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When do we fall off the undulating plateau? Pt 2

General discussions of the systemic, societal and civilisational effects of depletion.

Re: Come off the PO plateau how much gas price increase per

Unread postby americandream » Sat 21 Jun 2014, 20:38:27

Oil companies will face a significant quandry when PO is eventually acknowledged...pre-empting a run on capitalisation. Will be interesting to see what strategies they adopt.
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Re: Come off the PO plateau how much gas price increase per

Unread postby ROCKMAN » Sat 21 Jun 2014, 20:45:13

Sorry Pops...misread. An excellent analogy.
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Re: Come off the PO plateau how much gas price increase per

Unread postby ROCKMAN » Sat 21 Jun 2014, 21:13:11

Vt - Some valid points. But corporate debt is at an all time high. Even with current very low interest rates the oil patch already spends a big percentage of it's revenue to over debt. This is how the scenario usually works out: if a company's cash flow drops (including from the unlikely event of voluntarily shutting in wells) it greatly reduces drilling activity since it's debt burden is a fixed cost and can't be reduced. There is one constant rule in the oil patch: the banker always gets his money. Go into default, get liquidated and the shareholders end up with far less than from a corporate takeover. Less drilling leads to lower reserve replacement which leads to Wall Street reducing stock value. Which leads to shareholder discount which leads to the almost inevitable acquisition by another pubco...the scenario that a company that ExxonMobil lives for. Trust me: upper management of Big Oil is constantly evaluating the M&A market for their next big reserve boost. I've personally experienced this drama a number of times in my career. Both as the predator and the prey. And low cash flow (not low profitability) has always been the root cause. Cutting production might leave reserves in the ground to be sold for a higher price later. But they'll be sold at that time by the new owner...not the company that cuts it's production back voluntarily.
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Re: Come off the PO plateau how much gas price increase per

Unread postby vtsnowedin » Sat 21 Jun 2014, 23:11:03

ROCKMAN wrote:Vt - Some valid points. But corporate debt is at an all time high. Even with current very low interest rates the oil patch already spends a big percentage of it's revenue to over debt. This is how the scenario usually works out: if a company's cash flow drops (including from the unlikely event of voluntarily shutting in wells) it greatly reduces drilling activity since it's debt burden is a fixed cost and can't be reduced. There is one constant rule in the oil patch: the banker always gets his money. Go into default, get liquidated and the shareholders end up with far less than from a corporate takeover. Less drilling leads to lower reserve replacement which leads to Wall Street reducing stock value. Which leads to shareholder discount which leads to the almost inevitable acquisition by another pubco...the scenario that a company that ExxonMobil lives for. Trust me: upper management of Big Oil is constantly evaluating the M&A market for their next big reserve boost. I've personally experienced this drama a number of times in my career. Both as the predator and the prey. And low cash flow (not low profitability) has always been the root cause. Cutting production might leave reserves in the ground to be sold for a higher price later. But they'll be sold at that time by the new owner...not the company that cuts it's production back voluntarily.
I think everything you say about this is absolutely true but I don't think it will stay true in the future. Companies with oil in the ground but with cash flow problems will be able to attract investors for a small share of the reserve rather than a complete selloff. It would be foolish (and unnecessary) to sell off any reserve for less then it's worth ten years in the future. It has been in the ground for millions of years so a few more will not matter.
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Re: Come off the PO plateau how much gas price increase per

Unread postby ROCKMAN » Sun 22 Jun 2014, 11:33:42

Vt - So if I follow you would be willing to invest your hard earned savings into a company unable to pay it's debt interest and subject to either a hostile operate takeover (with you losing a significant portion of your investment) or bankruptcy ( losing all of your investment)? I get the point you're trying to make but I think you greatly overestimate how much control an oil pubco has in these situations. As I pointed out this isn't a new paradigm. It's been happening periodically from nearly the beginning of the oil age. I wasn't kidding: I've helped strip the meat of the dying bodies of cash flow crippled companies and have had it done by others to three of my companies. And one of them was Mobil Oil that was devoured by Exxon. Yes...investors do flock to the scene of the cash flow disasters. But rarely are the White Knights coming to save them. More commonly Black Knights coming to scavenge. Last time I was personally involved was when Karl Icahn (search that name if you want to learn about a world class Black Knight) mounted a successful hostile takeover of my small company. He eventually stripped the company of asset value, pushed it into bankruptcy and it disappeared forever. And yes those reserves might have been sold for more by the successor owners. But they weren't: prices actual fell further for the next few years. And guess what became of those reserves? They were sold at even lower prices as the successors tried to survive...which they didn't.

I realize it's tempting to play the what-if angle. But the assumptions you want to make have rarely ever been seen in the past and are even more unlikely in the future IMHO. Inside the oil patch the players have been preparing for the "Great Consolidation" for some time. Big Oil has been warehousing 100's of billions in anticipation. Which is why the cash flow weakened companies will sell every bbl of oil and every mcf of NG they can at what price they can. If they can't fend off potential acquisition companies management losses their big salaries and their stock options turn into toilet paper. Perhaps that's the point I failed to make: corporate management and the board of directors are focused on their self-interest and not the companies long term future. Consider my story about Icahn coming after my company. How did my management respond? They did a $100 million bond offering (@ 11% interest) and paid off $70 million in bank debt (@ 8% interest) with it. And how did our grateful banker respond? Immediately withdrew my company's complete credit line with his bank. Yes...he knew exactly what the plan was. Of course cash flow couldn't payoff the bond debt and support new drilling, Icahn got control of the company, the bond value turned to crap and Icahn bought it for $0.55 on the dollar. And as the company slowly liquidated itself we sent Icahn $11 million per year which allowed him to recover his purchase price. Of course in the end the company couldn't pay $1 dollar of the bond principal. At that point Icahn used the $100 million paper loss to offset his taxes on his other profits. IOW he got a $100 million write down at zero net cost to him. Which explains why he's one of he richest men in he country.

And thus the analogy of why you don't want to watch sausage being made: it kills your appetite to ever eat it again. That's what my experience with Icahn and my selfish management did to me and why I'm glad to be working for a privately owned company. What happened to my company isn't uncommon. But you and the general public will seldom see those bloody details on Bloomberg. But on the inside we all know the dynamics quite well. Which is why I belabor the point with you: I don't fault the logic of your argument. But the system is driven by its self-interest...not that logical view.
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Re: Come off the PO plateau how much gas price increase per

Unread postby alokin » Mon 23 Jun 2014, 04:51:29

More from the consumer side: I have a deep mistrust in inflation adjusted dollars. Who adjusts them and how is inflation valued today? You see it is not something mathematical, more politics selling a number. It would be better to ask how much bread and meat can I buy for one barrel of oil? And how much in the future? How much in the 60s?
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Re: Come off the PO plateau how much gas price increase per

Unread postby vtsnowedin » Mon 23 Jun 2014, 07:19:39

Nice post Rockman. I'll leave it the last word on it.
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Re: Come off the PO plateau how much gas price increase per

Unread postby Armageddon » Mon 23 Jun 2014, 18:24:35

How much oil would ISIS have to disrupt in Iraq for the markets to see disruptions? Rappier doesn't think it would take much to see $150.00+ oil
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Re: Come off the PO plateau how much gas price increase per

Unread postby vtsnowedin » Mon 23 Jun 2014, 18:48:45

Armageddon wrote:How much oil would ISIS have to disrupt in Iraq for the markets to see disruptions? Rappier doesn't think it would take much to see $150.00+ oil
It depends on the ability of KSA to increase exports by a like amount. They always have before and will be able to right up until the day they can't. I don't expect to get much notice before KSA reaches it's limits. Of course we could ease sanctions against Iran and let them market more. Stranger things have happened.
At any rate we will find out as soon as Baghdad falls to the ISIS.
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Re: Come off the PO plateau how much gas price increase per

Unread postby Pops » Mon 23 Jun 2014, 18:58:36

My WAG is $150 is going to be hard to maintain for the simple reason we've seen it recently and folks will quickly cut back - of course that might be completely backwards. Since we're at least a little used to seeing $4+ unleaded we might figure we'll just bear with it for a few months.
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Re: Come off the PO plateau how much gas price increase per

Unread postby Subjectivist » Mon 23 Jun 2014, 19:17:01

Pops wrote:My WAG is $150 is going to be hard to maintain for the simple reason we've seen it recently and folks will quickly cut back - of course that might be completely backwards. Since we're at least a little used to seeing $4+ unleaded we might figure we'll just bear with it for a few months.


So I do think you have a valid point that Americans at least have adapted to a certain extent to $4.00/gal gasoline because unlike 2008 this time the transition has ratcheted up over four years instead of six months.

On the other hand America still has a somewhat shaky economy, so a sustained six months of $4.00/gal would hurt us a lot. We would have to change our family budget if prices were above $4.00 for more than about six weeks.
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Re: Come off the PO plateau how much gas price increase per

Unread postby Armageddon » Mon 23 Jun 2014, 19:20:46

you think the last gasoline spike caused the last downturn in the economy?
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Re: Come off the PO plateau how much gas price increase per

Unread postby Subjectivist » Mon 23 Jun 2014, 19:22:56

Armageddon wrote:you think the last gasoline spike caused the last downturn in the economy?


I think it was a contributing factor, but not the whole story.
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Re: Come off the PO plateau how much gas price increase per

Unread postby Armageddon » Mon 23 Jun 2014, 19:29:30

Subjectivist wrote:
Armageddon wrote:you think the last gasoline spike caused the last downturn in the economy?


I think it was a contributing factor, but not the whole story.




we are paying pretty close to that amount now. Within .30 anyway
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Re: Come off the PO plateau how much gas price increase per

Unread postby ralfy » Mon 23 Jun 2014, 20:10:51

Related:

"Commentary: Interview with Steve Kopits"

Peak oil does not occur when we run out of oil. Peak oil occurs when the marginal consumer is no longer willing to pay the cost of extracting and processing the marginal barrel of oil. And we can actually calculate what the related numbers are.


http://www.resilience.org/stories/2013- ... eve-kopits

Video lecture and presentation (PDF) shared in other threads:

"Global Oil Market Forecasting: Main Approaches & Key Drivers"

http://energypolicy.columbia.edu/events ... ey-drivers
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Re: Come off the PO plateau how much gas price increase per

Unread postby Pops » Tue 24 Jun 2014, 10:14:17

Armageddon wrote:
Subjectivist wrote:
Armageddon wrote:you think the last gasoline spike caused the last downturn in the economy?


I think it was a contributing factor, but not the whole story.


we are paying pretty close to that amount now. Within .30 anyway


Your question was did the "spike" cause the crash. The 12 month average price today is higher than it has ever been and it's been there for 3 years. It is simple logic that when prices rise fast and unexpectedly you are forced to pay the higher price and you must spend less elsewhere. So there is a good case to be made that all spikes in oil cause slower economic activity as cash is funneled into that one sector.

The simple reason the economy isn't trashed (except for that 1 or 2% drop in the first quarter) is that we eliminated lots of driving. We changed habits and adapted to the new price by driving less but we are still spending in excess of the 4 or 5% the puts the brakes on.

Image


Image
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Re: Come off the PO plateau how much gas price increase per

Unread postby Subjectivist » Tue 24 Jun 2014, 10:44:52

Pops wrote:
Armageddon wrote:
Subjectivist wrote:
Armageddon wrote:you think the last gasoline spike caused the last downturn in the economy?


I think it was a contributing factor, but not the whole story.


we are paying pretty close to that amount now. Within .30 anyway


Your question was did the "spike" cause the crash. The 12 month average price today is higher than it has ever been and it's been there for 3 years. It is simple logic that when prices rise fast and unexpectedly you are forced to pay the higher price and you must spend less elsewhere. So there is a good case to be made that all spikes in oil cause slower economic activity as cash is funneled into that one sector.

Image


Image


Thanks for the graphs Pops. I can't speak for anyone else's family budget, but for us the increase in municiple and state/county taxes is a secondary effect of he fuel costs. Our local Police, Fire Department, the Sherriff Department, the State Police, the Ambulance Service and even the Park Rangers and Road Crews had to have bigger budgets to pay for their fuel. That all means more taxes have to be paid to cover those expenses that are three times higher in 2014 than they were in 2005. Then add in that the heating bills and labor pay scales had to be adjusted as well because government buildings around here have to be heated in the winter or the plumbilng freezes solid. The labor costs increased somewhat because if wages do not keep up at least a bit with increased costs faced by the workers individually then the workers will no longer work for the government entities doing all those functions I listed above.

After you take all that into consideration you can start to see why I think energy costs are a much bigger deal than just what the consumer pays this week at the pump.
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Re: Come off the PO plateau how much gas price increase per

Unread postby ROCKMAN » Tue 24 Jun 2014, 11:10:07

Sub - And that highlights the problem with trying to make such correlations: the time lag. It can take a year or more for those effects to completely filter thru. And while they do other factors contribute to the net effect. But logic argues that any increase in one component of a system will increase the cost of the system. Or reduce the output of the system. Or damage the system. Or any combination of these results.
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Re: Come off the PO plateau how much gas price increase per

Unread postby AgentR11 » Tue 24 Jun 2014, 11:20:18

I've posted this from time to time... its not that we just drove less, everything became less; what followed then was a restatement of the economy via QEx such that its absolute dollar numbers did not decline, even if almost everyone participating in the economy perceived a real decline in their standard of living. There is finally a nice trend of recovery, but if you project forward, and exclude any future trauma, full recovery is still DECADES away.

Image

I like this chart specifically because it doesn't arbitrarily exclude or include in order to make 'terrible' look 'ok'. Then again, what would a real world power down look like, other than the above chart.....

sooo.. to the topic, any spike creates a stall&fall in the economy, a power down. This is a *GOOD* thing. Its a bit painful though. If we're going to use energy slaves like goopy ancient dead algae or whatever, ideally the few need to be seriously employed, a large swath needs to have some activity related to providing comfortable amenities for all, and the 'all', need to find ways of moving through the economy that doesn't burn up tons of energy for no particular gain. And that's exactly what the price spike, stall&fall does.
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Re: Come off the PO plateau how much gas price increase per

Unread postby Timo » Tue 24 Jun 2014, 11:47:16

Armageddon wrote:
Subjectivist wrote:
Armageddon wrote:you think the last gasoline spike caused the last downturn in the economy?

I think it was a contributing factor, but not the whole story.

we are paying pretty close to that amount now. Within .30 anyway

We've adapted to the higher prices, and those prices aren't as much of a shock to us anymore. Been there. Done that. Prices will have to escalate higher than $4.50 in order to get our attention and concern again. My only worry is that concern will translate into more military action to appease the fuel-hungry and callous American public. This is an election year, and war just might win votes, or it just might lose votes. I've given up trying to predict government's reaction to public opinion. Heck. I've given up trying to predict public opinion on such matters.
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