The Ambiguity of what's happening in Oil vs. Inflation

[metalman]

Re: The Ambiguity of what's happening in Oil vs. Inflation

This has been an interesting discussion.

Lukester, you are correct in your assertion that Asia will consume all possible present and future oil production should existing rates continue in any fashion whatsoever.

However, I've noted before that China's elite are already well aware that it is physically impossible for all of China to enjoy the standard of living that the US has now.

Furthermore, while China is growing, nonetheless the Faustian bargain they have is that they must create organic growth in order to progress beyond a certain point. This growth is still not there, but fortunately China is not at this inflection point yet. Perhaps closer than most would think, though...

Thus it is a highly complex situation where the source of new demand (China and other developing countries) is still highly dependent on the existing capital/consumption sources (US/EU) with a 3rd wild card - the oil producing nations who have capital but don't have organic growth or non-commodity production.

I have been looking at this situation with a different viewpoint as I've consistently noted.

1) Should demand organically overcome supply, we'll get a world similar to what you saw in Mad Max: cutthroat tactics to secure what little there is of a dwindling resource. Up to and including all out war, occupation, and re-population of vital resource areas

2) Technological solution: Fusion power or some such

3) Muddle-through - US and EU standards of living fall significantly, China and 3rd world nations rise significantly, but the two are still far apart.

Unlike Rube Goldberg nor perpetual motion machines, you cannot as a nation have more than the sum of your customers unless you have some type of monopoly and a strong defense - especially not if you have more people. China cannot go Japan's way - as a remora on the US' backside.

China's labor is ultimately NOT necessary for survival, thus at the end the US could just stop buying from China and regrow all of the industry that was outsourced. A long and painful process but do-able.

Thus it may be possible that oil will hit $1000/barrel or some such, but as a strategic resource of such ubiquitous impact on all stages of economic activity, I see neutron bombs being used before that much money changes hands for a barrel of oil. This is, of course, assuming no hyperinflation in the US

man, i could never have put it that well. what HE said! thanks, c1ue!

[metalman]

Re: The Ambiguity of what's happening in Oil vs. Inflation

I took your advice to sell all stocks at a time this summer which personally cost me tens of thousands of dollars...

bit early to say that, eh?

ej's on it and schiff's on it. they're both good... different. 2004 was too early on housing but good enough for gummit work, as they say. ej's 2005 call a year later was spot on.

i'm still waiting for the "sell gold" call. i'm going to hate that call. i really am. :mad: but i know some day it will come. meantime... wooooohooooo! wheeeee!

[bill]

Re: The Ambiguity of what's happening in Oil vs. Inflation

Factor in SE Asia's secular growth trend and it may be a topic here worthy of careful examination.

Thailand very concerned about high oil prices. They are implementing energy efficiency, boidiesel production (considering GMO, they are a NONGMO producing country) and of course Nuclear.

http://www.nationmultimedia.com/2007...s_30054861.php

Published on November 5, 2007
Darmp Sukontasap, senior vice president of Tesco Lotus, said oil prices had been increasing steadily for the past two years and therefore the company already had plans in place, especially for energy-saving and increased efficiency.

Since the company has been prepared for some time to deal with the situation, the immediate impact will be minimal, he said, though conceding: "If oil prices keep going higher we believe that it will hit not only business operators but more importantly consumers. As a retailer, and with the cooperation of our suppliers, it is our policy to maintain low prices for our products as long as possible for the benefit of consumers."

Tesco Lotus has recently switched its entire fleet of trucks to the use of B5 biodiesel, aiming at cutting fuel costs by 5 per cent. The switch is made possible through collaboration with Tesco Lotus's exclusive logistics suppliers Linfox Transportation (Thailand) and Eternity Grand Logistics.
Tesco Lotus used to consume about 22,500 litres of diesel every month in 400 tractor trailers that hauled products from its central warehouse and distribution centre in Wang Noi in Ayutthaya.

Pornsilp Patcharintanakul, vice chairman of the Board of Trade, said the oil-price rise had certainly affected business as price rises by their nature pushed up business costs, especially transport. "The oil price is one of the key factors pushing up costs, because it increases raw-material prices."

Nonetheless, he said the private sector had learned to adapt to the situation. "They know that the oil price will continue to break records and rise further."

He said the Thai government should look for alternative energy sources, especially nuclear and wind power, to ease the pressure from too much dependence on world oil supplies. He added that the cost of solar energy might be too high, though nuclear energy was a possibility.
Pornsilp said that alternative crops were another option but the supply of these crops as raw materials might not be sufficient. He suggested the government promote the use of GMO crops for use as a fuel.

The BOT forecasts that in its base-case scenario the oil price at the Dubai market will average $75 a barrel in the fourth quarter, allowing the economy to grow by 4.4 per cent. The economy could grow by 4.3 per cent as projected if the oil price jumps to $80 a barrel in Dubai or $100 for WTI.
For every increase of $1 per barrel in the crude-oil price, the retail price will rise Bt0.3 per litre. However, the strong baht will help absorb the shock. For every Bt1 appreciation of the currency against the dollar, the retail price will drop Bt0.5-Bt0.6 per litre.

[Guest]

Re: The Ambiguity of what's happening in Oil vs. Inflation

Bill -

Thanks for your input, but I see some beefy looking guys dressed in fluorescent green tee-shirts with a pinkish tulip thingy printed on the front who've been parked across the street from me for five hours in an unmarked black Ford Crown Victoria.

They all look like clones of each other, wearing wrap-around black shades? There must be eight of them piled into that black Crown Vic, chain smoking and just sort of sitting there with the motor running.

I think it's time I make like a lizard and go crawl under a rock for a coupla months. I'm from NY - you know, these guys could be iTulip enforcers. :cool: :cool: :cool: - I dunno - the Crown Vic and the lime green teeshirts are a dead giveaway - what do they think? I was born yesterday?

Gotta go hide now ...

[Guest]

Re: The Ambiguity of what's happening in Oil vs. Inflation

GRG55 -

You wrote:

<< I think the acceptance of, and response to energy prices likely staying elevated for an extended time is beginning to occur. >>

This could possibly be a fairly extended time frame.

Those with economic and business strategies based upon the return of petroleum prices to "normal" levels may best cover all contingencies by rehearsing the procedure for passing their "return to normal" business plans on to their children. :rolleyes:

[Andreuccio]

Re: The Ambiguity of what's happening in Oil vs. Inflation

lukester,

my tendency is to think as you do: that there will be a rough transition to a petroleum constrained world, that there will have to be much higher prices to enforce demand destruction, and that oil producers will also use oil in non-economic ways for political reasons both domestic and international. so i see the possibility, and i'd say the likelihood, of severe crisis.

i just don't know what to do about it, beyond allocating about 8-10% of my assets to canadian energy trusts. i choose them because they hold mature reserves and thus i'm just buying oil [or gas] in the ground, along with its income stream.

so what else should i do?

JK,

When you say "canadian energy trusts", which ones are you refering to? I had a stake in Canadian Oil Sands Trust, but I'm not sure it's the answer you're looking for. Here's why:

the transformation of oil sands into usable liquids requires lots of energy and lots of water, not to mention lots of other inputs, including engineers that need to be trained, housed, paid and have kids that need to be schooled. Thus the price of the useful "barrel of oil equivalent" keeps on rising as the cost of all these inputs keeps on going up. Some of that (housing costs, local infrastructure) can be attributed to growing pains, but the rest (energy, water, equipment, trained workforce) are structural problems that will ensure that the industry will never be more than barely profitable, as its costs roughly mirror oil prices - quite simply because the thermodynamics are not great (if you need half a barrel of oil, in addition to other inputs, to produce one barrel of usable oil, that puts a very real damper on your profitability).
The Oil Drum has had a very enlightening series on oil sands which you can find starting here.

From this diary:

http://www.dailykos.com/storyonly/2006/7/10/93821/3495

[jk]

Re: The Ambiguity of what's happening in Oil vs. Inflation

When you say "canadian energy trusts", which ones are you refering to? I had a stake in Canadian Oil Sands Trust, but I'm not sure it's the answer you're looking for.

i used to own some of that but took profits way too early. i now have positions in 11 different trusts. the largest, about 2% each, are in some trust mutual funds - evdvf, sriuf, bsiuf, with 0.5% positions in 2 pipeline trusts - pmbif and ebguf, and still smaller positions in the rest - peyuf, bnpuf, naluf, blxjf, pgxff and a tiny position in wlluf [tiny because it went down a bunch]. the total adds up to 10%.

[Guest]

Re: The Ambiguity of what's happening in Oil vs. Inflation

Reposted for Laffs :

Rajiv -

You've got to wait for the bison-drawn Cadillac Escalades in North America before the general public will believe you. (4-Bison powertrain Cadillac Escalade - rated 0-3 MPH in 20 minutes by Cow & Driver magazine - 2015)

The Queen of England's Bentley (well actually it will be Prince Charles's Bentley, as he finally staggers briefly to the throne at the age of 90) will be drawn by a beautiful team of prize Herefords (8 cow powertrain Bentley, with gilded poop bags - rated a "powerful but sedately regal" 0-1.5 MPH in 45 minutes by British Cow Magazine - 2033).

German sports cars will have an advanced powertrain comprised of a 40 Holstein powertrain team (rated 0-4.75 MPH in 15 minutes flat - by Auto Bild magazine - 2017).

[touchring]

Re: The Ambiguity of what's happening in Oil vs. Inflation

However, I've noted before that China's elite are already well aware that it is physically impossible for all of China to enjoy the standard of living that the US has now.

Food is already not a problem, so if you do not count the luxury of driving a gas guzzler as part of the standard of living, while it may take a very long time, several decades, it is not impossible. They just have to find a way to do it without using oil - plant oil or crude oil.

Most Asian cities, not just china cities are built compact and high density, so rail and public transport can take over most of the logistics and commuting. There's no need for a car.

[bill]

Re: The Ambiguity of what's happening in Oil vs. Inflation

If anyone is in a panic about conserving energy or coming up with alternatives it would be China .

Uranium is still my favorite as nuclear moves forward.

http://www.renewableenergyaccess.com...nt_October.doc

On October 28, 2007, the revised {Energy Conservation Law} was passed at the 30^th Meeting of the Tenth NPC Standing Committee. The revised {Energy Conservation Law}, which takes effect as of April 1, 2008, clearly enshrines energy conservation as a core State policy on a level with economic development and for the first time ties career advancement by local government officials to achievement of energy conservation goals. In 2006 China’s per unit of GDP energy consumption declined just 1.2%, short of the goal set for the year of a 4% reduction in per unit of GDP energy consumption and an inauspicious start towards the goal of bringing about a 20% reduction in per unit of GDP energy consumption for the full five years of the 11^th Five Year Plan period (2006-2010). The amended {Energy Conservation Law}, which has grown from fifty articles in six chapters to eighty-seven articles in seven chapters, also prohibits energy producers from supplying power to their workers and staff without compensation and implementing any system of guaranteed prices; fines may be levied for non-compliance of these provisions of the amended {Energy Conservation Law} of between 50,000 Yuan and 100,000 Yuan.
At the “Trade, Climate Change and International Competitiveness” Conference held in Shanghai in late September 2007 a researcher with the NDRC’s Energy Research Institute said that in the short term China will not be imposing a carbon tax as a method to promote the reduction in greenhouse gases, but that in the short term the principal means by which greenhouse gas emissions in China will be reduced are renewable energy development, energy efficiency improvements and the development of more nuclear power.

http://www.renewableenergyaccess.com...story?id=50479

[bill]

Re: The Ambiguity of what's happening in Oil vs. Inflation

On Monday two think tanks to release a climate report.

The Report:
http://www.csis.org/component/option...d,4154/type,1/

[GRG55]

Re: The Ambiguity of what's happening in Oil vs. Inflation

...On your question our views appear broadly similar. My mental model is that the upstream sector (your "wet oil"?) explorer/producers are perpetually long physical oil by virtue of holding reserves in the ground. The only way they can reduce their physical long position is to produce and sell.

The offset to this physical long are the refinery capacity owners, who are perpetually short physical crude (their raw inventory is irrelevant compared to annual throughput). Being short physical means that rising crude prices hurt their business, and that's exactly what we saw in the 3Q '07 reports released in the past couple of weeks.

I think these are fundamentally different businesses, although there is a long standing school of thought that integrating them somehow makes for a superior business. I disagree completely; so much that in 1997, as the "supermajor" M&A was gathering momentum, I voluntarily left "Big Oil". I firmly believed that integration was a busted business model, that the creation of the "supermajors" was the last gasp of brontosaurus after the meteor hit, and these companies would underperform. Nothing that has happened in the past decade has changed my mind (Integrated oil is like running a long/short hedge fund with all the pair trades in completely independent economic sectors). The reserves problem in Shell, production difficulties in BP, and recent earnings issues in Exxon and Conoco/Phillips (with oil hitting all time highs!) suggest to me that these companies will ultimately be broken up into the independent constituents you listed (with Wall St. making fees coming and going).

From Business Week (Note that the likely next shoe to drop will be reserves write-downs at the supermajors. They may try to obscure this with acquisitions - the long reserves life index Canadian oil sands will be a particular target - but you can be quite certain that the reserves numbers on the books right now are optimistic and the production figures in future years won't support them. You heard it here on iTulip first):

Trouble ahead for Big Oil

Despite surging crude prices, profits may be on the wane at the big multinational energy companies.

By BusinessWeek
Even as oil prices break records and test the $100 mark, profits aren't gushing for major oil companies.

ExxonMobil on Nov. 1 reported a 10% drop in profits for the third quarter. Its shares tumbled 3.5% on the news. Chevron on Nov. 2 said third-quarter profit plunged a greater-than-expected 26%.

BP PLC, Europe's second-largest oil company, reported a 29% drop in third-quarter profit, while ConocoPhillips, the U.S.'s third-largest oil company, said its third-quarter profit fell 5%.

What's ailing Big Oil?

Problems here to stay

This round of lower profits was caused by low refining margins, or the difference between the price of crude oil and that of refined products like gasoline. Because gasoline prices haven't been rising in tandem with soaring crude, integrated oil companies and refiners are suffering a major blow in refining and marketing profits.

Some analysts say refining problems are here to stay.
"Gasoline prices can't keep pace with the sharp run-up in crude oil prices," says Fadel Gheit, senior energy analyst for Oppenheimer. "Going forward, whatever an oil company can get for crude oil (production), it will forfeit at the pump."

Still, analysts say it's important to keep the industry's woes in perspective. "Only in this crazy bull market do people think that Exxon making $9.4 billion is some sort of problem," says Peter Beutel, president of the energy risk management firm Cameron Hanover in New Canaan, Conn. "I'm personally not shedding any tears for Exxon; it'll keep making plenty of money."

Global woes

International political developments have been causing more problems, too. From Russia to Nigeria to Venezuela, private energy companies have been struggling to get access to oil as governments become more difficult to work with.

In June, Venezuelan President Hugo Chávez forced international oil companies to hand over equity stakes in their local operations to the state oil company Petróleos de Venezuela, prompting Exxon and ConocoPhillips to pull out of the country altogether. That contributed to a 2% drop in Exxon's production in the third quarter, despite the sharp rise in the price of crude oil.

Crude-oil prices, which have been on a bull run throughout 2007, are having a dual effect on oil majors, benefiting their exploration and production businesses while compromising refining segments.
Amid tensions between Turkey and Iraq, fear of a U.S. confrontation with Iran and supply concerns, crude oil prices have broken consecutive records in the last month. A barrel of light, sweet West Texas Intermediate benchmark crude settled at $92.97 on the New York Mercantile Exchange on Nov. 2, having surpassed a record $96 earlier in the week.

But high crude-oil prices are only good news for refiners if they can charge high prices for refined products like gasoline. And relatively soft demand for gasoline is holding down prices at the pump, at least for now. Since the end of August, the wholesale price of crude oil has risen 60% per gallon, while gasoline is up only 16% a gallon.
The world's not running out of oil, says Vijay Vaitheeswaran of The Economist. But the countries in which the resource is concentrated present challenges to Western oil producers.

End of an era?

Not long ago, integrated oil companies were basking in the glow of record profits. In the third quarter of 2006, for example, Exxon reported the second-largest quarterly profit ever for a U.S. company. Also last year, Exxon set a record for the highest ever annual income, with earnings of $39.5 billion.

Some analysts say the golden era of sky-high profits could be over for integrated oil companies. A combination of factors, including higher material and labor costs, increased competition from national oil companies and potentially falling oil prices, could dim future prospects for oil majors.

Chinese national oil company PetroChina had an initial public offering today and by some estimates it now has a market value of $1 trillion, which would vault it ahead of ExxonMobil and make PetroChina the world's biggest company by market cap.

With PetroChina and national oil companies coming on fast, U.S. energy leaders are calling on the government to take action. ConocoPhillips CEO James Mulva has joined other leaders in the industry calling on the U.S. government to create a more robust energy policy to help U.S. oil companies compete with national oil companies. "We don't have a national energy policy," says Mulva. "The Chinese have a very coordinated strategy that allows them to support economic growth and their standard of living."

Profits 'will decline, decline, decline'

Other analysts warn that the golden era for oil majors' profits may be in the past because oil prices could drop. "For now we're just seeing a normal seasonal wiggle and jiggle, but at some point Exxon's profits will decline, decline, decline," says Cameron Hanover's Beutel. "Ultimately this (oil) market will peak, and prices will start to move lower. Refining margins will provide some relief, but profits won't be the extraordinary ones we've seen."

Despite the gloomy earnings news, Exxon's vice president for investor relations, Henry Hubble, was upbeat on a conference call with analysts and investors. "These results highlight the fundamental strength of our business and our ability to deliver superior performance," said Hubble. "We are well positioned for demand growth and continue to create value for shareholders."

Analysts like Gheit agree. He says that even when trouble arises, the world's largest oil company will be positioned to compete.
"Exxon has no control over commodity prices, but it will always be the best-prepared student for whatever test comes its way," says Gheit. "It doesn't matter how difficult the test will be -- it will always be at the top of the class."

This article was reported and written by Moira Herbst for BusinessWeek.

[bart]

Re: The Ambiguity of what's happening in Oil vs. Inflation

Why not start your oil chart back when the US went off the gold standard and project from there?

I'll see that puny chart only going back to 1971 and raise you one, complete with CPI & CPI+lies adjustments, going back to 1900... ;)

[jk]

Re: The Ambiguity of what's happening in Oil vs. Inflation

grg55,
re: majors' reserves
my understanding from some material of matt simmons is that the contracts that the majors have with various nations changes the profit split once some base dollar value of oil is pumped. the implication was that high oil prices would cause the dollar value of oil extracted to quickly reach the contractual thresholds. once reached, the majors' share of profits would be cut sharply. my conclusion was that this was a reason that majors did their planning based on low prices. if they assumed high prices, they would also have to assume that they would quickly lose a big share of profits. to your knowledge, is this understanding correct?

[GRG55]

Re: The Ambiguity of what's happening in Oil vs. Inflation

I'll see that puny chart only going back to 1971 and raise you one, complete with CPI & CPI+lies adjustments, going back to 1900... ;)

Can a money supply line be superimposed on this as well?