A Mixed Bag of Oil Projections in the MSM
Update: One more noteworthy story from Newsweek:
Oil drives so much of the global economy, it’s almost impossible to fully imagine the world of $200 oil. No question, the shock will force nations to go greener much faster than now, particularly by conserving energy and developing and adopting new non-fossil fuels. But none of this can happen full stop in six to 24 months. So the predictions tend to be gloomy: some analysts see a shift toward regional trade, and even a major reversal of globalization itself, as rising transport costs make it too expensive to ship many kinds of goods long distances.
A major acceleration in the transfer of wealth that has, in the past five years, shifted trillions of petrodollars from oil consumers to producers would alter the world balance of power—including a boost for the troublesome oil autocrats of Iran, Venezuela and Russia. At $200 a barrel the proven oil reserves of the six Gulf nations alone would rise in value to $95 trillion, about twice the size of public equity markets, according to Morgan Stanley managing director Stephen Jen. That would make the Sovereign Wealth Funds of oil states market kingmakers. Western efforts to press more openness on these funds, many controlled by royal courts, would surely grow.
As I browsed through recent energy headlines on my Sunday morning – which lately has been the only time slot that allows me to catch up – I saw two contrasting stories in the mainstream media. One is from CNN Money, warning of $6 gasoline if we have a bad hurricane season:
NEW YORK (CNNMoney.com) — Batten down the hatches: hurricane season starts on June 1. It’s expected to be a rough one, threatening to upend refineries and disrupt pipelines in the southern United States.
“With the market the way it is now, a move in crude because of a hurricane could really be exacerbated,” said MF Global energy analyst Don Luke.
Peter Beutel, oil analyst at Cameron Hanover Beutel, said if a Katrina-like hurricane were to hit in July, gas prices could go as high as $5 or even $6.
“The last thing this market needs at this time is a hurricane, because we can’t afford to lose any of our refining capacity at this point,” said Beutel. “If anything bullish happens with the market in this state, it would make it go absolutely crazy.”
One thing that I haven’t covered lately is that gasoline stocks have now slid to the lower end of the normal range, which you can see at the lastest version of This Week in Petroleum:
As was discussed at length last season (also note my warnings in those archives of rising gas prices), that does put the pieces into place for a huge run-up in case of a disruption. Last year, we didn’t see any bad hurricanes than interrupted supplies, but we certainly take a risk in this situation.
The other MSM story comes from Newsweek:
There are widespread signs that the surging oil price is leading to demand destruction in the largest consumer of oil—the United States. From reports of the sharpest ever year-over-year drop in miles driven, SUV sales falling off a cliff and cutbacks airlines are making to their flight operations, U.S. consumers are clearly coming under severe stress. Oil spending as a share of the global economy has risen to more than 7 percent, a level last seen in late 1979. What happened next is instructive: from 1980 to 1983, the consumption of oil fell by 10 percent, and it took another seven years for oil consumption to reach the 1979 peak level of consumption. The length of the cycles may vary, but in the end, oil, too, is a cyclical business.
Encouraging signs that we are reducing our consumption, but I think the author misses the mark with that last statement. Oil has historically been a cyclical business. This will change when supply growth can no longer outstrip demand. This is going to be the case when oil production peaks, and all signs indicate to me that the erosion of excess capacity is driving the current surge in prices. Unless we have enormous demand destruction (and how is that going to occur other than through very high prices?), or there are a couple of Saudi Arabia’s hiding in the Arctic and soon to be discovered, I can’t easily see supply getting far ahead of demand. That is what would be required to continue the cycles – an oversupply situation.
All price setbacks in oil over the past three decades have been demand- and not supply-led. Still, the oil bulls are willing to ignore evidence of demand destruction and are instead obsessed with supply issues. While there may be some merit in the increasingly fashionable “peak oil” theory, which essentially postulates that the world will have consumed most of its oil within a 300-year period, there is no evidence that world oil production is peaking today. The crude-oil market is currently well supplied, and production is expected to grow by 1.5 to 2 percent this year.
Peak oil is now “fashionable.” That’s a relief. Now I am going to try to promote this idea I have called “Peak Money” theory. It goes like this. If I inherit a bank account, and I draw money out of it – yet I make no deposits – eventually I will run out of money. If my spending is increasing over time, then I will need to make some big adjustments when I start to run out of money. In truth, this is no more theory than peak oil is a theory. It puzzles me to hear people refer to “so-called peak oil theory” or some other term that indicates that it is anything other than an observation.
There is no question that global oil production will peak. We have country after country in which this has already taken place. The key questions are “When?” and “What are the impacts?” I believe the answer to the timing is that it is soon. Even the most optimistic predictions mean that my children will have to deal with it. The more pessimistic suggest that it is upon us now. Personally, I think >90% probability of a global peak within 5 years – which is why I spend so much time pondering the impacts.
Regarding the question on the impacts, that debate continues to play out in my mind – and in this blog.