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By Robert Rapier on Jan 3, 2011 with 28 responses

Supply Side Ramifications of the Gulf Spill

Shortly after the Deepwater Horizon disaster in the Gulf of Mexico, I wrote the following:

BP’s Oil Rig Disaster May Bring an End to Support for New Offshore Exploration

“I believe the long term implications of this incident will be to exacerbate our slide down the backside of peak oil. Fields take a long time to develop, and fields being developed now may have been producing oil in 5 or 10 years. But I believe this window of opportunity has now closed, and it will be much more difficult to find broad support for expanded drilling.”

I held this view because I believed the disaster would sharply shift the debate on drilling, giving drilling opponents fresh ammunition and pushing even some proponents into the opposition camp. The Energy Information Administration (EIA) recently estimated the impact on 2011 production. The Wall Street Journal reported on this today:

Drilling Is Stalled Even After Ban Is Lifted :

“The slowdown also has long-term implications for U.S. oil production. The Energy Information Administration, the research arm of the Department of Energy, last month predicted that domestic offshore oil production will fall 13% this year from 2010 due to the moratorium and the slow return to drilling; a year ago, the agency predicted offshore production would rise 6% in 2011. The difference: a loss of about 220,000 barrels of oil a day.”

So the projection has gone from an expected increase in offshore oil production to a double-digit loss of production. As I said at the time — and continue to believe — the long term implications of the disaster on supply will be significant. The 220,000 barrel per day loss will be made up by importing more oil, and the loss of that oil from the market will add to the upward pressure on oil prices. There will be some savings from conservation as prices continue to climb, but mostly the shortfall will just result in billions more dollars that will flow out of the U.S.

This isn’t meant to suggest that we need to speed up the permitting process. Maybe we do, but maybe we should continue to take it slow in the wake of the accident. As always, we need to try to understand the long-term risks/consequences of either approach. In any case, in a market abundant with oil, the impact on price would be minimal. Yet I believe we have very little spare global capacity, and therefore any shortfalls like this are going to continue to contribute to volatility in the oil market.

What this means is that that you should get ready for $4/gallon gasoline again by summer.

  1. By Wendell Mercantile on January 3, 2011 at 10:31 pm

    RR~

    One thing you can bet on: As gasoline approaches $4+ this summer, none of the headlines will say it was because the Obama administration’s regulations slowed offshore drilling. All the headlines will say it’s because of (take your pick):

    1. Commodity traders speculating on oil futures
    2. The cold-hearted, high-paid executives who work for Big Oil
    3. Those evil oil companies

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  2. By KLR on January 3, 2011 at 11:43 pm

    WoodMac predicted 2011 loss of 143kboe/d, according to Deutsche Bank. They say we’re headed for an all time high in capex, too, with a decade long plateau. Always interesting stuff, as usual, from DB.

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  3. By walter-sobchak on January 4, 2011 at 12:39 am

    Is the Administration foot dragging on new permits? Of course they are. The real question “Is Obama intentionally damaging our economy? I don’t think so, but I’m scratching my head trying to figure out what he’d do differently if he were. …” Link

    As I have said here before, I do not think the United States has any real choice as to whether to continue and even accelerate offshore production,. The country is bankrupt and its finances are deteriorating at a high rate of speed. The solution is that we must spend less, particularly borrowed money, and produce and save more.

    Producing oil is production of a high value product, and we have to do it. I would not advocate doing it with out due regard to safety. But the idea that some places in this country are off limits has to go. I think we should be drilling not only in the Gulf off LA, but off Florida and California too. As well as in Alaska. We no longer have the luxury of disdaining “dirty work”. Oh yes, and we need to reopen those rare earth mines … STAT!

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  4. By Kit P on January 4, 2011 at 7:53 am

    The real question “Is Obama intentionally damaging our economy?

    On one hand Obama is creating economic uncertainty while on the other hand demonstrating ineptness at solving problems and getting things done.

    For example we are debating how old power plants use cooling water at a cost of $800 million per large power plant while on the other hand delaying construction of new cleaner power plants to replace the old one. The environmental benefit is small but the uncertainty is large. EPA is proposing regulations on ghg emissions. The cost is huge now but the benefit is sometime in the future.

    We have demonstrated that we can produce oil and electricity safely with insignificant environmental impact. What is the root cause of BP’s failure? What is the root cause of last year’s coal mining accident? What is the root cause of failure of TVA’s coal ash pond? Are theses things symptoms of underlying weakness in regulations or isolated occurrences?

    The Obama folks can not help themselves. They have an agenda and do not know how to prioritize emerging issues. Workers being killed has the same priority as fish being killed. People getting back to work is less important that debating effects of wind turbines on kangaroo rats.

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  5. By Alyssa on January 4, 2011 at 11:03 am

    Political peak oil can be a handy self-fulfilling prophecy. Don’t knock it.
    Political peak oil: When real peak oil fails to show up as predicted.

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  6. By rrapier on January 4, 2011 at 12:24 pm

    Political peak oil: When real peak oil fails to show up as predicted.

    Just to be clear, I was always one of those people speaking out against those predictions of a peak in 2005 or 2008. What I have always said is that I think production can still be expanded a bit, and that those who predict an imminent peak and then civilization falling apart are off the mark.

    On the other hand, we do have oil trading above $90 per barrel, and clearly a tight supply/demand situation. I still believe that peak oil is a threat, but that it will apply a slow squeeze to the economies of oil-dependent nations.

    RR

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  7. By art on January 4, 2011 at 12:38 pm

    oil prices wont be a slow squeeze for dependent nations but a hard clash of armies…

    many of the armed conflicts in the world are related to energy with a focus on oil… could someone confirm an estimate of 90% of the worlds conflicts being relatable to energy ?

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  8. By Wendell Mercantile on January 4, 2011 at 1:44 pm

    could someone confirm an estimate of 90% of the worlds conflicts being relatable to energy ?

    90% sounds a bit high to me. Wars over religion would be greater than 10%.

    If I had to guess, I’d say about 2/3′s energy (or resources) and 1/3 religion (or ideology).

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  9. By Benny BND Cole on January 4, 2011 at 2:44 pm

    I think 200kbd is too small to impact world oil markets. Prices are rising on speculation; there appears to be a lot of supply. I favor aggressive domestic production of energy, so I favor offshore drilling, though I was appalled that the industry seemed to have no plans at all on how to react to a blowout. After the blowout, innovative entrepreneurs evidently developed some great oil skimming tools.

    On oil, the global picture rests in hands of unreliable thug states, some with huge supplies of fossil fuel. Venezuela, Iraq, Iran, Libya, Mexico, Nigeria, Uganda, Russia …with free markets in thug states, we could have 40 mbd in new production in 10 years. If only, if only….

    Some say Iraq alone will hit 12 mbd in 10 years. I suspect Iran could do the same, if freed up (and no, I am not a jingo–I just prefer free markets to thug states.

    So 200kbd is small potatoes, I say.

    Sheesh, who knows what Putin is doing on the NYMEX? Not the CFTC.

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  10. By Wendell Mercantile on January 4, 2011 at 2:53 pm

    200kbd is too small to impact world oil markets.

    It’s not too small. True, 200kbd is small amount, but when the demand/supply calculus is so closely balanced, slight variations can cause large swings in price.

    Think of it as a see-saw from when you were a kid. Our park had a see-saw on which we could slide the seats to compensate for different kid’s weights to get perfect balance. Once we had the balance figured out, added weight as small as a can of soda could make one side go to the ground.

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  11. By Benny BND Cole on January 4, 2011 at 5:47 pm

    Wendall-
    Well, there is somehwat inelastic demand for oil, in the short-run.
    So, if demand exceeds supply at one price point, it will quickly migrate to a higher price point. True. Vice versa.
    But today there are 19 digital barrels being traded for every real barrel on the NYMEX. This ferocious and largely unregulated trading tends to swamp little 200kbd fidgits here and there.
    There are sovereign wealth funds, with practically unlimited capital,that can trade on the NYMEX, while cloaking their identity.

    As Putin’s grip on power –perhaps even life–is related to the strength of oil prices, what do you think Putin is doing? Indeed, I would assume he is gaming NYMEX prices. Why would he not game NYMEX prices? He is afraid of the CFTC?

    It would behoove Putin to engineer trades at $93 a barrel (he can take both sides on a digital trade, and thus lose nothing–but still spike the market higher, benefitting his real sales of oil).

    BTW, I see USA demand for oil is down by 1.5 mbd from 2005. Really, conservation and other factors will swamp Gulf Oil. That said. I favor Gulf Oili., Alaska oil, North Dakota oil (growing nicely, btw) shale gas, and PHEVs.

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  12. By mac on January 4, 2011 at 6:36 pm

    Ben,

    Along with you, I expect Nat gas to play an increasing role in the transportation energy mix. Here’s an interesting excerpt from a NYT article:

    Gas Field Confirmed Off Coast of Israel
    By ETHAN BRONNER
    Published: December 30, 2010

    ”JERUSALEM — Exploratory drilling off Israel’s northern coast this week has confirmed the existence of a major natural gas field — one of the world’s largest offshore gas finds of the past decade — leading the country’s infrastructure minister to call it “the most important energy news since the founding of the state.”

    Houston-based Noble Energy, which is working with several Israeli partner companies, said that the field, named Leviathan, whose existence was suspected months ago, has at least 16 trillion cubic feet of gas at a likely market value of tens of billions of dollars and should turn Israel into an energy exporter. ”

    http://www.nytimes.com/2010/12…..athan.html

    In related news, Iran just dropped its internal gasoline subsidies with a corresponding 20% drop in nation-wide gasoline demand.

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  13. By PeteS on January 4, 2011 at 7:03 pm

    Sorry, somewhat off-topic, but there is a story going around that China has perfected a nuclear fuel re-processing technique that could dramatically increase the lifetime of uranium supplies. Most of the reports are just reprints of a Chinese state news announcement, so could be bullshit proaganda. Here is AP’s take on it.

    If it’s true, and if they build and perfect the pebble bed reactor design at the Shidaowan plant in Shandong, and successfully adapt it for use with MOX fuel, it could be a new golden age for nuclear power. PBRs can also produce hydrogen fuel as a by-product.

     

     

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  14. By Kit P on January 4, 2011 at 7:16 pm

    “could someone confirm an estimate of 90% of the worlds conflicts being relatable to energy ?”

     

    To the ontrary, zero is the current number of conflicts over energy.   

     

    The World at War

    http://www.globalsecurity.org/…..index.html

     

    Those who fail to learn the lessons of history are condemned to repeat the the lessons. Of course the problem is figuring out what the lessons are. The world has been at war forever and long before oil. It used to be that an army marched on its stomach, now tanks run on oil. If you want to dominate the world by force, your plan should start controlling oil.

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  15. By Benny BND Cole on January 4, 2011 at 7:23 pm

    Mac-
    I saw that, about the big Israeli natural gas strike.
    There seems to be gas everywhere. The biggest wells of all time, by a factor of three or four, have come online recently in Indonesia. Of course, in the US we have shale, and who knows where is shale elsewhere.
    The Peak Oil doomsters simply never understood the price mechanism. I see Nate Hagens recently rediscovered the price mechanism, and said oil cannot stay above $100 for long, as demand fades away. Duh.
    My own view is that Peak Demand happened even before Peak Oil, a few years back. And that both are yawners.
    Sheesh, we could even have methanol cars in America, my guess at $2 a gallon, although one half the BTUs of gasoline. So what–in a PHEV, you use a gallon here or there.
    I see a bright future for the world, if only we can have civil governments, and reasonably well-regulated free markets. The USA with just a lucky break or two could thrive for the next 10 years, and beyond.
    I expect a cleaner and more-prosperous future.

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  16. By Benny BND Cole on January 4, 2011 at 7:32 pm

    BTW, I just checked Methanex’s webite. They are selling methanol for $1.35 a gallon. Today. Without subsidies.
    http://www.methanex.com/produc…..price.html
    They make methanol from natural gas.
    I wonder if economies of scale would bring this price down.
    I know there are cars on the road that can switch from CNG to gasoline. I wonder if cars could be made to switch from methanol to gasoline.
    Seems like a gigantic market here–just a chicken and egg problem. Why buy a methanol car when there are no methanol stations?
    The natural gas industry is waaaaaayyyyy behind the ethanol industry in PR-lobbying efforts.
    Speaking of that, where is Rufus?

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  17. By savro on January 4, 2011 at 7:59 pm

    The top story currently on Drudge is linking to a Financial Times article about the IEA warning that oil prices are entering a danger zone for the global economy. The following is a snippet from the article:

    Oil price ‘threat to recovery’

    High oil prices threaten to derail the fragile economic recovery among developed nations this year, the leading energy watchdog has warned, putting pressure on the Opec oil cartel to increase production.

    Over the past year the oil import costs for the 34 mostly rich countries that make up the Organisation for Economic Co-operation and Development have soared by $200bn to $790bn at the end of 2010, according to an analysis by the International Energy Agency.

    The increase, due to high crude prices, is equal to a loss of income of about 0.5 per cent of OECD gross domestic product, according to the IEA.

    “Oil prices are entering a dangerous zone for the global economy,” said Fatih Birol, the IEA’s chief economist. “The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers.”

    http://www.ft.com/cms/s/0/056d…..z1A7M5LSC7

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  18. By Kit P on January 4, 2011 at 8:32 pm

    “Most of the reports are just reprints of a Chinese state news announcement, so could be bullshit proaganda.”

     

    Yes Pete, it is communist propaganda. The US perfected repossessing fuel spent fuel in 1944.

    “CCTV said the country has enough fuel now to last up to 70 years and the breakthrough could yield enough to last 3,000 years.”

     

    When reasonable people have a 30 year supply of fuel they stop looking for a little while. Find more uranium is easy. Storing spent fuel is easy. When harder becomes more economical we will do harder. Reactor designs that operate to ‘produce hydrogen fuel as a by-product’ must run at higher temperatures than LWR.

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  19. By PeteS on January 4, 2011 at 8:48 pm

    Kit P said:

    Yes Pete, it is communist propaganda. The US perfected repossessing fuel spent fuel in 1944.


    Well, THORP (the Thermal Oxide Reprocessing Plant) at Sellafield is just across the little pond from me, and people seem to send their junk from all over the world to it (resulting in hazardous waste traversing the Irish sea just outside my window). If reprocessing was “perfected”, wouldn’t people have their own micro-facility at the end of their own back gardens?

     

    Kit P said:

    Reactor designs that operate to ‘produce hydrogen fuel as a by-product’ must run at higher temperatures than LWR.


     

    PBRs are gas-cooled and run at high temperatures, so more thermally efficient, and the exhaust is apparently still hot enough to crack steam.

     

     

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  20. By PeteS on January 4, 2011 at 8:53 pm

    O/T again — artificial rare earths.

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  21. By mac on January 4, 2011 at 10:22 pm

    Pete S

    Japan’s Nidec to make motors without rare earth metals

    TOKYO | Thu Oct 28, 2010 6:10am EDT

    TOKYO (Reuters) – Japan’s Nidec Corp will begin making switched reluctance motors from 2012 as it reduces its reliance on rare earth materials used in the production of precision motors.

    Japanese firms, which use the metals in hi-tech products, have been in a tight spot after China, which supplies about 97 percent of the world’s demand, slashed export quotas and reduced shipments to its neighbor following a territorial dispute.

    Prices of the minerals have spiked and mining firms have begun rushing to develop sources outside China amid fears that Beijing will use its leverage as a political tool, something a Chinese government spokesman denied earlier on Thursday.

    Nidec will start producing the switched reluctance motors, which do not use rare earth metals such as neodymium, for heavy machinery from 2012, for tractors from 2013, and eventually for motor vehicles, company spokesman Takehiro Osaka said.

    The Kyoto-based firm acquired the technology when it bought two of U.S.-based Emerson Electric’s motors businesses earlier this year.

    Prices of some rare earths on world markets have increased tenfold this year, reversing a long-trend toward lower prices caused largely by greater Chinese production over the past two decades.

    Shares of Nidec settled 3.8 percent higher at 7,990 yen on Thursday.

    (Reporting by James Topham; Editing by Lincoln Feast)

    Another recent post from another Japanese company Toshiba ………….

    Japan finds alternative to China’s rare earth metal stranglehold —
    Ferrite is might

    Read more: http://www.techeye.net/science…..z1A7vEow7f

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  22. By armchair261 on January 5, 2011 at 12:47 am

    Sheesh, who knows what Putin is doing on the NYMEX?

    I’ve wondered the same thing about airline and refining CEO’s, and also the leaders of energy importing nations. Or are only suppliers allowed to game markets?

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  23. By Benny BND Cole on January 5, 2011 at 7:52 pm

    Armchair-
    Unfortunately or otherwise, Western democracies do not have sovereign wealth funds that can be covertly used to manipulate the NYMEX or other commodities exchanges.

    Oil exporting nations are largely thug states. Russia was recently labeled “a Mafia state” by a Spanish diplomat. The throne of Saudi Arabia is not accountable to a Government Accounting Office.

    So, we have a Putin or Abdullah with access to tens of billions of dollars, and a desire to game prices higher. Airlines do not have the resources to combat that (besides, they can hedge).

    But let’s answer the question: Why would a Putin not try to game NYMEX prices higher? Um, I see not reason why he would not try.

    Okay, we can assume he is trying. It would be in his, and Russia’s ,national interest to do so. He would be a poor leader and patriot if he did not do so.

    Okay, we can assume Putin has nearly unlimited resources and is gaming the NYMEX, Now, which way is he gaming the NYMEX?

    Two guesses.

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  24. By armchair261 on January 6, 2011 at 12:54 am

    Benny,

    Although I can’t prove that manipulation isn’t significantly boosting the price of oil, I do have several serious problems with your interpretation. Most my problem has to do with the fact that you attempt to explain a variable (oil price) with a constant (supplier greed). I think that the wild volatility in the past decade has to mean that other forces are far more powerful in price setting, unless we assume fluctuations in the levels of supplier greed.

    Specifically….

    1. OIl prices were relatively flat between 1981 and 2002. Crude oil futures trading began in 1983. Was it not also in the interests of the Russians and Saudis to game the NYMEX then? Then why didn’t they? And why did we not see a price spike following the introduction of futures trading? Instead, we saw prices continue to fall until early 1986.

    2. Putin came into office in 1999. We didn’t see any significant oil price volatility really until 2004 to 2005. Why not? We could conclude that he had either not thought of the scam yet, or that he tried but was not successful, or that highly specialized conditions are required for gaming to work.

    3. Many commodities peaked in price during the summer of 2008, and many are going up now along with oil. So if you believe oil volatility is primarily due to producer mischief, then what forces do you think move beef, sugar, corn, coffee, cotton, wool, rubber, tin, and lumber markets in harmony with Putin’s oil machinations? All have behaved similarly to oil in the past few years. Do we explain all significant commodity price movements to gaming, or do we say, well, THOSE commodities can change drastically in short time periods, but oil has to be different?

    4. You imply that gaming markets is practically a risk free venture. But I wonder whether Russia was spending billions gaming markets in 1998, or in late 2008. If so, they failed miserably. Spending billions on trying to influence commodity markets is not a slam dunk: ask the Hunt brothers about their foray into silver, a much smaller market. Clearly there are markets forces far more powerful than any influence the Russians might have, or we wouldn’t have seen oil fall by 75% over 6 months n 2008/2009.

    5. How much does it cost to game markets? You imply that it costs billions, or at least an amount beyond the reach of, say, the Japanese, Taiwanese, Chinese, German, French, Italian, or Indian governments, all net importers. I’m not so sure.

    6. Russia is the world’s leading nickel supplier. During the commodity boom of 2008, nickel was dropping, and selling below its 2004 prices. The average nickel price in 2007 was $16.83/lb, while in 2008 it was $9.57/lb, a fall of 43%. The figures for WTI oil were $72.34 and $99.67, respectively, and increase of 38%. Now, for a nation that can significantly influence commodity prices, and that has a greater market share in nickel than it does in oil, this seems like a very strange result indeed.

    Okay, we can assume he is trying. It would be in his, and Russia’s, national interest to do so.

    Perhaps. But to me, the observations above imply that he hasn’t been particularly successful, and/or consistent in his gaming over the years. Or at least, no more successful than many other commodity gamers. And aligned motives are not the same thing as proof of guilt, lest we attribute the collapse in oil prices in 2008 to an airline cabal.

    Now, which way is he gaming the NYMEX?

    Do you mean right now? Or in late 2008, when oil was falling? Or during his first 4 years in office, when oil was essentially flat?

    History has plenty of examples of price bubbles. I don’t think it’s necessary to call upon manipulation to explain them. I believe that human nature and the herd instinct can adequately explain the oil bubble, as well as bubbles in housing, tulips, and dotcom stocks.

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  25. By Kit P on January 6, 2011 at 1:37 pm

    Safety and the environment are important factors in producing energy in the US.  While I often bash China because they have lower standards, this was in the news: 

    Last year, 593 people were killed in 135 gas-related mining accidents nationwide, down 21.5 percent and 14 percent year-on-year.

    http://www.chinadaily.com.cn/c…..800620.htm

     

    While still 10 times higher than the US, it is still a huge improvement.

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  26. By Optimist on January 6, 2011 at 2:18 pm

    Benny, Benny, Benny. You start out so well, but you just can’t stay with what makes sense, can you?

    I think 200kbd is too small to impact world oil markets.

    Bingo! 200 kbd is 1% of US oil consumption or 0.25% of global oil production. The difference between $4/gal and $3.99, at best. And, no Wendell, the markets are not that perfectly balanced.

    Prices are rising on speculation; there appears to be a lot of supply.

    Wow, two baseless assertions in one sentence! Where have the mighty speculators been for the last two years, Benny? Spending their 2008 profits? After completely losing control of oil in late 2008, why are they now getting it back? And what do you know, that makes you so confident that there’s a lot of supply? Oh, and what difference does it make how many times a barrel is traded before it gets to the final user? Each transaction needs a willing buyer and a willing seller.

    Also, note that iron ore (no speculators allowed) followed the exact same price trend as crude in 2008. Coincidence?

    On oil, the global picture rests in hands of unreliable thug states, some with huge supplies of fossil fuel. Venezuela, Iraq, Iran, Libya, Mexico, Nigeria, Uganda, Russia …with free markets in thug states, we could have 40 mbd in new production in 10 years. If only, if only….

    You’re not making the key connection, are you? The “blessing” of natural resources tend to be a corrupting influence: Why is Africa poor, while Japan is rich? Note that even in the good old US of A it was impossible to leave oil prices to the free market: the Texas Railroad Commission was allowed to control oil prices, to smooth things over for both suppliers and buyers (we were toldWink). It’s a bit hypocritical to now wish for free oil markets, just because the ability to control prices has moved elsewhere.

    Nonetheless, it is true that the free market is the best protection we have against Peak Oil. Unfortunately, I don’t think prostitutians (US and elsewhere) will allow the free market to address the issue. Their interference will cause the real problems. As Richard Nixon did in the 70s.

    On a related topic: I don’t think Mr. Obama is trying to screw things up, it is just that clueless and incompetent prostitutians do this all the time. But with the banksters really, really screwing up, Mr. Obama was forced to take more action that usual, and hence the opportunity to screw up on a scale not seen since WWII.

    It would behoove Putin to engineer trades at $93 a barrel (he can take both sides on a digital trade, and thus lose nothing–but still spike the market higher, benefitting his real sales of oil).

    If it’s really that simple you should take that strategy to Wall Street, and retire.

    I expect a cleaner and more-prosperous future.

    Bingo!

    But let’s answer the question: Why would a Putin not try to game NYMEX prices higher? Um, I see not reason why he would not try.

    Sheesh, Benny. To illustrate how dumb this question is, just replace “Putin” with any other name you can think of, and see if you get a different answer. Some of those names have access to a lot more money than Putin.

    Careful, Sen. McCarthy, you are starting to see a Commie behind everything that happens everywhere.

    “could someone confirm an estimate of 90% of the worlds conflicts being relatable to energy ?”

     To the ontrary, zero is the current number of conflicts over energy.

    Can’t say I often agree with your sentiments, Kit, but you sure nailed that one. With a reference to back it up! Nice job!

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  27. By Stephen on January 8, 2011 at 8:00 pm

    Hello Ben,
    I have been looking at your site and I am pretty impressed. This seems like a very solid source on energy. I am writing because I am curious about switchgrass ethanol and even sugar ethanol as opposed to corn ethanol. While the latter appears to be a failure unless oil’s price went unbelieveably up, do you know if the two former are viable? I found this article: http://www.scientificamerican……-than-corn . I appreciate any time you give me.

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  28. By gail-tverberg on January 11, 2011 at 6:36 pm

    It seems to me that what seems to be an abundance of oil comes from its relatively high price. If prices were lower, there would be more job creation, and demand would be higher. The high prices now are a little scary–if they go higher, they could really send the economy into recession.

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