A "Flood" of new oil..........

[GRG55]

Re: A "Flood" of new oil : Be Careful What You Wish For

GRG,

When the frac oil is used up, what will happen to Texas and North Dakota?

They will just revert to what they were like before the shale boom.

North Dakota is certainly "less diverse" then before the boom. But after the boom,
it must of necessity become less dependent on resource extraction, and therefore, more diverse.

Alaska is already going through this painful process. People adapt.

Northern California was once heavily dependent on resource extraction. No more.

The best example I can think of for what happens when the oil "runs out" is visiting Oklahoma in the late 1980s and throughout the 1990s. The young working age people don't adapt. They mostly move away. Even during the oil boom of the 1970s places like Tulsa didn't see much of it compared to Dallas and Houston. And the old timers reminisced about the good ol' days, which for Oklahoma was the 1920s.

[Polish_Silver]

Re: A "Flood" of new oil : Be Careful What You Wish For

The best example I can think of for what happens when the oil "runs out" is visiting Oklahoma in the late 1980s and throughout the 1990s. The young working age people don't adapt. They mostly move away. Even during the oil boom of the 1970s places like Tulsa didn't see much of it compared to Dallas and Houston. And the old timers reminisced about the good ol' days, which for Oklahoma was the 1920s.

I'd say they adapted to the situation by moving to where they could get jobs. There used to be a big steel mill in Phoenixville, Pennsylvania.

It closed sometime in the 1970's. The population there is probably smaller than in 1965. But the town is far from dead. The location of the steel mill is a city park. The downtown is as picturesque as an English village. Not all the rust belt came out so good.

[don]

Are Petrodollars the Real Story?

by MIKE WHITNEY

Why is the Fed threatening to raise interest rates when the economy is still in the doldrums? Is it because they want to avoid further asset-price inflation, prevent the economy from overheating, or is it something else altogether? Take a look at the chart below and you’ll see why the Fed might want to raise rates prematurely. It all has to do with the sharp decline in petrodollars that are no longer recycling into US financial assets. This is from Reuters:

Petrodollar Exports
Source: Reuters

“Energy-exporting countries are set to pull their ‘petrodollars’ out of world markets this year for the first time in almost two decades, according to a study by BNP Paribas. Driven by this year’s drop in oil prices, the shift is likely to cause global market liquidity to fall, the study showed…

This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

This year, however, the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations:

‘At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out,’ said David Spegel, global head of emerging market sovereign and corporate Research at BNP.

In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.” (Petrodollars leave world markets for first time in 18 years – BNP, Reuters)

Can you see what’s going on?

Now that petrodollar funding has dried up, the Fed needs to find an alternate source of capital to keep the markets bubbly and to shore up the greenback. That’s why the Fed has been talking up the dollar (“jawboning”) and promising to raise rates even though the economy is still pushing up daisies. According to the Fed’s favorite mouthpiece, Jon Hilsenrath:

“Federal Reserve officials are on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation…

Many Fed officials have signaled they expect to start lifting their benchmark short-term rate from near zero around the middle of the year. Recent developments in the economy and markets have caused some trepidation among Fed officials and, if sustained, could cause them to delay acting. However several have indicated recently they still expect to move this year and are withholding judgment on delay.” (Fed Officials on Track to Raise Short-Term Rates Later in the Year, Jon Hilsenrath, Wall Street Journal)

And we’re hearing the same from Reuters: “The Federal Reserve is still on track for a potential mid-year interest-rate increase, a top Fed official said on Friday, citing strong U.S. economic momentum and a falling unemployment rate.”

Notice the sudden change in tone from dovish to hawkish? Expect that to intensify in the months ahead as the major media tries to spin the data in a way that serves the Fed’s broader objectives. Like this article in Bloomberg titled, “Yellen Signals She Won’t Babysit Markets in Turmoil”:

“Janet Yellen is leaving the Greenspan ‘put”’behind as she charts the first interest-rate increase since 2006 amid growing financial-market volatility.

The Federal Reserve chair has signaled she wants to place the economic outlook at the center of policy making, while looking past short-term market fluctuations. To succeed, she must wean investors from the notion, which gained currency under predecessor Alan Greenspan, that the Fed will bail them out if their bets go bad — just as a put option protects against a drop in stock prices.

“The succession of Fed puts over the years has led to a wide range of distortions in financial markets,” said Lawrence Goodman, president of the Center for Financial Stability, a monetary research group in New York. “There have been swollen asset values followed by sharp declines. This is a very good time for the Fed to move away.

“Let me be clear, there is no Fed equity market put,” William C. Dudley, president of the New York Fed, the central bank’s watchdog on financial markets, said in a Dec. 1 speech in New York.” (She’s No Greenspan: Yellen Signals She Won’t Babysit Markets in Turmoil)

“There’s no Fed equity put”?

That’s ridiculous. Then how does one explain the way the Fed has launched additional rounds of QE every time stocks have started to sputter? And how does one explain the Fed’s $4 trillion balance sheet all of which was spent on financial assets?

Let’s face it, Central bank intervention has been the only game in town. It’s not just the main driver of stocks. It’s the only driver of stocks. Everyone knows that. Yellen is going to do everything in her power to keep stocks in the stratosphere just like her predecessors, Greenspan and Bernanke. The only thing that’s going to change is her approach.

As for the economy, well, just a glance of the headlines tells the whole story. Like this gem from CNBC last week:

“U.S. consumer prices recorded their biggest decline in six years in December and underlying inflation pressures were benign,…The Labor Department said on Friday its Consumer Price Index fell 0.4 percent last month, the largest drop since December 2008, after sliding 0.3 percent in November. In the 12 months through December, CPI increased 0.8 percent…

Darkening prospects for the global economy could also complicate matters for the U.S. central bank.

Inflation is running below the Fed’s 2 percent target, despite a strengthening labor market and overall economy.” (Consumer Price Index drops 0.4% in December, in line with estimates, CNBC)

Think about that for a minute: Consumer prices just logged their biggest drop since the freaking slump of 2008 and, yet, the Fed is still babbling about raising rates.

Talk about lunacy. Not only has the Fed not reached its inflation target of 2%, but it’s abandoned the project altogether. Why? Why has the Fed suddenly stopped trying to boost inflation when the yields on benchmark 10-year US Treasuries have just plunged to record lows (1.70%) and are blinking red? In other words, the bond market is signaling slow growth and zero inflation for as far as the eye can see, but the Fed wants to raise rates and slash growth even more?? It doesn’t make any sense, unless of course, Yellen has something else up her sleeve. Which she does.

Now get a load of this shocker on retail sales in last week’s news. This is from Bloomberg:

“The optimism surrounding the outlook for U.S. consumers was taken down a notch as retail sales slumped in December by the most in almost a year, prompting some economists to lower spending and growth forecasts.

The 0.9 percent decline in purchases …. extended beyond any single group as receipts fell in nine of 13 major retail categories.
…
Treasury yields and stocks fell as a deepening commodities rout and the drop in sales spurred concern global growth is slowing…

…average hourly earnings falling 0.2 percent in December from the month before in the first drop since late 2012. That limits the amount of spending consumers can undertake without dipping into savings or racking up debt.” (U.S. Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead, Bloomberg)

Remember when everyone thought that low oil prices were going to save the economy? It hasn’t worked out that way though, has it? Nor will it. Falling oil prices usually indicate recession, crisis or deflation. Take your pick. They’re usually not a sign of green shoots, escape velocity, or sunny uplands.

And did you catch that part about falling wages? How do you expand a consumer-dependent economy, when workers are seeing their wages shrivel every month? In case, you haven’t seen the abysmal stagnation of wages in graph-form, here’s a chart from American Progress:

Negative real wage growth means the amount of slack in the market is still considerable.

So while stock prices have doubled or tripled in the last 6 years, wages have basically been flatlining. That’s a pretty crummy distribution system, don’t you think. Unless you’re in the 1 percent of course, then everything is just hunky dory.

But at least Yellen can find some comfort in the fact that unemployment continues to improve. In fact, just two weeks ago unemployment dropped to an impressive 5.4%, the lowest since 2007. So if we forget about the fact that wages are stagnating, that management has nabbed all the productivity-gains for the last 40 years, and that another 451,000 workers dropped off the radar altogether in December, then everything looks pretty rosy. But, of course, it’s all just a bunch of baloney. Take a look at this:

“Another month, another attempt by the BLS to mask the collapse in the US labor force with a seasonally-adjusted surge in waiter, bartender and other low-paying jobs. Case in point… the labor participation rate just slid once more, dropping to 62.7%, or the lowest print since December 1977. This happened because the number of Americans not in the labor forced soared by 451,000 in December, far outpacing the 111,000 jobs added according to the Household Survey, and is the primary reason why the number of uenmployed Americans dropped by 383,000.

(Labor Participation Rate Drops To Fresh 38 Year Low; Record 92.9 Million Americans Not In Labor Force, )

So, yeah, unemployment looks great until you pick through the data and see it’s all a big fraud. Unemployment is only falling because more and more people are throwing in the towel and giving up entirely.


Finally, there’s the rapidly-expanding mess in the oil patch where the news on layoffs and cut backs gets worse by the day. This is from Wolf Richter at Naked Capitalism:

“Layoffs are cascading through the oil and gas sector. On Tuesday, the Dallas Fed projected that in Texas alone, 140,000 jobs could be eliminated. Halliburton said that it was axing an undisclosed number of people in Houston. Suncor Energy, Canada’s largest oil producer, will dump 1,000 workers in its tar-sands projects. Helmerich & Payne is idling rigs and cutting jobs. Smaller companies are slashing projects and jobs at an even faster pace. And now Slumberger, the world’s biggest oilfield-services company, will cut 9,000 jobs.” (Money dries up for oil and gas, layoffs spread, write-offs start, Wolf Richter, Naked Capitalism)

And then there’s this tidbit from Pam Martens at Wall Street on Parade:

“In a December 15 article by Patrick Jenkins in the Financial Times, readers learned that data from Barclays indicated that “energy bonds now make up nearly 16 per cent of the $1.3 trillion junk bond market — more than three times their proportion 10 years ago,” and “Nearly 45 per cent of this year’s non-investment grade syndicated loans have been in oil and gas.” Raising further alarms, AllianceBernstein has released research suggesting that the deals were not fully subscribed by investors with the potential that “as much as half of the outstanding financing from the past couple of years may be stuck on banks’ books.” (The perfect storm for Wall Street banks, Russ and Pam Martens, Wall Street on Parade)

How do you like that? So nearly half the toxic energy-related gunk that was bundled up into dodgy junk bonds (and is likely to default in the near future) is sitting on bank balance sheets. Does that sound like a potential trigger for another financial crisis or what?

And, no, I am not trying to ignore the fact that third quarter GDP came in at a whopping 5 percent which vastly exceeded all the analysts estimates. But let’s put that into perspective. According to economist Dean Baker, the growth spurt was mainly “an anomaly” …”driven by extraordinary jump in military spending and a big fall in the size of the trade deficit that is unlikely to be repeated.” Here’s more from Baker:

“As usual, just about everything we’ve heard about the economy is wrong. To start, the 5.0 percent growth number must be understood against a darker backdrop: The economy actually shrank at a 2.1 percent annual rate in the first quarter. If we take the first three quarters of the year together, the average growth rate was a more modest 2.5 percent.” (Don’t Believe What You Hear About the US Economy, Dean Baker, CEPR)

So, the economy is growing at a crummy 2.5 percent, but Yellen wants to raise rates. Why? Does she want to shave that number to 2 percent or 1.5 percent? Is that it? She wants to go backwards?

Of course not. The real reason the Fed wants to raise rates, is to attract foreign capital to US markets in order to keep stocks soaring, keep borrowing costs low, and reinforce the dollar’s role as the world’s reserve currency. That’s what’s really going on. The petrodollars are drying up, so US markets need a new source of funding. Direct foreign investment, that’s the ticket, Ducky. All the Fed needs to do is boost rates by, let’s say, 0.5 percent and “Cha-ching”, here comes the capital. Works like a charm every time, just ask former Treasury Secretary Robert Rubin whose strong dollar policy sent stock prices into orbit while widening the nation’s current account deficit by many orders of magnitude. (We never said the plan didn’t have its downside.)

The Fed’s sinister plan to raise interest rates (sometime by mid-2015) will push the dollar’s exchange rate higher thus triggering capital flight in the emerging markets which are already struggling with plunging commodities prices and an excruciating slowdown. The investment flows from the EMs to US financial assets and Treasuries will offset the loss of petrodollar revenue while expanding Wall Street’s ginormous stock market bubble. As for the emerging markets, well, they’re going to take it in the shorts bigtime as one would expect. Here’s a clip from an article by Ambrose-Evans Pritchard that lays it out in black and white:

“The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion in US dollars, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries…

Officials from the Bank for International Settlements say privately that developing countries may be just as vulnerable to a dollar shock as they were in the Fed tightening cycle of the late 1990s, which culminated in Russia’s default and the East Asia Crisis. The difference this time is that emerging markets have grown to be half the world economy. Their aggregate debt levels have reached a record 175pc of GDP, up 30 percentage points since 2009…”

This time the threat does not come from insolvent states. They have learned the lesson of the late 1990s. Few have dollar debts. But their companies and banks most certainly do, some 70pc of GDP in Russia, for example. This amounts to much the same thing in macro-economic terms. ” (Fed calls time on $5.7 trillion of emerging market dollar debt, Ambrose-Evans Pritchard, Telegraph)

The Fed has been through this drill so many times before they could do it in their sleep. (” U.S. interest-rate hikes in 1980s and 1990s played a role in financial crises across Latin America and East Asia.” Foreign Policy Magazine) They’ve learned how to profit off every crisis, particularly the one’s that they themselves create, which is just about all of them. In this case, most of the loans to foreign businesses and banks were denominated in dollars. So, now that the dollar is soaring, (“The dollar’s value has risen about 15 percent relative to the euro and the yen just since the summer.” NPR) the debts are going to balloon accordingly (in real terms) which is going to push a lot of businesses off a cliff forcing sovereigns to step in and provide emergency bailouts.

Did someone say “looming financial crisis”?

Indeed. Bernanke’s “easy money” has inflated bubbles across the planet. Now these bubbles are about to burst due to the strong dollar and anticipated higher rates. At the same time, the policy-switch will send hundreds of billions of foreign capital flooding into US markets pushing stocks and bonds through the roof while generating mega-profits for JPM, G-Sax and the rest of the Wall Street gang. All according to plan.

Naturally, the stronger dollar will weigh heavily on employment and exports as foreign imports become cheaper and more attractive to US consumers. That will reduce hiring at home. Also the current account deficit will widen significantly, meaning that the US will again be consuming much more than it produces. (This took place under Rubin, too.) But here’s what’s interesting about that: According to the Bureau of Economic Analysis: “Our current account deficit has narrowed sharply since the crisis…The U.S. current account deficit now stands at 2.5 percent of GDP, down from more than 6 percent in the fourth quarter of 2005.” (BEA)

Great. In other words, Obama’s obsessive fiscal belt-tightening lowered the deficits enough so that Wall Street can “party on” for the foreseeable future, ignoring the gigantic bubbles they’re inflating or the emerging market economies that are about to be decimated in this latest dollar swindle.

[Southernguy]

Re: Are Petrodollars the Real Story?

February 02, 2015
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The Problem Isn’t That We Have Too Little Oil. We Have Too Much and are Cooking the Planet With It.
Why the Crash in Oil Prices Should Bury “Peak Oil” Once and for All

by ARUN GUPTA
In 1977 Isaac Asimov wrote of “The Nightmare Life Without Fuel.” Writing in the wake of the first Middle East oil shock, Asimov imagined cars and air conditioning as distant memories, cities mined for valuable minerals and hardware, and the last barrels of oil hoarded for agricultural and military purposes. A future of scarcity seemed in the cards after the 1979 revolution in Iran disrupted global supplies, reviving gas lines and rationing in the United States, and sending oil prices to a stratospheric $117 a barrel in today’s dollars.
The U.S. economy plunged into recession for the second time in a decade. Inflation, food prices and unemployment all shot up. Energy-importing Third World nations were devastated as expensive crude depleted their treasuries even as the U.S. Federal Reserve jacked interest rates, triggering the debt crises that remain unresolved to this day.
But high oil prices didn’t last long as Saudi Arabia opened its spigots to replace Iran as the West’s top oil supplier, oil exploration boomed in Texas, and vast new fields in the Gulf of Mexico, North Sea and Alaska ramped up. By the mid-1980s two-hour lines at the filling station were my faded memory as I’d zip up to the pump and fill my gas-sipping Nissan Sentra for $5.
We are now replaying that era of energy shocks radiating from the Middle East with its tight energy markets, expensive oil, and an eventual oversupply and bust. The cyclical nature of the fossil-fuel industry disapproves a concept that’s gained wide support, especially on the left, even though it’s flawed in every way: “peak oil.”
Asimov never used the term peak oil in his essay, but that was the underlying idea: oil would run out because it was a fixed resource unaffected by economic and technological innovation. Shell Oil geologist Marion King Hubbert developed peak oil theory in the 1950s, predicting domestic U.S. oil production would peak by 1970 and decline steadily thereafter. In exploiting an individual oil field, Hubbert contended, production ramps up quickly and hits a peak at about which time about half the recoverable oil has been extracted. As the oil becomes increasingly difficult and costly to pump out, the field goes into decline. Think of the production as a bell-shaped curve. The top point means half is gone and half is left. But because population and the economy continue to grow, so do energy needs. Hubbert held that his theory about an individual field was applicable to the continental U.S. oil production and even the entire world, which he predicted would peak around 2000.
After that, as one website describes, comes the nightmare future. “Worldwide demand for oil will outpace worldwide production of oil by a significant margin … the price will skyrocket, oil dependent economies are liable to crumble, and resource wars are liable to explode.”
It sounds scary, except panics over looming oil shortages are as old as the industry itself. One snake-oil salesman in 1855 implored buyers to purchase his petroleum-based cure-all “before this wonderful product is depleted from Nature’s laboratory.” The U.S. government warned numerous times in the 20th century that oil supplies would be depleted in a decade or two. The infamous 1972 Limits to Growth projected that by 2013 the world should have run out of “aluminum, copper, gold, lead, mercury, molybdenum, natural gas, oil, silver, tin, tungsten, and zinc.” Peak-oil theorists like Colin Campbell, Kenneth Deffeyes, Richard Heinberg and James Howard Kunstler have been declaring peak oil for more than twenty years but , consumption, production and reserves keeps growing.
Despite this dismal track record many leftists embraced peak oil during the Bush era. It was a secular version of end times in the post-9/11 world. If movement building seems insurmountable, then it’s tempting to find solace in building post-carbon, do-it-yourself communities and wait for the wells to run dry at which point everything from the “war on terror” to climate change is resolved.
Fervent peak oilers are neo-Malthusians, believing the relentless growth of population and society on their own will outstrip natural resources. While Malthus’s ideas were discredited on scientific, historical, and economic grounds in the 19th century, they live on in peak oil, peak water, peak minerals, peak soil, peak food and peak everything.
From a scientific perspective, peak oil posits geology as determining oil supplies. Of course oil is a finite and non-renewable resource, but the last decade of spiraling oil prices was caused by Middle East wars, Wall Street commodities speculation, and ecological disasters like Hurricane Katrina, not by natural limits. It’s the socio-economic system that determines how much oil, along with every other commodity, is produced, distributed, and consumed. Grasping why peak oil and its variants are flawed offers a deeper understanding of the global energy order, the politics of climate change, and capitalism itself.
Even the term peak oil is problematic, obscuring how the energy industry works. We may imagine oil as gushing out of a steel derrick in a barren desert, but energy companies are after any form of hydrocarbons that can be profitably refined. Cars on a highway could be powered by fuel derived from tar sands, natural-gas or its condensates, shale oil, biofuels, heavy oil, or coal-to-liquid. One scenario by the U.S. Energy Information Administration estimates such non-conventional sources could account for more than one-third of all oil produced by 2030.
Then there is the concept of a peak. Even though Hubbert was off by only one year—domestic production peaked in 1971—production looks nothing like his bell curve over time. It rose after each seventies shock, went into a twenty-year funk after the mid-eighties crash, and in the last five years it has soared to near its 1971 peak.
The inherent flaw of peak oil is that it naturalizes capitalism. Energy reserves are determined by price, investment and technology. The current oil boom, driven by innovations in fracking and drilling, tar-sands production, low-cost investment capital and persistently high oil prices, have smashed Hubbert’s theory to bits like brittle shale.
The inaccuracy of peak oil hasn’t stopped prominent figures like Paul Krugman and George Monbiot from flirting with the concept. Monbiot admitted his error in 2012, correctly noting the problem is not too little oil, but too much: “There is enough oil in the ground to deep-fry the lot of us, and no obvious means to prevail upon governments and industry to leave it in the ground.” On the left, Michael Klare has pushed versions of peak oil in books like Resource Wars and The Race for What’s Left. In 2005 Klare declared that “the world is headed for a severe and prolonged energy crunch in the not-too-distant future.” In 2008 Klare wrote that “the current energy crisis is almost certain to be long-lasting.” In 2012 he asserted that “oil prices are destined to remain high for a long time to come.”
Like the hardcore peak oilers, Klare confuses the energy economy with oil reserves rather than analyzing how economic, political, and technological forces turn tight markets into gluts, and booms into busts. While Klare tends not to endorse peak oil outright, he often quotes the ideas favorably. In recent years he has shifted to peak oil-lite, proclaiming the end of “cheap oil” or “easy oil.” Most any gas station these days refutes the “cheap oil” notion. The U.S. average is currently $2.03 for a gallon of gas, close to the inflation-adjusted average in the 1950s.
As for “easy oil,” that’s relative. In 1947 when the first commercial oil well was built out of the sight of land in the Gulf of Mexico it was an engineering marvel and in all of 18 feet of water. Today, Brazil has committed $82 billion to develop a “pre-salt basin” of oil under 6,900 feet of water and additional 17,000 feet of seabed. Japan is in uncharted waters with a pilot project to exploit methane hydrates, a form of frozen hydrocarbon on ocean floors that may be twenty-five times the size of all potential natural gas reserves. While there are uncertainties about these projects, especially methane hydrates, they show huge sums of investment are readily available to an energy industry that can rapidly innovate to develop profitable resources.
Klare, however, dismisses new hydrocarbon sources. He claims shale and tar sands oil is “tough oil” that “will have to overcome severe geological and environmental barriers.” The energy industry, however, doesn’t give a hoot about the environment. As Naomi Klein, author of This Changes Everything, puts it, “[Its] business model is fundamentally at war with life on earth.” And just as low gas prices refute the end of cheap oil, the output from Canada’s tar sands, more than 2.5 million barrels of synthetic crude a day, and U.S. shale formations, nearly 4 million barrels a day, proves tough oil is meaningless.
It’s the quest for hydrocarbons in general and geopolitical maneuvers that’s made the current oil crash rapid and steep. The last major crash was in the mid-eighties, and that taught Saudi Arabia to plan ahead. It’s amassed $750 billion in currency reserves and is pumping oil at full tilt rather than give up market share. The Saudis are willing to weather low prices to punish rivals like Iran and to force some unconventional black gold like shale and tar sands into the red. Conspiracy theorists see Washington’s hand because of the pain inflicted on Russia, Iran, and Venezuela, which all need high oil prices to meet their budgetary needs. But as the Socialist Worker points out, “Saudi Arabia’s decision not to prop up prices is the product of its rivalry with U.S. oil producers, not coordination with U.S. policymakers.” Daniel Yergin, author of The Prize, the Pulitzer Prize-winning history of the oil industry, contends we may be entering a new oil era where the United States supplants Saudi Arabia as the “swing producer” that can exert direct control over oil markets.
Critics contend that given ever-increasing thirst for hydrocarbons historically, any assumption about future usage based on current supply is dicey. That’s true, but “proven reserves” of oil and natural gas, which is the most conservative category, keep rising. One figure that has remained consistent over decades is the “reserve-to-production” ratio. In 1995 the world had an estimated 51 years of oil supply based on consumption that year. After burning through half-a-trillion barrels of oil since then, the global reserve-to-production ratio in 2013 was up to 53.3 years.
While peak oilers snipe that Middle East producers overstate their supply, the opposite is the case. Officially, Saudi Arabia has 267 billion barrels of oil, but in twenty years, Saudi Aramco estimates it will have 630 billion barrels of recoverable reserves. That’s on top of current production rates of 4 billion barrels annually. The same is true for the United States, Canada, Venezuela, Iran, and Iraq. They can potentially produce far more oil than what’s listed in their reserves. One study of U.S. oil fields found the actual production was more than seven times the initial estimates. Conservative estimates of Brazil’s pre-salt oil fields put it at 14 billion barrels, which means they would eventually produce more than 100 billion barrels.
State companies like Saudi Aramco, known as “nationals,” often resist U.S. pressure to pump more oil because that could lead to a price crash. As the nationals control 90 percent of global reserves, many large fields remain untapped. The “majors”—corporations like ExxonMobil, Shell, BP, and Chevron—are left to grab what they can, such as shale oil, tar sands, or search in extreme environments like the Arctic Ocean. This tendency only reflects the market imperative to maintain profitability, not a harbinger of the end of oil. But since Klare focuses mainly on the majors, his view is one in which oil is rapidly dwindling. In 2005 he wrote that “in the absence of major new discoveries, we face a gradual contraction in the global supply of petroleum” because “major private oil companies are failing to discover promising new sources of petroleum.” Yet since 2003 global proved reserves have increased by more than 350 billion barrels, and that is in addition to over 300 billion barrels consumed in the same period.
Even when shortfalls occur these days they are political, not geological. Explicit U.S. policy is to control the global oil spigot. Obama told the U.N. General Assembly in 2013 that because “a severe disruption could destabilize the entire global economy,” he was prepared to use military force to “ensure the free flow of energy from the [Middle East] to the world.”
Since the 1990s, Washington has disrupted many major oil producers. This includes the invasion of Iraq, the overthrow of Muammar Gaddafi in Libya, sanctions on Iran, and dirty tricks against Venezuela. Ironically these actions tightened the oil market such that domestic fracking and tar sands became profitable. But the world is not about some free for all scramble for oil as in Klare’s “resource wars.” He contends that “unsettled resource deposits—contested oil and gas fields, shared water systems, embattled diamond mines—provides a guide to likely conflict zones in the twenty-first century.”
Other than those countries Washington designates as rogue states—like Iran, Iraq, and North Korea—every state accepts, even if grudgingly, the U.S.-managed global oil order. Even countries on the out are looking for an in. The drop in oil prices helped create the conditions for a rapprochement between Cuba and the United States, and it may be pushing Iran to reach a deal with the White House over its nuclear energy program.
A more accurate view of the global oil order is provided by physicist and geopolitical analyst Tom O’Donnell who terms it “one global barrel.” He argues that the pre-1973 oil system had no meaningful open market, making it a form of mercantilism. Back then the majors backed by Western states controlled the production of oil-rich countries. Supply disruptions to one company could affect an entire consuming country. The new system developed after Third World states nationalized oil companies. The global oil order now works through the market, mainly the London and New York commodities exchange, and is dominated by U.S.-protected Gulf States in OPEC and managed by international institutions such as the Organization for Economic Cooperation and Development and the International Energy Agency. Above it all is the U.S. government.
Klare implies national interests still reign supreme and nations are constantly on the brink of war over shrinking energy supplies. While China may chafe at U.S. control and Russia and the United States are at odds, the global oil order is marked by conflict, competition and cooperation at the same time and often in the same place. In Russia, Western oil companies continue to do business despite sanctions. In Iraq some opponents of the war crowed that Russian and Chinese oil companies that won concessions there marked the “declining influence of American capitalism.” But the scope of revamping Iraq’s oil infrastructure is so large that much of the lucrative drilling and exploration work is going to U.S. oil services firms. More important, Washington policymakers are generally indifferent to who is producing Iraq’s oil as long as it flows freely into the global market and U.S. influence holds over the Iraqi state.
If we could fast forward through time to find when oil production and consumption peaks, that would tell us nothing about the social impact. The 1980s crash was due to an increase in supply and drop in demand. Oil consumption may seem to march in lockstep with population and economic growth, but it is elastic. A barrel of oil today generates three times as much economic activity as it did in 1976. Unbelievably, U.S. oil consumption was lower in the first half of 2014 than in 1989. Factors include lower car usage and increasing fuel efficiency that hit a record of 23.6 miles per gallon in 2012. Yet most European economies produce 50 to 60 percent more economic activity per unit of energy as does the United States. We could slash our oil consumption in half in a decade with a concerted effort. It could keep going down until oil is reserved for far more valuable uses such as road building, metal making and specialized lubricants, chemicals, plastics, and pharmaceuticals.
Oil consumption needs to drop dramatically because of the dangerous planetary effects. But that has nothing to do with peak oil. It’s a matter of how we reorganize our society and economy on the surface of the earth so we stop using the stuff that’s under it.
Arun Gupta contributes to numerous publications including The Guardian, Counterpunch, In These Times, The Nation, Al Jazeera, and Alternet. He is writing a book on the social construction of taste. @arunindy
A version of this was originally published by Telesur.

[Southernguy]

Re: Are Petrodollars the Real Story?

r

[jk]

Re: Are Petrodollars the Real Story?

i'm waiting for the economist to repeat the cover titled "drowning in oil."

[EJ]

Re: Are Petrodollars the Real Story?

i'm waiting for the economist to repeat the cover titled "drowning in oil."

My cousin has been in the oil patch his whole life. During the oil boom days -- a few months ago -- when everyone was talking about an endless boom in oil and his services firm that employs several hundred was overwhelmed with demand, he said the last thing I'd ever expect to hear from him. Paraphrasing, "It's great that we're producing all this oil but it's a finite resource. What are we going to do once we use it up?"

The mantra among the oil guys is "there's plenty of oil" so when a veteran speaks such heresy I take notice.

As I've been saying, on the other side of this once-in-a-lifetime oil glut is an epic panic upon realization that the dynamics of the energy industry and the finance industry that financed the production that produced the glut have led us to the edge of an oil production cost/affordability crisis with no magic technology to take us up the production curve, only price.

Coming to the global economy in 2018 or so.

In the mean time, there is some hay to be made while the sun shines.

[phinolerun]

Re: Are Petrodollars the Real Story?

Is the "hay" an opportunity to buy some of the oil names that have been beaten down? Has anything peaked your interest in the last couple of months?

[lakedaemonian]

Re: Are Petrodollars the Real Story?

Is the "hay" an opportunity to buy some of the oil names that have been beaten down? Has anything peaked your interest in the last couple of months?

+1000

GRG55's commentary is also appreciated as the forum energy industry guru

[Polish_Silver]

Re: Are Petrodollars the Real Story?

GRG has said there will be a time to buy, but another factor seems to be, that as retail prices rise, the production prices are also rising, so that oil company profits are not necessarily big when retail prices are high. You would want to find a company with production cost slightly higher than profitable at today's prices, and which could keep that same production cost when the market sets a higher price for oil.

[touchring]

Re: A "Flood" of new oil..........

Not sure if the opportunity is passed, SU has gone up quite a lot.

ISIS is winning the war on both the ground and on the Internet while Obama is busy with Russia - not sure whose side he is on?

[GRG55]

Re: A "Flood" of new oil..........

The US$ is on an oil standard now...falling oil prices, which used to be considered an economic boost, now strike fear into the hearts of bankers everywhere. Brings out the "D" word at the Fed...

The "D" word raises its ugly head again; headline inflation is negative, mostly due to falling energy (gasoline, etc) prices:

U.S. inflation falls 0.7% in January; core prices up 0.2%

Feb 26, 2015 01:40PM GMT

Investing.com - Consumer price inflation in the U.S. fell more than expected in January, while prices excluding food and energy costs inched up modestly, official data showed on Thursday.

In a report, the U.S. Department of Labor said that consumer prices declined by a seasonally adjusted 0.7% last month, compared to estimates for a decline of 0.6% and following a drop of 0.4% in December.

Year-over-year, consumer prices dipped at an annualized rate of 0.1% in January, in line with expectations and compared to an increase of 0.8% in December.

Consumer prices, excluding food and energy costs, increased by a seasonally adjusted 0.2% in January, above expectations for a 0.1% increase. Core consumer prices were flat in December.

Core CPI increased at annualized rate of 1.6% in January, meeting forecasts and unchanged from December.

Core prices are viewed by the Federal Reserve as a better gauge of longer-term inflationary pressure because they exclude the volatile food and energy categories. The central bank usually tries to aim for 2% core inflation or less.

EUR/USD was trading at 1.1305 from around 1.1318 ahead of the release of the data, while GBP/USD was at 1.5484 from 1.5489 earlier, while USD/JPY was at 119.03 from 118.85 earlier.

The US dollar index, which tracks the greenback against a basket of six major rivals, was at 94.57, compared to 94.52 ahead of the report...

[porter]

Re: A "Flood" of new oil..........

Can you explain why oil being priced in dollar causes deflation when oil prices fall? I don't understand this.

[jk]

Re: A "Flood" of new oil..........

iirc the fed's favored price index is the pce deflator. it was DOWN 0.997% in january.

[Polish_Silver]

deflation vs oil

The "D" word raises its ugly head again; headline inflation is negative, mostly due to falling energy (gasoline, etc) prices:

. . .

The US dollar index, which tracks the greenback against a basket of six major rivals, was at 94.57, compared to 94.52 ahead of the report...

I am hoping EJ will explain more about the related questions of interest rates, dollar purchasing power, oil prices, and debt deflation.

One thing I am certain of is that lower prices due to lower cost oil is not the same thing as lower prices due to a debt deflation. Finster has speculated that the lower oil prices are due to the lack of QE, ie, the fed is now permitting market forces to express the deflationary bias inherent in the still high debt levels.

If oil is genuinely cheaper, it just means more money to be spent on other things, which is certainly not deflationary.