Thursday, May 29, 2008

The coming oil price crash

There are numerous "experts" talking up the price of oil. Like at the end of the boom, I believe this is a technique to give those in the know time to sell dud futures to those that aren't. As far as reality is concerned, supply and demand are nearing that elusive intersection. From the demand side:US demand has already slumed 10% on some figures

from this article.

On these figures, the US demand will drop much faster than it will pick up in China, in barrels per day terms.

On the supply side, there are several increases in capacity going on in Saudi Arabia, and Iraq production has stabilised and is likely to increase, if anything. oil saviour? perhaps.

Consumer committment to reducing petrol usage has finally started happen in several countries. For the layman this means that even if petrol prices suddenly drop, consumers are likely to keep to these committments, without the usual usage surge that happens with lower prices.

As far as when? goes, the US is stocking up on fuel for the summer driving season. When the oil companies realise few are driving this will reduce the price a little bit. China is stocking up big time for the Olympics and internal aid. Once the Olympics are done and there is spare, the oil price will plummet.

Yes I'm talking down the oil price, but does anyone listen? :) we'll see....


FLoyd said...

Where are we going with this. Oil is craaaaaaazy. A quick example: oilheat users. They’re running out of money to keep their heating supply. Working for NORA I have seen the toughest people break down and just give up. We can’t let that happen. Someone should tell them about bioheat. They will still use oil, but a much better, biodegradable kind. It can help conserve 400 MILLION gallons of oil. Conservation is the key to lower prices in my honest opinion. Here’s the site i got info from: oilheatamerica . com/

Marco said...

What? There's 400 Million Gallons of biodegradable oil just sitting around waiting to be used?

No = not a real solution.

(tongue in cheek) I've got three better solutions:

1) Summer
2) Move to somewhere warmer before winter
3) Global Warming.

(/tongue in cheek)
Heating oil is a non-issue in the long run. The big test for oil is transport fuel.

Anonymous said...

According to the previous Iraqi minister for the oil industry, the high oil prize is not the result of a shortage in production, but due to speculation, largely of the big banks. If I remember this correctly, a Saudi oil expert said about the same thing.\\Klaus

Chris Fellows said...

I thought there was also a shortage of refinery capacity due to underinvestment and the NIMBY syndrome.

Let me quote from my latest copy of Saudi Aramco World which arrived today:'Despite producing millions of barrels of crude oil daily for decades, the amount of oil Saudi Aramco can tap for future production has actually increased over time to an estimated 260 billion barrels, the largest in the world. Two things explain this phenomenon: First, the amount of oil it has discovered, in almost every year, has been greater than the amount produced in that year; second, technological advances in such areas as reservoir characterisation and drilling methods make more oil accessible that couldn't be reached before.'

Chris Fellows said...

The Australian Academy of Science talks from February are up on the web, including v the interspecies gene transfer one I was talking about before.

Marco said...

Refinery capacity shortfall would be reflected in the oil/gasoline price differential, which hasn't changed anywhere near as much as the oil price.

The Saudis are saying a lot of things that don't reaally stack up in a fundamental economic sense. I think they are being coy. Their argument that it is the speculators fault doesn't fit the evidence. If I were in their position, with a lot of spare capital to invest, a large chunk of investment would be in extra pumping capacity as a hedge for if/when alternate suppliers (or alternate fuels) make a grab for market share. Similar to a game like poker where the person with the most money can afford to raise to beyond the absolute maximum betting limit - The Saudis can sit on their extra pumping capacity until competitors think they can give them a run.

As far as the horizontal gene transfer goes - it is fairly wicked and perhaps will be found to be more common once people start looking in the right places for evidence! What a non-sequiter!

Chris Fellows said...

As I understand it, the Saudis are *the* world source of extra pumping capacity, and by mobilising it let us avoid a serious oil shock in 1991.

Do you have any historical data on the oil/gasoline price differential? My guess would be that it ballooned out sometime after they stopped building refineries, and that instead of driving high prices, the lack of surplus capacity contributes to inelasticity in the system.

Chris Fellows said...

"instead of driving up prices *directly*," that should have read...

Marco said...

There is, in fact, a reasonable surplus capacity in refineries in most parts of the world (Iran excepted!) In the US for instance I have seen figures that they are old and run down but usually running at 80-90% capacity. The strategic reserves there are of refined liquids, so there is enough elasticity to account for occasional maintenance shutdowns/issues as well.

There is quite a lot of inelasticity in the medium term, especially because of the huge capital expense and low margins in refining. I can imagine that in a lot of places, a drop in the oil price would change the bottleneck, but high prices would remain at the bowser. In the long run other alternatives would take up the elasticity from refineries ie. other fossil fuel sources etc.