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The Crude Watch

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February 22, 2008 – Comments (10)

Minyanville had a very good post looking at oil, "stagflation", inflation, deflation, economic growth, etc.

I am of an opinion that crude will see a downward corrections and where I see that coming from is supply and demand.  Recessionary forces will reduce demand in a number of the global markets, the US, Europe, Canada, and so on.  Already we see a shift to those buying vehicle to buying smaller vehicles.  As people try and balance their home budgets, they will be driving less, and travelling less.  People have no choice but to get debt under control.

You can't buy anything that hasn't had an energy input, not a thing.  People are cutting back on spending, and that is a cut back on energy.  

China has the Olympics this year and they've had a huge increase in growth due to that.  Do some homework here and what you find is that everywhere that you have an olymics you have a huge increase in growth going into the Olympics.  You get 5-10 public projects built where normally there would be one.  China's economy has had a duel leverage happening here, their exports to developed countries, which are declining, and their building for the Olympics.  I can't see them not having a slow down.  China does a lot of part imports from India, well, there goes India into a slow down as well.

Meanwhile, capital investment is already committed and happening in oil, there will an increase in supply before there is an adjustment to capital investment. 

It seems to me that China has much strong fundamentals in terms of the level of investment into wealth producing industries, so they have greater choices in how to over come a slowing export industry and public works, however, China has to go through a slow-down period of adjustment.

Oil can do a little spike here, but I still think it loses up to a third from the peak.

As Minyanville says:

"The Great Depression did not just ruin banks and wipe out stock market speculators, it permeated every aspect of life for an entire generation. How many of us listened with wonder as our grandparents (or parents) rationalized seemingly absurd and frugal behavior because of some transitory event 70 years in the past.

"Excess credit is our generation's allegory – it's all we know. It touches every aspect of our financial lives, from buying bread to buying a house. Credit crosses socioeconomic borders, used by rich and poor alike to conduct the transactions of life. The impact of this swift evaporation of such a ubiquitous aspect of daily life cannot be downplayed; it holds an unprecedented potential to alter the way we live. "

 

10 Comments – Post Your Own

#1) On February 22, 2008 at 10:25 AM, CycleFreak7 (< 20) wrote:

So true.  I am already making big changes to the way I spend - becoming more frugal.  And I have no debt (well, I do have a mortgage, but positive equity). No credit card debut, 2 cars on which I owe $0.  That's a nice feeling.

Oil, gold and other commodities are the next bubble. Everyone's yanking money out of equities, bonds and US treasuries are practically worthless, so they are buying commodities. This inflates the price beyond reason. The will come crashing down eventually. 

Re: great depression "seemingly absurd" behavior ... 

However, I do remember visiting my grandmother when I was younger and thinking it quite odd that she would make us write our name on a plastic cup, rinse it out and use it again. Typically for the entire visit, we got one cup.

Whenever she cooked chicken, or a turkey, she would clean those bones until there was not an ounce of meat left on them. Impressive. Then use the meat bits for sandwiches, etc.

It might have seemed silly then, but I'm leaning much more toward the old "penny saved is a penny earned" addage.

I'm saving my pennies :)

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#2) On February 22, 2008 at 11:35 AM, 292972826 wrote:

I don't see oil going downward, The US/Europe/Canada will decrease their consomption of oil, but the rest of the world will not. Look at the number of car sale in south america/china/india, they are consomming more and more and it has an impact on the price.

So the consumption will continue to increase globally (2%) while the production is staying flat, it can only bring the price higher.

 

 

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#3) On February 22, 2008 at 12:48 PM, WillSurfForFood (80.02) wrote:

I think your analysis of oil is wrong. I will just start listing items in no particular order.

Conservative estimates of world oil demand growth are for another 1.4 million barrels per day increase per year. Current world production of oil + other liquids has been around 86 million barrels a day since early 2005. Peak crude oil production so far actually occurred in May of 2005. My guess is we will eventually excceed these production numbers, but if your looking for a reason for current high oil prices there it is.

Despite all our technology advances the peak decade for oil discoveries in the US was in the 1930s. The peak decade for world discovery was the 1960. The amount of oil discovered each decade has decreased since then. It will continue to decrease. The largest oil field in the world (Ghawar in Saudi Arabia) is 59 years old. 

 If you had listened to the earnings conference calls of some major oil companies they are spending more on oil and yet finding and producing less.  Most of the new discoveries such as the Tupi field off Brazil are in very deep water and hard to get to. And when it is described as a very large discovery, it is not 1960's large, it is modern large.

Yes the Olympics in China is a big deal but I find it hard to believe it is that much a driver for economic growth of a country that has 1.3 billion people, also what about India or Latin America? Per capita the Chinese use 1/20th the oil we do (from memory a few years ago). The energy demand growth has much more to do with their increasing middle class than the olympics.  

The average car lasts for about 18 years now so even if people start getting smarter about the cars they buy it will take a long time for this to have much of an affect on oil usage.  When you factor in population growth it probably amounts to no change in demand. 

I have no idea what the price of oil will do in the near term, obviously I think it will go higher in the long run. I've been suprised at the current level of oil prices given the weakness in our economy. If you think oil prices are going to be cut by a third your estimate is well below CERA's which is a mean of $86 for 2008. CERA has been consistantly wrong.

 http://www.theoildrum.com/node/3627

I know you are a big fan of Mish because often what I read from his site shows up in your blogs. But even Mish has a link to The Oil Drum on his page and references peak oil sometimes. You might want to expand your reading because the energy problems could end up being much more significant than the debt the average American has. 

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#4) On February 22, 2008 at 1:15 PM, EScroogeJr (< 20) wrote:

Check back in 10 years, and can guarantee you price will be much lower. But in the next 3 years, I'm not so sure.

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#5) On February 22, 2008 at 1:25 PM, AnomaLee (28.65) wrote:

I'm on board and been outside the domestic slowdown because we're going to see a huge global slowdown over the next year or more, so I do think oil and all commodities are going to pullback. 

No one talks about why oil is really going up domestically and that's because the dollar is sliding more than schoolkids out on recess...

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#6) On February 22, 2008 at 6:10 PM, dwot (55.07) wrote:

AnomaLee, I should have quantified wrt the dollar.  Part of the increase in the declining dollar, but part is because of the rate of growth.

Longer term I see oil up, but not a smooth line.  I don't believe the rest of the world is growing fast enough to take up the slack from the US and industrialized contries slowing.

We've all got our opinions in, so now we wait. 

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#7) On February 22, 2008 at 8:41 PM, floridabuilder2 (99.36) wrote:

i still feel all commodities are going to come down... how can you have a global slowdown and credit bubble unwind without these assets tanking?  i find it strange that some of the biggest bears on our economy are loading up on PGMs and oil

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#8) On February 22, 2008 at 11:40 PM, abitare (90.56) wrote:

FYI - Air Powered car coming to US

http://www.popularmechanics.com/automotive/new_cars/4251491.html?series=19 

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#9) On February 23, 2008 at 3:03 AM, Donnernv (< 20) wrote:

D:

The pros and cons are pretty clear.  No growth in crude supply and monotonic historical growth in demand.  Devaluing US dollar.  Fighting back is a projected slowdown in US (and world?) economies.

I don't think it's a fair fight.  India and China have 2.3 billion people, many of whom are just getting their first cars.  Driving is ingrained, even necessary, for US citizens.  Technology cannot help in the next two years.  National oil companies (e.g., Aramco) control 70% of the world's known reserves.  Major oil companies must pay them for crude with US$.

Will an economic slowdown make a difference?  A bit.  It may slow the growth of demand (not total demand) but not nearly enough to overcome the depreciating dollar and the gap appearing between growing demand and faltering supply.

 I'll make you a bet.  December 31, 2008...crude more than $120/barrel.  And I think I'm shooting fish in a barrel.

CG

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#10) On February 23, 2008 at 12:17 PM, dwot (55.07) wrote:

And the bet is for what Donnernv?  Say a donation to the other's choice of charity?  Want to put some teeth into this bet?  Say a couple hundred?  Certainly if you are correct I think it costs me way less in Canadian...

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