[sparky]

.
.................85$..........2025 !!! we should be so lucky

[ROCKMAN]

sparky - What I find interesting about such predictions is that they seldom seem to take inflation adjusted prices into account. You tell someone that oil was just $35/bbl back in the late 70's and they say that doesn't sound to bad. But if you adjust that nominal price to 2013 $'s it puts it up about where we are today. So take $85/bbl in 2025 and back off 12 years and adjust to 2013 $'s and you probably end up closer to $40/bbl . A tad more unlikely projection IMHO.

[Tanada]

BTW, that whole wedge form of rising cost and lowering economic ceiling was what prompted the Price of Collapse thread trying to figure out what happens when costs rise but the economy can't pay the price

Here's one of the first scribbles I can find along that line

Not to doubt your methodology Pops but I find that graph hard to accept while maintaining belief in Peak Oil. I understand your logic is that price will cause contraction in demand which will in turn cause price to fall, but I don't see that as being a declining slope. I see it as more of a hard ceiling, above a certain price point demand drops off, but then as demand and price falls below a certain price demand rises back up. In the future as humanity gets more efficient using oil demand will fall less as the oil price rises and that pattern will repeat so that over time the price will be able to rise a bit without cutting demand any further, which in turn will make more resources economically viable. The cycle goes on with price rising, not falling, as ever more difficult to extract resources are added to the mix supported by greater value added efficiency on the demand side. As one or more people point out a gallon of fuel in India is used to move many more people than the average in the EU and an order of magnitude more than in North America. A scooter rickshaw with 12 people clinging on does a lot more useful work than a 6000 pound SUV hauling a petite 20 something. It isn't as comfortable or safe, but it is efficient. At some point even a rising price won't be able to supply enough extraction to meet demand and that is where we fall off the plateau, but oil is so useful I don't see it becoming cheaper even in those circumstances. At that point I see production falling because new supplies can not be extracted at the price people can afford to pay, but the old supplies will still be extracted at the highest possible price and shortages will result. All IMO of course.

[Pops]

I knew that chart would get all the attention, after all the 1st commandment of PO is Prices will Riseth. LOL

I'd just ask to put dogma aside and consider the situation as it stands for a scant moment, it has plenty of doom, lol

All the Gurus said we'd be at $500/bbl by now but we aren't.

Why?

Because there is a ceiling the economy can bear for a certain amount of supply at a certain moment in time.

That the price of oil must rise to enable extraction of increasingly expensive oil I have no doubt but there is no law that says prices must stay at a constant level.

We'll afford higher prices by consuming less and increasing utility. But I also think there will be increasing volatility as prices are whipsawed by the economy adjusting to the peak environment. As our friends in the biz have said, the current price is what decides new production. The unit cost after the well is flowing is waaay lower than the initial cost of the well and infrastructure. So except for the Saudis, pretty well everyone just keeps the tap open once it's bringing in the sheaves - sorta speak.

Currently drillers are spending more to get less oil than 5-10 years back, spare capacity is tight, KSA is increasing rigs to a new record and westexas says for years now oil available to bid on the market has been declining as if physical decline had already set in.

But look, The trend isn't up on the green line or even following inflation along the red line - it is pointing down. (I just extended the lines from the previous chart and tilted the "ceiling" line to reflect mild inflation as per ROCK.)





Obviously those are just lines pointing out trends and trends continue to precisely the point they don't.

But... the fact is the price trend for the last 2 years (the orange line) points down, not up. That's not because of a glut of oil, spare capacity is small.
Some think that means voluntary conservation is kicking in, Peak Demand doncha know. Conservation in the minds of economists, market fluffers, Growth Boosters, etc. is another way of saying A willing decline in the Desire for oil.

My thought is this reduction is happening in the other half of Demand; a forced reduction the Ability to pay part.

Which was my original premise, we won't be able to pay the increased freight with the old economy,
so parts will die,
demand and so price falls,
new production stops,
supply falls 'til space capacity gets crimped,
the price zooms back up,
new production of whatever kind resumes...

Voilá! Undulating Plateau.

The key difference in my description is that prices only need rise far enough, long enough, for a little new production to come online and ease the crimp, after which new production stops and we glide a while.

Post-peak will be different, but we aren't there yet.

Anyway, that's one idea, we'll see what happens.

[ROCKMAN]

I’m not good creating graphs so let’s try a verbal chart. Just one scenario to bounce off you guys. In 20XX the max oil production rate on the planet is 60 million bopd. Won’t even say who’s producing what. So what would that oil sell for? Obvious the world requires a great deal more to just function as it does today but that’s it: 60 mm bopd. Obviously it will go to whoever can pay $X/bbl. But there’s obviously a limit to that price: if the price is too high a buyer’s economy can’t handle it. So the buyers will be those economies than can function at that price.

But isn’t that exactly where we are today: those economies that can function positively at $100/bbl are buying and doing just that. So (ignoring inflation adjusted $’s) oil will sell for around $100/bbl. If, for the most part, none of the economies can afford more than $100/bbl but there’s enough money out there to buy more than the 60 mm bopd who gets it? Normally prices would rise to limit demand to 60 mm bopd but again, what if there are not enough buyers that can handle more than $100/bbl?

An odd situation, of course: more folks with the capability of buying a commodity then there is commodity to buy. Sounds like any period in the past when the govt instituted price controls. The govt says companies can’t charge more than $2/gal for gasoline. But that means there is greater demand (folks who can pay) than supply so who gets the fuel? Obviously there has to be a distribution mandate to go along with the price mandate. Coupons maybe?

So is that what the oil exporters do in 20XX: they distribute the oil on some prorated basis? Sell to friendly countries? Sell to threatening countries? Sell to a country that you co-own a $15 billion refinery with? Might explain why China is trying to tie up so much oil via long term contracts, in ground ownership, refinery JV’s, etc.

If one assumes there will be a max price limit to avoid too severe a demand destruction then eventually some other method then pricing will have to determine who gets to buy the remaining oil reserves if there are more buyers (i.e. demand) then production.

Over 70 years ago Japan could afford to pay for the oil its economy required. The US instituted an embargo so acquisition was no longer tied to pricing. A variety of factors led to the war with Japan IMHO. But many historians give credit to the embargo for allowing the Japanese military to bring more pressure onto the civilian govt. Who knows how this current situation ends up. Gotta remember they once referred to WWI as "the war to end all wars". Unfortunately they were wrong and we had to go to a numbering system.

[Tanada]

Here is the way I see it, the world supply limit is 60 MMbbl/d but the average world economy can only pay $100.00/bbl. At that price demand is 90 MMbbl/d so this creates a problem
Some people are more eager for the oil or have stronger economies than the average. The price goes to $110.00/bbl and demand at that price drops from 90 MMbbl/d to 80 MMbbl/d because fewer buyers can afford the higher price. The cycle repeats to $120.00/bbl and then $125.00/bbl before you get down to 60 MMbbl/d worth of buyers. The price stabilizes at this level and supply is encouraged to develop higher cost resources, but PO is relentless and a year later only 58 MMbbl/d are available. Price rises to $130.00/bbl balancing demand destruction with supply shrinkage.

That is posited on a perfect world market scenario where presumably we did not go from 80 MMbbl/d supply to 60 MMbbl/d supply too rapidly. Meanwhile the theoretical invisible hand of the market will be encouraging substitution of other fuels to offset some of the demand for crude oil, and the higher the crude oil price the more cost competitive those alternatives become. A plug in hybrid car with a solar cell layer on the skin so that it partially charges while sitting in the parking lot will be much more valuable if you are paying $7.00/gallon for fuel in the USA. Give it a 40 mile electric range like the Volt and if you always park in the open air lot at work and remember to plug it in when you get home at night you won't have to buy much expensive gasoline.

IOW people will adapt if the rise in price and fall of supply is slow enough.

If it isn't slow enough things will get ugly.

[Pops]

If, for the most part, none of the economies can afford more than $100/bbl but there’s enough money out there to buy more than the 60 mm bopd who gets it?

I'm a little confused on this one, either enough buyers can afford to pay more than $100 to buy the 60 or they can't, it can't be both.
If none of the economies can pay $100 then the 60 available sells for whatever the bid.
If there is enough money to buy more than the 60 the bid goes up till everyone that has the ability to pay is satisfied.

Normally prices would rise to limit demand to 60 mm bopd but again, what if there are not enough buyers that can handle more than $100/bbl?

In an auction the buyers set the demand (desire x ability) and the sellers set the supply, the result is the price

Generally speaking if the bid for a certain volume is too low, sellers take supply off the market, if the price is too high, sellers add supply. When everyone is done that's the market price for that moment.

If $100 is required to justify new production but buyers can't swing it, then the supply will decline.


This is the reason I tried to make the case of increasing volatility as costs rise.
When the cost of new production exceeds the buyer's ability to pay, you're left with the combined field decline rate as the overall drop in supply. If that is 5% it is a big drop in supply pretty quickly.

The result is the price runs back up because you have buyers wanting 60Mbd at $95 but since there is only 57Mbd now that decline has happened, the price buyers can afford is once again back to $100.


Add in war, population, globalisation, speculation and who knows what for a little drama,

Or maybe we'll all just switch to PEVs.

[ralfy]

Don't forget oil production costs, the lag time for bringing back production online, increased credit pumped into the system, potential demand for the global population, etc.

[sparky]

.
In the 60 M barrels scenario ,
there would be a strong incentive to use non financial assets into play,
possibly some military protection , willing or not

[Tanada]

Can anyone rationally explain to me why the WTI/Brent spread has suddenly opened up to such a wide margin? It doesn't make any sense to me so I am looking for insight as to the cause.

[vision-master]

Gasoline prices are to drop all the way into Christmas - on the news this morning.

Yesterday - paid $3.15 gal.........

[SeaGypsy]

Can anyone rationally explain to me why the WTI/Brent spread has suddenly opened up to such a wide margin? It doesn't make any sense to me so I am looking for insight as to the cause.

I'll hazard a guess- US export embargo, rail based bottleneck breakage- 'new oil' becoming unstuck more in the USA than Brent sources- which if anything are stuck ATM.

[John_A]

Gasoline prices are to drop all the way into Christmas - on the news this morning.

Yesterday - paid $3.15 gal.........

I paid $2.92 this weekend.

Something in the news about high inventories, Chinese demand growth not being enough, peak oil being dead, all the usual culprits being blamed. I think it is the 9/11 commissions fault, those who engineer black swans or organize the 2012 crackpots trying to placate those trying to get registered on Obamacare and not making it, throw cheaper gasoline at them and give them hope.

[dolanbaker]

Can anyone rationally explain to me why the WTI/Brent spread has suddenly opened up to such a wide margin? It doesn't make any sense to me so I am looking for insight as to the cause.

Libya!

Oil production has collapsed due to internal political instability, down about 1 million barrels a day.

[Tanada]

BTW, that whole wedge form of rising cost and lowering economic ceiling was what prompted the Price of Collapse thread trying to figure out what happens when costs rise but the economy can't pay the price

Here's one of the first scribbles I can find along that line

Hey Pops, just came across an article that shows other people are coming around to your way of thinking on this.

With the response to the price increase much delayed and insufficient, there will be nothing else to stop the price from rising, except demand destruction and as we well know, demand destruction of oil means a recession, because oil is a very inelastic product. A recession will in turn cause prices to go back down again, which means that oil producers will have no choice but to cut back on investment once again, just as they are increasingly doing now. It is possible that we will be caught up in a long period of repeated cycles of oil price spikes and plunges, with the price failing to stabilize as it did after the 2009 price drop. The resulting effect on the global economy can potentially be devastating.

There is only one potential factor which could help prevent such a situation and that is OPEC action. All indications are however that OPEC is no longer in the business of oil price stability. I will not speculate on the possible reasons why Saudi Arabia seems to be unwilling to stabilize the global oil market, because there has already been plenty of speculation in that regard already. We can only go on what we actually know right now, and what we do know is that OPEC is currently dysfunctional. As I pointed out many times in the past year and a half or so, the current WTI price range that is sustainable more or less from both the consumer and producer perspective seems to be $80-120, with the price ideally spending most of the time in the middle of that range. We are now obviously very far outside that range, and when prices will recover, there is a very good chance that the price will overshoot the ideal range. If we will be unable to once again stabilize within the range I suggested, we will be looking at a period of great economic upheaval for many years.

Long article with graphs can be found here,
http://seekingalpha.com/article/2787535 ... -recession

[ROCKMAN]

Pstarr – Excellent points IMHO. And folks should remember that when they see the “price of a bbl of oil” it might not be what they think it is. It might not be the price I’ve sold my oil for. Or the price that many producers sold their production for. Often it’s the “spot price” posting. Here’s the history of such pricing from the EIA:

http://www.eia.gov/dnav/pet/hist/LeafHa ... s=RWTC&f=D

On Thursday July 3 2008 it hit the high of $145.31. Just 4 weeks later it was $121.45 on 4 Aug. That’s a 16% price decrease in just one month. And just one month later it fell to less than $100/bbl on 30 Sept 2008. And it didn’t make it back to $100/bbl until 2 March 2011...two and a half years later. Think about this: oil fell 40% from that 2008 high in just 3 months. And from 7 Oct this year to 29 Dec, about 3 months, the spot price of WTI fell 40%...just like it did the 3Q 2008. Maybe just a coincidence.

Imagine you’re a refiner that paid $140/bbl for $x/bbl that’s competing with other gasoline retailers that bought the same amount of oil for $30/bbl less. And imagine if you bought 1 million bbl of future oil contracts on 7 July 2008 at $150/bbl expiring in one month. And in one month oil contracts are selling at $120/bbl: you just lost $30 million in 4 weeks.

Volatility is both very rewarding and damaging. Just a question of whether you end up the steer or the butcher.

[sparky]

.
found this table of the crude price , inflation adjusted .

http://inflationdata.com/Inflation/Infl ... _Table.asp

The world was running fine at 20$/Bl , then inflation really kicked in overprice and over producing
by 2004 the price rise was steep , having sucked in 6 Millions Bl/Day of spare capacity

I don't believe production has this amount of fat now ,
a guess , certainly ,but I would expect prices to climb out of the hole in 2015

[ROCKMAN]

sparky - That was my point about '08. Forget about the $145/bbl spike...that was short lived. But the average price for the entire 2008 year was $98/bbl. And then prices crashed to $58/bbl for the entire 2009 year. And during 2014: oil had averaged $99/bbl. And then prices crashed to below $60/bbl. So a coincidence? Or does it show that the global economy can handle higher oil prices for just so long. When prices reach a certain sustained level, around $100/bbl, the global oil consumers can no longer make additional cuts to accommodate the higher costs as they have been. And they finally react by strongly cutting consumption which causes the oil sellers to react even more strongly to avoid losing market share in the face of decreasing oil prices. But we don't see consumption cut very much because the new low oil prices allow that level of production to still be acquired. As I pointed out before: the demand for $60/bbl oil is quite good. But not much demand for $95/bbl oil to allow the producers to hold prices there. They would still be selling $95/bbl oil today...but just not as much and thus would be seeing even lower incomes then they are earning today with $60/bbl oil.

But the global economy, still suffering from the high oil price “hangover”, isn’t able to respond quickly to the new lower price levels. It will eventually but probably won’t show up in the numbers for a year or so. Takes a while for a bad wound to heal, ya know. And perhaps just as the wound is nearly completely healed an infection (increasing oil prices) begins to develop...again. Sorta like some cases of multiple sclerosis: can walk around fairly well and then a flare up puts you back in a wheelchair. And then you improve and start walking again. Until the next flare up. So even when you're more mobile that wheelchair isn't far from your thoughts.

[Tanada]

sparky - That was my point about '08. Forget about the $145/bbl spike...that was short lived. But the average price for the entire 2008 year was $98/bbl. And then prices crashed to $58/bbl for the entire 2009 year. And during 2014: oil had averaged $99/bbl. And then prices crashed to below $60/bbl. So a coincidence? Or does it show that the global economy can handle higher oil prices for just so long. When prices reach a certain sustained level, around $100/bbl, the global oil consumers can no longer make additional cuts to accommodate the higher costs as they have been. And they finally react by strongly cutting consumption which causes the oil sellers to react even more strongly to avoid losing market share in the face of decreasing oil prices. But we don't see consumption cut very much because the new low oil prices allow that level of production to still be acquired. As I pointed out before: the demand for $60/bbl oil is quite good. But not much demand for $95/bbl oil to allow the producers to hold prices there. They would still be selling $95/bbl oil today...but just not as much and thus would be seeing even lower incomes then they are earning today with $60/bbl oil.

But the global economy, still suffering from the high oil price “hangover”, isn’t able to respond quickly to the new lower price levels. It will eventually but probably won’t show up in the numbers for a year or so. Takes a while for a bad wound to heal, ya know. And perhaps just as the wound is nearly completely healed an infection (increasing oil prices) begins to develop...again. Sorta like some cases of multiple sclerosis: can walk around fairly well and then a flare up puts you back in a wheelchair. And then you improve and start walking again. Until the next flare up. So even when you're more mobile that wheelchair isn't far from your thoughts.

ROCKMAN do you happen to know how much fracking was going on in 2009 when prices were low compared to 2011-2014?