$100 Oil

[OwnerOfCalifornia]

carlislematthew, I also hope that eventually we’ll get over our nuclear phobia and start building oodles of nuclear plants. This is one of many actions we need to assist the transition in the coming years.

Beyond that, of course we’ll never run out of oil, but the rate of production could be insufficient before we are ready to transition to something else. There are no alternative technologies today that are inexpensive and scalable, and this problem transcends economics 101. I think many people confuse “technology” of the electronics and semiconductor industries with oil-field technology. We have made amazing strides in electronics and computers in the last 20-30 years, but there is a reason all of these alternative energies are still undeveloped, despite several oil shocks and assurance that once oil hits $30, $40, $50, $60, $70/barrel they will ‘finally’ come online. Or to put it another way, there is a reason we don’t have colonies on the moon yet; some physical realities trump economics

I read the Economist article you spoke of and frankly, it was rather shoddy and biased journalism. There were several factual inacurracies. To cite one example: the author claimed the North Sea production basin was only now peaking when it has actually been in a precipitous decline for years. The British side of the basin has fallen from 6.1 million barrels per day in 1999 to only 3.6 million barrels per day now. Adittionally, no one really knows how much oil in left in the middle east. We take their stated reserve numbers as fact, when we really have no way of auditing them. Matt Simmons makes a disturbingly convincing case in his book Twilight in the Desert that Saudi Arabia’s fields could be ripe for severe declines and that ‘abundant middle-eastern oil’ may be one of the greatest myths of the last 70 years.

The title of this thread is $100 oil. I don’t know where the price is headed over the next few years, but if it goes back to $20, that implies a severe economic or geopolitical malfunction.

[picpoule]

$200/barrel oil — under this scenario: Israel can’t wipe out Hizbollah in Lebanon. Israel’s failure causes Iran to become more emboldened. Iran can spread its influence even more among Shi’ites in Iraq and Shi’ites in the oil producing region of Saudi Arabia. The Saudi princes can’t really do anything about it because there are too many Shi’ites in this region without destabilizing the country, so Shi’ites, with Iran’s help, can control the oil in Saudi Arabia. It’s just one scenario, but man, it’s scary.

[Anonymous]

What happens when China bows to pressure from the Western Central bankers and revalues its currency higher?

Hmmmmm….

Let’s think this through. Oil priced in Yuan will suddenly be cheaper. Chinese demand will increase. Prices will rise in $$$$.

Notice how you don’t even need to postulate mideast crises to believe that oil price are continuing upwards. And all those graphs showing gold/oil and all that? Try looking at those graphs in a different currency than $$$$ and then tell me what they say. I have a feeling that when you graph gold prices in Yen that it has a quite different shape.

And continuing this thought… what happens to the US $ when oil prices skyrocket and our economy slows down? Hmmmm. Could it be that the $$$ drops further against the Euro? Does anyone else besides me remember the period 1977-1982 or so? Interest rates were very high, inflation was high although coming down. And guess what? Property prices in California were going up up up up up. In $$$ terms anyway.

[VCJIM]

I don’t belive China will consume more oil if the Yuan increases in value. I belive their consumption is tied to demand, based primarily on manufacturing. So if demand for Chinese goods decreases, Chinese demand for fuel decreases. Just my guess.

[Anonymous]

You don’t think China will burn more oil if it gets cheaper for them? Think again. China has manufacturing capacity to spare. If we don’t buy their goods here, they will figure out a way to consume them domestically.

Automakers are flocking to China seeking to tap that domestic market. If oil prices decline in yuan, then they will definitely find ways to either sell more cars, or sell bigger cars that burn more oil.

To postulate flat demand for oil in China is ludicrous even now as prices are rising. If they flatten or fall in yuan, you think that demand will stall? You’re just wrong wrong wrong.

[VCJIM]

I certainly could be wrong, wrong, wrong. I don’t recall writing that I am right, right, right. Only that my opinion is a little different than yours, and the reasons why.

I have believed that China is strongly export dependent, that they have not built a consuming infrastructure. Has that changed? Is it changing?

[lindismith]

VCJim you were missed on Saturday at the meet-up.
And, I agree with you. As someone who does business in China, and is regularly there, I just don’t know how workers earning 60c an hour in a factory will be able to afford the blow-up plastic Santa that was meant for selling in Costco, or the Timberlane boots meant for selling in Target, or the flat screen tvs meant for selling in???? The Chinese economy is currently very dependent on us continuing to consume what they produce. If we slow down, they slow down.

[Carlsbadliving]

Here’s an interesting article that provides some insight into the future of China and what impact that could have on demand for oil.

http://articles.moneycentral.msn.com/Commentary/Experts/Jubak/Jim_Jubak.aspx?msn=1&GT1=8380

[VCJIM]

Thank you Lindi, that’s very nice of you to say : )

I’m in Ventura County, so it would be quite a drive, but maybe next time I will make it.

I also do business with China, but I’m a manufacturer / exporter. Shocking, I know! But I see it the same as you.

For example, take the packing foam we use to package our products; the cost of this is directly tied to the cost of petroleum. My business has slowed down in the last couple of months, so I am purchasing less packing foam, thereby consuming less petroleum. Then I start thinking about all of the other things I purchase that are tied to petroleum…EVERYTHING. Then I start thinking about all the things that are manufactured in China. These are not necessarily the consumer goods labeled “Made In China”. I think about printed circuit boards and material, ICs, those plastic knobs in your Toyota, Honda, etc. It is mind-boggling to consider how many products we buy from China, even though we may never know it. Another example is a Gateway computer. How much of that comes from China? I don’t know exactly, but I would bet a huge portion. Many PC mother boards are made in Taiwan…but guess what that means? In most cases it means the board was assembled, and tested, in Taiwan, with electronic components largely manufactured in China.

Then, if one is of the belief that USA consumption is a significant driver of manufacturing production in China, directly or indirectly, AND one believes we are headed into an economic slowdown, then it would follow that China would consume less petroleum.

Maybe. I’m often very, very wrong. And I love it, because then I get to learn something new.

[qcomer]

Colombo,

Chinese govt already provides oil at subsidized rates to its people. If Yuan appreciates, it will happen slowly and there will be no sudden jumps. Have you checked the per capita income of China and US? You don’t seem to understand why savings rates are so high in China. Chinese govt doesn’t promise to provide for its elderly and so people save for their retirement. Houses, Cars, etc are generally bought with huge lumpsum payments since the credit/finance system is not well developed. This is crucial in stoking domestic spending. There is also a change in mentality that will happen as 2 very different Chinese generations switch hands as head of houseold. So yeah the Chinese will start consuming more but they cannot immediately replace the US consumer. A US recession later this year or next year will definitely slow Chines growth and also slow oil demand worldwide and bring down oil prices. In the long term though, I guess everyone agrees that oil will be higher as US and European nations will have to make space for the more afluent lifestyle of Chinese consumer.

[powayseller]

Colombo, how can China’s oil demands keep growing if their economy stalls? They are just wanting oil to be like us, but are not fully dependent yet on oil as we are.

But in the US, how much can our demand be reduced? What is the biggest use of gas in this country? Isn’t it gasoline for motor vehicles? In a recession, I guess truckers and the unemployed make fewer trips,but for the most part people will still drive to work, heat and cool their homes, and farmers will keep buying fertilizer and running their tractors. How much did oil demand decline in the last recession, or during the last oil price spike? Was it 10%? My question is whether price spikes in oil or a recession will dampen demand enough to cause a price reduction.

leung_lewis, what significance is a chart showing gold/oil? Historically, gold is correlated with inflation, and NOT correlated with the dollar. Is it correlated with oil? I just don’t know why they made that chart.

Thanks for the link to Jubak’s article on China. I look forward to reading his Friday follow-up. It sounds like oversupply and overinvestment is their biggest problem. Then there’s the bad bank loans, housing bubble, government corruption, artificial pegging of their currency. The gov’t enacted tax laws to dampen housing speculation, so an art bubble had replaced the housing bubble.

[anxvariety]

ConocoPhillips 2Q Profit Surges 65 Pct – ConocoPhillips Reports $5.1 Billion in Second-Quarter Income

http://biz.yahoo.com/ap/060726/earns_conocophillips.html?.v=6

[carlislematthew]

Your statement that it’s been said for 10 years doesn’t hold weight either – some economists have been talking about the housing bubble popping for 5 years and they were wrong too, until it happened. I appreciate your response. Well, what do you think about the impact of the END of CHEAP OIL?

You wondered why people were in denial about oil prices going to $200 a barrel and I responded that it’s because the “peak oil” argument has been used before too many times. Oil bears have cried wolf too many times and so they’re mostly ignored. Same with the housing bears. It doesn’t matter if they’re right or not.

Dire predictions were made regarding $60 oil. Same with $70 oil. Some inflation hit us, but nothing huge. I think as soon as the economy weakens just a little (end of somw MEW, or whatever), oil prices will drag us down. The expensiveness of oil at the time will define the speed of our decline. That’s my opinion.

$200 oil? Maybe, but let’s hope it takes a decade to get there.

[qcomer]

Poway,

Oil is traded in free markets and like everything else, its price is driven up and down by speculators in addition to real supply/demand. Like any hot asset, speculators add a premium to the fair price determined by supply/demand, if price of asset keeps going up. On the demand side, China has been the main driver of growth in Oil demand and not the US. The growth in US oil consumption has been relatively flat over last 3 years though oil prices have doubled in last 3 years.

You seem to underestimate the effect money has in both directions on people’s habits. It can spoil and it can also discipline better than anything else. Have you noticed the number of people who car pool to work has increased lot and that demand of hybrid vehicles has gone through the roof whereas demand/price of used SUVs has gone down.

The main reason I see higher oil prices is not in demand but on the supply side problems. I believe in short term oil will hit some inflection point like $100 and then take a tumble. In the long term though, it will keep rising in price due to supply side concerns.

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