[Numbersman]

There is an interesting hypothesis (and much technical analysis and reporting) offered by a PO contributor "shorten oil". The main premise is that due to increasing costs to extract, ship, and refine oil, the useable energy in a barrel of oil is falling. Therefore, the price should be falling in proportion to the useable energy. There is another element to the commentary, which is that their organization, The Hills Group, has developed a pricing model that is highly correlated with historical pricing, and they claim, should predict future pricing.

I find this all quite interesting, especially in light of the personally unexpected drop in oil prices. I have developed some opinions, lightly researched, and lightly held, and would like to get feedback on them.

Some of this might sound dismissive of the claims of Shortonoil. I suppose that is partially true, but I also want to say I am impressed with the concept proposed and appreciative of the shared information and interactive discussion that Shortonoil provides to this forum.

One of my first opinions about the claims for a predictive pricing model based on historical prices is: Hogwash. I believe I can take any historical price set and fit it to a curve, with any degree of correlation I choose based on the degrees of freedom (complexity) I allow in my fitting model, be it a traditional math equation such as high order polynomial or something numerical and heuristic (rules based). Furthermore, if I did have a predictive model with even a slight edge of accuracy over random chance, I could essentially make unlimited amounts of money using leverage and financial instruments tuned to the probabilities and time periods.

The premise that oil usage should fall as the useable energy content falls seems logical and a strong perspective with which to look at the oil markets. One of the constructs offered by Shortonoil, that I really appreciate, is that we can think of high cost oil more like a battery - as an energy carrier and not an energy source. However, this mode of thought also seems overly simplistic, and dismissive of the many variables (changing conditions) of the "real world".

In a world of growing demand, where "new oil" is continually required, then the cost of producing a marginal barrel of oil rules the pricing jungle. In this case, the dynamic of energy content (or ETP model as Shortonoil calls it) would seem to rule.

But we have a self affected real world, where things bump into ceilings and constraints, and then behave in unpredictable ways.

If supply does exceed demand, then what happens? It would seem we are in that condition right now, and the price of oil has fallen a very surprising amount.

Here is my takeaway: For a marginal barrel of oil (new oil from expensive to get spot), the cost is high and remaining energy content is low. But for a legacy barrel of oil (from a massive deposit, relatively easy to get, and/or already paid for), the costs can be extremely low. So this explains to me the wild swings we have seen the price: a function of demand in an increasingly unstable system.

Predicting the price becomes essentially a prediction of whether demand will require the marginal barrel of oil, or whether we can live with the legacy (and shrinking) barrels of oil.

I see lots of reasons why demand is low, and reasons it could stay low or even shrink. Most of these were brought about by high oil prices, so as prices fall the question becomes "how quickly will lower prices restimulate demand?"

There is the "normal case" of hard fought growth, stimulated by socio-Eco systems dependent for survival on growth and linear projections into the future. I cannot discount this, because the Patriot Act and Quantitative Easing (massive money printing) both show the surprising extent to which the world superpower will go to preserving "normal".

On the other hand, there is the awareness that we live on a finite planet striving for perpetual growth, that will one say fall short and create cascading failures and massive instabilities.

The zigzagging price of oil, and the underlying binary modality that is driving it, appears to be a possible entre of these expected future instabilities.

[basil_hayden]

*Insert Pops' wedge graph here*

[BobInget]

numbersman poses many interesting avenues of inquiry. So many unanswered questions, so little time.
My take-away, for this complex subject (oil pricing) there is no simple predictive formula .

The world finds itself today in the odd situation where market forces are being used
to up-end entire societies for political and/or denominational motive.
History changing wars are nothing new. Also, it's hardly novel for populations enduring 'interesting times' not to fully understand how changes will effect one's own life and future humanity.

Just-In-Time Delivery works when all round pegs go in all round holes.
Too few holes and round pegs begin to accumulate. WE are being led to believe
oil demand is lower. Too few holes can be fixed with drills and bits. Making pegs
to fit is lots harder.

[efarmer]

Easy Peasy:
1. Supply and Demand
2. Supply Manipulation
3. Demand destruction via price increases
3. Greed
4. Geopolitics
5. Stupidity and random mistakes
6. The Bogie Man and his sister in law Tinkerbell
7. The Voodoo Woman if she is low on chickens
8. Other very technical things only Rockman could explain
while we nodded like a doberman pincer getting a lecture and
really just waited for the keywords "cheap" or "food".

[ROCKMAN]

Some interesting points made. Just a minor correction: it appears, at least for the moment, supply is balancing demand just fine: the world is demanding and buying every bbl of $60 oil that producers can supply. IOW there is no current over supply: I have not seen a single report of any producer unable to sell every bbl they could produce. OTOH there's a huge oversupply of $100/bbl oil. I haven't seen a single report on any being sold...every bbl is still sitting in a storage tank somewhere.

And just a reminder about the demand for oil by the consumers: there is virtually zero demand. Essentially consumers don't buy oil...refiners buy oil. So the buyers, the refiners, decide what they will and won't pay for oil. The oil producers only have the option the producers have is how much oil they sell. Consumers do buy products refined from oil. And they don't get set those prices: the refiners/retailers set those prices. The only option consumers have is how much product they can/will buy.

Or to put it differently: how many here would volunteer to pay more for a gallon of gasoline then the price posted at the Chevron station? Likewise: how many here would expect Chevron to volunteer to pay Saudi Arabia more for a bbl of oil then the price posted by the KSA?

[Numbersman]

Good points, Rockman. In the way that you describe it, essentially supply always equals demand, with the price fluctuating to find a spot between a bid and ask price. Supply and demand are essentially inferred from bid and ask, and the direction price is moving.

[Subjectivist]

Good points, Rockman. In the way that you describe it, essentially supply always equals demand, with the price fluctuating to find a spot between a bid and ask price. Supply and demand are essentially inferred from bid and ask, and the direction price is moving.

So the Saudi's are not my Master I am alone in this world

God is always with you.

[SeaGypsy]

Looks like fishing for investment strategy. As the only multiple winner of our annual price competition I have applied strategies based on market support for the more marginal barrels, which despite current price signals, I still believe are crucial to the overall global economy as it stands/ teeters. Other then that, what farmer said, especially the chickens.

[ROCKMAN]

Pstarr - "So the Saudi's are not my Master". Essentially they are not. No oil producer is. IOW none of us oil producers are denying you any oil you want to buy. All you have to do is pay the going rate. Which identifies who your masters really are: the other oil consumers. Many folks in the developed economies (most especially in the US) don't appreciate this because we are at the top of the food chain. Imagine how you would feel if you lived at the bottom of that pyramid with millions of others who would see their lives and those of their children greatly improved with $30/bbl oil. And then watch consumers in the US drive prices up to $70+/bbl and piss it away on pickup trucks, billions of Christmas lights, McMansions, etc. Their inability to buy oil etc. is a function of how much the financially stronger oil consumers can pay.

Even today's "cheap" oil prices aren't benefiting many of those folks. But some are. As I pointed out before: when oil prices crashed in '09 oil consumption in most countries fell...including in the US. Except China: they went on a shopping spree. In the next few months we'll see why prices fell: too much oil in the market place or to few buyers able to continue paying those high prices. IOW are we going to see consumption increase or decrease with oil being 40% less. It didn't happen globally in '09 when prices also dropped 40%.

[Scrub Puller]

Yair . . .

ROCKMAN said

$100/bbl oil. I haven't seen a single report on any being sold...every bbl is still sitting in a storage tank somewhere.

. . . . or still down there in the hard rock yet to be "produced"?

Cheers.

[ROCKMAN]

Scrubby - True. I should have tagged that as sarcasm: obviously no one is holding back selling oil they have sitting in storage waiting for prices to jump back up. But there is oil sitting in storage that someone paid a much higher price for then what they could sell today. And they could hold it there for a while...but they pay for that storage. And most companies would still sell at a loss for the sake of the cash flow.

[sparky]

.
I don't know how things run in the US but in Oziland , the companies simply run through their 100$ stocks
delaying any cut to customers until they have replenished with the 60$ stuff
Of course should the price jump from 60$ to 100$ the price rise would be immediate ,
providing the distributors with a nice little profit

[dolanbaker]

.
I don't know how things run in the US but in Oziland , the companies simply run through their 100$ stocks
delaying any cut to customers until they have replenished with the 60$ stuff
Of course should the price jump from 60$ to 100$ the price rise would be immediate ,
providing the distributors with a nice little profit

Exactly the same happens here as well, in fact it usually kills off a number of small independent petrol stations as they get left "high and dryfull" and can't sell at a loss, so usually a few weeks later the station shuts.

Those that double as the local shop do survive while cobwebs grow on the pumps.

[ROCKMAN]

“Oll companys downsize, loose managers, skilled operatives etc, many of which will leave the industry…OPEC ramps up oil to over $100, no more cheap oil, competition is gone or severely strangled”.

True. OTOH in 1998 oil prices adjusted for inflation, fell to $17/bbl and remained under $50/bbl for 6 years. And then prices jumped up and the US oil patch responded from its “death bed” by adding mucho production. Granted they borrowed out the ass to do so…but they did so. Never underestimate the power of the greed factor to push the oil patch forward.

Back in the late 70’s oil boom a drilling contractor put out a lot of TV ads:” Don’t have an oil well? Get one!”

But the conditions will change a bit as we stumble further down the POD trail.

[shallow sand]

"Don't have an oil well, get one!" Ha Ha. Someone on here awhile back opined that once you hear the, "Own your own oil well!" radio ads on CNBC, Bloomberg, etc., it is time to short the oil market. May be the best price predictor I've heard of. Interesting the same thing occurred in late 1970s. Lol.

[ROCKMAN]

Shallow – I’m sure you’ll enjoy this article. For everyone else the points made in this piece are valid. IF you are dealing with an honest operator. If he’s a crook (and we have our share) you’ll regret investing directly in the biz every day for the rest of your life. The question for the investors: can you tell the difference between the honest players and the crooks? Here’s a hint: the most convincing stories are usually told by the crooks. LOL. Really.

You can go to the link for the details: http://nsioil.com/i-always-find-oil/the ... oil-wells/

Myth #1 – You can lose all of your money.
Myth #2 – It is more profitable to buy stock in Exxon or a major oil company from my stock broker than to invest in an oil well.
Myth # 3 – Most oil wells are a dry hole. They only find oil in about 1 out 10 wells drilled.
Myth # 4 – If someone offers you an opportunity to invest into an oil well it is a scam.
Myth #5 – I know that the only reason I am asked to invest into an oil well is because they know it isn’t going to be a good well.
Myth #6 – Investing into an oil well is easy, but it is after they start the well is when it gets expensive.
Myth #7 – Drilling oil wells sound dangerous and could have a lot of liability and I don’t want to become part of the liability factor.
Myth # 8 – Oil wells don’t have a very long life span.
Myth # 9 – If the price of oil goes down and the well is a low producer I won’t ever get my money back.
Myth # 10 – If I invest in an oil well I will be stuck with it forever and won’t be able to sell my interest.
Bonus Myth # 11 – They have found all of the oil there is to be found so why waste the time to drill?

[shallow sand]

Looked at link and noticed site has been inactive for 4+ years. Maybe they didn't get many takers.