Oil prices will swamp subprime as market driver

[Guest]

Re: Oil prices will swamp subprime as market driver

Fred -

My apologies for posting garish, vulgar screaming headlines on this forum thread. I post mostly from my home PC, where for some reason I am unable to see most of the formatting (font sizes, etc) onscreen.

http://www.itulip.com/forums/showthr...23019#poststop

Consequently I only noted the post I made above had some 'screaming tabloid' size fonts in it just now!

How embarassing. I've tried to go into the post and edit it down to plain type three or four times but the server won't open up the post for edits. I just get the little 'pending' spinning wheel indefinitely.

Can you let me edit the post so I can take out all the blaring type?.

Other than when kidding around, I am really embarassed by screaming tabloid type. I had no idea the formatting was stuck in there. Can you please provide access to this thread so I can reformat it!

[FRED]

Re: Oil prices will swamp subprime as market driver

"What the Oil Industry is Afraid to Tell You!"

As 2007 ends, oil is up in the mid-$90s. Its year-to-date average is $84.83, shattering last year’s record of $72.05. Yet despite these blistering-hot prices, oil production is falling. And profits of major energy companies are plummeting as well. Meanwhile, demand is driving upward. This sounds insane, but it’s all true. Brace yourself for even higher prices in 2008!"

Luke, all you have to do is use the edit button then the little A/A edit mode changer thingy in the upper right of the edit box (that's tech talk).

As for oil demand rising, that's a common fallacy we are going to try to dispel. It was true for the banner post-recession oil demand years of 2003 and 2004, but not after. Somehow the news from 2003 - 2004 got stuck in everyone's heads and was never revised.

From an oil piece we're working on for next year, first of all it isn't easy predicting and measuring world oil demand. The Organization for Economic Co-operation and Development, International Energy Agency has an especially hard time forecasting when a US recession is coming. Notice the forecast in red and the actual in green, below. Way off in the recession year of 2001. This year they predict oil demand to rise 2.5% in 2008. Our guess? Less than 0.5%.

Then there is the fiction that oil demand has been driving prices. Oil prices have increased an average of 27% a year since 2004 while global oil demand has increased only 1.2% a year. That includes the blistering 16% a year oil demand growth in China. OECD countries have seen falling demand that more than compensates for the increases in China and India.

If global oil demand has not been driving oil prices since 2004, what has?

The dollar correlation is strong starting around 2004, about the time it picked up for gold and other metals as well.

[Guest]

Re: Oil prices will swamp subprime as market driver

FRED I well understand this is your (and iTulip's) view of what's happening to the petroleum price. If you require this glaring anomaly to be overwhelmingly due to the USD, then iTulip certainly has a powerful reputation sufficient to present this as now 'ascertained fact'. Even though I'm merely a peon around here, I (think I) retain the prerogative to openly disagree.

I posted a 60 year chart of the Commodity Index a good while back, on one of Mish's brief threads. I've seen a couple of other iterations of this CRB long term chart re-posted here by others, which you posted a marked appreciation of, as these CRB index charts very clearly show a two stage 'stair-step' upwards progression, where the only two steep uplegs in the CRB occurred during the 1970's inflation and today's monetary inflation.

I understand this is for iTulip's thesis a significant datum, in that it's considered at least one of the 'smoking guns' correlating commodity prices to monetary policy, (and to latent accumulated inflation?).

iTulip long ago convinced me on other editorial posts, that this to very significant degree correct, but as to it's being the sole significant story, I for one don't buy it.

Here is an inflation adjusted CRB through the inflationary 1970's and through this decade, and we can see that in fact the CRB seems to have actually declined in inflation adjusted price across an entire inflationary decade, straight through the 1970's.

Yes of course, this may imply that monetary inflation was proceeding faster than the run-up of commodities prices, resulting in effective deflation of the commodities constant price - but at very least it also indicates that the relationship between CRB and monetary aggregates is a loose relationship. I think iTulip is proposing it here as a close relationship?

I look at a 40% devaluation of the currency, and a 400% revaluation of oil, not to speak of a 1000% revaluation of uranium, and I maintain my view, it's by no means the whole story. The "wholly attributable correlation" of CRB to monetary aggregates remains for me a theorem, not an axiom.

NON INFLATION ADJUSTED CRB - LONG TERM.png

INFLATION ADJUSTED CRB - LONG TERM.png

And what's with these missed projections? Is the EIA's petroleum price formal projection right out to 2030 a significant datum here in terms of the extent it has missed the accurate call? We can not claim to have seen 'hyperinflation' yet acting upon energy prices strongly enough to account for this kind of yawning gap between their best analyses and the actual progress of the oil price?

WORLD OIL PRICES PROJECT - 3 SCENARIOS.jpg

Lastly, I note your correlation arguments are derived from a very short term window, i.e. you noted a non-correlation occuring 'since 2004'. This is a very brief time span from which to derive global deductions as to what's the prime driver of petroleum prices.

I submit that the massive resurgence of A) Uranium prices, and B) public and governmental interest in reinstating and amplifying nuclear power plants provide a very large 'epistemological' hint that there are some very large shifts at work governing global perceptions of the abundance and availability of petroleum. iTulip's thesis employs a narrow time window, and by implication refutes the significance to price, of an easily discernible, globally expressed, growing nervousness at all national levels, about ready energy availability, as having a significant role in the spot price. The spot price is a quite possibly a function of somewhat more than petrodollar fiat currency value and immediate supply / demand data, delimited to a one, two or three year time window.

Respectfully.

[FRED]

Re: Oil prices will swamp subprime as market driver

The absolute usage of gasoline in the US declined in absolute terms 13% from 1975 to 1985 as a result of the last inflation/dollar depreciation episode.

The mess back then was smaller.

The situation is further more complicated because a lot of the production of goods used by the US is no longer in the US.

Thus it is very possible, even likely, that a significant portion of the oil consumption by India and China (and Bangladesh, Vietnam, etc) is devoted toward producing goods for the United States.

It is therefore very conceivable then that a major recession, much less an actual depression, in the United States could actually reduce oil demand in those very countries supposedly supplying much of the new demand.

Thus any assumption that oil prices can go nowhere but up are dependent on several things:

1) Oil demand in developing nations like China and India is mostly organic as opposed to a function of export mercantilism.
2) Oil demand from North America will not dramatically decrease
3) Technological solution will not be found
4) Oil price increases thus far are primarily not a function of dollar depreciation

All of these assumptions could be correct, but I personally refuse to take them on faith.

Your thinking is along the same lines as ours. Yes, dollar depreciation has been part of the reason for declining oil demand; a weakening dollar raises the price of oil by users. You'd expect in a peak cheap oil scenario that along the curve price increases will cause the rate of demand increases to decline. Markets are always seeking an equilibrium price; perhaps the oil markets are finding a continuously higher equilibrium price as demand declines and supply falls even faster. It's not so much an issue of total crude supplies as supplies of the kind of crude that is most needed for common transport applications.

[Guest]

Re: Oil prices will swamp subprime as market driver

C1ue (and FRED) -

Some final thoughts on your remarks validating the market's compensatory search for equilibrium in a Peak Cheap Oil scenario.

C1ue wrote:

____________

<< It is therefore very conceivable then that a (in a ) major recession ... United States could actually reduce oil demand in those very countries supposedly supplying much of the new demand.

Thus any assumption that oil prices can go nowhere but up are dependent on several things:

1) Oil demand in developing nations like China and India is mostly organic as opposed to a function of export mercantilism.
2) Oil demand from North America will not dramatically decrease
3) Technological solution will not be found
4) Oil price increases thus far are primarily not a function of dollar depreciation

____________

Addressing why these points do not translate into significant "price abaters" to do more than slightly abate the rate of ascent of oil prices for a short time window:

Responses to your points:

Per Rajiv's clarification, adding the energy input of all the goods manufactured abroad to the North American existing 29% energy consumption, expands total US global energy consumption to between 35% - 40% (that is, between another 6% and 11%). We can go ahead and use the high 40% number.

C1ue cited elsewhere the 15% (approx) US demand destruction during the oil embargoes of the 1970's, which included a more energy intensive US industry, two very severe recessions, and two outright petroleum embargoes (actual gasoline scarcity in the US forcibly curtailing usage). All of these long gone but tumultuous events, together with the massive energy credit America realised by downsizing all of it's huge gas-hog 1960's cars, resulted in net 15% across the board "demand destruction"?

Can we therefore take that 15% "demand destruction" and apply it as a very rough anticipated demand destruction today including the energy input of foreign manufatured goods consumed by the US?

If so, we have this in an upcoming US economic severe recession -

40% of global energy consumption, X 15% reduction caused by severe recession = 6% of the global consumption!

As a result of this severe slowdown, the US energy footprint in world consumption is reduced by (very, very roughly) 6% of the total global consumption.

Now lets look at the flip side - the "organic" growth in global non - OECD consumption. EIA projections from 2006 seem far too low, at least as evidenced by the "projections" chart I posted previously which solemnly opined as late as the early months of 2007, that oil prices would "rise to $60 a barrel" average by 2030 in their "high case scenario? (It does make one wonder how this vast agency obtains the funding to payroll an army of financial analysts coming up with these numbers).

According to this EIA estimate, we have a projected 3% annual consumption growth coming out of non-OECD Asia (the overhwelmingly largest part of the non OECD total). Non OECD global consumption growth out to 2030 is dreamily pegged at a low 1.4% a year. So be it. The Asian component of that, which is probably 75% of the total due to China and India demographics being the elephant in the room, pegs in according to the EIA at 3% annual consumption growth.

NOTE: Reference table (2007) is here:

http://www.eia.doe.gov/oiaf/ieo/pdf/ieoreftab_4.pdf

So here we have the total US energy footprint of 29%, expanded out to 35% - 40% with energy inputs for all the vast piles of junk it consumes, undergoing a demand destruction, or "equilibrium of the markets" reasserting itself, and cutting that (highline) 40% consumption down by 6% of the global consumption net?

What cataclysmic demand destruction have we observed here? Global demand in 2008 - 2010 gets a US tapped out consumer imposed "haircut" of 6%. Meanwhile non OECD "organic" oil consumption growth is chootling along at 3% annual. Seems the "US deflationary event" upon global oil consumption is replaced and fully superceded, by non-OECD Asia driven consumption growth, in a mere 2-3 years?

Now factor in the non OPEC net production decline reported in the article I posted above. I had to remove this article from these pages because I discovered that I did not have sufficient rights to post it. The non-OPEC production volumes for straight petroleum, net of natural gas production, declined by a massive 9% last year. Non OPEC production is 60% of global petroleum production. If that decline, or even a 6% annual decline, persisted for another two years, this together with the above organic consumption growth from Asia will make very short shrift of any US demand collapse of 6% expressed as a global percentage - and that includes all the junk Asia is building to sell to US consumers!

This is what I find unconvincing in your conclusions, regarding the idea that US consumer-led demand destruction due to the collapse of the whole "Ponzi scheme US consumer led global consumption boom" will bring the soaring price of petroleum abruptly back down to earth. These comparative demand destruction percentages as they net out globally, and flat to down global oil production numbers, suggests the "North American Lynchpin Consumer" factor is now simply too small to make a big difference to the rapidly changing whole!

These assessments, where the US consumer will make global consumption stand or fall, risk being "rear view mirror" assessments of the importance of the US consumer's relative position to global oil consumption trends in this new decade. This is NOT because America's consumption of oil as a global percentage is not massive - it evidently is massive. But the 1970's recessionary decade was a brutal one, and this country only netted out a 15% demand destruction! The US more than any country in the world is built out, hook line and sinker, on a larger petroleum usage than most other nations. You can't change the commuter driver, suburban, trucked goods everywhere US industrial model overnight. You probably can't really change it in a decade either! This industrial model will resist "demand destruction" much further down than that 15%. Ergo - translated globally this destruction will be not much more than a speed bump on the road towards the global consumption growth, vs. flat production growth train wreck.

Combine A) a net 6% (globally expressed net number) North American led "demand destruction" upon global oil consumption trends, with B) a 3% organic (this is the stodgy, conservative EIA's estimate of their 25 year growth average!) consumption growth trend coming out of just two countries (China and India - maybe 3 billion people, and long term growth rates of 6% - 12%), and C) global non-OECD production DECLINING 9% in one year (yes, we have to see how that progresses in another two - three years to discern a hard trend) - in the context of these three factors, the US imposed 6% demand destruction begins to look like distinctly temporary, and indeed quite brief setback to the approaching collision between global consumption trends and global production capacity.

I submit, it will require far more than the pain of the deflating US consumer upon global oil consumption to exert a world wide discernible brake upon consumption growth.

If non OECD production declines of 9% persist for another two or three years, the US consumer's "demand destruction" as a component of the coming energy crunch will be akin to placing a pillow under a guy who's coming to land after flying out of a ten story window. Not very effective at cushioning the blow.

As to "technological solutions" - if I were the guy flying out that window I would be taking grim stock of the fact I had only approximately 10 - 20 years to discover, render economic on vast scale, and then actually roll out to the entire world an "energy alternative". Expressed in terms of industrial societies timelines to retool to radically new (as yet unspecified) energy sources, that's about the equivalent to the few seconds the guy flying out that window has to contemplate his life insurance policy coverages before coming to terms with the asphalt awaiting him below.

I think Touchring's observations will therefore turn out to be not only correct, but even understated. I arrived at (extremely roughly, but to give an idea) 6% as a global demand destruction from the US consumer - when you factor in global production growth being flat, and non OECD country organic growth at 3% annual, Touchring's estimations are probably spot on:

Decoupling is indeed a myth, but with innovations like the $2000 car from India, the rise in oil consumption from BRIC would probably more than offset any fall from the West. Assuming that America goes into recession, by how much will oil consumption fall? 1 percent, 2 percent?

OIL PRODUCTION GROWTH STALLING OUT - 2007.JPG

[touchring]

Re: Oil prices will swamp subprime as market driver

I think Touchring's observations will therefore turn out to be not only correct, but even understated. I arrived at (extremely roughly, but to give an idea) 6% as a global demand destruction from the US consumer - when you factor in global production growth being flat, and non OECD country organic growth at 3% annual, Touchring's estimations are probably spot on:
[ATTACH]167[/ATTACH]

Thks, but to be fair, i've not considered the depression scenario which is not impossible, but unlikely in an inflationary environment. Also, OPEC policies can greatly impact the oil supply equation, like what happened Q4 2006.

[c1ue]

Re: Oil prices will swamp subprime as market driver

Lukester,

I'm not a math and/or science teacher, and am especially not your math and/or science teacher.

I will point out, however, that basing projections on tenuous data is poor practice and gives you unreliable results.

The report Rajiv links to does talk about the overall North America energy picture.

You will note several interesting items:

1) North America relies on 4 sources of energy: coal, petroleum, natural gas, with nuclear, alternative, etc being a half size 4th category.

Of these 4 sources, petroleum is the only one which does not have a North American supply.

2) "North American energy consumption per unit of Gross Domestic Product was about three-quarters of the world average in 2003."

Part of this is no doubt due to higher efficiencies, part of this is also no doubt due to offshoring of high pollution and also high energy use industries. Given that the overall North America GDP is also 5x the world average, this means we use less energy per dollar of production created, but we also use 3.75x as much energy per capita period.

What does this mean? This means the 330M capita of Americans uses energy equal to 1.2B world average capita people. This is a pretty big footprint.

3) Rajiv's 35% to 40% number is not backed up with a link. He himself says this is only a guess. Certainly the report mentions nothing about it - although I may have missed it.

I'll give a more concrete example: Iron

From http://minerals.usgs.gov/minerals/pu...festemcs06.pdf

Iron production in the US dropped from an average of 41.3 million metric tons from 2001 to 2004 to 33.1 MMT in 2005, a drop of 20%.

Steel consumption increased from 107 from 2001 to 2003, to 117 in 2004 and 122 in 2005.

From 2004 to 2005, China increased iron production from 252 MMT to 290 MMT and steel from 272 MMT to 333 MMT. With one or two small exceptions, all other countries showed flat or decreased production in iron and steel in this period.

From the US data, consumption appears to have increased by 16% for steel with little production increase, while iron production decreased by 20% from 2003 to 2005.

Given the relative trade deficit changes, it is likely this production trend accelerated in 2006 and 2007.

Thus there seems to be strong evidence that 15% to 20% of US iron and steel production came from China in 2005, and possibly much more now.

A major slowdown in the US economy thus presumably would impact this.

From the same report:

However, increasing energy costs, including those of oil, during late 2005 may negatively affect the global steel industry, as happened in 1973 and 1979 when oil prices rose dramatically. Global steel consumption fell by 7.2% in 1975 and 11.6% in 1982, compared with that of the previous year, followed by a 6-year recession.

Here again we see mention of previous behavior: the 'oil crunch' in 1975 and the US economic recession in 1982 both impacted global steel consumption.

Given that China is now nearly 1/3 of global steel production - do you think there are possible risks to China's steel industry and by proxy China energy usage should there be a global recession or even just a US one?

[Guest]

Re: Oil prices will swamp subprime as market driver

C1ue -

You wrote:

<< I'm not a math and/or science teacher, and am especially not your math and/or science teacher. >>

You've offered up a number of such didactically disparaging remarks. Take a 180 degree arc, put a five year old in the middle of it. We'll probably agree any bright five year old toddler will be able to point out to you the left hand segment from the right hand segment of that arc?

This rudimentary capability was in fact all that I was humbly invoking in my previous post - wherein I noted carefully that all my suggestions are using highly approximate number suppositions. The "toddler" can discern in the broad outlines of what I was suggesting, that the overwhelming size of the US as an oil consumption market (40%++?) is misleading when working up actual "demand destruction" numbers expressed as global percentages.

The final net 15% demand destruction number which you noted occurred in the US, from the seventies, was surprisingly smaller than one would expect, given the severity of the recessions and the actual "gas lines at the pump" which enforced austerity upon Americans, even if they'd been willing to spend all kinds of money on keeping their cars running.

Your comments intersperse running commentary about my loose methodology with duly wonkish, very up-close, sector specific example data about steel manufacturing. Yes, such an analysis method does set a high standard, if you are prepared to draft an entire position paper on the subject and we are prepared to devote a couple of hours over parsing, and then amalgamating the components into a conclusion.

That's fine, and I fully take your point that China's substituting heavy manufacturing for so many world markets that there is a very large "hidden" energy footprint there which may evaporate in a US led, global recession.

But I think you can discern my (woefully inadequately) expressed point, that although the US may consume 40% of the world's energy when all is factored in, the demand destruction number propagated globally by a severe US consumer recession is not anything remotely near that full 40%.

Therefore the US economy and consumer tottering at the moment provokes fears of a demand destruction occurring which are probably fairly overrated, given non-OPEC production apparently fell sharply in the past year, and several dfferent agencies are confirming that by charting something which looks very much like flat production emerging in the past two or three years.

My woefully inadequate explanation was talking about single digit percentages of global demand destruction, against which non-OECD development is a rising tide with some extremely robust long term rising consumption trends. You doubtless took my general point on that, as you are a smart chap, right?

For the rest, I think I'll pass on further comment matey - your "didactic style" of address (I am certainly not your math and/or science teacher) does not appeal much at the moment?

[c1ue]

Re: Oil prices will swamp subprime as market driver

Lukester,

I again repeat - if you cannot understand the ramifications of a 13% net drop in usage of a critical resource in a DECADE long period, one which you have yourself noted as being central to almost all forms of economic activity, then I cannot help you.

Above I place additional examples of how a "core" commodity can see multiyear demand changes from price effects, yet still this does not seem to resonate.

Certainly it is easy to be lured by the magnitude of 300% gold price increases, 50% financial stock decreases or +- 25% changes in whatever commodity/stock/bond/asset in question, but when you are referring to actual physical activities, the revelant scales are very different.

As always, you have your opinions, and I have mine.

[Guest]

Re: Oil prices will swamp subprime as market driver

C1ue -

<< then I cannot help you. >>

My goodness old chap, the attempt at patronizing is so thick one could spread it like velveeta onto a slice of wonderbread. Is this really necessary?

[touchring]

Re: Oil prices will swamp subprime as market driver

Given that China is now nearly 1/3 of global steel production - do you think there are possible risks to China's steel industry and by proxy China energy usage should there be a global recession or even just a US one?

The huge overcapacity in China's steel production is a well known fact. One can't eat steel, nor can one eat the other metals like nickel, copper, etc. In fact, metals are in decline year 2007, and looking bleak, year 2008.

http://www.bloomberg.com/apps/news?p...RhI&refer=home

Nickel Will Fall Most as Metals Retreat in 2008, Survey Shows
By Chanyaporn Chanjaroen
Dec. 31 (Bloomberg) -- Nickel will lead a decline in industrial metals next year as stockpiles expand and demand slows with the U.S. housing market, a survey of analysts showed.

The idea that resource prices must rise because of the weakening dollar and printing of money by central banks maybe a myth. All boils down to the demand versus supply equation. For metals, the deflationary recession has started.