotage and 12,000 people were evacuated afterward.

A small, left-wing guerrilla group claimed to have attacked a major gas pipeline for the Mexican state oil monopoly Petroleos Mexicanos, or Pemex, in July and at the time at least a dozen major companies were forced to suspend or scale back operations.

http://www.nytimes.com/aponline/world/AP-Mexico-Pipeline-Explosions.html?_r=1&hp&oref=slogin

Wiggins said...

A small typo in your math:
86 mbpd * (1.013 ^ 3) = 89.4 mbpd in 2010 based on 1.3% increase in demand each year.

Anonymous said...

CIBC economist sees $100 oil in 2008

http://money.cnn.com/2007/10/02/markets/oil_hundred.ap/index.htm?section=money_latest

gilemon said...

You were right, as usual.
It was all in the title, not "Oil will hit", but "Why...".

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