Spare Demand Replaces Spare Capacity--Fungibility Obsolete?

[bratticus]

Since 2005 crude oil production rates have hit a ceiling and fail to rise. Concurrently China and India attempt to expand their industrial base as fast as they can. Oil production has shifted from a system where spare oil production capacity existed to one where spare oil demand exists. Is fungibility obsolete? If a nation stops selling oil to the UK and France and sells it to India and China instead, doesn't Asian industrial growth cause them to consume oil that was unsatisfied demand? Doesn't fungibility imply that the UK and France once could have replaced the missing oil? Isn't it clear that they cannot? Brent crude closed today, Thursday February 23, 2012 at $125.98 up $2.55 2.07% from yesterday.

[JohnRM]

The price of oil is rising along with a recovering global economy, just as one would expect, as would-be demand exceeds the ability of the world to grow supply and increase efficiency. By summer, we could see the price of oil stunt global economic growth and a possible return of recessionary conditions. If you don't have a job yet, after the last recession, you'd better get one soon, cause the hiring spree won't last.

[SeaGypsy]

To some extent yes, to more extent than most Americans believe, but not so much as to allow the west to fail without market destruction ensuing. It's still early days yet.

[sparky]

.
An interesting subject ,
I believe we have switched from a demand driven market to a supply driven one
we still could see production increase , but slower than demand
hence the rise in price ,
time will tell , I'm watching , I'm watching

[bratticus]

If a nation stops selling oil to the UK and France and sells it to India and China instead, doesn't Asian industrial growth cause them to consume oil that was unsatisfied demand?

Let me not be so general.

Iran says February oil output steady despite sanctions
Amena Bakr / Reuters / February 23, 2012
"The production for this month will be the same as the previous, around 3.5 (million bpd)," Mohammad Ali Khatibi told Reuters. "There will be no change, things are going as normal here."

Ahead of a European Union embargo, effective July 1, European buyers have been cutting back on supplies from Iran and some of its biggest customers in Asia have also reduced purchases. ...

... While India has said it will not implement the sanctions, it, along with China and Japan are planning cuts of at least 10 percent in Iranian crude imports as U.S. measures make it difficult for the top Asian buyers to keep doing business with the OPEC producer.

... "We still have customers, everything is normal," added Khatibi, Iran's representative on the board of governors of the Organization of the Petroleum Exporting Countries.

So for whatever reason Iran is losing legacy customers yet is able to produce oil at the same rate with the same overall export levels of oil to customers. If that is true is fungibility obsolete? How does fungibility hold up in a world where demand rises to meet supply and then some?

[Pops]

Fungibility implies that oil from here or oil from there is all equally oil so can be substituted equally no matter the source.

First it's wrong. Heavy/high sulfur/light/sweet oil can't be utilized equally. Each type requires more or less processing. Of course kerogen and nat.gas condensates aren't even oil so they need their own specific processing as well. This was the problem last year when KSA said 'we can replace Libyan oil' but all they had to offer was heavy oil that the EU refiners couldn't immediately use.

But more and what I've been harping about, is the problem beyond the export land model is that no matter the published number for exports, if the actual transaction is a closed one (f-16s for xMb/d or 100B yuan for direct investment and xMb/d for 20 years) then it isn't really an "export" at all - it's a nationalized oil deal so shouldn't even be classified as an export.

So the increasing substitution of and reliance on harder to process oils and not-oil-at-alls combined with the cross-national oil deals are reducing the effective available export market.

Personally I think this is the reason prices are so high, the amount of oil actually for sale on the open market has peaked and is declining.


Specifically about Iran, I don't listen to anything Akmed says.

[seahorse3]

We are essentially at a plateau of oil since 2005. So, not enough oil for everyone to grow their economies. Thus, we have western economies in recession since that time and eastern economies still growing and seen as "emerging markets." They are able to grow bc, as Jeff Rubin points out, they subsidize the costs of energy and the Western economies don't. So, Western economies can't grow with the increasing price of fuel. Eastern economies can, bc those costs are absorbed and not passed on (arguably, many of the other costs are passed on either, like environmental restrictions). As a former poster used to say here, poster Bill a bank investor from Greece, eventually the East will no longer be able to subsidize those costs of fuel or environment. Until that time, the East will get a greater share of the oil offsetting any drop in demand by the West, but oil production remains flat. It was argued years ago that PO was a Western problem, not an Eastern problem. That if the US economy failed, it would free up more oil for the rest of the world. That's what we are seeing. The Chinese don't view warfare as limited to tanks, for example. There was a good read from two Chinese colonels about the limited view of the West and particularly the US in warfare. We are Clausewitze, war is the battlefield where men die. Chinese are Sun Tsu, beat the enemy before you meet on the battlefield. That philosophical difference is important to the resource issue. If there is not enough oil to go around, beat the enemy to it without fighting him for it. They subsidize oil, among other things. Now, some argue this Chinese model will fail, but as it stands right now, they are growing, we are not. They continue to get a greater share of the oil. We do not.

[pup55]

Let me take the other side of the argument for a moment...

I am not sure if the peak year was 2005 or 2007 but you would have come to exactly the same conclusion in 1983, two years after the first Iranian revolution, and in the midst of the long recession that started in 1980. I believe if you look at the global oil production chart at that time you would have said that oil peaked in 1980.

Is there anyplace in the world right now where either oil or the finished products are actually in short supply? (well, aside from places like Haiti where the whole system is a wreck)? It is true that there was a drawdown of supply in Europe because of the problems with Libya, but demand is so terrible over there that the number of days' forward inventory cover is not much below the 5 year average.

http://omrpublic.iea.org/omrarchive/10feb12full.pdf

Why is the nation's refinery system only running at 85%, even last summer at the so-called peak of demand, we only got above 90% for a few weeks. Jet fuel... consumption dropped about 20 percent since 2008 and never came back. Distillates about 15%. Cars, at least a couple of decades since demand this low.

Asia: No one really knows what is going on over there but all of the demand and GDP revisions for that region have been downward.

China: They were able to find nearly 40 million barrels in the marketplace last year to fill their strategic reserve, and are going to try to find another 40 this year. If oil was short could they or would they do that?

Saudi: No apparent problem increasing their production 400,000 bpd last year to send that very oil to China. They claim to have a couple more million barrels per day to spare. Until the world needs the oil, there is no way to tell if they can do it or not. That is part of the mystery.

Let me suggest that with economies weak, and currency being printed out of thin air with no backing whatsoever except faith, at the rate of many trillion dollars (and Euros) per year, that holders of these pieces of paper are looking for any chance they can to exchange them for things of value. That's why gold has tripled in price since 2008, and so has Silver, and is going back up at a quite similar rate to oil right now, if I am not mistaken.

Also, if I am not mistaken, the pieces of paper in the wallet and 401K of J6P are not being as heavily swapped for things of value, so a stealth transfer of wealth is going on... no one is talking about this of course.

Until or unless we get to any kind of actual economy that is not supported by massive intervention by the central banks, we will not know for sure how much actual oil supply there is, because right now, there is enough. Unless demonstrated otherwise, I am inclined to go with the Saudi opinion that "the market is well supplied" and leave it at that.

[Pops]

believe if you look at the global oil production chart at that time you would have said that oil peaked in 1980.

Fair enough :^)

As far as many importers were concerned, their major supplier, the US, had peaked. Look back at the embargo of '67, it didn't have nearly the impact as those later because we had some spare capacity left.

The supply in the US in '79 was only a couple of percent less than in '78. The increase in price was partly artificial pricing (OPEC) and partly the end of artificial pricing in the US - Carter deregulated the price, WTI rose and eventually increased the supply (Prudhoe Bay).

Drillers have all the incentive in the world to drill these last years (except '09) - and are drilling, but the price of unleaded is at a record and demand is falling.

If the price is so high it kills demand then obviously supply is too low and it just as obviously has been these last years. In '08 the spare was basically zip and even including that period we have been below average for months now - again, even with our reduced demand...



I don't think you should expect there to be any widespread physical shortages with a plateau in all liquids or even early on in all liquids peak because the rationing is by price, not by license plate number. The people who can afford to pay, get. There shouldn't be panic buying people understand this is how things are, no use filling up because the price will be just as high tomorrow.

For now.

Obviously not an iron clad rule because as the available export supply gets bought up by the governments with the sense to do it and the refiners with the credit, the amount available continues to shrink. Even if all liquids are still rising, the point that all the production has been bought up is the point the music stops and the shortages start.

[eXpat]

One of the best threads of the year!!!!

[ritter]

Does the increasing cost of production complicate the supply/demand thing you guys are discussing? In other words, does the cost keep going up because the easy to get and easy to refine oil is in decline? Also, does the type of oil now available have an impact on current refinery capacity? Is it a retooling issue?

I understand the argument that we are still well supplied, and I'd agree as there are no apparent shortages. But it seems that something more than Iran and inflation are in the mix. I dunno. I'm certainly no economist!

[seahorse3]

Pup, I understand your argument and it is a fair argument. It is an opinion shared by rockdoc and others (although Rockdoc once said that PO would be somewhere around the 2012 time frame absent a recession - he never envisioned a big crash in production).

However, I agree with Pops that 1980 is not today. First, we have a lot more info on production profiles. More countries other than the US are admittedly in depletion - that wasn't true in 1980. Jeff Rubin has a convincing argument that the Egyptian "spring" was the result of the pressures of rising population and falling oil revenues, that wasn't happening in the 80s (so PO hitting a ME country). Despite high oil prices, SA production is less now than it was in 1980. Kuwait opined PO in 2015, that was fairly unprecedented and was agreed to by a former SA official. So, the general agreement back in 1980 as to high prices was not PO, but politics.

There is no question that oil prices will always have political components to them, but this is not 1980 revisited. If capitalism is true and high prices lead to an increase in production, the world would be producing more and all those early 2000 IEA predictions about increasing world oil production 3% per year to meet expected demand would have manifested, but they didn't. The facts on the ground, some areas suffering recession while others growing, all support the conclusion we are at maximum world production or close to it.

Now, you're right, if the economy could grow again we would know for sure. But if we are at plateau oil, we will never know for sure, bc the economies can't grow faster than oil production. I read Hirsch's latest book. He takes the position that the all liquids production and subsequent decline will hit by 2015. So, even if the economy doesn't recover, we should know if he is correct, but maybe he isn't. I don't know for sure. But, I've always believed that prices kill demand for a reason, bc the product is limited. Its what I was always taught, law of supply and demand. The SA used to argue they would defend low prices. They haven't. There's a reason. Energydigger who drilled in SA was of the opinion SA was at peak. I have little reason to question a guy who was on the ground and gave his reasons why.

[Pops]

@ ritter

In other words, does the cost keep going up because the easy to get and easy to refine oil is in decline?

I don't think it is so much about refining except when the only oil available is the wrong kind. Like Pup pointed out refinery utilization is pretty low, some refineries are even closing completely because of low margins.

Pretty simply, the cost of the oil inputs appears higher than the final products will bring in this market.

I think it's more about exploring and producing problems that are causing those oil prices to stay high. Even the conventional wells we are drilling produce less and deplete faster than just a few years ago. So even though the cost per well for those vertical, conventional, onshore wells is probably similar to what it's always been, the cost per barrel is higher because you need to drill more holes and drill more often to offset depletion.

Fracked wells look to be even worse. The miracle will be judged down the road when we are over the initial "gold rush" mentality and can see how they hold up over time. The plain fact is there is a lot of smoke around that particular miracle.

Anyway, "The Market" doesn't care how much you spend to produce your good or service, it does care about supply and demand - that the producer gets "it" there and someone buys it - whatever "it" is. Easy, quick, conventional oil has flatlined and the new stuff doesn't appear to be easy or quick so we aren't getting "it" there as fast as the market obviously wants. If we were there would be a true glut and the price would crash like nat gas has, or like oil did in '09.

[basil_hayden]

Fungibility is certainly not obsolete - just like oil is oil, customers with cash are customers with cash.
I guess this is what's meant when folks say we've gone from supply-side to demand-side economics.

Wasn't it reported last month that refined petroleum was the USA's largest export?

Despite having more domestic crude available, even at a lower flow rate than we're accustomed to, it's being refined to add value then shipped to the highest bidder - which happen to be outsided the USA right now. From what I hear reported, it's going to Mexico and South America, which makes no sense to me except that their oil fields are mostly in depletion. I'd bet the refined products are going quite a ways further - like China, or Europe, or India.

So consider connecting a couple more Peak Oil dots that have been discussed here historically -

1. Petroleum goes to the highest bidder; we expected that to be the developed world (and it was initially), but looks more like it will be the developing world (because they have cash from exploiting natural resources and citizens).

and

2. Wow, the Export Land Model working double against the US - less oil available in the market and what we have we're busy selling to pay the new exploration and production bills.

Once again, there's no $20 or $50 or $100 oil around, but we'll see what things look like at $150 a barrel of oil.
We've seen this cycle before. It's like one of those treadmills that keeps sloping up so you get a more intense workout.

We're one hurricane, conflict, revolution from $200 oil it seems.

[SeaGypsy]

I think it's as simple as major importers are filling their strategic reserves at their speculated low for the year. The price can't fall below about $85 (WTI) $90 (Brent) without these mega buyers stepping in.

They are able to grow bc, as Jeff Rubin points out, they subsidize the costs of energy and the Western economies don't. So, Western economies can't grow with the increasing price of fuel. Eastern economies can, bc those costs are absorbed and not passed on (arguably, many of the other costs are passed on either, like environmental restrictions). As a former poster used to say here, poster Bill a bank investor from Greece, eventually the East will no longer be able to subsidize those costs of fuel or environment. Until that time, the East will get a greater share of the oil offsetting any drop in demand by the West, but oil production remains flat. It was argued years ago that PO was a Western problem, not an Eastern problem. That if the US economy failed, it would free up more oil for the rest of the world. That's what we are seeing..

Most countries in Asia have either phased out fuel subsidies or are in the process of doing so. Also how does a 10-20% consumer subsidy compare to the massive subsidization of almost every sector of consumption in the west? Welfare nets in Asia barely exist and cost a tiny fraction of those in western countries, even the USA. A non productive westerner is subsidized to keep consuming at double to quadruple the rate of a 60 hour a week Chindian worker. That's the real reason the USA and most of Europe can't compete. The US in particular is amazingly hesitant to admit how utterly wasteful it is by comparison. This article reeks of this looking at the world through a cultural bias. Having offshored the worst toxic industry will not buy the west enough time to get a significant advantage before economic degradation pulls the rest of us down to 3rd world standards.

[AirlinePilot]

Great discussion. I think its important to point out that the price moves in 08-09 were anomalies that sit pretty far outside the trend of the last 10 years. We had a global financial event which spurred some of those moves, particularly de leveraging which was occurring on a massive global scale. I believe crude and ALL other commodities were used as a vehicle to limit short squeeze losses. In my thinking this was a result of the unusual nature of that event and cant be used to support any real supply/demand/export market picture with respect to crude.

I happen to agree with Hirsch on the total liquids picture. We have a limited time before it becomes obvious that even "Not Oil" wont be able to keep up or "mask" C&C declines.

[sjn]

I think it's as simple as major importers are filling their strategic reserves at their speculated low for the year. The price can't fall below about $85 (WTI) $90 (Brent) without these mega buyers stepping in.

I've read China is due shortly to be filling the next phase of their SPR, do you have reports of other importers doing the same?

They are able to grow bc, as Jeff Rubin points out, they subsidize the costs of energy and the Western economies don't. So, Western economies can't grow with the increasing price of fuel. Eastern economies can, bc those costs are absorbed and not passed on (arguably, many of the other costs are passed on either, like environmental restrictions). As a former poster used to say here, poster Bill a bank investor from Greece, eventually the East will no longer be able to subsidize those costs of fuel or environment. Until that time, the East will get a greater share of the oil offsetting any drop in demand by the West, but oil production remains flat. It was argued years ago that PO was a Western problem, not an Eastern problem. That if the US economy failed, it would free up more oil for the rest of the world. That's what we are seeing..

Human eco-socio-economic systems grow to fill, then exceed the available resources and energy as Montequest so often pointed out, until Liebig's Minimum* is reached. (*Which we've long suspected to be the EROEI of oil production.). This limit reveals many other essential resources, natural services and waste sinks to be in deficit whether due to attempts at direct substitution or because they themselves were leveraged directly or indirectly upon the limiting variable, systemic postivive feedbacks reach a tipping point exposing the population to the effects of ecological overshoot. In a very real way "Developing" countries aren't growing (eco-economically), instead they are liquidating their natural resources and habitats and converting it into financial debt.

Most countries in Asia have either phased out fuel subsidies or are in the process of doing so. Also how does a 10-20% consumer subsidy compare to the massive subsidization of almost every sector of consumption in the west? Welfare nets in Asia barely exist and cost a tiny fraction of those in western countries, even the USA. A non productive westerner is subsidized to keep consuming at double to quadruple the rate of a 60 hour a week Chindian worker. That's the real reason the USA and most of Europe can't compete. The US in particular is amazingly hesitant to admit how utterly wasteful it is by comparison. This article reeks of this looking at the world through a cultural bias. Having offshored the worst toxic industry will not buy the west enough time to get a significant advantage before economic degradation pulls the rest of us down to 3rd world standards.

Looking past cultrual biases is rarely easy, this includes the idea that 3rd world (urban) standards are in anyway more sustainable than first world Welfare States. Extreme poverty (such as in 3rd world slums) is ecologically and politically expensive to mainaftain, it is a breeding ground for desease, acute pollution, enironmental degregation, along with glaring inequality and disinfransisement. In large part the Western Welfare States were instituted as a solution to the recognised social, economic and political problems that arose following the mass urbanisation necessitated by the Industrial Revolution.

[SeaGypsy]

I keep up with Philippine news and a spread of ASEAN, I have been hearing that all except Malaysia, Thailand and Indonesia (all current net exporters) had heavily depleted SPR's by late last year. The chatter seems to be that if China is refilling despite $120 Brent/ $130 in Singapore, things are likely to get much worse.

Looking past cultrual biases is rarely easy, this includes the idea that 3rd world (urban) standards are in anyway more sustainable than first world Welfare States. Extreme poverty (such as in 3rd world slums) is ecologically and politically expensive to mainaftain, it is a breeding ground for desease, acute pollution, enironmental degregation, along with glaring inequality and disinfransisement. In large part the Western Welfare States were instituted as a solution to the recognised social, economic and political problems that arose following the mass urbanisation necessitated by the Industrial Revolution.

I am not arguing that the 3rd world is better or even relevant. The second/ developing world is capable of operating a higher human productive capacity with far less resources. It is also capable of continuing to grow with a level of inputs which would starve the 1st world back in the direction of the 3rd very quickly, yet mostly have lower social disaster (violence in particular) even though disease runs much higher.

[pup55]

I don't think you should expect there to be any widespread physical shortages with a plateau in all liquids or even early on in all liquids peak because the rationing is by price,

Oh, I dunno.. I believe we had a thread that tracked fuel and oil shortages in those days and there were actually a lot, I thought, probably a half million barrels per day. It happened in lot of the nations in Africa, for example, and I believe the Philippines as well for awhile since they are dependent on imports. The rationing was indeed based on price, right now Haiti, one of the poorest on the planet is short, but farther up the food chain there is no google-searchable widespread shortage situation yet. I will be more convincible if some of that starts to occur.

Rationing on the basis of price is still rationing, and at least at the moment the system is staying more or less intact without a lot of disruption. It is quite true that a lot of this money is coming from the next generation, since the system rulers right now both here and Europe have adopted the strategy of printing money and distributing it widely to avoid some expected adverse event at some point. I will be more convincible if the numbers do not work and the economic train wreck finally happens, but for the time being there appears to be at least some sentiment in favor of keeping the game going.

The export land model: We did a lot of work a couple of years ago and the only two places where that really matters much are the nations of Iran and Mexico whose production, internal consumption, and populations are big enough to make big difference. You can argue that the problems in Iran right now are actually an artifact of this, Iran would not have a nuclear program if there was an infinite amount of oil beneath it. Then again, maybe they would. They are crazy, or at least their older generations are. Their younger people kinda like the west. Mexico: a descent into drug-money-fueled chaos? They still have an export-based economy, their three main products being weed, oil and their young people. Naturally there are problems with all of the above but according to this:

http://univisionnews.tumblr.com/post/12 ... r-the-2012

they're still looking at positive economic growth, and because of the fact that Pemex is FUBAR no one really knows what kind of oil production they could get if they used their brains, which they eventually will have to do. So I am more convincible if either of these two places blows up in the coming months or years.

I am not going to spend too much time making the cornucopian argument because a lot of it is speculative and price-based, and since pricing has a political component, it could still be a long time before the system grinds to a halt. I said awhile back when Katrina hit that we might never produce more than 5 mbpd domestically but right now we are just below 6. I just have to be happy for the people in North Dakota which is a major source of new supply, so much so that they now are exporting more than OPEC member Ecuador. Good for them. It's a big world.

I guess what I am saying in this is that despite some warning signs, the system is still functioning reasonably well. It will be a long time before mass starvation events in the US and Europe and even most of the civilized places in South America and Asia. We are not at the brink of world resource war. People did not cancel their their vacation plans last summer, even with $113 oil last spring, or even start walking, as far as I can tell.

http://travel.usatoday.com/news/story/2 ... 47199314/1

I am in the epicenter of suburbia, and I am reasonably sure that I can go most of the day today without seeing a single pedestrian over the age of 16, which is the minimum age for driving in my area. I have been all over the world, all over, and can say that I'd be perfectly happy to live in a place that had the same energy consumption either per-capita or per unit of GDP as the crazy land of Germany, who is about twice as efficient as the US, their national drink, beer, is readily available, high quality and relatively cheap, their females are attractive and their kids are healthy. Japan? A little rougher but still liveable, declining energy use for the last 6 or 7 years. There is still plenty of slack in the system.

I am not saying that we do not have problems, and I am also saying that people are not going to have to change, but what I am saying is that for the average j6p in the US we are not having the kind of disruptions that would cause him to get out from in front of his or her TV and start rioting in the streets... and I actually think it will be a long time before we get to that point.

[Cog]

and I actually think it will be a long time before we get to that point.

Define a long time so we can pin down your prediction and comment on it.