[robsmith]

Read this in Depletion Modeling:

Exxon, and the Implications of 8%

The assumption that decline rates will continue to be 8% seems unrealistic. It doesn't take into account the effect of price increases. The price of oil has really been shooting up, sending a strong signal to markets that is increasingly being taken seriously. Predictions of $100/bbl oil in the short term (say, one year) are not that rare right now. If you had a gold coin in your hand right now and you believed you could sell if for $500 right now or $900 a year from now, would you sell it now to "meet demand"?

Despite earlier assurances from Saudi Arabia that they would pump enough oil to keep the price in the neighborhood of $28/bbl, they haven't come through. These high prices are great for them. And they can look forward to more of the same. Why would they pump oil to "meet demand"? They haven't been doing it and they won't do it IMHO, but will act in their own best economic interest. Not that they will admit it. They will say whatever they think likely to minimize political damage, like "we had to cut production because the world is running out of oil; we must conserve for the long run". The consequence is that they are more likely to be cutting production than increasing it when oil hits $100.

I'm not saying you're wrong, just that I haven't seen any serious argument of just why it is everyone is going to want to run out and sell an asset that's showing phenomenal returns.

If real estate values are growing at 15 to 20% and current inflation is 4.35%, I would say that the money taken out of inflated equities and spent into the economy shows up as nominal GDP and real GDP.

Otherwise, inflation would have to be at the rate of real estate price rises.

Most people don't see rising real estate values as inflation , but "wealth generation". That is an illusion. If it is, then GDP is only growing due to "financial speculation", fudged CPI, and increasing debt load.

I think you simply don't understand how what real GDP is or how it is computed.

Real GDP is the total value of final goods and services PRODUCED each year, adjusted for inflation. If Bob sells his house to Carol for $500,000, who then sells it to Ted for $1,000,000, that's just an asset changing hands. No final good or service is produced. If instead, Bob's house is revalued upward (by the market) from $500,000 to $1,000,000, again no good or service is produced. If Bob borrows money on that increase and spends it on a new SUV, again no change in real GDP occurs. Of course, that may lead to the car company producing more SUV's, but that is a REAL increase in GDP requiring REAL resources. It could also lead to a higher price for SUV's, but that's simply inflation, which the computation of real GDP will adjust for.

You seem to think that because house price inflation exceeds overall inflation that an increase in real GDP occurs. This is not the case. To get real GDP, you evaluate this year's production at a base year's prices. This COMPLETELY ignores price inflation. That's how the economists at the BEA do it.

You're right that home-owners see house price inflation as a real increase in wealth. It is if the homeowner sells his house and never wants to buy another. (Meanwhile, it is a real decrease in wealth for those who aspire to home ownership.) Those who fail to realize that increase, but use it to borrow money for consumption spending will be hurt greatly when house prices plunge. That's unfortunate and, possibly, catastrophic for our political-economy thereby resulting indirectly in a reduction in real GDP, but neither the earlier spurt in consumption nor the consequent plunge in consumption are themselves a part of real GDP.

[MonteQuest]

The assumption that decline rates will continue to be 8% seems unrealistic. It doesn't take into account the effect of price increases. [/quote}

The only swing producer is Saudi Arabia. What their fields do does not affect the rest of the world's oil field decline rates.

The price of oil has really been shooting up, sending a strong signal to markets that is increasingly being taken seriously. Predictions of $100/bbl oil in the short term (say, one year) are not that rare right now. If you had a gold coin in your hand right now and you believed you could sell if for $500 right now or $900 a year from now, would you sell it now to "meet demand"?

Gold is not the energy source that powers the world.

I'm not saying you're wrong, just that I haven't seen any serious argument of just why it is everyone is going to want to run out and sell an asset that's showing phenomenal returns.

Because if they don't, we will invade them.

I fail to see your point in all of this. If Saudi Arabia withholds production, peak oil arrives early, makes no difference if it is geological, policitical, or economical. Supply does not meet demand.

I think you simply don't understand how what real GDP is or how it is computed.

Real GDP is the total value of final goods and services PRODUCED each year, adjusted for inflation. If Bob sells his house to Carol for $500,000, who then sells it to Ted for $1,000,000, that's just an asset changing hands. No final good or service is produced. If instead, Bob's house is revalued upward (by the market) from $500,000 to $1,000,000, again no good or service is produced. If Bob borrows money on that increase and spends it on a new SUV, again no change in real GDP occurs. Of course, that may lead to the car company producing more SUV's, but that is a REAL increase in GDP requiring REAL resources. It could also lead to a higher price for SUV's, but that's simply inflation, which the computation of real GDP will adjust for.

So, you maintain that borrowing money from the Chinese, selling our houses to each other (2 out of 3 are speculation with no intention of ever living there) and taking that cash and spending it into the economy does not drive GDP growth? Shit, it is what constitutes the American economy today.

You just admitted it does right here:

If Bob borrows money on that increase and spends it on a new SUV, again no change in real GDP occurs. Of course, that may lead to the car company producing more SUV's, but that is a REAL increase in GDP requiring REAL resources.

40% of the money driving GDP growth is from financial speculation. Companies produce in anticipation of growth. If the engine behind that growth is 40% speculation, what happens when the refi-ATM is over? They don't call it the "housing bubble" for nothing.

We have a 248 trillion dollar derivatives market in a 40 trillion dollar economy. We have the Carry Trade.

Any credible financial website will back up this point.

You seem to think that because house price inflation exceeds overall inflation that an increase in real GDP occurs.

No, I say that when you spend this inflation into the economy, it is the same as printing money that has no backing. Housing prices cannot be supported by the fundamentals.

We have gone into debt to drive GDP growth. Period.

[robsmith]

Because if they don't, we will invade them.

I fail to see your point in all of this. If Saudi Arabia withholds production, peak oil arrives early, makes no difference if it is geological, policitical, or economical. Supply does not meet demand.

I don't see us invading Saudi Arabia. We can't even handle Iraq. This would double the problem. Moreover, it really wouldn't even be rational for us to do so, although we might try to impose the equivalent of some sort of excess profits tax on Saudi Arabia. Of course, irrationality is always a potential problem.

Rapid drop-off in oil production would be a big problem. Peak oil itself isn't.

40% of the money driving GDP growth is from financial speculation. Companies produce in anticipation of growth. If the engine behind that growth is 40% speculation, what happens when the refi-ATM is over? They don't call it the "housing bubble" for nothing.

Actually, you originally said "40% of recent GDP growth is financial speculation, not the production of real goods and services." But, real goods and services <i><b>are</b></i> being produced. You meant to say that production is driven by dangerous borrowing based on inflated asset values. Right?

Also, once again, do you have a reference for that 40% figure?

We have gone into debt to drive GDP growth.

We have gone into debt to avoid adapting to present realities. We are selling off our future to feed our present appetites. GDP growth would have occurred even if we had not gone into debt, but it would not have taken the seriously distorted form it has taken.

[MonteQuest]

I don't see us invading Saudi Arabia. We can't even handle Iraq. This would double the problem. Moreover, it really wouldn't even be rational for us to do so, although we might try to impose the equivalent of some sort of excess profits tax on Saudi Arabia. Of course, irrationality is always a potential problem.

Then I suggest you read the report, titled, Rebuilding America’s Defenses: Strategies, Forces, and Resources For a New Century, written by the neo-conservative think tank Project for the New American Century.

Or, the report, “Strategic Energy Policy Challenges For The 21st Century,” issued in April 2001, concludes: “The United States remains a prisoner of its energy dilemma. Iraq remains a de-stabilizing influence to... the flow of oil to international markets from the Middle East. Saddam Hussein has also demonstrated a willingness to threaten to use the oil weapon and to use his own export program to manipulate oil markets. Therefore the U.S. should conduct an immediate policy review toward Iraq including military, energy, economic and political/ diplomatic assessments.”

Saudi Arabia follows in those footsteps at her own peril.

Rapid drop-off in oil production would be a big problem. Peak oil itself isn't.

Again, I fail to see your point. Even a 2%/year decline is a rapid dropoff when you need a 3% growth. Makes for a 5% shortfall. How does Saudi Arabia withholding oil production for higher prices make this better?

How is peak oil not a problem?

Actually, you originally said "40% of recent GDP growth is financial speculation, not the production of real goods and services." But, real goods and services <i><b>are</b></i> being produced. You meant to say that production is driven by dangerous borrowing based on inflated asset values. Right?

Yes, in a way. What I was saying was that the money being spent to drive GDP growth did not come from wages accured from the production of real goods and services, but from inflated asset values.

Also, once again, do you have a reference for that 40% figure?

There are several that I have read. financialsense.com and prudentbear.com to name two. Don't have a specific link at the moment. I'll try to find it.

Not to mention that foreign debt is 40% of GDP.

GDP growth would have occurred even if we had not gone into debt, but it would not have taken the seriously distorted form it has taken.

I disagree. If not for the CPI fudging and "financial spec" we would have no GDP growth. Our economy rests on a thin thread of debt and consumption that is only sustainable as long as stimulus is applied. Once that stimulus wears off, the economy and the markets will roll over.

As Jim Puplava says:

You can’t create prosperity through debt and consumption. Real wealth comes from savings and investments and the production of real goods. It doesn’t come from financial speculation. Printing money and expanding leveraged financial assets that trade the markets is paper wealth—not real wealth.

[robsmith]

Or, the report, “Strategic Energy Policy Challenges For The 21st Century,” issued in April 2001, concludes: “The United States remains a prisoner of its energy dilemma. Iraq remains a de-stabilizing influence to... the flow of oil to international markets from the Middle East. Saddam Hussein has also demonstrated a willingness to threaten to use the oil weapon and to use his own export program to manipulate oil markets. Therefore the U.S. should conduct an immediate policy review toward Iraq including military, energy, economic and political/ diplomatic assessments.”

Saudi Arabia follows in those footsteps at her own peril.

I believe the administration wants stability in the Middle East with themselves in control of the oil spigot. Those are rational, if Machiavellian, goals for the US, although the administration has not been effective in pursuit of them IMHO. Pumping out the remaining oil in the Middle East at a rate that would precipitate at some point a rapid drop-off is not a rational goal for the US. Yes, this administration or the next may go off the deep end, but the odds are heavily against it.

Again, I fail to see your point. Even a 2%/year decline is a rapid dropoff when you need a 3% growth. Makes for a 5% shortfall. How does Saudi Arabia withholding oil production for higher prices make this better?

How is peak oil not a problem?

I would call peak oil a significant problem, but not one of the big problems. The big problems are, not necessarily in this order, (1) huge public and private indebtedness, and (2) the rapid growth in real GDP in the rest of the world. #1 we agree on, I believe. #2 is the demand factor in the oil price equation, which is much larger than the supply factor, now and probably for decades to come.

Don't have a specific link at the moment. I'll try to find it.

Thanks in advance.

Our economy rests on a thin thread of debt and consumption that is only sustainable as long as stimulus is applied. Once that stimulus wears off, the economy and the markets will roll over.

Yes, there's going to be quite a shock.

[gt1370a]

term (say, one year) are not that rare right now. If you had a gold coin in your hand right now and you believed you could sell if for $500 right now or $900 a year from now, would you sell it now to "meet demand"?

If I had one gold coin I would wait a year and sell it. If I were the largest producer in the world, I would definitely sell enough now to keep demand up, lest no one will be willing or able to pay $900 next year. See the difference?

[MonteQuest]

I would call peak oil a significant problem, but not one of the big problems. The big problems are, not necessarily in this order, (1) huge public and private indebtedness, and (2) the rapid growth in real GDP in the rest of the world. #1 we agree on, I believe. #2 is the demand factor in the oil price equation, which is much larger than the supply factor, now and probably for decades to come.

Yes, it is a merely a symptom of a greater disease. A milestone, if you will.

If your read my threads and blogs, you will see that I agree that our current economic situation is ripe for an unwind, sans peak oil.

We have found common ground.

[MonteQuest]

rob,

You still didn't answer my question:

How does Saudi Arabia withholding oil production for higher prices make peak oil less of a problem?

A decline in oil production is a decline in oil production.

[robsmith]

rob,
How does Saudi Arabia withholding oil production for higher prices make peak oil less of a problem?

The worst possible situation is if the peak oil date is the last day of production with everyone blithely ignorant of what's going to happen. In this case the production "curve" would look like a right triangle, peaking to the right, with an instant decline to 0 the day after peak production. One day, the last oil man goes to the last reserve and finds it is empty. He then has to tell the world "Oops! We have no more oil". Panic would be everywhere and "die-off" of at least half the human race a very high probability. Let's call this 100% peak oil, that is, peak oil occurring when 100% of the oil has been pumped out. Hubbert's original idea was that peak oil would occur with 50% of oil pumped out.

The earlier peak oil occurs, the longer we will have to adapt to it. When oil production begins to fall, the price of oil will begin to rise faster. (It will already be rising simply due to economic growth outstripping the growth in supply.) Consumption will drop. Higher oil prices will encourage more strongly than ever higher oil efficiency. World (real) GDP, however, if the past is a guide, will continue to climb. This will stretch out our oil supplies for many many years, perhaps for millennia, but almost certainly until we have adequate substitutes, possibly fusion power.

Here is a quote I found about fusion power from 1998.

One way to measure progress toward these (fusion) goals is to calculate the "triple product," which is the product of the density of the ionized electrons (ne), the length of their thermal confinement, and the plasma ion temperature (Ti). On average over the past 30 years, the doubling time of the triple product has been about every 3 years. It slowed a bit in the past decade, to about every 5 years. This rate of performance improvement is not quite as impressive as that in the semiconductor industry, but it is still quite remarkable. The triple product must increase by about another factor of 10 in order to reach the regime where a commercial fusion power plant would be expected to operate.

Unfortunately, on this critical issue it is not easy to find up to date information on the web, for me, at least. I spent considerable time on it this morning, but could not find out where we currently stand. I could not find a time series of triple product values, nor a graph. However, most experts on fusion seem to think it quite feasible with adequate funding to have commercial fusion power plants by, say 2020. That funding will come forward quickly with much higher oil prices, I believe.

[MonteQuest]

rob,
How does Saudi Arabia withholding oil production for higher prices make peak oil less of a problem?

The earlier peak oil occurs, the longer we will have to adapt to it. When oil production begins to fall, the price of oil will begin to rise faster. (It will already be rising simply due to economic growth outstripping the growth in supply.) Consumption will drop. Higher oil prices will encourage more strongly than ever higher oil efficiency. World (real) GDP, however, if the past is a guide, will continue to climb. This will stretch out our oil supplies for many many years, perhaps for millennia, but almost certainly until we have adequate substitutes, possibly fusion power.

The sooner peak oil happens, the longer we will have to adapt?

We need 10 to 20 years pre-peak to adapt to it says the Hirsch Report.

Conservation and efficiency will push peak oil into the future for millenia?

What about Jevon's Paradox and the 3 billion new comers?

China's demand will exceed all conservation efforts from the looks of things. Their % of the world's total consumption of commodities doubles every ten years.

[robsmith]

The sooner peak oil happens, the longer we will have to adapt?

You misunderstood me. By "earlier" I was sort of referring to where the peak is relative to the mid-point of the area under the production curve. What we want is as much of the area under the production curve as possible to be to the right of the peak oil date. Obviously, I should have said that more clearly. Had peak oil occurred after only 10% of oil had been pumped out, that would have given us an extremely long period of time to adapt to the higher prices.

Conservation and efficiency will push peak oil into the future for millenia?

Of course, I didn't say that.

What about Jevon's Paradox and the 3 billion new comers?

What about them?

China's demand will exceed all conservation efforts from the looks of things. Their % of the world's total consumption of commodities doubles every ten years.

It hasn't exceeded all conservation efforts yet. Annual World real GDP growth continues to grow faster than world population (or world oil production), about 5% for real GDP, 1% for population, and -1% to 1% for oil, depending on whether you think the peak has already arrived.