In response to Hurricane Gustav and the oil production that was taken offline as a result, the federal government announced that 250,000 barrels of oil would be released from the Strategic Petroleum Reserve:
Oil prices drop as US opens reserve taps
LONDON (AFP) – Oil prices fell on Wednesday as the US government decided to release crude stocks from its strategic reserve after Hurricane Gustav halted energy production in the Gulf of Mexico.
“The release of the oil will prevent any shortage and that will, of course, help calm the market,” said Victor Shum, an analyst with energy consultancy Purvin and Gertz.
The United States announced late on Tuesday that it was releasing 250,000 barrels of oil from its strategic reserve to help cover lost production.
There was no oil production on Tuesday in the Gulf of Mexico region, where a quarter of US oil is normally produced, the US Department of the Interior said. Ninety-five percent of natural gas production was also offline.
The threat from Gustav had raised grim memories of the 2005 hurricanes Katrina and Rita which damaged or destroyed about 165 of around 4,000 oil platforms in the Gulf. Damage this time appeared to be much less severe.
This news is helping to put downward pressure on oil prices, already down almost 30% from the highs set just a couple of months ago.
Long-term, I certainly don’t believe the oil bull is dead, but a lot of people are learning a very hard lesson about commodities trading: You can go from rich to poor very quickly. I have heard some in the “peak oil now” camp argue that it is a no-brainer to invest in oil futures, because 5 years from now oil is going to be $400 a barrel. That may very well be true, but there will be a lot of ups and downs in the short-term that make the long-term strategy difficult to realize. Those who bought oil contracts at $147 and are still holding them now understand what I mean.
” I have heard some in the “peak oil now” camp argue that it is a no-brainer to invest in oil futures, because 5 years from now oil is going to be $400 a barrel.”
Peak oilers are so fun. What happens when oil prices are going up? “Its because we are experiencing the first wave of true peak oil supply demand constraints” What happens when oil prices go down? “Short term pricing means nothing” What happens when we arent falling off that supply cliff they’ve been calling for a while? First, you take all your old incorrect peak oil models, adjust them to fit current trends, and republish! Then take the current estimates for the price of crude during peak oil and double it. “Yeah, that’ll get em talking again. You thought $200 oil was a lot. Whaddaya think about $400? If that doesnt scare ya, then we’ll throw in $800 oil.”
Get off it already. Its getting really old.
And oil five years from now could be at $60. That could very well be true also — in fact, far more likely than $400. We have already seen immediate demand destruction at $147, and faltering demand above $100. How on earth would oil go to $400?
Even doomers concede total liquids production likely will rise for at least two years more, and they avoid counting biofuels, which likely will reach 7 mbd by 2015 — although recent news on palm grove output suggests the palm guys are getting huge improvement in yields. Selective breeding is resulting in palm trees with double the old output (and yes, I am concerned about forests).
Others predict that total liquid (non biofuel) output will rise to at least 2015.
Meanwhile, demand fom the developed world will likely be less every year, not more, at these prices.
The EV is the death ray for OPEC and speculators. Imagine a world in which most new cars are EVs. That is the world we will have if oil stays above $100. It is a world of continuously declining demand for oil.
I just don’t see how how this sets up for $400 a barrel, barring geopolitical strife.
I do see a world with less pollution, cleaner city air and quieter streets. I like what I see.
“I just don’t see how how this sets up for $400 a barrel,”
Benny,
Oil is in demand for things other than transportation. In fact, one might say that using oil and natural gas for the petrochemical industry is even more important for the future than using oil for transportation.
As you point out, the transportation need could be filled by EVs. But there is no substitute for the many things in our lifestyle that petrochemical products provide.
Hawkshaw, the vast majority of the demand for oil comes from the transportation sector. If EVs (or other alternatives) reduce the demand for oil for transportation, the entire oil depletion curve must be recalculated.
I can’t find the EIA numbers that deal with this on their site, but if I’m remembering correctly approximately 35 gallons of each 42-gallon barrel of crude oil goes towards transportation fuel in some form or another. If you reduce those numbers by even a moderate amount, the reserves of oil available for non-transportation uses jump enormously. Barring an implausible rise in demand and/or drop in supply (well beyond most forecast depletion rates), petrochemicals simply don’t anything like the power needed to drive prices that high in the near future.
I tend to agree with Robert that the overall oil market is likely to remain bullish for some time yet, but I’m far from convinced that simple supply and demand is going to justify an increase to $400/barrel.
I remember a saying about day traders in the 90's: If you don't know what you are doing, then you will lose your money. If you do know what you are doing, you won't lose your money for awhile.
Peak oil could mean 400 dollar oil in five years, but it could also mean merely 200 dollar oil or, with enough demand destruction, <100 dollar oil. There are too many factors to predict the direction of the oil price over the next month or year.
That's why Warren Buffet's (and Robert's) investment strategy is the correct one. Invest long-term in sustainably well-run companies creating needed products. While securities in the short-term my vary wildly due to investor psychology, these companies still have fundamental worth which will pay off in the long-term.
About 70 percent of oil is burned for transportation. Besides that, we can make plastic from rubber trees, or use paper bags instead of plastic, or glass bottles instead of plastic (anybody old enough to remember glass Coke bottles, with different bottling plants id’ed on the bottom?
If EVs are a commercial success, we will have oil coming out of our ears. Instead of just wax, ha-ha.
The problem is, that will lead to glut, and the rise of ICEs again.
Oh, if you want a chuckle, turn to The Oil Drum today. Now, after saying speculation had nothing to do with oil prices, they say the liquidation of some speculative positions is pushing prices down.
Just one player liquidating might be thumping prices, they say.
Oh.
But many, many and larger speculators buying contracts? That couldn’t make a bubble?
What happens when we arent falling off that supply cliff they’ve been calling for a while?
I have friends in both camps. And some of my friends in the peak oil now camp are quite rational. I put myself in the “peak oil soon” camp, and I certainly believe I am rational.
What drives me absolutely crazy is for forecasts to be made – falling off of the supply cliff, for instance – and then when that doesn’t happen to watch the incredible rationalization that occurs. It never seems to be “I was wrong.” People predict Saudi production falling off a cliff, and when it actually goes up, do those people admit they were wrong? No! They say things like “Yeah, but production won’t be higher than 2005.” Some simply lack the ability to say “I was wrong.”
Believe it or not, I once had one essentially tell me once that they didn’t want to hear good news. Some just seem to wallow in misery.
RR
my input today said only taker of SPR oil was that owned/operated by Venezuella.. does that provide an OMEN or a GOTCHA?–Getty?
like any investment blowout to the upside, prudence dictates profit taking prior to eventual reversion to mean. RULE 1–don’t lose money. RULE 2- -see RULE 1.
fran
I for one think that a decline in world oil production is inevitable, but unlike others, I don’t claim to know when it will start. We’ll know when it happens. Whether oil plummets to $60 or skyrockets to $400 depends on whether demand destruction keeps up with the decline. Trouble is, although now is the time to prepare, if oil drops below $100 (thanks to destroyed and sidetracked demand), we will lose our sense of urgency and the necessary preparations will not be made. (That’s why I always argue that the price of crude should be kept in the triple digits.)
One other factor to consider is the strategic value of controlling oil and gas supplies, which is not lost on many governments, as we can see from the tussel over Middle East and Caspian Basin reserves and pipeline routes. This could result in the decreased availability of hydrocarbons to the losers. No country with a modern military wants to give up its tanks and jets, and go back to horses. It is possible that what Jeff Vail calls “geopolitical feedback loops” could have grave consequences.
The German’s gave us a word for delighting in misery like your friend, Robert:
schadenfreude
Peak oil is a “no-brainer” alright. In more ways than one.
Until now, oil has been made over eons of time, by entirely natural processes. That will not be the case in the near future.
Synthetic liquid fuels will have improved economics as the work is done to improve processes. CTL, GTL, BTL, STL, TTL, etc etc etc. Yep, it takes time to scale up lab processes. Time will go by anyway, whether we develop alternatives or not.
So predicting that the production of oil is destined to follow an ever declining path, is not using one’s head.
Since Robert wrote the original article, Citgo has rescinded it’s request for SPR oil, now that the Calcasieu Ship Channel is open again. However, Marathon has made a formal request for SPR oil for its Robinson, IL and Catlettsburg, KY refineries.
See DOE press release at:
http://www.energy.gov/print/6506.htm
How on earth would oil go to $400?
Islamic revolution in Suadi Arabia would do it. Attack on Iran, perhaps, or some scenario involving Russia. Though it’s likely the US and other countries would ration and cap the price around $250.
Another route to $400 is a US Dollar collapse. A barrel of oil might cost 400 dollars but stay near the current price of 75 euros, 750 yuan, etc. Of course a US dollar collapse could set off a global recession and destroy demand, but not necessarily. In a dollar collapse US actions such as rationing don’t help much to temper the price rise.
IMHO $400 is too high a price to be sustainable based purely on supply/demand without some sort of supply shock or dollar collapse.
“MHO $400 is too high a price to be sustainable based purely on supply/demand …”
Work out what effective price for oil Europeans are paying at the pump. Lots of room for discussion, but the untaxed equivalent is in the range of $350-400 per barrel untaxed.
And yet Europe's fine superhighways are packed tight with cars — many of them small cars for sure, but lots & lots of them. As a result, the EU imports almost as much oil as the US.
Strong indication that life would go on even at $400/Bbl — and evidence that higher prices than that would be required to make alternate fuels (or even Electric Vehicles) attractive to the mass market.
Kine-
Until recently, consumers did not have a viable option to ICEs. Oh sure, mass transit and scooters, but a viable option that was as good.
The advances in lithium batteries are really remarkable. In my lifetime (and I am bald) I expect to buy an EV. Maybe used.
It is a tribute to the deadening effects of socialism that the Europeans have not advanced the EV. But the Chinese, Japanese and Americans are going great guns.
Ifoil stays at more than $100, and EV in a few years will make great sense.
As a matter of national security policy, EVs make great sense. Every GM Volt is worth 10 tanks. Environmentally, EVs make great sense.
Although the European upper class can afford $10 a gallon by using small cars, I doubt the world can.
Oil demand is faltering already.
Innovation, substitution, alernative fuels, conservation — never underestimate the response of free people in well-capitalized societies (except Europeans).
“Hawkshaw, the vast majority of the demand for oil comes from the transportation sector. If EVs (or other alternatives) reduce the demand for oil for transportation, the entire oil depletion curve must be recalculated.”
Yup, I know that. My point was that the demand for oil won’t go away even if we quit using the stuff to push cars around. The demand would be lower (for awhile anyway) and Peak Oil would be pushed into the future, but petrochemical demand will still eventually draw down the rock oil supply. (100 years ago if you built a picket fence, it would have been wood. Today it is plastic resin made from petrochemicals.)
The most important use of our fossil fuel reserves in the future will be to make useful things from it, not to push metal down a highway.
Kinuachdrach, with out getting too much into your details, it astonishes me that people keep using the argument that since Europe pays higher prices, America can.
IT DOES NOT TRANSLATE.
Their entire lives have been adjusted around high gas prices (car buying decisions, commute distances, money spent on consumables, etc). Their infrastructure has been adjusted around high gas prices. If American’s had a sudden increase to Europe pricing, the American economy would simply crumble, because there would be large segments of people with absolutely no money left, because they would be squeezed in every way possible financially. It would eat up any money large parts of the population would have left. And there would not be a good public transportation system to help them cope.
Ryan, I think the bigger point is not whether Americans can pay the higher prices, but that many people throughout the world can. Even if just 1 in 20 families in China or India acheive comparable car use similar to Europe, that is going to keep pressure on oil prices, whether Americans can on the whole afford to pay that price or not. And sure, a bigger hiccup in America than we have now does have economic ramifications throughout the world, but that influence is waning over the long-term. And don’t forget the subsidizes prices in oil-exporting countries.
Your argument seems to suggest that high oil prices can’t happen because that would seriously harm America. But I don’t think that long-term global supply and demand issues will take a break just to save us. Markets can be a real b-tch to people caught off guard (the theme of Robert’s post), and America is currently off-guard.
Again, my thinking here is long-term. Certainly in the short or medium term a historic recession/depression in America will have an impact on world oil prices, given how much we consume.
I think Kinuachdrach is right on that $400+ oil doesn’t cause the world to end. It may cause America to end, as we now know it, but parts of the world are going to keep on rolling.
Len-
America to end, as we know it? Sheesh. You can’t ride a scooter? Drive an EV? Take the bus?
If Nissan comes out with the 200-mile EV with rapid recharge, you would not buy it?
“Ryan, I think the bigger point is not whether Americans can pay the higher prices, but that many people throughout the world can. Even if just 1 in 20 families in China or India acheive comparable car use similar to Europe, that is going to keep pressure on oil prices, whether Americans can on the whole afford to pay that price or not. “
Ok. Let me get this clear. Of COURSE there will always be someone out there that can/will buy oil at any price level. However, the world demand for oil at a $400 price level would probably not use 50% of what we are currently consuming. That is if the price of $400 happened anytime in the near future (5 years). At $400, you have inflation of massive proportions, the countries that have been the cause of China’s growth (Americans and Europeans that are buying their goods) would no longer buy much. It would be a world wide depression. I see it no other way.
I simply cant see $400 oil in anythnig but doomsday scenarios. There would have to be a massive and quick drop in production that leaves no time for adjustment or switching to an alternative. Otherwise this would be the cycle (actually this is kinda what we are seeing now):
1) Price of oil increases as supply margin tightens
2) Consumers reduce demand for product
3) Consumers replace petroleum use with alternatives or oil is used more efficiently
4) Demand destruction of oil becomes permanent for some individuals
5) Supply margin improves
6) Economies grow
7) Supply Market tightens
8) Prices of Oil go up again
9) More consumers reduce petrol demand
10) More users switch to alternatives
11) More permanent demand destruction
12) Supply margin improves
And on and on and on…
The cycle only becomes more excited and accelerated the higher prices go. I could only see $400 oil if the peaker’s worst case scenario plays out… Thats when you’ll have the richest people waiting to use oil, and clammoring for the expensive resource, but the vast majority of us will be financially crippled and consumed in the worst great depression of all times, and the price of oil wont matter.
“If American’s had a sudden increase to Europe pricing, the American economy would simply crumble, because there would be large segments of people with absolutely no money left, because they would be squeezed in every way possible financially.”
That’s simply not true.
As recently as the 1930’s my Mother walked three miles each way to school; her farmer parents used horses; and they drove their one car to town perhaps twice a month to pick up the supplies they couldn’t provide themselves.
There would have to be changes of course, but the economy would not “crumble.”
We might have to live more like people did in the 1930s; or the 1890s; but life would go on. (Even life in the 1890s was far superior to life in the 12th or 13th century.)
People are much more adaptable than you think. People in the U.S. would complain (a lot) but they would eventually adapt. Billions of people in the rural, undeveloped parts of India, China, and Africa get by — we would too.
your way of telling me the world economy wouldn’t crumble is pointing me to an example of the great depression? I didn’t say the world would end. Economies will crumble.
Hawkshaw-
You are right.
Right now, go online Craigslist whatever. You can buy a scooter for $1000, 150 cc.
There are even electric scooters out there, which in a few years I think will be pretty good, after they go lithium.
At $10 a gallon we will convert to EVs. If we have to cross-country drive, then we will rent for that special occasion, probably a car that gets 50 mpg, after 40 miles on charge (like the Volt will).
None of this requires futuristic breakthroughs. We are almost there now.
There may be futuristic breakthroughs, and that means so much the better….
The sniveler-doomers just have it wrong…
I realize now why I don’t post on internet blogs much. When you write the in the way that you speak, readers who don’t know you can draw wrong conclusions from your comments. “End of the world” is definitely an imprecise if not loaded term.
Len-
America to end, as we know it? Sheesh. You can’t ride a scooter? Drive an EV? Take the bus?
If Nissan comes out with the 200-mile EV with rapid recharge, you would not buy it?
I agree completely, and that is reflected in my personal lifestyle. All those changes will kick in, and it will be the end of the world to many people (I know many people who would feel that the world was ending if they had to get on a bus every day, sad as that is).
Ryan, I see what you’re saying about short to medium term. But in the long-term $400 oil does seem very sustainable globally. Kinuachdrach’s point is that many people around the world are already effectively paying that much now, and it is not some sort of doomsday scenario. In fact it’s fine.
I just re-read this whole comment thread, and it seems like the discussion is ships passing in the night. My apologies in the sense that I only added to that effect by using loaded terms. I think the time frame for arrive of these $400 hypotheticals seems critical.
Work out what effective price for oil Europeans are paying at the pump. Lots of room for discussion, but the untaxed equivalent is in the range of $350-400 per barrel untaxed.
Europe as a society does not pay $400/bbl. 70% of that (the tax part) goes right back into their economy. The actual cost to their economy is less than 75 euro/bbl (vs. 25 per bbl 6-8 years ago). Amd since Europe’s pump taxes and other policies kept per capita oil consumption at half of US levels, that price rise has less economic impact there than here.
A true $400/bbl would be an order of magnitude more disruptive to the US economy than anything Europe has seen. I do not dispute that “life would go on”. My point was simply that the areas of life involving oil consumption would change dramatically. And large cuts in US consumption are still enough to drive world oil prices back down.
doggydogworld, that’s a good point about European tax revenue recycling back into the economy. Hadn’t considered that before.
And meanwhile, here’s the vanadium battery: Vanadium Battery
“Europe as a society does not pay $400/bbl. 70% of that (the tax part) goes right back into their economy.”
Tell that to the poor EUnuch paying for gas!
But you have a point, Doggy — sort of. Money circulates through the economy.
At present, the high taxes paid by EUnuchs are used by their gov’ts to hire Equal Opportunity Outreach Coordinators, and such like (i.e., to pay for non-productive workers).
Suppose all of a high ~$400 oil price went to the Saudis. Then what?
The Saudis would recycle a good part of their higher income into the productive parts of the European economy, by buying more Mercedes automobiles, Airbus jets, and Danish butter. The European bureaucrat class would suffer, but Europe’s real economy might be better off.
Any sudden change in oil price will be hard on the global economy, but the economy clearly can support higher prices without collapsing.
The really interesting part is that, even with higher effective oil prices, there is still no effective competition for fossil fuels on European roads. There is a message there, no matter how hard we try not to listen.
Some calculations regarding Vanadium redox batteries. I was wondering if limited V stocks would keep their storage from ever being significant.
1.4 eV per Vanadium atom (wikipedia)
1.6×10-19 Joules/eV so 2.24×10^-19 Joules/atom
6×10^23 atoms/mole so 1.34×10^5 Joules/mole
51 grams/mole Vanadium so 2.6×10^3 Joules/gram
worldwide production of V approximately 100,000 tons/yr or 10^11 grams/yr (http://www.springerlink.com/content/p4m32m6758r22421/, Monakhov, et al 2004)
putting all of this into vanadium redox batteries would amount to a storage capacity of
2.6×10^14 Joules or 70 GW-hrs, enough to run the U.S. (which uses ~100×10^18 Joules/yr) for less than a minute and a half, or all the electricity in the U.S. for ten minutes. Need at least a few hours to be really interesting, but this suggests that although V stocks will be a significant constraint, this will not be a show-stopper for the technology.
That said, I think that cost (due to the complexity of the redox batteries) will be the main limiting factor; this will no doubt drop as production scales up. This will take a while, though. Redox batteries are good only for stationary installation, by the way, due to their weight and volume, and expect V prices to rise quite a bit if use becomes widespread…
Overall, good news for wind & other intermittents.