Ignoring the Obvious

(Note: I'm having some formatting problems -- indents, etc -- with this TypePad platform, which I hope to fix by next week. If you want to see a clearer version of my blog this week go to the regular site: www.kunstler.com -- JHK)

November 5, 2007,
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.

Comments

[David Mathews]

Hello Jim,

The Washington Post is all over this story:

"Oil's Recent Rise Not as Familiar as It Looks

"Traders, Not Political or Supply Concerns, May Be Pushing Fuel Toward $100

http://www.washingtonpost.com/wp-dyn/content/article/2007/11/04/AR2007110401753.html

"Many veteran oil analysts say this is a bubble."

So it must be a bubble! Americans ... fill up your SUVs and go Christmas shopping!

[Zack S]

The Hang Seng is down 5% today. Is this the first big hole in the world wide market bubble?

http://finance.yahoo.com/q?s=%5EHSI

[Dave]

Another Great Today !
JHK is hitting on a all cylinders today fueled by justified anger and frustration with his dumbass countrymen best exampled by an editorial today in the Citizens Voice that states that all of our prolems are due to the Republicans and that all that is needed is Democratic sweep next November and the golden age will return just like Jesus and Santa Claus.

[Kickaha]

Interesting that a few hours ago, PetroChina became the first company to achieve a value of over $1 trillon. A very timely post by JK.

"[PetroChina] has seen revenues soar amid surging oil prices but has struggled to boost production from its aging domestic oil fields. In refining, it has struggled with a widening gap between soaring world crude oil prices and state-controlled prices for oil products in the domestic market."

"The company's luster appears to have been undimmed by a decision by Berkshire Hathaway Inc.'s decision to sell off all its 2.3 billion PetroChina shares."
http://marketplace.publicradio.org/apheadline_detail.php?story_id=D8SNFPT80&group=ap.online.headlines.business

[asoka]

Every wee is as scary as Halloween here!

New prediction time. Since we have effectively reached $100/barrel oil and Costco was full of shoppers this weekend, I am revising the estimate of when American behavior will change. I now think it will be when we have $200/barrel oil.

Depending on events in Pakistan and Iran we could have $200/barrel oil in around six months. When gasoline is at $7 per gallon I would expect consumers to begin to alter their choices, perhaps even sell the Surburban.

[Tangurena]

The NY Times is sucking up to the bush administration. Like how Miller's remarks were carefully cultivated as justification for invading Iraq, these remarks are carefully crafted to spread the ignorance again. I am always amazed at how people pretend that the media is "liberal biased" when an actual reading of the media shows a severe right-wing bias.

[Scott E]

"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."

I think Jim has mentioned it before, but the mainstream media seem to deliberately ignore the obvious explanation: The folks in the oil industry know better than anyone else that production is going to decline, making it virtually certain that large investments in more infrastructure will never be paid off. Such investment now would simply be irrational business policy.

[Lost Horizon]

What a Great summary by JHK of the pickle barrel we are in! If it wasn't such a grim situation, it would make a wonderful 'comedy of errors' film romp, like the old, "It's a Mad,Mad World". Instead of a zany adventure however, we seem to be headed towards a Bladerunner like gothic rehab of Dante's, "Divine Comedy" with a new 8th Ring of Hell added for the Intentionally Clueless and Ignorant by Choice crowd of Americans.

The information to enlighten one and all about the issues concerning Peak Oil has been out on the Web for years available to any and all to peruse.

The notion that real adults need the 'Mommy's of Mainstream Media', like the NYT or WPO to essentially 'cut their meat into little pieces for them' so they can chew and digest the news properly is the sad reality of what passes for American intellectual discourse and competency.

I've heard Jim tell college kids he cannot give them Hope about the situation, that Hope is something you generate when you display competency and genuine skill to yourself. I guess that leaves the "Gray Lady" out of the equation.

[scott]

I was listening in on a conversation between a couple of drivers yesterday and the female said, "I have lived in Florida since 1960 and when the housing market goes back up I am going to sell because I am sick of the influx of new people and the congestion."

This is going to come as quite a shock to many Americans or as the saying goes, "You reap what you sow."

[DanaJ]

Jim, there was a small article buried in the back pages in the local paper here in Santa Rosa, CA a couple of weeks ago stating that Mexico's oil production is at the point that they may not be able to export any oil next year to US and will actually have problems meeting their own demand, and in fact could become an importer in the next two years from Venezuela. Now how much oil does the US get from Mexico & Venezuela? Would Venezuela have to cut US exports to meet Mexican demand? The hurricane that went through the Gulf caused major disruptions to Mexican production. I think this is one reason for the spike in oil prices.

[singo]

To asoka

I am writing from the UK. The cost of gasoline here is currently around $10 a gallon, and it hasn't affected us in a meaningful way at all. Why would it? It only makes up a few percent of our disposable income. I reckon it would need to get nearer $20 a gallon before people really start cutting back.

[Michele]

You might be interested to know that the soarong price of oil may lead to the break-up of the UK within the next decade. Most of the oil beneath the North Sea lies to the north of the England/Scotland border. The Scotch Nationalists are in control of the Scottish Parliament already, and are making more and more noise about "independence" from Britain -ie separation from England. The rising price of oil is encouraging this talk of the breakup of the UK - currently, low income Scotland depends on subsidies from richer English taxpayers. The Scotch imagine that, since most North Sea Oil would be beneath Scotch waters after independence, the new nation would be able to get by without subsidies from London, depending instead revenues from the "vast" oil wealth beneath the sea. Rather a short sighted faith - the reserves under the North Sea are rapidly declining and in a few years there will be preciojus little revenue to be got from oil to finance a separated Caledonian Republic. Americans might be interested in the military consequences of a separation of England and Scotland: of all America's allies, Britain currently supplies the greatest bulk of troops for service in Afghanistan and Iraq. But a high % of those troops are from Scottish regiments - perhaps 40% or more. The Scotch Nationalists do not favour involvement in faraway wars fought on America's behalf. After separation of the two nations, England alone would not have the military resources to supply anything like the troop levels that currently the British State can supply abroad.

[ArnoldSkaaland]

Well, Kuntsler got his $100 a barrel oil.......any guesses when he gets his 4000 Dow Jones Average?

[2020Vision]

Asoka, Singo,

We currently pay $8.58 per gallon of diesel in the UK and about $8.33 per gallon of gasoline.

Even as far back as November 2002, before this mad (military) adventure began, we were paying $7.06 per gallon.

Whilst most of this is down to the high level of taxation on our road fuels, it certainly protects us from the effects of a sudden 33% rise in oil price since last Fall. Some people with long memories might recall it being $60 per barrel last November.

Happy Motoring

2020

[bud4wiser]

Yes, JK, same old newsflash: Business as usual......... films of Paris and Hanna Montana at eleven.

So we learn now - the best way to America's dependence of foreign oil is to price is out of the reach of Joe Sixpack. By the way, my good buddy Joe, has discovered that he can't quite make his sales tax bill for his new Durango, so he is paying penalties for delaying retitling and licensing.

In other news, price increases of 20-30 or even 40% are appearing on hundreds of items of many big box grocery stores and other specialty retailers.

Thank god, inflation is only 3% this year. America, fatter and happier than ever before.

After all, the market is up, and Brian Williams would tell me if anything was wrong.

[David Mathews]

Hello Everyone,

This should be big news in the Peak Oil community.

Robert Rapier, The Oil Drum's Big Oil mouthpiece, is upset because he isn't getting a seven-figure income:

"Well, I know one way to address that supply deficit. If the pay for engineers, geologists, and geophysicists was in the ballpark of what energy analysts and hedge fund managers are paid (seven figures is not that unusual, which has certainly tempted me on occasion) ..."

https://www.blogger.com/comment.g?blogID=20902939&postID=3045905495876339507

And he turned down a job paying $900,000 a year:

For instance: Robert Rapier reported recently that he had received several near 7-figure job offers. Now, I'm sure RR is very talented and experienced but the fact remains that he is a renewable resource.

Just want to clarify so there isn't any confusion. Those mid-six to seven figure job offers are coming from outside the oil industry. They are for energy analyst/hedge fund/Wall Street types of jobs. I have had something like a dozen of those at varying levels of interest; a lot of firms are looking for an inside perspective. The most recent one offered a salary exceeding $900,000, but I would be traveling all the time, and I would be advising people on their investments [and I am not comfortable with that]. I had some conversations with Nate Hagens - who used to do that kind of work - and my family, and I decided the trade-offs weren't worth it.

The oil industry in the UK is paying some engineers $300,000. That's process engineers, with no supervisory responsibilities. Even after BP let 350 people go [they were scooped up immediately] there is still a shortage of talented people. Without those talented people, projects do get delayed. And while I am out looking for people, I get 2 or 3 calls or e-mails a week from headhunters with half a dozen vacancies to fill.

If you want to see exactly what it is that I do, I have updated my CV. I am looking into taking some MBA classes, and the school wanted it. I want to emphasize that I am not looking for a job [now if you want to pay me 7 figures and let me live where I want, let's talk. I almost got that deal once, but negotiations eventually broke down over the 2nd point!]
( http://www.theoildrum.com/node/3186#comment-258921 )

Now if anyone wonders why Robert Rapier sounds like a shill for the oil industry, I think we know the reason now.

He looking out for his $1,000,000 paycheck!

[inquisitivemind22]

Hello,
A trend to report is that as oil is denominated in US $'s, we are essentially subsidizing it for the rest of the world, given the weak dollar. Other nations with currencies moving up against the US $ are able to offset some of the price increase in oil as it also moves up. Given the substantial decline in the $ going back to 2003 & '04, when oil averaged $33-$43/b, the decline in the $ has offset a good % of the price increase in oil up to $90 that has occurred since 2004 for foreign buyers with strong currencies.
This is interesting to note since demand growth is most robust overseas in the emerging economies, where they are able to benefit from the weak US $ when buying oil.
Regarding chatter about Pres Bush and all of this. I have one thing to say on that. He is an oil man! If anyone should be held responsible for educating the American public on the realities of peak oil, its Pres Bush! He can't claim to be ignorant on absolutely everything.

[scott]

Yesterday I had a conversation with a driver of a Canadian truck who turned out to be Russian and I am not sure how much of what I asked/said that he understood but I was trying to ask how he was making out on the Canadian Loonie(sp) being worth more than the dollar. I expected that since he was paid in Canadian currency and was often in the U.S. that there would be ways that he could profit from the exchange. He asked me if I wanted to trade money with him and asked where I was going presumably so that we could meet on the way to exchange money.

I don't think very many Americans are aware of the ramifications of the devaluing dollar or for the most part aware that it is even devaluing. Things of real value such as commodities of all sorts are inflating rapidly and is only going to get worse but Americans are somewhat insulated since most of their purchases are from cheap labor China and are of little (resale) value.

Also, Americans are mis-informed about inflation by virtually every mainstream source including our government which also seems to be content with excluding things of value when determining inflation levels. Everyone knows it's just speculators.

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[scott]

inquisitivemind22,

I think multinational corporations and our government including the FED with their recent 1/2 and subsequent 1/4 point rate cuts in the face of skyrocketing commodities are complicit in engineering demand destruction in the U.S. so that overall global growth can be sustained since the U.S. consumes 25% of the worlds resources and is only 4% of the overall global population would be the path of least resistence for maintaining Dow Jones Industrials bottom line. Not to mention the geopolitical bullshit that has to be going on in those G-8 meetings behind the scenes.

[Patrick]

For those waiting for Americans to change their behavior, in my opinion, the price of oil will have to be substantially higher than it is today for things to reach a tipping point. No real idea what that price might be, but my guess is around $15-$20 a gallon.
For myself, at $15 a gallon my 75-85 gallons of gas per month (I keep track for work) would be around $1125-$1275($15 gal) which is a huge increase from $225-$255($3 gal). What's so scary about this, is just like the price of oil, which has almost doubled in 2007--the price of gas will just take off one day. And people(myself included) will be trapped in their current living arrangements leaving everyone to fight over the hybrids, motorcycles, scooters, etc in order to get to work-not to mention getting their food.
These prices are going to happen, my only hope is to pay off as much debt as possible by 2010 in order to have enough flexibility to move/switch jobs/whatever.
Also, I'm already seeing the creation of distinct "energy classes" in America, where those with the resources to do so are buying hybrids, insulating their homes, buying solar panels, buying local food--while the rest of the country either can't afford these choices or won't make them.
Those "energy classes" will be a real problem in the future.

[inquisitivemind22]

Scott,

Thank you for your reply. When you say, "...are complicit in engineering demand destruction in the U.S..." Demand destruction pertaining to what? Oil? So far higher prices have not impacted demand. Do you mean demand for other commodities? I am also wondering how the rate cuts destroy demand? Pertaining to the housing situation? Just wondering. Thanks.

[scott]

inquisitivemind22,

Yes, I meant oil and other commodities as well since supply/ demand constraints on all raw materials is causing a lack of growth potential. Rate cuts will destroy demand in the U.S. because oil and other major commodities are priced in dollars and since rate cuts inevitably increase the money supply the result is higher prices. Eventually higher commodity prices will steadily price more Americans out of commodity purchases since individuals only have a certain amount of buying power in the first place. A recession is in store for America and hardly anyone is prepared for it. Recessions cause layoffs and tighter jobs markets and lower wages.

Yes, some will continue to prosper at the expense of the many.

The FED and economic analysts in general know that rate cuts will have no beneficial impact on the housing situation because top-down liquidity is not the problem, it's bottom up liquidity. Home buyers are not paying their bills on a massive scale and continuing to lend to buyers who don't pay is futile no matter how low the interest is.

[scott]

"So far higher prices have not impacted demand."

Growth in consumption of transportation fuels in the U.S. has been flat over the past year and the trend will be toward declining consumption rates in the coming months.

I don't like to talk about the gory details of recession as it's going to be boring enough in real time but if you're living paycheck to paycheck up to your eyeballs in debt like most Americans please get a plan B together while there is still time.

[scott]

Hoarding gold is fun, so is having an out of the way garden and a stockpile of canned goods from it. It's like having a warm fuzzy security blanket that you can eat! Don't depend on institutions for your security! It confers too much power on them that they will surely abuse!

[JLee]

Right now oil is rationed by price. But just wait until oil isn't rationed by price but by who you know or who they want to sell to. Does Russia really want to sell to USA? Does Iran really want to sell to the USA? And we know the Mexico won't even be a supplier. Yet somehow we all imagine that as long as we can personally afford it, we will be able to get a fillup whenever we want to. News alert! ... you may be right for the next few years, but don't imagine that in your anticipated Pleasantville golfing retirement community that you will still be able to fill the tanks on your SUV. And if the kids ask about any of the pesky details just what are you going to tell them? That you enjoyed the fruits of your own labor and had a perfect right to spend and act just as you wanted.