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Crude Oil Prices, Opec And Other Peak Oil Stories

Commodities / Crude Oil Jun 06, 2014 - 05:48 PM GMT

By: Andrew_McKillop

Commodities

When In Doubt, Worry About Oil
One of the starkest oil worry pot pourri presentations – ruthlessly mingling fact, fiction and fantasy (but pretending its all fact) – can be had here http://energypolicy.columbia.edu...

Steve Kopits is the Managing Director of a known and still-in-business oil and energy forecasting firm, Douglas-Westwood. Both Kopits and D-W would appear to be (still) employable, but for how much longer we can only guess. The Kopits presentation is showcased by the Dublin sustainable economy and development firm FEASTA, with an even more ghastly presentation by David Knight called 'Peak Oil and Climate Change – Two Sides of the Same Coin?' FEASTA says that, as it perceives things,  Global Warming and Peak Oil are the two largest threats to the planet, human life and civilization.


To be sure this inevitably includes oil prices. Where is any so-called “peak oil induced” takeoff of oil prices in the chart, below, amongst the “exuberant” oil market volatility and constant rigging?

Both these presentations pretend, first, that oil prices are rising because production growth is stagnant or even that production is falling. Why did oil prices “negatively rise” in 2008-2009? Why did oil prices rise so much in 2007-2008? Ask Goldman Sachs, not a petroleum geologist.

Tanking The IOCs
The Kopits presentation is 60-slides-long and lovers of excited prose (I did not say exciting prose) will find a lower crop of it in his presentation, compared to the ghastly David Knight-FEASTA shortie which only stretches to 24-slides, but does it in PO-GW Apocalypse Now style. That is peak oil-global warming genre materiel.

Only rarely are we allowed anything resembling sense. For example, after a half dozen meaningless and-or misleading slides, Kopits says:

“Any excess supply or lack of OPEC discipline will tank oil prices and with it the IOCs”.

Again we could ask Goldman Sachs about that but any supply glut, sooner or later and despite Goldman Sachs would cause oil prices to erode, to possibly $75 a barrel outside of a financial market crash and outright economic recession, rather than the disguised present-version recession. In that case, the price has to fall below $50 a barrel.

With the “turn on a dime” mentality of market operators like Goldman Sachs, this will translate to $35 - $40 a barrel. Many IOCs will go bust, but GS doesn't care. With bankrupt IOCs on hand, prices could then be pushed to perhaps $29 a barrel, for a while, while GS planned and launched its Magnificent Price Recovery strategy, wrongfooting the bears and any surviving Bear Stearns. And so on. At $29 a barrel this would price oil at an energy price equivalent to $5 per million BTU of natural gas.

When were US domestic natural gas prices last at that level?

Not wanting nightmares, I did not check these presentations for their Peak Gas storyline, but I can inform the presenters that a person I consider a friend, called Mr Jean Laherrere, co-founder of ASPO and a lifetime petroleum geologist, unequivocally (meaning no maybes, ifs and buts) said there is basically no such thing as Peak Gas. Reasons include the near-impossibility of calling some gas production “conventional”, and other types “unconventional”. Another reason is the simply incredible amount of world gas production that is flared, vented and lost from pipelines and LNG tankers – so much it makes the Ukraine gas story a laughable side issue! Literally.

Yet another reason, of course, is the simply incredible amounts of “new gas” that have been found since about 2009. The new gas is “conventional” and “unconventional” World gas prices do not exist, either. They vary from the US domestic price to more than 3 times that, in Asia. As if the same oil cost $50 a barrel in one market and $160 a barrel in another “and everything is normal”.

This is only possible because gas is dirt cheap – and because oil is overpriced. One tanking IOC that knows all about this, to its dismay, is Shell which fondly imagined, about 15 years ago, that “world gas prices could only rise”. They did, but nowhere near enough to save Shell. Today, like the others, it is forced to depend on the largesse of Goldman Sachs, keeping oil prices “high and proud”.

Tanking The Economy
Both of the cited presentations are predictably gruesome with oil doom for-the-economy predictions as oil prices “inevitably rise”. This is only partly nonsense, to be sure, but the nonsense quotient is pernicious.  What happened to world oil prices between 1986 and 2005? For example.

They were “rather low”. In 1998 the neoliberal house magazine 'The Economist' gleefully predicted oil at less than $10 a barrel for the decade 2000-2010. It even mentioned $5 a barrel.

But what happened to global and regional economic growth outside the Emerging economies, between 1986 and 2005? What was the trend? It was down. Cheap oil did nothing at all to change the storyline. Conversely, with much more expensive oil, the G7 countries had an uber-brief interval of higher than usual growth in 2004-2007. The Swan Song.

We are expected to buy the story that High oil prices = Economic recession. The next pork pie we are supposed to buy is that Global Warming = Economic recession, a la Lord Stern, meaning that intense or prolonged Global Cooling should automatically be good for the economy, right? When the Thames freezes over in winter, again, we will have Nirvana. It can only make sense.

Not wanting to bore my readers too much, they could look at Slide 15 of the Kopits presentation where, black on white, he says that the oil coefficient of economic growth (percent rise or fall of oil demand for a 1% rise or fall of economic growth) “is 0.75”. Pure nonsense. Maybe 0.55, if that. Why this lie is pernicious is because it goes back-to-back with the threat of oil demand overreach anytime when-if the economy recovers. The bankrupt IOCs wont be able to help us. The Arab-majority OAPEC and OPEC states likewise – and no use asking Putin for cheap oil, either.

So, Mr Kopits tells us, additional spending on oil E&P will have to be well above the shakily calculated $2.5 trillion he calculates as extra and additional in 2000-2010 compared with 1990-2000. Say $4 trillion. To be sure, clients of Douglas-Westwood include oil E&P firms. The bankrupted IOCs would be suddenly un-bankrupted and Goldman Sachs would be delighted! Everybody likes fairy stories.

And What About China?
An awful long time ago, to be provocative I wrote “The Chinese Car Bomb”. Unfortunately, persons like Kopits and Knight, lacking a sense of humor took it seriously. Interestingly however, China is slipping down and out of the oil genre materiel these days. You have to wade a half-way through these presentations to get the China Oil Doom story, these days.

China is now sidelined by much more eery threats to oil. One is simple. In the US for example, gasoline consumption only decreases. Every year, like clockwork. Young people don't buy cars anymore because they grew up. If they happen to want to buy a car, for some reason, they buy a second-hand car, with friends, and don't use it much. Why shouldn't the Chinese imitate that?

This argument is totally and absurdly turned around, in both these cited presentations to mean the following:

World conventional oil output peaked in 2005. Car miles traveled in several countries, including the US peaked in 2005. Sherlock Holmes could work out what it meant.

China to the rescue. It now produces more cars (20 million a year) than the US, even if the Chinese, like the American producers can't sell them. Quite a lot of average Chinese car sales are of clunkers swilling gasoline and diesel fuel, and other are not. As in the US and Europe and Japan. This is totally upstaged by urban planning ordnances and regulations, in existing and new Chinese cities, for limits on car densities – simply to reduce pollution. In other words, cars will be taxed out of existence. Being a communist regime and to date, five major Chinese cities will simply ban car ownership in certain city districts. Yes, you do not have the choice!

China tasted urban car pollution and did not like it – somewhat faster than the Western countries. To scare us, or something, Kopits tells us that in the US, “only 19% of persons aged 18-39 without a driving licence hold a job”. How many persons who cannot read and write hold a job? How many left-handed persons hold a job? How many unemployed Americans have a driving licence?

How many days a year does the Thames have to freeze over to bring Economic Nirvana?

What About The Rest?
So why did US airline travel measured as passenger kilometres-per-year peak in 2006? We are not asked the much more interesting rhetorical questions of why should Apple, Google, Facebook & Co have market capitalizations rivaling, or exceeding major international oil and energy corporations. If Google is so precious, why should we be worried about fossil oil?

Not too frequently in these presentations (it would be sacrilege) we get a glimpse of how the oil boondoggle killed itself. Soaring capex was wonderful – but profits didn't rise anywhere near as fast, for energy corporations. Costs rose even faster. This is (but of course) due to Peak Oil.

So we are invited to believe the IOCs and their friends along Wall Street and in government ministries will repeat the trick! They will increase energy prices and taxes, further and more, and the witless public will go on paying – because of Peak Oil and Global Warming.

Think again. Both of the cited presentation have some “ambivalent but generally positive” things to say about Europe's climate-energy charade. It fights the terrifying menaces of global warming, and peak oil, by charging European consumers an average of about $350 per barrel for oil at the filling station (Goldman Sachs only wants $125 a barrel), and around $500 per barrel equivalent for electricity.

And we are (supposed to be) surprised that energy demand is dropping. What a surprise!

I recommend completely ignoring this mindless propaganda. Today's oil industry can't survive unless oil is at least $100 a barrel. Gas prices (apart from being bizarrely variable) have to rise. Even electricity prices should rise according to the Alice in Wonderland tales we are shown in these presentations. The Queen of Hearts said.....

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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