price cascades: cdo tranches down, inflation up

[GRG55]

Re: price cascades: cdo tranches down, inflation up

Demand destruction will occur much earlier as the market prices of oil increase -- the IEA is smoking something if it thinks that 116M b/d will ever be produced!

Alt energy will never come close to replacing that destroyed demand. However, I do believe that there will be more efficient uses of the resources that are there. With the current state of knowledge, I am unable to speculate as to the level of the standards of living that will result when that happens.

Demand destruction is occuring at the margin already. It hasn't been visible because it's happening in places like sub-Saharan Africa where nations can no longer afford to purchase all the petroleum needed to run their power plants and transport systems.

However, in aggregate, and over the long term, I am quite convinced that man's "standard of living" will continue to rise. One example - we will continue to see advances in medical technologies and life span. I am guessing that "quality of life" perceptions could gradually displace our current consumption/accumulation metrics of "standard of living".

On the energy front, a personal anecdote: I've taken the high speed Eurostar train (200 mph; 300 km/hr+) between London and Paris several times. Compared to flying it is, IMO, by far the more civilized, enjoyable, "higher quality of life" way to make that trip (2 hrs - 15 min station-to-station). It's a good example of displacing liquid hydrocarbon (Jet A) fuel with stationary power (its an electric train) for transportation. Since much of the power in France is nuclear, possibly it appeals to the climate change cohort as well. So what's wrong with this picture? A Eurostar ticket costs about double the typical air fare (or more if you are willing to fly a discount airliine from an outlier airport like Stansted instead of Heathrow).

A period of relentlessly higher petroleum prices may change that. Until then I will continue to pay the extra to avoid the BAA airport security-Nazis and time wasted getting between airports and city-centre, as well as enjoying the greater leg room. Now if they would just do something about the food...

[Guest]

Re: price cascades: cdo tranches down, inflation up

I highly recommend all readers look through this Matt Simmons report (the visual quality of his PDF presentations is uniformly awful however) - and then simply conclude whether the data looks good or bad.

If the data looks good, the implications for a prosperous society that has "successfully reinvented" itself on alt-energy in 25 years looks more like a "Hail Mary Pass" than any remotely assured prospect.

http://www.simmonsco-intl.com/files/...Conference.pdf

Dr. Sadaad Al Husseini's charts are an eye opener, and Matt Simmons many coordinated charts here speak so coherently, with an authority which only painstakingly assembled, plain collected field data can provide, that anyone suggesting the charts are inaccurate or inconclusive should be invited to come up with equally plain summaries of data evidencing an alternate conclusion.

[Guest]

Re: price cascades: cdo tranches down, inflation up

Chinese, Indian Growth to Spur Oil `Crunch,' IEA Says (Update1)

By Tom Cahill

Nov. 7 (Bloomberg) -- Chinese and Indian crude oil imports will almost quadruple by 2030, creating a supply ``crunch'' as soon as 2015, the International Energy Agency said.

China will replace the U.S. as the world's largest energy user early next decade and its oil demand will more than double to 16.5 million barrels a day by 2030, led by a sevenfold increase in Chinese car ownership, the IEA said. China and India together account for almost half of a projected 55 percent increase in world energy demand, the IEA said in its World Energy Outlook.

Oil investments of $5.3 trillion will be needed as new sources pace slowing output from old wells, the IEA said.

If investments aren't made, this year's 61 percent surge in crude prices to more than $98 a barrel may be the start.

"From 2012, oil supply will be tight, this is not good news for anybody who wants to see an ease in prices,'' IEA Chief Economist Fatih Birol told reporters in London. "The message to our governments is to slow down the demand increases and to producers to invest more if we want to avoid a supply crunch.''

China and India's combined imports will surge to 19.1 million barrels of oil a day by 2030 from 5.4 million barrels of oil a day in 2006, the report said in its so-called ``reference scenario.'' That's more than today's combined oil imports to Japan and the U.S., the largest energy user.

High Growth

The IEA maintained projections for oil production reaching as much as 116 million barrels of oil a day by 2030, up from about 85 million barrels a day now. Demand would reach 120 million barrels a day and crude prices as high as $159 a barrel in a "high growth scenario,'' Birol said.

"We have to look at this because we have all been wrong so far'' about Chinese and Indian economic growth, said Birol. "The most important question is what is the pace of growth in China and India in years to come.''

Birol, who began leading the team writing the World Energy Outlook in 2002, said high growth forecasts have more closely tracked actual results than the reference scenario for the past five years.

Some in the industry doubt world production can meet IEA projections. Reaching 100 million barrels a day may be "optimistic,'' Total SA Chief Executive Officer Christophe de Margerie and the chairman of Libya's state oil company, Shokri Ghanem, said last week.

"We are saying what needed to be done, not what will be done,'' said Birol, who added the investment decisions will largely be up to OPEC nations. "If they put their money there they can meet demand.''

Field Declines

An average field decline of 3.7 percent a year means 12.5 million barrels of new production -- more than the current output of Saudi Arabia -- needs to be added between 2012 and 2015 to counter the drop and meet new demand, the Paris-based adviser to 26 oil importing nations said in its 674-page report.

Even a slight increase in the rate of decline would "eat up most of the world's current spare oil production capacity,'' the group said. "Any shortfall in net capacity growth could result in a sharp escalation of prices.''

For every $4 invested in oil infrastructure, $3 will be needed to slow declining rates in existing fields, while $1 will go to new production, Birol said.

Russia and the Organization of Petroleum Exporting Countries, home to as much as 82 percent of oil reserves according to statistics from BP Plc, should account for a larger share of production though they may withhold investment because they realize higher prices will result, the IEA said.

Weak Alternatives

"The alternatives to OPEC are getting weaker and weaker,'' Nobuo Tanaka, the IEA's executive director, said at the conference in London. "They may well go for the higher prices. One of the reasons we may see higher prices is investments won't be made.''

OPEC's share of world oil production will rise to 52 percent by 2030 from the current 42 percent, the IEA said. So-called non- conventional oil sources, such as extra heavy oils, tar sands and natural gas-to-liquids sources, will quadruple to 8.5 million barrels of oil a day from 1.8 million barrels of oil a day in 2006, the IEA said.

To contact the reporter responsible for this story: Tom Cahill in London at tcahill@bloomberg.net

Last Updated: November 7, 2007 09:43 EST

[touchring]

Re: price cascades: cdo tranches down, inflation up

Once again, I question just how much cheaper manufacturing is in China were the subsidies to be removed.

Don't forget that transportation for low cost goods is a significant factor - only because the goods are SO cheap that it is worthwhile.

Where does financing for the subsidies comes from? China is running a budget surplus.

There is a huge grey economy in China, a lot of money is not accounted for by known statistics.

There might be many factors that lead to a lower cost in China, just to throw a few i can think of:

Municipal government efficiency.
Better logistics.
Economies of scale.
Workforce efficiency.
Return on capital.
Cheaper training and education.
Better communications and network.
Lower health cost.

Incidentally, anyone here travels around both China and Japan, care to tell us the difference?

[Jay]

Re: price cascades: cdo tranches down, inflation up

http://www.cnn.com/2007/WORLD/americ....ap/index.html

Thought I'd throw this link into the discussion and then duck. Big oil field found off of Brazil.

[Rajiv]

Re: price cascades: cdo tranches down, inflation up

8 billion barrels -- That is only 95 days of world oil consumption if all of it was extractable. I hope Brazil uses this windfall wisely.

[GRG55]

Re: price cascades: cdo tranches down, inflation up

http://www.cnn.com/2007/WORLD/americ....ap/index.html

Thought I'd throw this link into the discussion and then duck. Big oil field found off of Brazil.

Certainly good news, and offshore Brazil is a prospective basin, but unfortunately this is following a now familiar news pattern for petroleum exploration annoucements:

On Nov 12, 2005 Kuwait Oil Company announced that its largest field, Burgan, would have a lower peak production than previously forecast (1.7 mm vs 2 mm bbls/d). A few months later there were headlines around the world of a "massive" new condensate/light oil discovery in the north of Kuwait. Since then? Not a peep. But Kuwait maintained its official OPEC reserves figure despite the Burgan revision.

In 2005 reports that Mexico's Cantarell field was indeed experiencing a production decline began to be confirmed with Ministry data releases. A few months later (March 2006) there were official press reports of a "massive new oil discovery" by Pemex offshore Mexico. Within days that discovery was being touted as 10 Billion barrels. I haven't updated my file for a while but the last number I have from Mexico's Oil Ministry is 43 million barrels.

On Sept 5, 2006 Chevron, Statoil and Devon Energy announced Jack-2, a "huge Gulf of Mexico discovery". The US press and Bubblevision immediately entered a state of delirium. Before the day was out this ultra-deep (7000 ft) water, $100 million discovery well, TD'd at 20,000 ft below the sea floor, had been inflated to a 15 Billion barrel discovery, a figure that was repeated ad nauseum by countless Congressmen and Senators, and petroleum industry consultant groupies. That this claim was totally ludicrous - it meant a single well had found as much oil as all of Exxon Corporation - completely escaped all the people being interviewed by the breathless Bubblevisionaries.

I will confidently predict that this newest discovery will be revised downward by no small amount, and the reality of the ultra-deep nature of the find will temper production forecasts, but those won't make any headlines... :p

Just a side note: This is another sub-salt discovery. The salt layers attenuate the seismic signals used to identify structures to target with a drill. The huge increases in desktop computing power and the seismic processing algorithms this allows have significantly advanced sub-salt targeting and improved exploration success rates. When I started in this business my employer had a Cray supercomputer in a "glass house". What the geophysicists can do on their desktop today goes way beyond the Cray; the transformation has been dramatic.

The Chevron operated Jack-2 in the Gulf of Mexico is also a sub-salt discovery. Chevron, BP and Devon have applied these techniques to prospects in Angola, and BP and Devon have used them offshore in the Egyptian Gulf of Suez. This is unlocking more oil in places that were previously at or near the end of their post-salt oil exploration potential.

[touchring]

Re: price cascades: cdo tranches down, inflation up

Will this solve the problem? Electric car.

Any opportunities into battery, lithium?

[Guest]

Re: price cascades: cdo tranches down, inflation up

Ooohhh! That is really swank! Can you see the hollywood movie stars spinning this up into the new "cool" when everyone is forced to start driving these?

Paparazzi photographers catch Angelina Jolie climbing out of a black SmartCar displaying a world class decolletage? The new cool needs only a few star endorsements to really take off...

[ST]

Re: price cascades: cdo tranches down, inflation up

Demand destruction will occur much earlier as the market prices of oil increase -- the IEA is smoking something if it thinks that 116M b/d will ever be produced!

In 2006 shale represented 0% of all O&G US production. Today it represents 40%. Our long view of oil prices needs to be tempered by where international shale development is going. At present, that segment looks to impact only post 2020, but by how much is important given what we've witnessed in the U.S.