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Thread: Preparing for the coming Oil Shock

  1. #1
    Banned Melonie's Avatar
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    Default Preparing for the coming Oil Shock

    this blurb is based on excerpts from a recent consultant's report to the US House of Representatives ...




    (snip)Douglas-Westwood comes to the same conclusion about oil prices being recessionary as results I have quoted elsewhere from Steven Balogh, Dave Murphy, and Charles Hall–at $85 barrel. The ratios to GDP appear different (4% for Douglas-Westwood; 5.5% for Hall, Balogh, and Murphy), because one analysis uses retail oil prices and the other uses wholesale oil prices, but the fact that the two approaches come out with the essentially the same dollar threshold for recessionary impact shows that they are equivalent.(snip)





    (snip)How much spare capacity Saudi Arabia really has is a big question. Steven Kopits says if Saudi Arabia’s maximum level of production is really on 10 million barrels a day (that is, the bottom line on his graph), an oil shock is theoretically expected in the third quarter of 2012, based on Douglas-Westwood’s demand estimates.(snip)





    (snip) don’t remember seeing a slide like Slide 23 before. One question I would ask is where all of the future increases in oil production that Douglas Westwood is forecasting are going to come from, if all of the majors are past peak. Does this mean that all of the increases are going to be from much smaller operators, producing NGLs, Barnett Shale, and the like? If so, these smaller operators are going to have come up with enough capital to finance all of their increases in operations. Theoretically, if oil prices are high enough, this could work out, but as this presentation indicates, recession tends to set in at $86 a barrel. So it is by no means clear that prices will be high enough to make production economically attractive.(snip)





    (snip)What this slide shows is EIA’s estimate of future oil production from the Gulf of Mexico (excluding a little strip along the shore, which is state controlled, rather than federally controlled). The point being made is that the forecast drop in oil production from the Gulf of Mexico of about 600,000 barrels per day is very significant, amounting to 11% of crude oil production. The expected job loss according to Douglas-Westwood’s calculations is 65,000 full-time equivalent employees.

    The point should probably made too, that the loss from the Gulf of Mexico is actually crude oil, while quite a bit of forecast new production is products which have lower energy per barrel than crude oil. Thus, a drop in Gulf of Mexico production can be expected to have a bigger impact than an equivalent drop in something like ethanol or natural gas liquids.(snip)


    (snip)This is the first two summary slides. Steve suggests here that the next oil shock is in 2013, even though the earlier slide seemed to suggest 2012 as a possibility, and Steve’s recent post for ASPO-USA is called An Oil Shock in 2012? Perhaps this summary statement is a matter of shading the results a bit for an audience who will be shocked even by an estimate of an oil shock in 2013.(snip)


    (snip)This is the final slide. It seems to me (Gail) that if we can’t get the price down to a reasonable level (and I am afraid we can’t), we do need to dismiss Alaska’s Outer Continental Shelf as a possibility. This will be something oil companies will be learning more about, as they look into the particulars of extraction in that part of the world.
    Steve’s final point is

    The single largest risk to the US economy today is an oil shock— awareness and management of this risk appear minimal.

    I would very much agree with this, which I believe is his major point to the committee.

    By. Gail Tverberg (snip) from



    There would seem to be one particularly 'Bright Prospect' included in this report in regard to the potential for individual investors being able to 'hedge' against the negative impact of sustained high oil prices on the US / world economy. Did you spot it ?


    I also recommend that if you have the time that you review the entire presentation provided at the link above. There is lots of additional information and especially additional graphics which SW's program would not allow me to post.


    I would also point out that, while this presentation was based on recent data, it predates the $115 a barrel Brent Crude price and $105 a barrel World Trade Index price levels that have developed for oil over the past couple of weeks.


    My personal take-away's from this presentation / article were ...

    - total existing 'real' worldwide oil production capacity is now very close to the actual level of total worldwide oil consumption.

    - ( from the link but not discussed here ) reductions in oil demand by industrialized countries will be totally offset by growth in oil demand by developing countries, thus worldwide oil demand will continue to rise absent 'black swan' demand destruction.

    - what little 'excess production' capacity remains is in the hands of the Saudis ... and it is questionable as to how much of this supposed 'excess production' capacity really exists

    - events in the US Gulf reduced production by some 600k barrels of oil per day ... with little to indicate that this production can come back online in the near future

    - events in Egypt, Libya, Algeria etc. are causing additional reductions in oil production and/or delivery

    - output from 'conventional' land based oil wells worldwide is dropping as we speak. These oil fields have very low production costs, relatively speaking. There are also extremely few opportunities for developing additional 'conventional' oil well production.

    - The vast majority of new oil production is going to come from 'unconventional' oil sources ... shale oil, deep water offshore oil, 'synthetic' oil substitutes via conversion of LNG and other hydrocarbons. These 'unconventional' oil sources all have relatively high production costs.

    - all of the above tend to indicate that absent a great depression 2 that massively destroys oil demand on a world-wide basis, $100 a barrel oil prices and $4 a gallon gasoline prices are probably here to stay this time !



    ~
    Last edited by Melonie; 03-08-2011 at 03:54 AM.

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    Banned Eric Stoner's Avatar
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    Default Re: Preparing for the coming Oil Shock

    Actually there is plenty of supply at the present time. The problem is future supply vs. future demand. Obama has effectively shut down much of the Gulf and permit issuance elsewhere has ground to a virtual halt. America has enormous PROVEN reserves and we could easily boost domestic production by at least 500,000 barrels per day and as much as 2 million barrels if we ever got serious. Not to mention the hundreds of thousands of jobs more drilling would generate.

    Obama is clearly hostile to oil and the oil industry. He likes the current high prices. So does Russia. They are investing the extra billions they are making in a total upgrade of their military. This talk of releasing a few million barrels from the National Strategic Oil Reserve is a joke. It will do next to nothing to affect prices because there is NO shortage of supply. Kuwait and Saudi Arabia have picked up the slack. Whatever effect it does have will be temporary.

    We need a stronger dollar and a sensible oil policy. THAT will drive down prices.

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    Default Re: Preparing for the coming Oil Shock

    It will do next to nothing to affect prices because there is NO shortage of supply. Kuwait and Saudi Arabia have picked up the slack
    The 'no shortage of supply' is of course dependent on Kuwait and Saudi actually being able to produce the additional oil required to cover the shortfalls in Libya, Algeria, and whatever other current middle eastern oil production winds up being disrupted by the middle east 'domino effect' of protests / rebellions IN ADDITION TO the declining output from Mexico, the US etc. The author's point was that with current 'lost production' remaining surplus Saudi production capacity is down to less than 1 million barrels a day in real terms ... such that an additional loss of another ~1/2-1 million barrels of production from disturbances and natural output declines, plus an additional ~1/2-1 million of oil demand growth from China / India / Asia / South America could very well cause supply to equal demand by the 3rd quarter of 2012 !!! Once that happens, a 'bidding war' starts re oil prices. Obviously a return to global recessionary conditions would cut oil demand growth and 'postpone' the inflection point into 2013.

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