The oil bubble is leaking

I told you so!  Ah, that's not very mature.  Yes, but it feels sooo good.

Down how much last week?  What's that again?  I couldn't hear you...

It is true that there is a severe supply and demand problem in crude oil supply, but it is a long term problem.  As is often the case, the time-scape of this problem is one of the most important parts of it.  There clearly is not enough oil in the ground for humanity to continue using it in the ways that we have been doing.  Growing demand in newly industrialized places like China and India exacerbates that problem.  The solution to the supply problem in energy lies in new reliance on different ways to produce electricity.  Cheap electricity would enable short distance drivers to use electric cars and could eliminate the absurd reliance on fuel oil to heat buildings in the deep north.  That would produce a very different situation.  Al Gore is calling for windmills, etc., but the real solution (as he says) is nuclear power.  The Greenies will have to "suck it up" and accept the idea.  Hey, the French get most of their electricity from nuclear power.  The Francophobe crowd should take that as a challenge.

The short term problem is not the same.  This is and has been a bubble generated in the ways that have been discussed in previous articles.  Short term investment in the futures and spot markets have driven prices to levels unrelated to present supply and demand.  The markets have recently been a fantasy world without real limits for movement on the up side.

The bells are now tolling for that fantasy.  The smart people who stand to lose from this festival of childish greed have been kicking the psychological props out from under the process of finding bigger and bigger fools.

You don't think so?  Good.  It will be amusing to see how much money is lost in your disillusionment.

Sometime in the next few months the price per barrel will fall below 100/barrel.  It will be interesting to see how far it falls below that level...  pl

http://en.wikipedia.org/wiki/Gordon_Gecko

Comments

[Mad Dogs]

Jiminy crickets! Rub it in, why doncha?

If I had a nickel for every bet I've lost...hmmmm...I'd be broke. *g*

I can't honestly say that I'm hoping for more bad news (war with Iran, famine, plague, pestilence, Yankees win the World Series, etc.) to increase the odds that my guess of $200 per barrel by the end of the year will come true, but 'cause of gas prices, I could use the money. *g*

[Curious]

69% of oil import is used for transportation, 1% for electric generation, and 23% industrial

http://lugar.senate.gov/graphics/energy/graphs/US_oil_use_by_sector.gif
http://www.eia.doe.gov/basics/quickoil.html

US electricity main source are pretty much "coal", gas followed by hydro, then nuclear. (it's all pretty eisenhower-esque. We are nowhere near green/super advance technology.)

http://upload.wikimedia.org/wikipedia/commons/thumb/5/51/Sources_of_Electricity_in_the_US_2005_New.png/800px-Sources_of_Electricity_in_the_US_2005_New.png

more detail electricity generation breakdown.
http://www.dropofoil.com/us_elec_gen.gif

The main problem with our current electricity generation pattern. It's using massive coal. Producing gigantic amount of CO2, a greenhouse gas.

I don't know what the solution is. (but going nuclear all the way is problematic for sure. I suspect it will be a "mix" solution. No single magic bullet. diversification of source, using technology to replace wasteful appliances, changing house design, city planning, etc)

---------

anyway in term of oil consumption drive. It's the suburban commuting in large SUV and the Iraq war (diesel/jet). That's what I am pointing finger at.

On top of that China and India. They have money to burn. So I think US rural and fringe city are about to change drastically.

[Curious]

some of my fav subject when it come to oil use.

- The japanese is working hard to create next generation car battery. And they are ahead by 3-5 yrs. (about one generation in term of car design)

Battery technology is boring, hard to do, and not sexy. But like efficient small engine, it will kill the big car companies.

The japanese are keeping their advance battery manufacturing all in japan. (those disposable rechargeable batteries you buy from walmart? they are made in japan. )

http://news.yahoo.com/s/nm/20080719/tc_nm/autos_battery_dc_1

Nissan Motor Co (7201.T), Matsushita Electric Industrial Co (6752.T) and other Japanese companies will work together to set up common standards for lithium-ion batteries being developed to power next-generation cars, the Nikkei business daily said on Saturday.

Under the lead of an organization affiliated with the Ministry of Economy, Trade and Industry, nine car and motorcycle makers, six battery makers and utility Tokyo Electric Power Co (9501.T) will come up with a draft of the standards covering testing and charging methods, vehicle safety and other areas

--

second. the reason industry pushing nuclear: It's profitable for utility companies.

Look around the house. lightbulb, old TV, fridge, aircon, micro leaks, etc. Then look at solar panels tied to grid.

Most houses can reduce electricity consumption by 10-30% easy, without changing house design and minimal lifestyle change.

the problem with encouraging such behavior: what happen if giant utility company suddenly lost 10-30% revenue from electricity sale?

It'll be pretty stupid for electricity company to push the idea of advance appliances or smarter way to use electricity.

[jon]

Col. Lang,

Oil prices have declined because the US and Iran have decided to mute their saber rattling momentarily. The price of oil is related to its value for what it can provide, rather than the costs of extraction and refining. A quadrupling of price in the US ha led to a five percent decline in driving, and a lot of bitching but not much else. We have not yet approached the theoretical ceiling for oil pricing, and I hope we never do.

When oil drops below $80/bbl I might believe that we're out of the woods.

Couldn't agree more than we need to lessen dependence on oil and other unsustainable fossil fuels, and the need to have diverse energy sources. Nuclear energy falls within the realm of fossil fuels. It is the most expensive way to produce electricity, there would be no private industry if not for enormous government indemnities and subsidies, there is no solution for waste storage, and it doesn't even wind up a net positive for energy production when all of the inputs have been properly factored.

Nuclear power as a primary vector for weapons proliferation should be a priority concern for readers of this site. Since 1960, no country has built nuclear weapons without first having a civilian nuclear energy program. As nuclear energy programs have all been derived from weapons work. this should be no surprise. Despite the work of the IAEA, it is a demonstrated fact that determined countries can divert materials to weapons programs, or create weapons programs in the shadow of legitimate activities.

You might have noticed a number of countries deciding to develop nuclear reactors in the past year. These countries have been observing North Korea in its contrast to Iran and Iraq. They are hedging more than their energy future.

At best there is a hundred year supply or uranium to be mined. To follow France's example is to concentrate on the production and reprocessing of Plutonium for use in breeder reactors. There is no better vector for proliferation. This week France has admitted to two leaks from one reactor. And a while back a disgruntled employee decided to retaliate against a manager, by placing some highly radioactive metal under his boss' car seat.

If we placed the resources now devoted to nuclear power into a 'Manhattan Project' to produce and install renewable energy, we would rapidly reverse our present reliance on the Middle East, and be able to make better, more considered decisions about our foreign policy.

[b]

I don't think this is over:

How much was the high oil price part of Iran's strategy to bring the U.S. to the table?

In April/May Iran rented 10 tankers for storage. That took oil and transport capacity off the market.

July 3 oil hit $145. Then the Hersh piece about clandestine action against Iran came out (clandestine = no open war). Oil dropped $10 to $135. Three days later Iran launches rockets and delivers photoshopped picture (and unmanipulated movie) to better make the news. Oil jumped $10 to $145. Then the U.S. announced to take part in talks, oil dropped to $130.

The U.S. is over a barrel.

Iran can manipulate the oil price just by launching a few missiles and the U.S. has to negotiate because between credit crisis and oil shock the economy is really, really endangered.

Note that Israel also can influence the price by talking about war on Iran.

This whole game is not over yet. There will be crisis in the negotiations and minor provocations in the Gulf that will lift the price up again.

link

[William R. Cumming]

To live is to have hope! Your dreaming if you think the oil market is somehow the free market. NOCs (National Oil Companies) have been drugged into seeing that no real tailoff in prices from those currently in effect. No longer is oil elastic. Greed is necessity for many petrostates. Lower prices means instability. But good try PL. Hope your right.

[FDChief]

"Hey, the French get most of their electricity from nuclear power."

The French also generate power as a heavily regulated monopoly, and one of the most critical factors is that the French government forced their nuclear industry to standardize their reactors years ago. U.S. reactors have typically been one-off designs, meaning that practically every new plant is a beta-test. When it doesn't work, as it never did at the Trojan plant in Oregon, it's a mess.

I would agree tha nuclear is part of the solution, but probably only one part and that perhaps a relatively minor one.

One big problem is that our country has never taken energy policy seriousy enough to research the cost/benefit analysis. So none of us really know...

[Duncan Kinder]

Your argument is interesting, Col., but if I were maliciously intent upon proving you wrong, then I might be blowing up a pipeline in Nigeria about now.

[Will]

"Al Gore is calling for windmills, etc., but the real solution (as he says) is nuclear power. "

I don't think T. Boone Pickens (close enough to T-Bone isn't it?) and Al Gore would agree with that. Even though T-Bone bankrolled the swiftboaters, he is now redeeming himself.

See pickensplan.com

read the tammy haddad interview with T-Bone in the National Journal (Haddad is Arabic for Smith). Just google haddad pickens energy, it"ll come up. He agrees with Gore about windpower & photocells and getting electricity from renewable sources. he even recommend ed Gore for energy czar in an Obama Baby admin.

The only difference b/n T-Bone and the Gore Man is that Gore Man wants to go directly to the electric car whereas T-Bone wants to transition the cars to natural gas saying the successful battery is still too many years from now.

[Jonathan House]

Dear Pat,

It seems to me that your intuition is that the recent decline in the price of crude from about 145 to about 125 suggests something about the questions of "bubble" and/or "speculation" and/or the question of whether, how, and by how much the futures market affects the spot market or vice versa.

I am not sure what you are saying about any one of these "issues". So I don't know how what evidence would count as tending to disconfirm your intuition. For instance, if the spot price spends the next 6 month largely between $110 and $130 would that change your view in any way?

Jonathan

[JohnH]

I agree with earlier comments that relate the oil price drop to a reduction of tensions with Iran.

But what's interesting also is that the corporate media does not assign this as a reason for the drop. In fact, many articles don't assign any reason at all.
This is curious because financial editors compulsively assign reasons for any market movement, even if the reasons are nonsense - “the market was down because of profit-taking.”

Once again we're seeing the corporate media taking its familiar role as an embedded arm of the US government. Obviously they don't want people making the link between bellicosity and pain at the pump. Wars and warmongering are supposed to be cost free. And oil prices are supposed to have a life of their own, independent of threats against oil suppliers.

[Nevadan]

Has anyone else considered the timing? The domestic drilling order is signed by Bush and prices start dropping? While not the only reason, I wonder if we've had that particular gun to our head until oil companies could pressure legislation better accepted by the public.

[Farmer Don]

Col. Lang,
A month or so, you were complaining about how much work it took to run your blogg.
Now doesn't getting to write the above article make it a little more fun?

Your faithful reader

Farmer Don.

[Patrick Lang]

All

OK. On va voir. pl

[whynot]

Oil went from $20 to $45, but the fell back to $35. And all the oil bears crowed, "told you so". The soared all the way to $75. But then oil fell from $75 to $50. And oil the bears crowed, "told you so". Then, it went back to $75 and up to $100. But then, it fell back to $80, and all the oil bears crowed, "I told you so". And then it went back through $100 and all the to way $145. But fell back $125. And all the oil bears crowed, "I told you so". And the cycle continues unabated.

No markets go up or down in a straight line. They move up, and back and fill, and then slide forward and then back and fill. It's a process, and nothing has changed with oil. There is not enough supply to meet demand. Period, end of story. It is not the speculators, and anybody who thinks it is should try doing some research on the dynamics of commodities markets.

I've set it before, and I will repeat it over and over gain. If you want cheap oil, what you need is a global depression. Otherwise if you'd like the economy to display a sense of normalcy oil will continue to be 'expensive' When you turn a currency into trash, inflation is inevitable. The dollar will continue to fall long term, and the price of everything you need will continue to rise. Welcome to the world that Greenspan built.

[Cieran]

Colonel:

I agree that part of the price of oil in world markets is due to a commodity bubble. But this is a different issue:

Cheap electricity would enable short distance drivers to use electric cars and could eliminate the absurd reliance on fuel oil to heat buildings in the deep north. That would produce a very different situation. Al Gore is calling for windmills, etc., but the real solution (as he says) is nuclear power.

As others have pointed out here, without better battery technology (which has turned out to be a much more difficult technological problem than expected), electric cars cannot yet be deployed widely enough to replace much of our over-reliance on oil. And while cheap electricity has been promised many times (e.g., the AEC used to suggest we'd get rid of our electric meters because nuclear electricity would be essentially free), we haven't seen much yet in the way of realizing said promises.

Using electrical resistance heating to replace fuel oil for heating homes is tantamount to a crime against thermodynamics. All turbine-based electrical generation methods (e.g., coal, gas, nuclear) lose around 2/3 of their energy production to entropy in the process of making steam, so end-use efficiencies of electric home heat cannot generally exceed about 30% unless there is plenty of available hydroelectric capacity (and most good hydro sites have already been developed).

Natural gas is a better (i.e., safer, more efficient) replacement for fuel-oil heating, and especially with recent large-scale natural gas discoveries in the near northeastern region.

Current nuclear power plants provide only baseload electrical generating capacity, which is a very important part of the generation mix, but still only a part. We need peaking capacity provided by sources such as hydro or gas-fired plants to make the grid work, so as always, a mix of technologies is the best path.

Nuclear may prove to be an important part of that mix (it has some wonderful features, and some terrible flaws, and this country needs to pay a lot better attention to both), but that's not yet a given. For but one example, we need an informed open discussion about the Price-Anderson Act, because without it, there likely would be no nuclear power industry in the U.S.

Thus nuclear power currently requires large doses of big-government support to compete in the energy marketplace... so those who support a more constrained role for the federal government ought to have some serious second-thoughts about civilian nuclear power technologies.

[Will]

how much can you change a culture?

Japanese are the most insular, homogenous population, in the world (but curious, malleable, and willing to learn), yet a brazilian born Lebanese has been compared to MacArthur on his impact on Japanese culture in turning Nissan around. There's a pdf paper on the wiki biography comparing the two.

He has bet the farm on the electric battery (litium ion technology). Deciding to skip the hybrids altogether.

In Israel, Nissan has a joint project with an American Israeli company for electric cars modeled on the cell phone business plan.

subsidize the car, sell the minutes, er.. the miles.
Carlos Ghosan- CEO of Nissan and Renault.

It was delicious reading the comments section of the Israeli papers regarding the electric car disparaging dumb Ayrabs never having the initiative to undertake such a project. The ignoramouses never having a clue as to to Carlos' identity.

[Glen]

Pat,

The "Greed is Good" mantra pushed by Wall St and others has negatively impacted more than just the price of oil. It has been a large factor in the de-industrialization of America. Much of the industrial base investment/return cycles do not coincide with the quarterly earnings statements, but CEOs now manage their companies as if gains must be made at every quarter. Business, as a result, have all but given up on basic research and investment in people and equipment, and have slid down the slippery slope of the "quick and easy" money. America will become the country which cannot make anything of consequence within your and my life time while Wall St lauds it's ability to make money from thin air. We have heard various excuses about how we will become a service industry country or a country which sells it's information expertise, but this is really all so much fluff. What we will become is a second rate nation unable to effectively compete in the world market, and that is when life will get interesting as in that old Chinese curse, "May you live in interesting times".

Yours,

Glen

[David W.]

It is good news that the bubble is deflating, but I don't see it as vindication of the markets (I'll admit that i'm a bit confused about what your thesis is, PL). Wall Street has got what it wanted, floating in free cash, it can play its games, which appear to be more firmly rigged in the noveau business mantra of 'privatizing gains and socializing losses.'

The canard of invading Iraq for oil is that it was done for 'US'--ordinary American citizens might take that to mean We The People, but to the kleptocracy, 'us' means the Cheney secret energy task force. Look at the recent no-bid oil contracts handed out in Iraq to Shell, BP, Chevron, Total, ExxonMobil in very murky fashion--coincidence?

Again, we apparently see 'privatizing profits / socializing losses' in action, because, despite Wolfowitz's mendacious promise that Iraqi oil would help pay down the US bill for the war, that propaganda was promptly buried once the green light to invade was given.

Let us also acknowledge that the average price of gas in the US was $1.44/gallon on the day Bush Jr. took office.

Meanwhile, as Nevadan noted above, Big Oil is not content to simply rake it in, and is taking advantage of the political/economic situation by lobbying publicly to drill in ANWAR, and offshore in the Gulf of Mexico even though this will have no impact in the short-term, and limited impact on the future. (Again, don't forget that when they say 'our' oil, they aren't talking about you and me--we will pay the same at the pump whether it's 'our' oil, or Saudi Arabia's.)

In this light, it is almost touching how the 'little people' so earnestly talk about energy independence, when, in fact, it is against the short-term interests of Big Oil, Detroit, and all the other players who flood Washington with money. Obviously, this is money well spent for them, because it brings back large returns, such as the head of the EPA acting against his own (career) staff's recommendations and denying California's attempt to enforce stricter greeenhouse gas emissions. http://www.nytimes.com/2008/01/25/washington/25environ.html

In short, the current system is set up for profit, and is being protected by those who profit from it, and these are the forces that will oppose, co-opt or attempt to bury any alternative energy solutions, while pushing their own solutions, which are exemplified by the Orwellian 'clean coal' and oil sands. Any alternative energy solutions will come in spite of the best efforts of our goverment and their private paymasters' fervent opposition. As always, 'cui bono?' applies...

[Patrick Lang]

All

I would have thought my "thesis" was rather clear. A market like this is entirely the result of interaction among market makers in a kind of global craps game. In other words this market is no more real in its fundamentals than the Iraq information operation was. pl

[LJ]

By my thinking, oil will only get under $100 will be because there is a worldwide recession, which of course is entirely possible. As we approach peak oil, which in fact is a near-term event, oil will find its floor and start climb dramatically. My sources are over at http://www.theoildrum.com/>The Oil Drum.

[searp]

Over the last 3 years my modest investments in "energy", essentially oil, have done handsomely.

I am willing to take a temporary haircut for the reasons cited by LJ. This is not a bubble in the same way housing and the Internet were bubbles. Oil is an increasingly scarce commodity.

I disagree with COL Lang's assessment.

[endgameAK]

A three day decline in the oil futures market does not make a trend ... until it is sustained, it is a fluctuation.

I'm convinced that SOS Rice was able to prevail over the Neo-Cons and convince Little W to take tentative steps towards negotiating with Iran because of the near apocalyptic effects that the tensions were causing with the ever increasing fuel prices on the economy and any hopes Republicans may still cling to for this election cycle, particularly for retaining the White House.

Our national and economic security are at risk as long as Americans continue to empower and enrich oil producing states that wish us ill by relying on gasoline Petroleum should be replaced by other more benign energy sources for transportation. Oil should be produced for the myriad other products we depend on for modern life - plastics, fertilizers, medicines, etc. We can obtain all the oil we require for non-transport uses from North America, if we can change our habits and mindset.

I was born into a Can-Do America in 1943, with limitless possibilities, but then America became stogy ... with the election of Richard Nixon and the rise of modern Republicanism ... a Can't Do nation. The country became in thrall to a merger of government and corporations. We can't have modern, universal healthcare because of the opposition of Big Insurance. We can't have reasonably priced medicines because of Big Pharma. The Fourth Amendment to our Constitution is rescinded, surpassed by the needs of the Big Telecoms. A seismic shift away from oil to power transportation can't happen because Big Oil insists the only solution is more oil. The entire Federal government is complicit. And now, faced with near term catastrophe, the public's focus may be amenable to other Can-Do answers to the questions long ignored. The failure and discrediting of Republicanism offers hope that the future of America can be salvaged.

For the last three decades, the Free Market has been the Godhead in America. Of course, free market capitalism has a long history of excess and failure in American history. Cyclical depressions in the 19th Century, countered by the Progressive Era at the turn of the 20th century. (and no matter what McCain or David Brooks claim, T. R., was a Progressive, not a conservative.) The disaster of unfettered Capitalism of the 1920's gave us the ultimate bubble and a Great Depression. F.D.R. and the New Deal saved America, and Capitalism. And the Republicans have hated the regulation and institutions enacted by the New Deal ever since, working to discredit and dismantle the social contract with all Americans that the New Deal enshrined and Republicanism has successfully shredded. Unfettered Capitalism is a darwinian recipe for national decline. The last three decades of Republican ascendency have brought America low and headed lower .... unless this crisis/opportunity is seized Progressively, along with the Can-Do ideal and energy that has seen us through the worst of times past.

Al Gore is right. Hell, T. Boone Pickens is right (And I never thought to be able to think or say that.). Time for an epochal change in America. Time to eliminate the necessity of imported oil, the burning of oil and the exporting of Alaskan oil to the Far East. Their are vast sources of benign energy available to us And a Can-Do America can lead the way forward with new technologies and methods, or we can listen to the same self-serving naysayers that are heavily invested in preventing actual solutions, (unless they own those solutions.).

Free Market Capitalism is an American myth. The truth is clear. Capitalism is only for the masses, socialism is the rule for the elite and well fixed. Too Big To Fail; if there are profits, they are private and unregulated, but if there are losses due to reckless behavior, illegality or unadulterated greed, why, the crisis requires the American taxpayer to bail out the rich. That is a corporate kleptocracy and the way America is ruled, today. Prudent regulation of American capitalism may again save us and allow us to move forward. But the sad possibility remains that America may join the Soviet Union in "the dustbin of history," without substantial change to the status quo.

I fear that it may take another Depression to make possible the rejuvenation America needs .... A ReNew Deal and Can-Do Americanism. We may be at that event horizon now.

p.s....I sure do enjoy your blog, Col. Lang. Thanks.

[Mark Logan]

Careful Searp, I do not
think the Col. is just whistling Dixie here.

Are you aware that Congress
this week will almost certainly gut the
Commodity Futures Modernization Act of 2000?
AKA: "The Enron Loophole"

http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000

This act changed the rules
and is allowing the type of speculation that has profited you so handsomely.
It will shortly be gone.
Both parties are in complete agreement on this issue. The Republicans may be delaying the process a bit by attempting to tack offshore drilling on to the bill, but it's fate is all but assured.

Short term, it might be wise to avoid this market until this settles out.
Remember the gamblers maxim!

[LJ]

To follow up on my dissenting post above, I refer you to the Peak Oil Report from http://peakoilassociates.com/POAnalysis.html>Peak Oil Associates. Take your pick of either the http://peakoilassociates.com/PeakOilAnalysisOctober6-2007.doc>MS Word format or as a http://peakoilassociates.com/PeakOilAnalysisOctober6-2007.pdf>PDF.

In my view, it will take a severe recession to get the price of oil well under $100 for an extended period of time. What is going on the oil world is far bigger than speculation.