Fortune: Why oil prices will tank

[babylonsister]

I don't understand a whole lot about this, my DH pointed me to this article. Other opinions are welcome.


Why oil prices will tank
Arguments that $4-a-gallon gas (or even higher) is here to stay are dead wrong. Housing's boom-and-bust cycle tells you why.
By Shawn Tully, editor at large


NEW YORK (Fortune) -- High-flying tech stocks crashed. The roaring housing market crumbled. And oil, rest assured, will follow the same path down.

Not everyone agrees. In an echo of our most recent market frenzies, some experts pronounce that the "world has changed," and that the demand spikes, supply disruptions, and government bungling we face now will saddle us with a future of $4, $5 or even $10 a gallon gasoline.

But if you stick to basic economics, it's clear that the only question is when - not if - prices will succumb.

The oil bulls are correct in their explanations of why prices have jumped. It's indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It's also true that most of the world's reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth.

But rather than forming a permanent new plateau for prices - as the bulls contend - those forces are causing a classically unstable market that's destined for a steep fall.

more...

http://money.cnn.com/2008/06/06/news/economy/tully_oil_bust.fortune/index.htm?postversion=2008060610

[Terry in Austin]

1. All the way back down to $105!

;-)

[Jackpine Radical]

2. That model seems to ignore the fact that oil is in finite supply,

and new oil is harder to extract, and often of lower quality, than oil from traditional sources.

[rockymountaindem]

4. I think the point was

that prices have been built up to a frenzy, and peoples' willingness to pay more and more will eventually stop, driving the price back down. The floor, that article suggests, is at $70 per barrel where tar sand oil is profitable. Maybe, maybe not...

[Jackpine Radical]

16. Point taken. And thanks for the tar-sand number. I hadn't seen that before.

Of course there's a worldwide market now, with a lot of growth in the orient, so there are presumably some limits on how much the consumption behavior of Americans will affect the price...?

[Leopolds Ghost]

38. We have passed the tar-sand / oil-shale number and it has not come on-line

The $70 a barrel figure for extracting oil from tar sands is RELATIVE
to cheap oil and gas from somewhere else to power the process
(and doublethe amount of greenhouse gas used per barrel of oil.)

Also, tar sands require strip-mining the Arctic. As in, remove a layer of
topsoil from the tundra over a million acres. Ever been to the Athabasca
region? The stuff lays on top. It is similar to the stuff they mine for
jogging tracks.

Sand and gravel mines can be huge because it's all a thin layer of
topsoil. A mining co. wanted to remove the 10-mile long sand dune
separating the Okeefenokee Wildlife Refuge from the sea.

[robinlynne]

20. Let's not forget the whole reason for the Iraq War. to keep the Iraqi oil FROM flowing to keep the

oil prices artifically inflated. It's working quite well, isn't it?

[malakai2]

24. I'd like to see more justification of profitability at $70

If we assume the production costs are fixed, sure, I could see $70 being the floor for some fraction of oil produced. But I've been under the impression that both water and heat sources will become limiting for extraction of heavy oils like sands and shales, which would quickly drive the production cost up. Kinda difficult to find replacements for cheap, local river water and cheap, local natural gas.

As far as the Bakken goes, what kind of production rates are reasonable for that field? 1 million bpd at full build-out? It would certainly be easier if that oil had the good sense to be shallower, in a thick sandstone formation, rather than buried deep in a thin dolomite formation.

[Leopolds Ghost]

39. Yep, I was getting at this. But it sounds like you are a petrolieum geologist.

I just have relatives who work in oil and gas.

[Leopolds Ghost]

36. The problem with profitable unconventional oil is it becomes energy-negative

As the price of conventional oil and gas goes up, the price of extracting
oil (or electricity) from unconventional sources such as hydrogen goes up.

It takes massive amounts of natural gas to turn tar into oil.

And all that gas gets burned up.

Where d'ya think the hydrogen for hydrogen cars is supposed to come from?

After the gas is burned to turn tar into petrol for the 98% of cars that
US automakers insist will continue to run on gasoline into the remote
future by relying on fuel effeciency improvements to allow the number of passenger-miles driven to continue to double every 20 years (they bought
all the patents for all-electric cars in order to set hybrid vehicles as
the new standard),

the 1% of hydrogen in the natural gas is boiled off (in a process that
burns MORE gas) to create "clean" hydrogen for the remaining 2%.

The only other sources of hydrogen or unconventional oil require you to
burn conventional oil to get at them.

Even if the process to get tar sands is energy positive,
the increased price of oil increases the cost of extraction,
making economic tar sands a vanishing horizon.

Just as if more people used mass transit it would be profitable,
but mass transit loses money on every customer because of the
economics of transportation in a multi-modal city, so it can
never become profitable without subsidies. The same is true
for commercial air travel and highways.

[Kazak]

3. Of course they'll come down...

there's an election looming! :shrug:

:puke:

[KillCapitalism]

44. Not this time.

I think they're throwing McCain under the bus.

[Andy823]

5. I tend to agree.

I read this earlier today, and I agree that what is happening is just like it was with the housing market, and the results will be the same. Big money is making a killing trying to recoup what they lost in the housing markets. This is their last big chance to make a killing while Bush is in office. It's not only oil, but food that these investors are buying up to make money on. It will come down, but the questions is when. Like many other things the small investor will get the screwed, and the big guys will make a fortune.

Energy and food are things we all need, and have to buy in order to live, and these bastards know it, and are taking advantage of it. We need to remove food and oil from the market, and it will take leaders all over the world to do it, but it can be done. Germany is talking about doing something about this problem, and if we had a "real" leader instead of the idiot we have, we could be doing something about it also. I can't wait till the day Bush leaves office!

[slackmaster]

7. Biggest losers will be consumers who have already been paying inflated prices (i.e. us)

And some people who will get killed in the futures markets. (Not the big players, of course.)

[Andy823]

25. Yes.

It will be like the dotcom crash. I know people that jumped in on that right before the crash because they were told it was a sure thing. I see the same thing right now where people are jumping in on the oil boom. When prices drop as fast at they went up the last two days, many small investors will lose their shirts on it.

The consumers always seem to lose on these things, thanks to the big investors, such as the hedge funds, and big banks that are buying up the oil right now.

[BigDaddy44]

28. We need to remove food from the market?

Are you talking about nationalizing food production?

[Leopolds Ghost]

40. We have overpopulated the Earth. If oil runs out there will be a famine

More likely we will see a long economic depression as supply of oil
continues to decrease relative to demand, followed by economically
inflicted genocidal wars inflicted on the justification that
the enemy is using up our resources, like in Rwanda where
(per a study I read) the genocide caught on among landless peasants
as a way to remove unwanted neighbors, even in towns where there
were no Tutsis. Privation caused by insufficient resources can
produce mass hysteria designed to keep the population in check.

[Gabi Hayes]

6. Fortune has a long record of excellent analysis. This could be their best:

http://www.fsmitha.com/h2/ch20b.html

Many failed to see Hitler or Mussolini as much of a threat. Many saw Hitler as an anti-Communist and Mussolini as having saved Italy from communism. And there were those who found little wrong in Mussolini sending his troops and airforce into Ethiopia.

Representing this latter view was one of Roosevelt's critics, Henry Luce, publisher of Time, Life and Fortune magazines. Luce was a fervent anti-Communist.

He had devoted his July 1934 issue of Fortune magazine to praising Mussolini. He might have tempered his admiration for Mussolini with some criticism, but in 1935 his magazine, Time, described Mussolini's invasion of Ethiopia as a "civilizing mission" and it ridiculed the Ethiopians. Luce was no critic of the white man's mission to civilize the colored peoples of the world.

Luce and His Empire, by W.A. Swanberg, Charles Scribner's Sons, p. 128.

[Vilis Veritas]

8. Even if the price falls, the price at the pump will stay the same.

Greed will make it so...

[BigDaddy44]

29. Nope, won't happen

As the price stays high, consumers will continue to cut back. Oil companies will have loads of inventory they will need to unload. The only way to get rid of that inventory will be to lower prices.

[Vilis Veritas]

30. I have no problem being wrong on this one.

Time will tell...

saddlesore

[Leopolds Ghost]

41. Oil companies will have loads of inventory they need to unload? Only absent checks on production

Basic supply and demand theory / market theory for an oligopoly bringing a
product to the market is that what you say is true when demand is flexible
and production is not limited by other factors. If a company makes $1 on
widgets, it can't produce a billion $1 widgets even if there is a market
for them becasuse of checks on production (usually in the form of
diminishing return on investment, like trying to mine deep sea oil wells
using convcentional oil to power the infrastructure needed to drill it.)
Even if it could sell a billion widgets at $1, it would not do so if
demand is inflexible. It would sell 100 million $10 widgets instead
at a higher profit.

[Coyote_Bandit]

9. I do think that oil prices are likely to decline somewhat

But probably not down to their prices before the recent market increases. There are a variety of factors in play that will interact to impact the market. Among them:

the finite supply of oil
the ability to pay increased prices resulting from higher oil costs
the necessity of travel for various purposes
technology and telecommuting possibly becoming more widespread
the lack of available public transportation in some areas
a decrease in the consumption of other goods and services
planned outings to reduce mileage driven
deveoopment of more fuel efficient vehicles
development of alternative fuels
use of more local suppliers
better consumer budgeting
politics

[Darkseid69]

10. You forgot..

the upcoming election..

Anyone want to bet how much prices will drop in October right before the election?

[Coyote_Bandit]

11. As far as I'm concerned

the upcoming election falls under the broad heading of politics.

[Edweird]

12. I tend to believe that the looming eviction of the oil-men/woman from the white house is the biggest

reason for a drop in gas prices.....

[Andy823]

26. Yep.

Bush's "base", the super rich, are cleaning up before he leaves. They know things will change and they want to rip off the people of this country for as much as they can before Bush leaves office. Isn't greed grand! :mad:

[davsand]

31. A Windfall Profits tax might help too.

Seems to me that big oil is not only worried about the departure of the current regime (does Arbusto ring a bell?) but I think they are also just a bit worried that they might see a Windfall Profit tax go into place if the oil lobby no longer carries as much sway.

When greed gets punished, suddenly those record profits are no longer as attractive...



Laura

[Warpy]

13. This applies to spot market futures, certainly

If Stupid is prevented from starting a war against Iran and if the Israeli hotheads can be prevented from starting their own, oil futures are going to lay a large, smelly egg.

Everything hinges on war. Prices surged over $9.00 today on the strength of an Israeli pinhead screaming that Israel will bomb Iran if they don't halt their nuclear enrichment program.

Personally, I prefer seeing hedge funds and other speculators get ruined to seeing another war. We all know what Stupid thinks, though.

[Speck Tater]

14. If you "stick to basic economics", you miss the problem.

As the article concludes:

"We don't know where the new abundance will come from, from shale, or tar sands or coal or an OPEC desperate to regain market share. We just know that it will appear. With prices like these, it always does."

The problem is not the amount of oil in the ground. There are massive amounts of oil in the ground.

The problem is the rate at which it can be extracted.

Shale and tar sands both have very low maximum extraction rates. As far as conventional oil is concerned, OPEC is building drilling rigs like crazy and still can't increase their output rate.

Smaller fields can't produce as fast because you can't put as many rigs on them. Larger fields are in decline. Saudi Arabia pumps just as much "stuff out of the ground as they ever have, but the "stuff" they are pumping now is 60% salt water, where it used to be around 10% salt water. That giant field being touted in the U.S. midwest is in dense rock formations with extremely slow flow/refill rates, and that oil cannot be pumped fast enough to make much difference, regardless of how much oil is there.

It's not how much oil is under ground. It's how much oil can be pumped out in one day. In spite of thousands of new drilling rigs being built, we have not been able to pump more that 85 million barrels per day since May 2005. Optimists say we might, someday, be able to reach 100 million barrels per day, but for three years there's been no sign that we can even exceed 85 million.

No, we are NOT running out of oil. We are running out of capacity to increase daily production to meet daily demand.

But this article does agree with prominent oil geologists on one simple fact: "We don't know where the new abundance will come from".

The difference is that oil geologists deal in reality, and economists deal in faith-based theory that demand ALWAYS creates supply. That faith is being tested, and I think reality will win out over faith this time.

Welcome to the beginning of the end of the petroleum age.

[Strelnikov_]

19. The problem is one of thermodynamics, not economics

Tar sands? What, EROEI~3 at best (personally, I think 2 is more realistic). Shale 'oil' (kerogen) ~<=1, as I have yet to read of any process to harvest this resource that will yield more than a dribble of net energy.


Yea, there was collusion in the oil market. Thing is, the collusion was to keep us from kicking the oil habit until production peaked.

The oil companies, and their Quislings in government, build an intricate scaffolding and place a big rock over our head. We have been standing underneath the whole time it was being built, ignoring the warnings, holding a wad of cash in our hand. Occasionally we become nervous, and they use a combination of ridicule alternated with promises of unlimited prosperity to keep us in place.

Eventually, they drop the rock, knock us out, and steal the cash. When we wake up, who do we blame? Why gravity, of course! Because without gravity those criminal oil companies would not have been able to steal our cash.

It's a market system.

It can be used for good, like building the Internet.

It can be used for bad, like keeping a society hooked on a limited resource, and once the supply of the resource begins to dry up, cash in on the inherent price inelasticity of demand.

[Leopolds Ghost]

45. Whats the horizontal axis on that graph?

Total amount of oil in the ground where cost Y is derivative of X+Y
available to user?

Or is Y the horizontal axis and X+Y is the product of Y for any given Y
(dependent on energy source)?

Is the vertical axis energy in dollars? Thanks, this is a useful graph.

[Altean Wanderer]

22. Excellent synopsis of peak oil flows n/t

[Terry in Austin]

32. Thanks, fiz

The pundits always seem to talk about the money, not the oil.

> It's not how much oil is under ground. It's how much oil can be pumped out in one day.

That's it, right there. You wouldn't think it'd be such a hard concept to grasp, would you?

Except for the catechism:
"We don't know where the new abundance will come from... We just know that it will appear. With prices like these, it always does."

Whew! Such faith would be touching if it weren't so... so... {adjective failure}

> Welcome to the beginning of the end of the petroleum age.

Word.

[Leopolds Ghost]

42. There are massive amounts of uneconomic oil in the ground.

There is enough gold in the Earth to build Mount Everest out of gold. But that gold will never come to market because it is inacessible, uneconomic or thermodynamically unprofitable to do so. That is three different reasons why much of the "oil bonanza" will never come to market.

You would be spending all your other resources in an effort to secure a cheap commodity that no one would then be able to buy or use.

The largest discoveries of oil ever in a single year, worldwide, were in
the 1900s-1940s. We have burned more oil drilled in the US than we have
economically accessible to us from the entire Middle East today.

Put it another way, without cheap food the Romans could not have built
the aqueducts. Had the supply of water gone down, the system would have
become uneconomical due to the knock-on effects caused by food shortage.

The Hubbert's curve already accounts for oil that is economically
inaccessible. If it takes $30 to bring $60 worth of oil out of,
say, the Himalayas, and the price of oil doubles, the cost of
extracting it doubles with it. Besides which there is no oil
in the Himalayas or anywhere else that oil-bearing structures
do not exist.

The History channel had an excellent documentary about oil recently
discussing these problems.

In hard scientific terms, there is no more oil surplus,
meaning supply vs. demand is permanently limited.

It is an economic tipping point we have not seen since the late 1700s
when the European colonies ran out of cheap gold needed to finance
the domestic European population boom. No more rooms full of gold
in North America, excepting what was mined back then for the most part.

[tama]

15. "if you stick to basic economics"

Don't, forget the "flat earth economics". It's the physics, stupid.

And the axis of evil govs "mismanaging production"??? This guy is utterly stupid.

[bluesmail]

17. Isn't the No 1 reason, among many including biofuels

that Greedy Wall Street puts money into futures, and that raises the price, then they cash in before the futures price drops? It' intentionally confusing.

[BlueEyedSon]

18. LOL... published at 10AM!

One should never make predictions, especially about the future.....

[JCMach1]

21. It will crash only when electric and other alternative vehicles

have a decent portion of the market...

[hogwyld]

23. For those that think $4.00 gas is high

hasn't made a trip to europe recently. In Germany, gas is running 1.49 Euro per litre. At today's exchange rate of 1.57, that comes out to about $8.84 per gallon.

[Leopolds Ghost]

35. Europe was paying $4 a gallon in the 1960s-1980s.

They had excellent mass transit and drove less until the North Sea oil came on line and encouraged "progressive modernizers" to build more highway interchanges with the oil money.

Similarly, there used to be a lot more bikes than cars in China.

The idea of cars as a status symbol is predicated on cheap oil and free government-mandated infrastructure.

[lynnertic]

27. what strikes me as odd is that there's no talk of regulation

as if it can't be done.

[Leopolds Ghost]

33. The author of this piece disputes peak oil, so their opinion is irrelevant.

"governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth."

Consult an engineer or petroleum geologist, not an MBA or economist
whose goal is to provide stock tips.

Housing is a limited resource too, and hasn't truly crashed in 200 years.
Neither have stocks since the mid-90s. They've just gone up in real
dollars. All we've seen are corrections. The whole system is a
conveyor belt designed to increase the relative worth of the haves
vis a vis demand from increasingf numbers of have-nots. the whole
system is built on cheap oil which allows population and economy growth
over 100 year period without famine.

Remove cheap oil and housing and stocks WILL crash, causing the value
of limited commodities such as oil and gold to go UP.

The author of the piece is an idiot if he thinks oil, or diamonds, operate on a bubble tracking stocks and housing. The value of these commodities goes up when an economy tanks, and up even more when taken off the market.

The value of oil will reach a correction point when we slide into a depression and are too poor to buy more oil, causing a deflation in the dollar.

Right now, as the Mad Money guy pointed out, American demand for more oil is so inflexible that Americans drove MORE with gas at $4 a gallon than they did last year.

We are nowhere near deflation. We are experiencing stagflation
because peak oil causes stagflation just like it did in the 1970s.

[Lex]

34. Are we just paying what the Europeans have been paying for years?

:shrug:

[The2ndWheel]

37. Without the taxes

While the Europeans, or at least the ones protesting, are paying more than they were. They could lower the taxes on energy, but then that's less money for the social net. It's all a give and take.

[spanone]

43. they will tank, right around the first of nov. then start peaking again immediately after

[Leopolds Ghost]

46. ding ding!

And economists will say "see, there's oil in thar hills and the Democrats
and them Arabs they're so buddy buddy with are keeping it out of your hands."

Projection and all that.

They will spend 4 years blaming Obama for peak oil, like they
blamed Carter for the domestic peak oil (which is when the US
manufacturing economy collapsed).