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Tilting at Windmills

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May 6, 2008
By: Kevin Drum

OIL, OIL, EVERYWHERE....The price of oil closed at $122 today. But where's it going next? According to this AP dispatch, one analyst thinks it's likely headed up to $200 while another thinks it's probably headed down to $80. Yawn. This reaction, however, grabbed my attention:

"It's not that the genie is out of the bottle — it's that 100 genies are out of the bottle," said Daniel Yergin, chairman of Cambridge Energy Research Associates. Normally known for optimistic forecasts of lowering oil prices, Mr. Yergin's firm now says the price could rise to $150 a barrel this year.

The world's diminished spare production capacity remains the strongest single catalyst for high prices, Mr. Yergin says. The world's safety cushion — the amount of readily available oil that could be pumped in a moment of crisis — is now around two million barrels a day, according to most estimates. That's just 2.3% of daily demand, and nearly all of the safety cushion is in one country, Saudi Arabia. Everyone else is pretty much pumping all they can, which makes the world vulnerable to political or other shocks.

Saying Daniel Yergin is an optimist is like saying Chris Matthews is annoying. Yergin basically thinks peak oil is Luddite crankery and that new technology will allow us to continue increasing production for at least the next several decades. He's the Pollyanna of the oil patch.

Now, I'm sure he'd say that his current pessimism is based not on a fundamental reevaluation of recoverable reserves, but instead on "aboveground" issues: political instability, terrorism, lack of investment, and so forth. Still, if even Daniel Yergin thinks oil prices are headed upward, it's a pretty good guess that oil prices are headed upward.

Kevin Drum 11:16 PM Permalink | Trackbacks | Comments (49)

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Comments

As long as no homos get married, who cares?

Posted by: craigie on May 6, 2008 at 11:21 PM | PERMALINK

Yawn.

Posted by: Yawn on May 6, 2008 at 11:37 PM | PERMALINK

Someone pointed out to me a recent newspaper photo (AP?) of a fancy or fancy-ish suburban neighborhood in Los Angeles where there starting up the neighborhood oil wells again. The photo shows your typical suburban builder-designed house, not quite a McMansion, next door to an oil well, and with a oil-guzzling SUV in the front drive. HILARIOUS!!

Posted by: Anon on May 6, 2008 at 11:40 PM | PERMALINK

Why is nobody talking about the 50 billion barrels found in Brazil. deep sea but soon on line. How about the estimated 300-500 billion barrels in North Dakota/Montana shale? At current U.S.consumption that would last almost 100 years.I am all for moving to green tech., but it seems that the high price is all from speculation/greed. Look it up, we are not that close to peaking as we are told

Posted by: chgo mike on May 6, 2008 at 11:41 PM | PERMALINK

AN oil-guzzling SUV. I wish there were an editing widget here.

Posted by: Anon on May 6, 2008 at 11:42 PM | PERMALINK

At current U.S.consumption that would last almost 100 years.

Even if that were real, I don't think very much would be left alive after another 100 years of burning everything in sight. We're not just running out of things to burn, we're running out of places to put the results of burning it.

Posted by: on May 6, 2008 at 11:52 PM | PERMALINK

Kevin,

The econ forecasts I get almost uniformly call for slowly falling oil prices. There's some internal consistency problems in "everyone is pumping flat out!" and "the people with the oil (i.e., the ones who know the true state of the oil market) think oil will only keep going up in price". Imagine you have some stock of bangles, that you can store buried in your backyard for free. You can invest money in non-bangles and earn x% per year. Otherwise your source of income is bangle sales. If you think the price of bangles will double next year while your outside return is 5%, why would you go all out digging up your spare bangles to sell? You'd just keep the bangles in your backyard.

The same story, of course, goes for oil. Saudi Arabia and Venezuela and Exxon and all the rest aren't stupid - if they thought the long-run trend for oil was rapid price rise, they wouldn't sell you any at all, let alone pump full out. A much more consistent story is that commodity prices are notoriously bubblicious, and the real price of oil was at a similar level 30 years ago before falling 90% in real terms to $10/barrel in 1999. If Saudi Arabia thinks oil prices will *fall*, you would expect inventories to be low and plants to be producing full out.

This is a simplified story, but worth thinking about.

Posted by: cure on May 6, 2008 at 11:52 PM | PERMALINK

Sure, but at least the guys with their fingers on that last little 2.3% are our wonderful friends and allies in the War on Terror:

www.asecondlookatthesaudis.com

Posted by: Bill in Chicago on May 6, 2008 at 11:56 PM | PERMALINK

"Why is nobody talking about the 50 billion barrels found in Brazil. deep sea but soon on line. How about the estimated 300-500 billion barrels in North Dakota/Montana shale? "

Exactly. And what about the methane on Titan? There's enough natural gas there to last us a trillion years!

"I am all for moving to green tech., but it seems that the high price is all from speculation/greed."

Bullseye once again. In fact, chgo mike, since you are so sure this price is not based on reality, how about you make some easy money by buying and selling the appropriate options?

Posted by: Maynard Handley on May 7, 2008 at 12:14 AM | PERMALINK

Dagnabit! Mules and buggy whips and oxen to pull the Hummers I tells ya. Goshdarnit!

Posted by: R.L. on May 7, 2008 at 12:23 AM | PERMALINK

$150 barrel ~ $5.00 gal.
$200 barrel ~ $6.50 gal.

Posted by: Bush Lover on May 7, 2008 at 12:23 AM | PERMALINK

Maybe just using less?

Posted by: Mike Meyer on May 7, 2008 at 12:25 AM | PERMALINK

"How about the estimated 300-500 billion barrels in North Dakota/Montana shale?"

If you believe in it, invest in it. The oil shale scam was pulled two decades ago and some people obviously forgot that fact. But go for it, if you want. But plan on losing all your money. Until the laws of thermodynamics are repealed, it won't work. We'd be lucky just to break energy parity in the extraction process. Without massive government subsidies, it won't be profitable. And for the rest of us, it will never be profitable.

Posted by: fostert on May 7, 2008 at 12:26 AM | PERMALINK

Suburban oil rig?

How about an oil rig smack-dab in the middle of Beverly-freakin'-Hills' High School grounds?

Painted with a student-happy bright flowery mural, of course.

http://www.salamworldwide.com/coverstory7th.html
http://cache.viewimages.com/xc/1980559.jpg?v=1&c=ViewImages&k=2&d=17A4AD9FDB9CF1939057D9939C83F1068F936C97DEA683ED5A5397277B4DC33E

Posted by: anonymous on May 7, 2008 at 12:30 AM | PERMALINK

"two decades ago" Oops, that was about three decades ago. I guess I keep forgetting how old I am. Maybe that's why I'm surprised people can't remember things I've lived.

Posted by: fostert on May 7, 2008 at 12:30 AM | PERMALINK

The commodities bubble will be bursting by Christmas, that will tell us how much speculators have driven up the price of oil. If Mr. Yergin is generally an optimist about oil reserves, then speculation's effects on the market have affected his point of view, which is what bubbles do. To me that means a dramatic spike in oil will occur, then a 30-50% drop. Barrel tops out at $160 and falls to $80 six months later. I doubt that will be good news, because the state of the economy will be quite bad.

Posted by: Brojo on May 7, 2008 at 12:39 AM | PERMALINK

What a drag.

Posted by: What a drag on May 7, 2008 at 12:39 AM | PERMALINK

This is real insight: as of just a few months ago, Yergin was saying prices would fall, probably to about the $70 a barrel level. If a diehard optimist like Yergin has thrown in the towel, that means anything could happen.

Look at it this way: Who thought in 2004 that oil prices could be at $120 a barrel before the election? No one. Not even Paul Krugman. Demand is outstripping supply. We all know what that means.

Posted by: Kit Stolz on May 7, 2008 at 12:45 AM | PERMALINK

Do you all remember the last time the pump price shot up this fast and stayed there for awhile?
What's that putrid stench wafting on the breeze?
Stagflation here we come.

Posted by: joe on May 7, 2008 at 12:46 AM | PERMALINK

We need a gas tax holiday. That'll fix everything.

Posted by: josef on May 7, 2008 at 12:47 AM | PERMALINK

"We all know what that means."

We should. But here's some help: The population of India is about what the population of Europe, North America and South America is combined. They want cars, but mostly don't have them yet. The newly emerged middle class of India alone is a lager population than America. And Tata motors has now provided them with a really cheap car (about $2900). And it's not very fuel efficient (28 mpg). Think they'll buy some gas? Oh, and there's China, which will buy even more cars and gas. The newly emerging drivers of the world will not drive as much as us, but there are eight times as many of them. Think that might make a difference?

Posted by: fostert on May 7, 2008 at 12:57 AM | PERMALINK

High petroleum prices have driven food costs up 50% in the Middle East on people already living on the edge PLUS the Rapture Index is at 169 which is near its record high.
http://www.raptureready.com/rap2.html

You better watch out, it's coming!

Posted by: Don Bacon on May 7, 2008 at 1:11 AM | PERMALINK

I generally agree with Brojo. There is a huge speculative element to commodities that coincidentally kicked in big time last summer when our "financial crisis" started. Mortgage-backed securities aren't the hottest thing in town anymore, banks pay shit for saving money, all that global cash has got to flow somewhere, so now it is hedge fund sponsored commodity speculation. There are "rumors" of needing to start hiking interest rates to head off inflation. When the commodities bubble busts, let's see where oil stands vis a vis the rest.

Posted by: Doc at the Radar Station on May 7, 2008 at 1:15 AM | PERMALINK

Please please no VP offer to Hillary. Do you all realize this would make the 7th presidential election in a row with at least one Bush or Clinton on one or both of the national tickets? I am so sick of seeing either name on my presidential ballot. Can we please give it a rest?

Posted by: jimBOB on May 7, 2008 at 1:22 AM | PERMALINK

Oops, wrong thread. Sorry all.

Posted by: jimBOB on May 7, 2008 at 1:23 AM | PERMALINK

How about the estimated 300-500 billion barrels in North Dakota/Montana shale?

The USGS report issued April 10, 2008 has the technically recoverable oil in the Bakken formation at 3 billion to 4.3 billion barrels. That's about how much we (the US) use every 150 to 200 days. Throwing this into the mix over a period of, say, 25 years would lessen our foreign imports by less than 5%.

And if the price of oil does abate, the amount of economically recoverable oil will decrease along with the price until some steady state is reached.

Posted by: Dave Howard on May 7, 2008 at 1:42 AM | PERMALINK

Chcgo Mike is almost certainly talking about the Bakken rather than a number of other oil shale plays. The good news is the Bakken is real. The bad news is wells arent cheap (USD4-6m a throw), they do decline fast and his estimates of total recoverable rely on some ... faith based ... assumptions.

For a start, the USGS is saying 3.65 ... but if you're interested, hit

http://bakkenshale.blogspot.com

And as for the new Brazillian find ... much as Petronas kicks several kinds of ass in deepwater, there are ummm technical difficulties. Mostly to do with 'how hot is it down there anyway ?'.

If it's too hot, your stuff tries to turn from a solid to a liquid, or from a liquid to a gas. And that includes any drill bits, production pipe and long-chain hydrocarbons.

So dont go counting no chickens, OK ?

Ian Whitchurch

Posted by: Ian Whitchurch on May 7, 2008 at 1:44 AM | PERMALINK

Oil price isn't a big problem since people will pay anything for gas. When the shortages come...

Posted by: Luther on May 7, 2008 at 1:47 AM | PERMALINK

This I think gets us closer to the real reason of the war.

The problem isn't who has the oil - who ever has it will sell it and they can only sell it at market prices.

But when the equilibrium spikes, resources flow to those that have it. Rethugs saw the price spike coming and didn't want Saddam and Iran and Putin to be getting those kinds of resources in kind. With Putin, Bush looked into his soul and said, okay, you are alright. With Saddam and Iran, he lumped them to gether in the axis of evil and away we go.

It seems we should have taken the money we spent in Iraq and built nuclear power plants and invested in better battery technology (capacitors). At that point what goes on in the Middle East doesn't mean squat.

Posted by: Bubbles on May 7, 2008 at 3:21 AM | PERMALINK

As Yergin has been incredibly consistantly wrong, I guess it is time to sell those oil options.

cure has an interesting insight, but the truth is nobody knows. While opinions differ people still probably reckon a bird in the hand. The Saudi's reckon they are making enough - they can wait. But if I was an oil company - I wouldn't count on my "ownership" of a particular reserve necessarily being reliable in the long term. They may well find massive increases in royalties coming their way.

Posted by: reason on May 7, 2008 at 3:30 AM | PERMALINK

In response to Cure post at 11:52:

If you go back and read the many articles here at W.M., you will see that there is a definite limit to how fast oil can be pumped out of any given field. Try to pump faster and it damages the field.

For the most part, M.E. oilfields are being pumped at or near capacity, that is why the Yergin says there is only about 2 million barrrels of spare capacity -- about 2.3% of daily demand.

If oil providers pumped less now, it might give them a little more capacity few years down the road when the fields would otherwise be going into decline, but it won't make much if any difference in how much they could pump if prices spike in the next year or two.

Posted by: tanstaafl on May 7, 2008 at 4:10 AM | PERMALINK

As soon as oil production begins to decline this year, we will see oil hit $500 a barrel soon after, according to government and scientific studies, reviewed here: http://www.peakoilassociates.com/POAnalysis.html
It's called Peak Oil, and it is explained in the report cited here. Cheers, Cliff Wirth

Posted by: Clifford J. Wirth on May 7, 2008 at 7:34 AM | PERMALINK

"Demand is outstripping supply."

Uh, no, not in the US. Gasoline demand is down, inventories are up, and demand is expected to drop more.

Odd situation.

Posted by: Bob M on May 7, 2008 at 9:13 AM | PERMALINK

chgo mike,

I sincerely hope if you have a tech job at Ameritech you use reasoning skills instead of faith.

Here is a clue - "oil" is not all equal. The best is "sweet crude" that is the easiest to get at. If you believe the movies it will spurt out of the well and practically jump right into the car.

If you pin your hopes on low quality oil that is hard to get at and takes a LOT of water and energy to refine then you are fooling yourself.

Bob M,

The US /= the globe. Global demand for oil is up and will rise geometrically unless something constrains it. I would hope by now nearly everyone has learned that the China and India demand for oil shows NO signs of peaking anytime soon. At about $2K a Tata the number of autos alone in China and India will skyrocket.

The price of oil is up sixfold and people still deny we are at peak oil. Yowsa. Thank goodness we are only experiencing the beginning with oil speculation and the real peak hasn't hit yet.

Yup. Global demand skyrocketing, existing fields declining, new fields of sweet crude non-existent, but this is all just a speculation bubble.

Good luck telling that to your local gas station when you decline to pay the new price. I know, maybe if you vote for the right guy this will all go away.

Posted by: Tripp on May 7, 2008 at 9:59 AM | PERMALINK

Tripp, they voted for those guys, who could get the oil away from those brown skinned people, 2 elections ago.

Posted by: slanted tom on May 7, 2008 at 10:15 AM | PERMALINK

...one analyst thinks it's likely headed up to $200

Like manufacturing multiple contusions to the American body of economic woe. I don’t know if the patient is going to die but damn, it sure doesn’t look too good.

It’s coming folks – and there is no way this going end pretty.

At $ 150 a barrel, we’re going to be screaming to get out of this war by November. Bush and Cheney don't give a damn about this country, just their good buds, and McCain - just another lover of mud, or that black, smelly ooze supporter. Expect alot more talk about how we can't let that oil fall into the hands of terrorist. The Repugs Parties dying warning.

Peak oil, peak oil, peak oil. It'll go down heavy and when and if we emerge, one can only hope that Exxon/Mobil, Chevon and BP are not around anymore.

One can only hope, pray, whatever.


Posted by: me-again on May 7, 2008 at 10:23 AM | PERMALINK

Chgo Mike: Cuz the Brazilian oil WILL NOT be online soon. Have you actually read beyond the headline on any of the stories about it?

Cure: You're reading the wrong sources. Jim Jubak of MSN predicted $180/bbl a month ago, as I blogged at my blog.

Kevin, you're too polite to Yergin, who is in the pocket of Big Oil.

But you're right that if he's become a bear, for whatever reason, this is serious.

And, "structural/geopolitical" issues don't have that much power unless production/Peak Oil issues lie behind them.

I recommend The Oil Drum, www.theoildrum.com, as an excellent Peak Oil blog.

Posted by: SocraticGadfly on May 7, 2008 at 10:25 AM | PERMALINK

I mean, $ 200.00 a barrel is alot of speculation to lose when it goes belly up. AND it will go belly up.

It’s going to have a massive ripple effect when it goes too.

Posted by: me-again on May 7, 2008 at 10:29 AM | PERMALINK

Another note... even Big Oil or Big Gas can be stupid at times.

At current natural gas prices, supposedly the majority of wells in the Barnett Shale here in Texas are price-losers, but get drilled anyway.

Posted by: SocraticGadfly on May 7, 2008 at 10:30 AM | PERMALINK

You're reading the wrong sources. Jim Jubak of MSN predicted $180/bbl a month ago, as I blogged at my blog.
Kevin, you're too polite to Yergin, who is in the pocket of Big Oil.

Wrong again, sir. Oil will top out at $125 and sink like a stone this summer. Look for $89 a barrel by Labor Day and $80 a barrel by Election Day.

Posted by: Norman Rogers on May 7, 2008 at 10:58 AM | PERMALINK

Norman,

Hey, welcome!

Look for $89 a barrel by Labor Day and $80 a barrel by Election Day.

Most excellent! Where are you offering the futures contracts at these prices? Share the wealth. You can help out an old buddy, right? You know I'd do the same for you.

Oh, and am I banned from your blog? I made a comment there but if you don't want on your blog me there is no reason to ban me. Simply ask that I not comment and I will honor that.

But I hope to get back on your good side. Is it something I've done? How are your darling children? Still doing well I hope.

Posted by: Tripp on May 7, 2008 at 11:53 AM | PERMALINK

Norman,

Some people asked me what I meant.

Let's get a standard contract where you agree to sell me, on Labor day of this year, say a million barrels of sweet crude at $89 a barrel. Actually, since you are an old colleague and everyone deserves to make some money let's make it an even $90 a barrel. That will be an easy $1 million or more for you as a nice little Labor's day present.

What do you say - let's have my people talk to your people.

Posted by: Tripp on May 7, 2008 at 12:18 PM | PERMALINK

If Kudlow says it's going to turn around, then it's going to turn around, sir.

As for my blog--a hateful pair known here under the handles of "NSA Mole" and "Thersites" went over to my blog and started hurling invective and began bringing outrageously homophobic comments over to THIS blog.

What is it with you liberals and your desire to try to put on airs about being enlightened and smart? You don't have the talent to pull it off.

Posted by: Norman Rogers on May 7, 2008 at 1:01 PM | PERMALINK

Oil, Gold & the Greenback Oil is going down. Gold is going down. The dollar is going to strengthen because the Fed is now out of the way of the dollar. And the dollar will find its natural level, which is a whole lot higher from here…The market forces are starting to assert themselves. Gold, remember, is down from $1030 dollars to well below $870. That is a big move, and oil is going to follow it down very soon…I think the next step is the European Central Bank cuts their interest rates—then we’re going to see the dollar do very well.

So, who do I listen to? Some nut with a blog or Larry Kudlow, my old friend from Wall Street?

I report. I decide. And I don't take any guff from wannabes and naysayers and hate merchants.

Posted by: Norman Rogers on May 7, 2008 at 1:22 PM | PERMALINK

Norman... if you've got $80/bbl oil you think is headed your way, can I offer you my cut-rate prices on Arizona swampland?

Posted by: SocraticGadfly on May 7, 2008 at 3:58 PM | PERMALINK

SocraticGadfly,

Gosh darn it be quiet! You'll spook the fish.

Norman, remember, I offered the first contract. Buddy old pal. You know me - the born again Republican? Now watch me cheat on my wife.

Posted by: Tripp on May 7, 2008 at 4:02 PM | PERMALINK

Norman,

What is it with you liberals and your desire to try to put on airs about being enlightened and smart? You don't have the talent to pull it off.

From your mouth to God's ear. I won't even use the 'L' word anymore. It is too vulgar. Oh maybe under extreme circumstances, when nothing else will do, and I've earned it, like when I hit my thumb with a hammer, if I hammered, which I don't. I have people for that.

Anywho, what is your blog address again? I am so glad we are on good terms. I'd like to direct my lovely daughters Bitsy and Muff to your blog. I am afraid they've fallen into a bad crowd at college (even at Brown University! What is the world coming to?).

My daughters think Daddy is a crank and I'd like to have them see your blog and have them come to their senses.

I thank you in anticipation Sir!

Posted by: Tripp on May 7, 2008 at 4:25 PM | PERMALINK

Well Norm,
Here's to hoping you're right, $80/bbl and I'm wrong $145/bbl, end of summer.

Posted by: sheerahkahn on May 7, 2008 at 6:58 PM | PERMALINK

The printed copy New York Times that appeared in my driveway Tuesday morning had a subtle but important difference. The last sentence was separated and moved to a location three paragraphs earlier. It lost the connection: "Why is this oil crisis different from all other oil crises?"

Further, the Times story stated, "Global oil consumption is still expected to increase by 1.4 million barrels a day this year, driven by demand in China and the Middle East." According to the Energy Information Agency, world oil production is now down a million barrels per day from the 2005 peak www.eia.doe.gov/ipm/t11d.xls (MS Excel spreadsheet). Where does Mouawad think he's going to find an additional 1.4 million daily barrels?

http://www.princeton.edu/hubbert/current-events-08-03.html

That's the blog of Ken Deffeyes, at one time probably the chief geologist in the world. Ignore him at your peril, as they say. Or you can believe the Magic Capitalists and the hucksters.

Posted by: Jeffrey Davis on May 8, 2008 at 10:37 AM | PERMALINK
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