One of the biggest laughs of the season came out of a New York Times business section story last Tuesday by reporter Michael Grynbaum, who wrote, "Oil is on a steady march toward toppling the inflation-adjusted high of $101.70 it set in April 1980, analysts said, though many are at a loss as to what keeps driving the price." (Italics mine.) Actually, lots of people know what is driving up the price — just not anybody who works at that once-august and now-clueless newspaper. It can be stated simply — the demand line has crossed the supply line — though that simple fact has many curious ramifications.
Among the most subtle is a theory out of Doug Noland's latest Credit Bubble Bulletin (published every Friday).
"There are literally trillions of dollars of liquidity sloshing around the world keen to hold “things” of value. Liquidity sources include the massive central bank reserve holdings as well as funds at the disposal of the sovereign wealth funds. Importantly, the more apparent becomes U.S. financial fragility, the keener they are to stockpile real 'things'. . . . Indeed, it should be noted that this is the Federal Reserve’s first attempt at reflation where U.S. securities are not the speculators’ or foreign central banks’ asset class of choice . . . . Not only is the pool of potential global buying power unparalleled in scope. It is fervidly attracted to tangible assets — as opposed to U.S. securities — and is highly speculative in character. At the same time, an unwieldy global boom is stoking unprecedented demand in China, India, Asia generally, and the other “emerging” markets including Russia and Brazil. Throw in various weather related issues and energy production constraints and the prospect for some very serious bottlenecks and shortages has developed."
In short, foreigners stuck holding dollars that are hemorrhaging value would rather spend them on something other than dollar-denominated financial paper, and nothing is more crucial to the maintenance of industrial economies than oil. Noland's theory comes on the heels of reported oil and gasoline shortages in China, bad enough to have caused some civil unrest — and bad enough for China's leadership to want to spend some of its vast US dollar reserves bidding up oil prices in the open markets to quell that unrest.
This is nothing more complicated than hoarding behavior on a
global scale, a mounting crisis of frightened self-interest that has
already been well-described by investment banker Matthew Simmons. Simmons was only one of many analysts who spoke at the mid-October Houston conference put on by ASPO-USA (the Association for Study of Peak Oil) — to which The New York Times
failed to send a reporter. Simmons has also said that the American
public (and its leaders) will probably not "get" the fundamental
problem with oil until rising prices are joined by spot shortages —
i.e. gas station lines, which will represent hoarding behavior on the
basis of individual motorists.
Behind the hoarding dynamics are several clear circumstances.
One biggie is the growing export crisis,
described by geologist Jeffrey Brown. Countries like Saudi Arabia and
Mexico that sell oil to importing nations like The USA and Japan are
using more of their own oil and producing less. Mexico's trajectory is
so steep (due to the severe depletion of its giant Cantarell oil field)
that it could easily go from being America's Number 3 source of imports
to zero in less than five years. The anticipated yearly growth in
worldwide oil demand next year will equal 80 percent of the USA's
entire oil production.
The export crisis is only an
additional layer on top of the general peak oil situation, but it
illustrates the way that complex systems we depend on — and oil markets
are one — are liable to wobble and fail just as the world comes off the
all-time oil production peak for good. Finance is another complex
system and it, too, is entering a stage of robust instability. Food
production is yet another, with a grain scarcity that has driven wheat
prices to all-time highs. The roster of complex systems entering phase
change is long and gruesome.
Another big element behind rising oil prices is oil nationalism. The
old "major" oil companies — Exxon-Mobil, Shell, BP, Chevron, et cet —
now only account for about five percent of world oil production. The
other 95 percent comes from nationalized oil industries like Saudi
Aramco, Mexico's Pemex, Petroleos de Venezuela, and Brazil's Petrobras.
Russia's Lukoil and Rosneft are effectively state-controlled. Not only
is worldwide oil in depletion (past peak) generally, but most of the
remaining oil is controlled by entities that are inclined to both
withhold (hoard) some remaining oil for their own future use and to
direct whatever oil they do sell into places other than open auctions
on the futures markets. Selling oil to favored customers will be an
extremely potent instrument of geopolitics in the decade ahead, and is
only one aspect of a desperate global resource contest that could turn
ugly and violent. For the moment, though, its meaning for the US is
that the two-thirds of our daily oil supply composed of imports is in
jeopardy.
Another big element of the oil price story is the condition of the
equipment used all over the world for getting it out of the ground,
moving it around the globe, and refining it into useful byproducts like
gasoline and aviation fuel. The world is woefully short of drilling
rigs, and the cost of steel is way up. The demand for new equipment is
out-of-sight. The existing worldwide inventory of equipment can be
fairly described as decrepit. As Simmons points out, there is a
frightening gap between the need for investment in new rigs, tankers,
and refineries and the money available to just keep production at
current levels. The outlook is grim. In fact, the worldwide lack of
will to invest in oil industry equipment is itself a symptom of the
crack-up of global finance as a complex system under duress. On top of
the equipment problem is a human resource problem: the world us not
producing enough oil technicians and engineers to keep up with
production, let alone increase it, and every year another wave of
senior specialists retires out of the system.
Beyond these parts of the oil price story are even more sub-plots, like
the political strife in Nigeria that effectively holds its oil industry
hostage, not to mention the fragile state-of-affairs throughout the
Middle East, and dare we leave out the insane habits of America's Happy
Motoring utopia.
There is really no excuse for The New York Times
and the rest of the mainstream news media to not understand what is
going on out there. The pervasive cluelessness is a symptom of another
complex system out of whack — the system that informs us what's going
on. Meanwhile, the danger mounts. The heating season is underway and
the furnaces are clanking. Many Americans will have to start choosing
whether to pay their mortgage, fill the tank of the Chevy Suburban, buy
that brick of Velveeta, or pay the heating oil guy. It looks like China
will be spending more of its accumulated dollars bidding up the price
of oil (or making favorable contracts with foreign suppliers) instead
of buying Freddie Mac bonds. The USA could not find itself in a less
favorable position among all these forces roiling the scene. It
certainly can't afford to continue its pathetic pose of cluelessness.
wondermike38: peaking world crude oil extraction rates
There is little point in trying to sway the majority of U.S citizens regarding peak oil. The best one can do is gather a variety of coping strategies for rapid change on the individual and local community level. A person can also attempt to cast off the expectations of a white picketed fence, the swimming pool and the 3 cars in the garage mentality.
1
November 08, 2007
augusta7909: 3 car garage
Good comment on the 3 car garage, 3 cars in a garage is stupid. That 3rd bay is for the ski boat, the SUV that tows it is parked outside. And it's not just a swimming pool it's a lap pool, anything less than 25yds long would be embarrassing. How else am i going to "cope" with the stress of life, not to mention fictional "peak oil"?
2
November 09, 2007
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