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OPEC Has Lost the Power to Lower the Price of Oil

The cartel's power has finally gone into decline
Tuesday, May 22, 2012, 11:39 AM
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There’s been a lot of excitement in the past year over the rise of North American oil production and the promise of increased oil production across the whole of the Americas in the years to come. National security experts and other geo-political observers have waxed poetic at the thought of this emerging, hemispheric strength in energy supply.

What’s less discussed, however, is the negligible effect this supply swing is having on lowering the price of oil, due to the fact that, combined with OPEC production, aggregate global production remains mostly flat. 

But there’s another component to this new belief in the changing global landscape for oil: the dawning awareness that OPEC’s power has finally gone into decline. You can read the celebration of OPEC’s waning in power in practically every publication from Foreign Policy to various political blogs and op-eds. David Ignatius of the Washington Post wrapped up nearly all of the recent claims in a nice bundle in his May 4, 2012 piece, An Economic Boom Ahead?, when he quoted PFC Energy’s David West:

“This is the energy equivalent of the Berlin Wall coming down,” contends West. “Just as the trauma of the Cold War ended in Berlin, so the trauma of the 1973 oil embargo is ending now.” The geopolitical implications of this change are striking: “We will no longer rely on the Middle East, or compete with such nations as China or India for resources.”

(Source)

While it’s true that the Americas hold great promise to convert natural gas resources to higher production levels, that is not the case with oil. The celebration of a geo-political swing in energy power therefore misses a crucial point: No region -- from OPEC to Non-OPEC, from Africa to Russia -- has the single-handed ability to lower the price of oil now, because none can bring on new supply quickly enough for a long-enough sustained period of time. And there is more to this story than meets the eye.

History of OPEC

For over 30 years, OPEC has produced less than half of the world’s oil. Indeed, as of today, OPEC produces only a little more than 40% of the world’s oil. But most of the world’s spare capacity has been held by Gulf State producers. Thus OPEC, primarily Saudi Arabia, has long been able to control the price of oil in not one, but two, directions. Historically this has meant that the concentration of oil pricing power resided with OPEC and its largest producer, Saudi Arabia.

But starting in 2005, global oil markets sensed that OPEC was only able to influence the price of oil in one direction: higher, by lowering output. OPEC’s ability to lower prices started to crack, break up, and generally fail as the first phase of oil’s repricing headed into 2008. Indeed, OPEC raised production several times in the 2004-2008 period, attempting to restrain oil prices as it moved to protect the global economy from an oil shock. However, the oil market, which was going through a fundamental transition at the time, as it reoriented itself towards insatiable, price-insensitive demand from Asia -- paid little attention.

Instead, supply disruptions at small producers and in small regions had a greater influence on oil price (pushing it higher) than OPEC's influence on attempting to push the price lower.

It’s actually not clear that OPEC has had any measurable influence on restraining oil prices for years. Summer hurricanes in the Gulf of Mexico, unrest and outages in the Niger Delta, and various strikes presented greater upward pressure on oil prices than upward OPEC supply changes.

The Mythology of OPEC

There is a trailing cultural myth, therefore, (which is nothing more than a hangover from 30 years ago), that OPEC can mount swift, price-killing upsurges of production. But as the below chart shows, OPEC production has made no progress in at all in the seven years since 2005, as oil began its price transition.

As oil rose above $50 in 2005, eventually reaching $90 in 2007, and then on to levels above $140 in 2008, OPEC production both rose and fell, but without any reliable correlation to price. In the aftermath of 2008, OPEC production has correlated better with the recovery in oil prices. But again, the rise in OPEC production has only come back towards the previous highs from last decade. Here is a recent news story rather breathlessly discussing the most recent OPEC production levels this year:

Acting to mitigate market nervousness amid Iran supply fears, OPEC on Thursday said it was pumping more oil than the market needs—at levels not seen since summer 2008—and expressed a cautiously optimistic note on demand. The cautious optimism, combined with a production boost sufficient to cover all of Iran's oil exports, is likely to further stabilize oil markets, where volatility by some measures has already smoothed in recent weeks. In its latest monthly market report, the Organization of Petroleum Exporting Countries said its crude production was 32.42 million barrels a day in March, up 317,000 barrels a day from the previous month.

Yes, but there’s a neglected point to make: these production levels are not special. Not meaningful. And are not newsworthy in any sense. Production at/above 32 million barrels a day? That level has been reached at least 4-5 times since 2005, with at best weak correlation to price changes.

Let's take a closer look at the global share of oil supply, divided in two between non-OPEC and OPEC production.

Non-OPEC vs. OPEC Oil Production 

There are several possible conclusions to draw from the above chart, which shows that non-OPEC provided nearly 58% of global crude oil supply in 2011, and OPEC provided 42%.

  1. Non-OPEC is the domain of private oil companies, and has managed to increase its market share over the past 30 years through competition and through the use of technology.
  2. OPEC’s market share has stagnated, possibly due to the predominance of state-run oil companies and the interference of political structures.
  3. Non-OPEC has the pricing power, due to its larger market share.
  4. Or perhaps OPEC still retains the pricing power, due to its greater quantity of spare capacity.

There’s an element of truth in each of these observations. 

Many also believe that both OPEC and non-OPEC could be producing a lot more oil. In the case of OPEC, many harbor the view that state-run producers and governments are sitting on massive, hidden spare capacity and retaining it as a cartel to manipulate oil prices higher. In the case of non-OPEC, many believe that environmentalists, regulations, and other limits placed by democratically-elected governments are suppressing a wall of supply that could come to market easily if only the oil is ‘set free.’

These views, however, are not only extreme but shaky. They are typical of the kind of grand claims that fit people’s worries and suspicions, rather than fitting any empirical data. The fact is that OPEC spare capacity has been under pressure for some time despite persistent belief to the contrary, with estimates running below 3 mbpd, or even below 2 mbpd. (For recent commentary on OPEC spare capacity, see A Model of Oil Prices by Chris Nelder). The case for hidden, held-back oil capacity in OPEC is weak, especially as domestic populations in the Gulf have dramatically increased the consumption of their own oil.

Meanwhile, non-OPEC large producers like Russia have significantly increased production this past decade. And regions like North America have been able to slow declines. Western oil companies -- which dominate non-OPEC production -- have scoured the globe looking to replace their reserves, but largely to no avail. This is why ExxonMobil and ConocoPhilips eventually gave up, capitulated, and bought natural gas assets instead. By doing so, they followed in the steps of Royal Dutch Shell, which had taken the natural gas pathway years earlier.

Therefore, a fact about non-OPEC production that was unknown even to the industry ten years ago is now very plain: There just isn’t a vast quantity of new oil that can come online easily and inexpensively outside of OPEC-controlled regions. Only Russia, the largest non-OPEC producer and now the largest single country producer in the world -- eclipsing even Saudi Arabia -- was able to significantly increase production.

A Window into Non-OPEC Supply: Russia

Two charts will tell us all we need to know about the limits facing non-OPEC crude oil production. First, let’s take a look at total non-OPEC production on an annual basis:

Just as with OPEC production, little if any progress has been made in the past seven years. This has been a complete surprise to most analysts, especially within the industry itself. Who would have thought that with a regime change in oil prices, non-OPEC could not sustainably increase production to much higher levels? Instead, non-OPEC production remains stuck around a ceiling, just like OPEC.

The Big Reveal comes, however, when we take a look at non-OPEC supply without Russia.

Without Russia, non-OPEC supply has actually lost about a million barrels a day of production in the last ten years. This speaks volumes to the quickly-rising costs of bringing on a new barrel of oil in non-OPEC regions, which we will discuss further in Part II of this report.

The Price of Oil When OPEC Is Powerless

Let’s imagine for a moment that OPEC could, if it chose to, pour an extra 3 mbpd of oil on the world market. And that by doing so, it could lower the price of WTIC oil to $90 or less. What would that accomplish? And for how long would such “lower” prices last?

In Part II: The Cruel Math of the Marginal Barrel, we explain that while fluctuations in economic activity can certainly raise and lower the price of oil, there are deeper structural reasons why OPEC -- even with its spare capacity -- can no longer sustainably “lower” the price of oil. Moreover, we will discuss how, paradoxically, any surge of supply from OPEC which did persuasively lower the price of oil could wind up having the opposite effect on price eventually thereafter.

Surprising? Yes, but not strange or unlikely, for reasons we will explain. Finally, we conclude that oil’s floor price -- outside of volatile 30-90 day periods -- is higher than ever before. This will make for a large surprise, should another acute phase of the financial crisis rock oil prices lower over a 2-3 month period.

Click here to access Part II of this report (free executive summary; paid enrollment required for full access).

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48 Comments

timeandtide's picture
timeandtide
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Peak Peak Oil

"OPEC production both rose and fell, but without any reliablecorrelation to price"

That is the ony statement that makes sense in this commentary. The myth that OPEC can increase production quickly enough to lower demand is also matched by the myth that OPEC can increase prices by lowering production. 

Another myth is that higher oil prices kill the economy. The only reason, I would suggest, for oil hitting record prices has been the record production of money which was initiated by the abandonment of the gold standard in 1971. Increasing complacency led to the abandonment of prudent banking and the deregulation of the financial industry during the 1980s.

Deflation will change all this and we will see oil, along with all the commodities (including precious metals) sink to nominal pice lows that will shock most people. Of more interest will be the relativities. Only time will tell whether the shale gas story will be as good as presently touted - whether yields can be maintained, whether the cost of extraction in energy terms remains sufficiently positive and whether or not there are damaging side effects (water quality or perhaps seismic) which are a force for limiting use of the technology. The most important thing to recognise about oil is that it is a high energy liquid at normal temperatures and so is currently irreplaceable as an energy source for aviation.

Lurking in the background always are potential breakthroughs in nuclear and battery technology as well as an increase in the use of domestic solar energy, particularly if widespread adoption of a carbon price leads to a more honest system of accounting based on energy value rather than nominal money value. Thirty years of manipulation by bankers and politicians have ensured that the information inherent in the nominal value of money is now almost meaningless.

As for the very silly article by David Ignatius forecasting an "American boom a decade or so from now" - that is just as easy to forecast as a recession at some vaguely defined point in the future. Just another example of the economic dross we are served  up by national newspapers today.

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Damnthematrix
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Peak Peak Oil

timeandtide wrote:
Another myth is that higher oil prices kill the economy. The only reason, I would suggest, for oil hitting record prices has been the record production of money which was initiated by the abandonment of the gold standard in 1971. Increasing complacency led to the abandonment of prudent banking and the deregulation of the financial industry during the 1980s.

Deflation will change all this and we will see oil, along with all the commodities (including precious metals) sink to nominal price lows that will shock most people.

I have a different theory.....

I think we will see deflation AND inflation together.  As resources peak out and become scarce, it's IMPOSSIBLE for their price to fall.  or if it does, the companies that mine them will simply stop doing so, as extracting resources at a loss (both economically AND energeticall) wil simply not happen.......

timeandtide wrote:
Lurking in the background always are potential breakthroughs in nuclear and battery technology as well as an increase in the use of domestic solar energy,

Hmmmm....  except ALL those things rely on fossil fuels to actually occur.  And money of course, at least under the current system.

Mike

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RJE
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"My grandfather rode a

"My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel."

Back to manual labor.

BOB

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victorthecleaner
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OPEC

Dear Gregor,

I wonder whether you have seen what Chris Cook writes on the issue. For example, in the comments at

http://ftalphaville.ft.com/blog/2012/03/29/942361/saudi-arabia-resorts-t...

he writes

"Furthermore, my take is that the Saudis and J P Morgan Chase have for three years been using Enron-style Prepay contracts to maintain what was essentially an oil peg against the dollar using distinctly un-open market operations via oil repos.

The problem with this central oil bank strategy is that it requires a continuing flow of funds from muppets into the market as the producers take excess profits out. It is also susceptible to shocks. The Libya spike/shock last year was weathered.

But the inflation hedging muppet money has been pulling out; inventory financing is sparse to absorb excess oil, and once these fleets of tankers - which are IMHO carrying oil of which Saudis are only the nominal owner - reach the US and title is eventually transferred, then things should get interesting.

Marshall Auerback recently made the point that quite a bit of the oil which has already flowed to the US in Q1 has not showed up as US inventory. My explanation for that is that this is because the Saudis nominally still own it.

I have been forecasting a market collapse before the end of Q2 2012, and I stand by that forecast in the absence of a major shock."

Then, there is this article by the Saudi oil minister Ali Naimi in the Financial Times:

http://is.gd/8yLc20

So what do you think does this mean? Is FT Alphaville right that Naimi is just waffling, or is perhaps Marshall Auerback right that the Saudis have just started to crash the oil price:

http://macrobits.pinetreecapital.com/the-oil-conundrum/

He writes

Well, let’s look at history to get a clue: in 1990-1991: the oil price went up from $20 to $40 when Saddam invaded Kuwait. The Kuwaiti fields went down and we embargoed the Iraqi oil.

But then Saudi went full throttle. The oil produced went into hidden stockpiles. For five months. Then when the air war began in Jan of 1991 the oil price fell from 40 to 20, most of it in one day. The Saudis and the allies dumped the oil and killed the specs.

Right now, there are some 200+ million bbl of excess inventory inside the U.S., owned by some investment banks (who have bought from the producers and are short the future as the counterparty to the various commodity funds).

Once the Saudis stop rolling the swaps with the investment banks, the banks take the contracts into the delivery period. But the poor investment funds cannot take delivery of the oil and sell it in the spot market, simply because they cannot handle actual oil, and so they have to dump their futures at a loss (explains the backwardation). Oil crash in progress, isn't it?

What do you think about Marshall Auerback's estimate that the U.S. are oversupplied by 0.5-1.0 million bbl today?

http://macrobits.pinetreecapital.com/is-the-oil-mystery-being-revealed/

http://macrobits.pinetreecapital.com/an-opec-tax-cut-on-the-way/

What do you think will be the capacity of Libya and Iraq when they are back online, and at what price can they produce profitably?

Finally, in a previous thread here

http://www.peakprosperity.com/comment/134549#comment-134549

Jeffrey Christian wrote

Energy is an interesting area to discuss. I happen to not be a 'peak oil' believer. Yes, we will hit oil output limits, and annual output will decline globally at some point, but the major constraints on production at present are political, not geological. Russia, Venezuela, Mexico, Nigeria, and some other major producers have seen sharp declines in their oil output over the past decade. In each case, the declines reflected human actions, political or otherwise, and not geological constraints on production. We also have reasons to believe that Saudi Arabia has vastly more oil resources than is commonly believed and assumed.

[...]

Over the past year or so we have been focusing on an alternative energy scenario, in which oil production rises over the next decade or so, natural gas production rises, natural gas takes market share, clean(er) coal technologies come into play, LED lighting and flat screens cut energy consumption in half for many lighting and screen applications, other energy conservation efforts reduce the growth rate in energy consumption, and nuclear power increases its share of energy supplies... and all of these things lead to a period of three to 10 years of lower oil and energy prices. Sort of what we saw in the 1980s, 1990s, and into the 2000s. There's a lot more behind that headline conclusion, but we have begun paying more attention to an energy scenario that does not have oil prices rising more than 50% in the next five years, as our main scenario projects. Interestingly, we are finding more and more energy industry professionals that nod their heads knowingly when we discuss such an outcome. I gave a speech outlining this possibility in Abu Dhabi in February. i thought that might have proven unwise. The overriding reaction was that 'yes, we have been thinking about these same possibilities.'

Doesn't Saudi Arabia have to bring down the price, just in order to get rid of all the new competition? During the 1970s, they made the mistake (well, the Shah helped a lot) of keeping the oil price artificially high. The result was that a lot of new production (Alaska, Mexico, North Sea) came online and marginalized OPEC for most of the 1980s. Do you think they are keen on repeating that mistake?

Just to keep track of where we are, here is Brent:

Victor

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So much for insight

timeandtide wrote:

Another myth is that higher oil prices kill the economy. The only reason, I would suggest, for oil hitting record prices has been the record production of money which was initiated by the abandonment of the gold standard in 1971. Increasing complacency led to the abandonment of prudent banking and the deregulation of the financial industry during the 1980s.

Yes we could have avoided a lot of corruption and destruction if we had not torn down financial regulation, but you are wrong about high oil prices not having an affect on the economy. Are you saying that a gold standard would control the global supply of oil and the geologic phenomenon of Hubbert's peak???!!???

timeandtide wrote:
Lurking in the background always are potential breakthroughs in nuclear and battery technology as well as an increase in the use of domestic solar energy, particularly if widespread adoption of a carbon price leads to a more honest system of accounting based on energy value rather than nominal money value. Thirty years of manipulation by bankers and politicians have ensured that the information inherent in the nominal value of money is now almost meaningless.

Yes those breakthrough technologies are going to save the day....

yt75's picture
yt75
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The embargo and "agressive OPEC" myth

"“Just as the trauma of the Cold War ended in Berlin, so the trauma of the 1973 oil embargo is ending now.”"

I know that Chris Materson knows quite a bit about oil and its implication, but the above even if a quote, would tend to show that regarding oil exploitation and market geopolitical history, he is buying in the common legend ...

It is probably time to describe the first oil shock as it truly happened, no ?

Which is basically :

- The so called "Arab embargo" was a joke, an epiphenomenon if your prefer, lasted 3 or 5 months anyway, only towards a few countries, not even effective from KSA to the US (tankers going from KSA to the US Army in vietnam especially, thoughout the "embargo", James Akins very clear on that, interview in "la face cachée du pétrole" for instance)
- The real reason for the first oil shock was the American peak in 1971 (and fuel shortages started at that time in the US)
- Indeed after US peak it was very clear for US/western majors that oil price had to rise, in particular in order to be able to start more expensive plays : Alaska, GOM, North Sea (barrel around $1.5 at that time)
- And contrary to the "popular image", US Diplomacy **pushed** OPEC towards the price rise (and quotas).
- In other words first oil shock should simply be called "US peak shock", and if most Americans had known of this production peak, or even if they did know now, maybe things would be a bit different...

A key person around this is James Akins (unfortunately died a few years ago) :

- He was the guy nominated by Nixon to assess US oil production capacity after 1971 peak (without talking to the press)

- result : we are in a mess, no way to increase prod : clear sentiment that a price increase was necessary to start more expensive plays

- he was then US embassador in Saudi Arabia (key US "friend" in the region, don't forget) and especially he suggested a price increase around $4 or $5 a barrel in an OPEC meeting in Algiers in 1972 where he was invited.

- don't forget also the "counter oil shock" or oil glut story, especially starting 1985, where Reagan passed a deal with the Saudis for them to increase prod and by that put the last blow to the USSR (it worked, cutting their foreign currency revenues by 2/3)

- The general ignorance on this is truly amazing, really the first oil shock has to be labelled "US production peak oil shock", first producer of the time don't forget.

Arthur Robey's picture
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One step at a time.

I am loseing my compassion for people who still have to go through the 5 step grieving process. Denial, anger,bargaining,depression & acceptance.
Oil production has peaked. You may have one day per step.

yt75's picture
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About Akins

His 1973 article :

http://www-personal.umich.edu/~twod/oil-ns/articles/for_aff_aikins_oil_c...

Interesting read.

One can notice that he is very cautious in not adressing US 1971 peak directly (o at least for the part I read), but not very surprising as the subject was for sure qui touchy at that  time ...

Note that he also got fired for his positions :

http://www.motherjones.com/politics/2003/03/thirty-year-itch

For people understanding French or German, great Akins interviews in "la face cachée du pétrole" documentary part 2, can be found on youtube and dailymotion (too bad this doc doesn't exist in English and non dubbed, at least to my knowledge)

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RJE
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Yes Arthur, or put another

Yes Arthur, or put another way: Find, Drill, Produce, Deplete, Shut down (5 stages of an oil well).

A few more bites of interest: The average age of major oil company employees is 46 to 49 years old. With 55 being retirement age.

The infrastructure just in the United States for the transport of OIL is way past its useful life and should have been replaced already. Compounding this problem is the fact that when pipe was initially put in the ground no one lived in these areas, and now city's are built on top or aside of them.

We have NO battery storage system, YET.

We have 250 million internal combustion engines to work off just in private vehicle ownership.

BOB

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Primary Factors in Price of Oil

Victor: Yes, I've followed Chris Cook's work for years. His knowledge of the financing structure(s) that surround global oil--and the trading platforms also--is authoritative. But, he makes a final mistake in my view by subordinating actual real world flow of demand and supply to his own analysis. It just can't be that way. It never was that way. So again, the speculative, storage, financing structure can accentuate price movements to even stronger extremes during volatile periods. But, they are NOT the primary factor in the price of oil. My answer will not satisfy those who think otherwise, however. It's too short, and those who believe that its the myriad secondary factors that control the price of oil are very firm in their view. I can only refer to my many long essays at www.gregor.us and here on this topic.

G

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Interplay between Oil, Gold, Finance & US Foreign Policy

Very interesting articles, Gregor. While I agree that Peak Oil can't be stopped, I do take issue with the statement that these "secondary factors" are de minimis in  your view.

As way of explaining my statement, I would direct your attention to two must read articles. One is by Victor The Cleaner. He didn't mention it in Comment #5, so I will! It can be found at his blog:

http://victorthecleaner.wordpress.com/2012/05/17/beware-of-the-muppets-in-the-oil-market/

It is very interesting reading. And it is very prescient thinking about how secondary factors do play a role in how Peak Oil will continue to play out. I would like your opinion of Victors work if you have the time. 

The 2nd must read is a little dated, but it ties all the reasons together for WHY the 73 Opec embargo happened, as well as how gold, the dollar, US foreign policy all played a role in massaging Hubbert's peak. This article can be found at:

http://fofoa.blogspot.com/2010/10/its-flow-stupid.html

a pull quote from that article is actually a CNN transcript from Sheikh Yahmani ( former Saudi Arabi Oil Minister 1962-1986)

John Defterios: 1973, the Arab oil embargo, you were a key player during that process. The former US Secretary of State Henry Kissinger said it was political blackmail what Saudi Arabia and OPEC were doing to the rest of the world. In retrospect how did you see it?



Sheikh Yamani: Well that’s a very long story, and the reaction of America for what happened is not a one reaction. They decided to raise the price of oil 400%. They needed to help the oil companies to invest outside OPEC. In Mexico, in North Sea and so on. And this will not happen without a high price of oil.

I recomend reading that FOFOA piece as it ties so many things (Gold, the dollar, War, US Foreign Policy, etc) together.

For those that aren't familiar with the history of Oil, I recomend reading Yergin's The Prize as an overview of the history of how politics, economics, war, gold and many other secondary factors all influence the worlds use of Oil. Of course I disagree with Yergin violently on Peak Oil, but The Prize as a history primer is a very good start.

I write the above, not to disagree with the Peak Oil or Peak Cheap Oil thesis (which is where I am), but to point out that secondary factors have, are & will continue to play a huge role in influencing the marginal price of oil.

And as you so astutely proved, it is at the margin where the action takes place.

Gak

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gak wrote: a pull quote from

gak wrote:

a pull quote from that article is actually a CNN transcript from Sheikh Yahmani ( former Saudi Arabi Oil Minister 1962-1986)

John Defterios: 1973, the Arab oil embargo, you were a key player during that process. The former US Secretary of State Henry Kissinger said it was political blackmail what Saudi Arabia and OPEC were doing to the rest of the world. In retrospect how did you see it?



Sheikh Yamani: Well that’s a very long story, and the reaction of America for what happened is not a one reaction. They decided to raise the price of oil 400%. They needed to help the oil companies to invest outside OPEC. In Mexico, in North Sea and so on. And this will not happen without a high price of oil.

I recomend reading that FOFOA piece as it ties so many things (Gold, the dollar, War, US Foreign Policy, etc) together.

Interesting, but again, the basic reason why the US were pushing for OPEC price rise and quotas was that they(and western majors) in general needed higher prices following US lower 48 peak in 1971.(that happened to be US global peak anyway)

And the "popular image" of an "agressive OPEC move" is not only false, but basically has led to American citizens not being even aware that US peak is history, maybe time to tell it as it is ...

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gak
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"popular image" of an "agressive OPEC move" ???

yt75,

I am confused by your response. To wit:

Interesting, but again, the basic reason why the US were pushing for OPEC price rise and quotas was that they(and western majors) in general needed higher prices following US lower 48 peak in 1971.(that happened to be US global peak anyway)

I agree with you. The US needing higher prices t is one of the major thrusts of the FOFOA piece. The US NEEDED a higher oil price to stimulate demand from locals that weren't cost competivtive with the Oil that (at the time) literally gushed from the ground in Arabia. Remember the time frame here. So I am unsure why you put that comment in there. AFAIAC, that is not subject to dispute.

And the "popular image" of an "agressive OPEC move" is not only false, but basically has led to American citizens not being even aware that US peak is history, maybe time to tell it as it is ...

I don't know what this has to do with my comment to Gregor? I did not (and do not) consider what Opec did an aggressive move. I consider it a rational move in response to the US inflating the worlds reserve currency. Of course, as FOFOA points out, KSA was already aware of the debasing of paper.



In the 1950’s, numismatists were puzzled by these “discs” until - in 1957 – the story emerged in The Numismatist. Aramco, required to pay royalties and other payments in gold to the Saudi government, could not obtain the gold at the monetary price fixed by the United States so the U.S. government specifically began to mint the “discs” – actually bullion in coin form for these payments. In 1945, for example, the mint turned out 91,210 large discs worth $20, and, in 1947, 121,364 small discs worth $5, according to The Numismatist.

(Saudi Aramco World, 1981 print edition)



The coins were struck in Philadelphia by the United States Mint in 1945 and 1947 to satisfy the obligations of the Arabian American Oil Company, or Aramco, which had been set up in Saudi Arabia by four American oil companies. The company was obliged to pay the Saudi Government $3 million a year in oil royalties and its contract specified that the payment be made in gold.



The United States dollar at the time was governed by a gold standard that, at least officially, made the dollar worth one thirty-fifth of an ounce of gold. But the price of gold on the open market had skyrocketed during World War II.



For a time the Saudis accepted payment in United States currency, but by 1945 they were insisting that the payments in gold be resumed. Aramco sought help from the United States Government. Faced with the prospect of either a cutoff of substantial amounts of Middle Eastern oil or a huge increase in the price of Saudi crude, the Government minted 91,120 large gold disks adorned with the American eagle and the words "U.S. Mint -- Philadelphia." (New York Times, 1991)

My  comments to Gregor were that "secondary factors" do influence the oil price. Nothing more or less was intended or written.

Gak

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wroth5
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What am I missing here?

Shortage in the US? What shortage??!!!

"U.S. oil inventories climbed for a ninth week, reaching a 21-year high, as growing production bolstered a supply glut in the days before the Seaway pipeline began to move crude to refineries along the Gulf Coast, a Bloomberg survey showed. "

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@gak

Gak,

My point is that the label "arab embargo" or "opec embargo" is still the main label used to refer to the first oil shock, whereas it is really an epiphenomenon regarding the first oil shock, main reason being US 71 peak, leading to a "common interest" price rise between western majors and Opec countries.

I'm not saying you buy in this image (agressive Opec move), but seems to me that it still is indeed the prevailing one.

And about the embargo, it wasn't even effective at all, in a documentary "la face cachée du pétrole" with plenty of key people interviews (yamani, akins, gorbatchov, plenty of others) Akins mentions that during the "embargo" two senators started voicing quite strongly that "action" should be taken towards Opec, whereas at the same time, in fact tankers were going from KSA, through Barhain to be more discrete, directly to vietnam for the US army. So he asked the permission to tell them what was going on, got it and told them, and there was never any leak ... (Saudis would also have been pissed off if there had been any).

So we have this strange thing where for both the US and Arab "public opinions", saying that the embargo was real was a good thing (allowing not to adress the reality of US peak for the US, and showing that they were "doing something for the palestinians" for the Arabs) when in reality this was not the key point at all ...

Unfortunately to my knowledge this doc (adapted from a book same title) only exists  in german and french with dubbed interviews, but really well done for the whole history of oil, for the Akins interview part related to the senators and embargo story, you can check below at 17mn30s :

http://www.dailymotion.com/video/xj4eum_la-face-cachee-du-petrole-arte-2...

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@gak

Gak,

My point is that the label "arab embargo" or "opec embargo" is still the main label used to refer to the first oil shock, whereas it is really an epiphenomenon regarding the first oil shock, main reason being US 71 peak, leading to a "common interest" price rise between western majors and Opec countries.

I'm not saying you buy in this image (agressive Opec move), but seems to me that it still is indeed the prevailing one.

And about the embargo, it wasn't even effective at all, in a documentary "la face cachée du pétrole" with plenty of key people interviews (yamani, akins, gorbatchov, plenty of others) Akins mentions that during the "embargo" two senators started voicing quite strongly that "action" should be taken towards Opec, whereas at the same time, in fact tankers were going from KSA, through Barhain to be more discrete, directly to vietnam for the US army. So he asked the permission to tell them what was going on, got it and told them, and there was never any leak ... (Saudis would also have been pissed off if there had been any).

So we have this strange thing where for both the US and Arab "public opinions", saying that the embargo was real was a good thing (allowing not to adress the reality of US peak for the US, and showing that they were "doing something for the palestinians" for the Arabs) when in reality this was not the key point at all ...

Unfortunately to my knowledge this doc (adapted from a book same title) only exists  in german and french with dubbed interviews, but really well done for the whole history of oil, for the Akins interview part related to the senators and embargo story, you can check below at 17mn30s :

http://www.dailymotion.com/video/xj4eum_la-face-cachee-du-petrole-arte-2...

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Secondary Factors

yt75,

OK. I  understand what you are saying now.  I was misinterpreting your comment about  aggresive Opec actions (IE General US public belief that Opec is bad & evil and they really stuck it to the US) as being a response to what I had written. I now see that it wasn't.

As to the rest of your comment, debating whether or not the embargo was "effective" is a non starter IMO. How does one quantify "effective"? Instead lets state historical facts and see if we can figure out why they happened?

Firstly, I do think that the US peaking in the early 70's played a role. I don't think I said or implied otherwise.

However, will you grant the following facts?:

There were gas lines in America at that time.
The price of oil moved up.

These are not debateable facts are they?

Now the question is why did that happen.

I concur (again) US Oil production peaking played a significant role.

But did not the political ramifications of US support of Israel play a role as well?
Did not LBJ's guns & butter policy play a role in increasing the GPL (General Price Level) and unleashing a massive inflation run that Volcker finally slayed?
Did not NIxon's Wage & Price controls play a role?
Did not Nixons slamming the gold window shut play a role?
Did not the US telling KSA that they NEEDED the price of oil to move UP 400% play a role?

I could add more, but what I was and am getting at in my comments is that "Secondary Factors" do in fact play a role. How much to assign to each one? I have not the foggiest, but I am always willing to listen to others take on it.

As we slide down Hubbert''s Peak, the role may become minimized (I say may!). But to say that they don't & that it is all just related to the quantity of oil or the flow rate, just doesn't hold oil, er water for me :)

Take care!

Gak

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various

Gregor,

thanks for your reply. I wonder whether you'd like to comment specifially on the following points:

1) Jeffrey Christian says that the non-OPEC output has been declining over the previous 5-10 years not because of geological constraints, but because these countries chose to pump less. Do you believe he is wrong?

Do you believe it is the best strategy for an oil exporter to always pump the maximum flow of oil if the revenue in US$ is attractive? Or does the decision not to pump that much perhaps reflect issues with the US$ as means of payment for the oil?

As I said playing with Akins' original words: "Oil in the ground is as good as gold in the vault."

2) What do you think are Iraq's reserves and what do you think will be their maximum production for the next decade, provided the required modernization takes place?

Gak,

concerning the Nixon shock, some believe that the U.S. first decided to raise the oil price (in order not to become dependent solely on the Middle East). With a gold backed dollar at the old price of $35/oz, however, the U.S. would have lost their gold to the Middle Eastern oil exporters in no time.

Therefore, they had to

a) either revalue gold up substantially (say to $300/oz)

b) or stop gold convertibility of the US$

They chose (b) because they knew that the Middle Eastern oil producers still wanted to purchase gold for some part of their revenues. Without convertibility, they would therefore drive up the price of gold in the then very small London gold market. As a consequence, they would need to raise the US$ price of oil as well in order to still get their gold. Voila.

And then Kissinger just topped everything by getting the Shah to blatantly raise the price during the OPEC embaro of 1973 (when Iran was the primary Middle Eastern non-embargo supplier). Yamani says he figured this out only when he talked to the Shah. Akins must have learnt it from Yamani. Poor Akins made the mistake of going public with this information, immediately getting himself fired, of course.

Victor

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Your thoughts

Victor,

Thanks for the reply. When you  have time, would you be able to hazard a guess as to a weighting in regards to specific actions and their respective contribution to pricing? Or is that a fools errand?

IE in your piece on the muppets (and please correct me if I am wrong), my takeaway is that the dumb money that can't deal in physical will/is being slaughtered by the producers (or their representatives). And that in the short term, this will influence price downward more than the peak oil decline.

Is that an accurate portrayal or am I completely bass ackwards here?

In regards to Akins. I wonder how many people take the wrong course of action (going public in this case) simply because they have some of the information, but not the whole picture. I guess that's why markets will never be efficient, but better than centrally planned ones!  :)

Gak

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speculators

Gak,

I think you should really read the original of both the Thoughts! and the Gold Trail:

http://www.usagold.com/goldtrail/archives/another1.html

http://www.usagold.com/goldtrail/

In printed form, it is probably about 300 pages, and it's definitely worth it.

Concerning the muppets, in my picture, the inflation hedgers are the useful idiots. They are quite predictable and respond well to rhetoric ("...if not, we will strike Iran..."), and they can pony up the funds in order to take some 200mm bbl off the market inside the U.S. alone (it's not that much money btw).

But the producers (say Saudi Arabia) also need to collude. If they continue selling in the spot market, the muppets can only cause a serious contango, and then that's it. Only if the producers defer sales and go short the future instead, or if they swap their inventory with the investment banks (say JP Morgan), the speculators can cause the price to increase.

Here is where the politics start. Between mid 2009 and the end of 2011, apparently, Saudi Arabia agreed to keep the oil price high and stable.

Naimi's letter in the Financial Times may be the official announcement that their policy has changed ("oil is too expensive for Europe", "there is no shortage"). If true, this makes the collapse of the speculation that may have just begun, even more relevant.

If you think about the gold-oil relationship, you will realize that eventually, the gold/oil ratio will have to break out of its 70-year trading range of 10-25. And it will have to break out huge! This will end the preferred role of the US$ as the oil currency and may eventually substantially favour the Euro. Once this change in the gold/oil ratio is in effect, I wouldn't be surprised to see a decade or two of cheap oil in Euros, say E40/bbl (about half of today's price). I wouldn't want to own an Alberta oil sands company in this scenario (for more than one reason).

What about 'peak oil'? I am not sure it is that relevant to the original question. Yes, crude oil is a finite resource. Once you have burnt it, it is no longer there. True. So what? What we need to understand is what's the impact on the price.

Given that the present price is artificially high and that a lot of production has been taken offline (either by voluntary abstention of both OPEC and non-OPEC producers or by diplomatic/military actions such as in Iraq, Libya, Iran), we may very well see substantially lower prices for an extended period. I explicitly say one or two decades.

Then the question is how demand behaves during this period. Demand is by no means sticky, even less so if viewed on a time scale of a decade. Just take a look at what the high prices of 2009-2011 have done to U.S. demand.

Unfortunately many of the 'peak oil' prophets easily fall for the obvious industry propaganda and tend to relay industry sponsored research without verifying. That makes everything all the more complicated to disentangle.

Victor

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supply

Here are some questions that people should ask:

Saudi Arabia. They claim they can produce 12.5mm bbl/day. Until about a year ago, they typically went up to 8mm. The US/UK based oil multinationals have always tried to ridicule the 12.5mm and suggested that the 8mm was already the limit. Now we see them happily pump 10mm. The true answer is probably that with some upgrades, they can go even beyond 12.5mm. Why should they tell the world how much they really have?

Iraq. Before WW2, it was mostly covered by the Red Line Agreement. Then it was under Soviet influence and technically never fully up to date. They got drawn into the Iran-Iraq war in 1979. Then the second gulf war in 1990/1 and a decade of sanctions. Then 2003. Iraq is still largely unexplored and 'thanks' to three full-scale wars within 25 years, seriously underdeveloped. If peak oil were so threatening, where are the efforts to get Iraq onstream? They can probably produce some additional 10mm bbl/day for a decade. When I watch the news, however, I don't get the impression that it was that urgent.

Finally, you should ask why is oil priced and oil trade settled in US$. That's quite a privilege for the dollar, isn't it?

Firstly, today oil trade is settled in US$ because it was the case yesterday. But originally, when the US$ went off gold convertibility, it was the main swing producer, Saudi Arabia, who basically had the power to decide. They went for US$. Why?

The key to this question is the gold/oil ratio. Note that this ratio has been in the range 10-25 since WW2.  As long as the gold/oil ratio remains reasonably low, say <= 20, the oil producers can invest a small portion of their export surplus in gold at a very favourable price. That's enough to agree to settlement in US$.

Now the difficulty for the U.S. is that with the introduction of the Euro, there has no longer been any further international support for a low gold price. Take a look at the Washington Agreement in 1999. In fact, the gold price in US$ has been rising since spring 2001.

So, unfortunately, the U.S. can keep the gold/oil ratio low only if they accept (and actively maintain!) a high oil price in dollars. Of course, this cannot go on forever simply because the economy wouldn't survive it. But they managed to pull this off until the end of 2011 which is quite remarkable (and quite reckless as well).

This is why a potential new Saudi policy favouring a low dollar oil price is so explosive. Oil can easily go down by 30% or more, say to $70/bbl or less. But try this with gold ($1200/oz) and the system might run out of reserves. So the train is heading for a massive concrete wall.

Victor

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victorthecleaner wrote:And

victorthecleaner wrote:

And then Kissinger just topped everything by getting the Shah to blatantly raise the price during the OPEC embaro of 1973 (when Iran was the primary Middle Eastern non-embargo supplier). Yamani says he figured this out only when he talked to the Shah. Akins must have learnt it from Yamani. Poor Akins made the mistake of going public with this information, immediately getting himself fired, of course.

Victor

According to below :

http://www.motherjones.com/politics/2003/03/thirty-year-itch

Akins didn't get fired for this reason at all :

Quote:

In 1975, while Akins was ambassador in Saudi Arabia, an article headlined "Seizing Arab Oil" appeared in Harper's. The author, who used the pseudonym Miles Ignotus, was identified as "a Washington-based professor and defense consultant with intimate links to high-level U.S. policymakers." The article outlined, as Akins puts it, "how we could solve all our economic and political problems by taking over the Arab oil fields [and] bringing in Texans and Oklahomans to operate them." Simultaneously, a rash of similar stories appeared in other magazines and newspapers. "I knew that it had to have been the result of a deep background briefing," Akins says. "You don't have eight people coming up with the same screwy idea at the same time, independently.

"Then I made a fatal mistake," Akins continues. "I said on television that anyone who would propose that is either a madman, a criminal, or an agent of the Soviet Union." Soon afterward, he says, he learned that the background briefing had been conducted by his boss, then-Secretary of State Henry Kissinger. Akins was fired later that year.

Kissinger has never acknowledged having planted the seeds for the article. But in an interview with Business Week that same year, he delivered a thinly veiled threat to the Saudis, musing about bringing oil prices down through "massive political warfare against countries like Saudi Arabia and Iran to make them risk their political stability and maybe their security if they did not cooperate."

And Akins was also clearly pushing for a price rise, at least in 1972, he was the one suggesting $4 or $5 in an OPEC meeting in Algiers, that he mentions also in his 73 paper :

http://www-personal.umich.edu/~twod/oil-ns/articles/for_aff_aikins_oil_c...

He was the one that audited US capacity in 71 so perfectly aware of the situation.

Overall for me peak oil is vey real, we are currently on the top of the production rate curve, and most if not all countries produce as much as they can.

I don't believe either in a major influence of speculation (on futures and derivatives market) on oil price, but have the more simple view of :

1) the conomy grows, oil production and consumption as well (typically 2004 2008 period)

2) production approaches its current limit

3) high volatility, price spike

4) price trigger demand destruction (2008), ie recession

5) price fall, production as well, going below max current prod

6) more or less back to 1)

Typically also the view described in Nature jan 26 article below :

http://tribune-pic-petrolier.org/wp-content/uploads/2012/03/Murray12oil.pdf

By the way below a petition/call initiated before french presidential election but still active, please do not hesitate to sign it up ! :

http://tribune-pic-petrolier.org/mobilizing-society-in-the-face-of-peak-...

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 I am interested in why

I am interested in why people think "inventories at a 21 yr high" means anything.  Could mean we're using less but buying the same amount.  May not mean a single thing or may mean a lot.  Personally, I think it means we have oil in inventory and that's about it.

As far as I can tell, US oil production has increased by a small amount and is, relatively, meaningless in the scope of things.  I am far from an expert on energy issues but it looks to me like the whole issue if far too complex to be dealt with in any single article or any one person's opinions.  The gist of it all, appears to me, to be we're in a world of hurt, there aren't any viable solutions and endless hours are being spent with "what ifs, could be's and future technology will".  At 70, the real hit will, probably, come after me but if I were a young person, I'd quit bickering and look for a hole to crawl into.

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specs & other "secondary factors"

Victor,

I have been reading Thoughts! & The Gold Trail, as well as FOFOA, (as well as the new kitco archives) for the last 2 years. I haven't mastered them & I frequently have to re read portions, but it is slowly sinking into my dullard cranium.

But to this thread, Fofoa pointing me to The Gold Trail  was what opened my eyes to the thought that looking at selected pieces of data in isolation means that one will never see the big picture & consequently will miss the all important Forest because one is so focused on a particular tree. As FOA writes,

We must view the world in a broad context, just as much as in a detail perspective. The larger perception can be just like looking at a river the valley from the ridge above. From far away it's easy to see what direction national trends are flowing. The whole body moves as one, always towards the sea. The problem comes when we get too close and interpret things using only a small river section in front of us. More often than not, the white water we see only hides a deeper flowing truth.” 

FOA (2/23/2000; 19:49:22MT - usagold.com msg#6) 

http://www.usagold.com/goldtrail/archives/goldtrailone.html

That is one of the reasons I like CM’s site with the emphasis on the three E’s and how they interconnect.

Now, that doesn’t mean that Chris (or anyone else) gets it right (IE looks at all the variables), which is why I asked my question of Gregor. Why does one dismiss Secondary factors? How does one put a weighting on them to figure out how important they are to the overall question?

I happen to fall in the camp that believes that we are in Peak Cheap Oil. However, I do think (and as a former oil hand, I have seen it firsthand) that those secondary factors do play a role. I think those secondary factors (More so than flow rates) is what drove the price of oil to $147 & then back down into the $30 range. But I think that they were more pronounced because we are in an era of peak cheap oil combined with FOFOA's peak $ credibility. IE bumping up against a max flow rate threshold in both products :)

I think your line of thought about the POLITICAL reasons for why KSA, Iraq & others don’t produce more is important to determining  what is going to happen to the price of oil.  I think that the interplay between physical Gold, Oil, the Euro, the Dollar, Foreign Policy goals, Western Consumer demand destruction and many other items all go in to the hopper of secondary  factors & that they do affect flow rates & decisions about bringing fields online.

I think westerners make the faulty assumption that KSA values the dollar as much as westerners do. To KSA, oil in the ground is better than a devaluing currency & as long as the gold flows the oil will flow. But eventually, the flow will lesson. The question for me, is how long is eventually in this context.

Gak

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thanks!

Thanks, ty75, you are right about Akins. My mistake above towards the end of #18.

Victor

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Fracking

I've been reading a lot lately in the Wall Street Journal(love my free subscription!) about fracking - specifically, how the US oil companies have developed it, how we have been able to open up new fields(Bakken) while re-energizing old oil fields(Texas) and how the technology is just now being exported to other countries for their use. While I don't believe this will cause a new oil boom, I do believe that this new oil being extracted in the US and eventually worldwide will help to smooth out the current effects of Peak Oil, perhaps for several years. At least, that is what I am hoping.

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The article by Dreyfuss

yt75,

I'd like to comment on the article by Dreyfuss you cited:

http://www.motherjones.com/politics/2003/03/thirty-year-itch

I agree with the facts presented or at least find them plausible. However, I think the interpretation is completely bass ackwards. The "Kissinger plan" of invading the Middle East and to seize the oil was not an actual plan that he wanted to pursue, but it was rather the rhetoric that helped underpin the artifically high oil price created at that time. So the purpose was not to have cheap access to the Middle Eastern oil, but rather to scare Europe and Japan in order to sustain the artificially high oil price.

Furthermore, I find it entirely plausible that the Bush/Cheney administration revived the successful "Kisiinger plan", but with its original intention. The plan was not to get access to cheap oil, but again to scare everyone and keep the oil price artificially high. I think if you compare this with the reality of Iraq post 2003, it is pretty obvious that getting access to the Iraqi oil was not at all the goal, quite the contrary.

So here is what I expect for the coming one or two decades:

1) oil trade will switch from dollar settlement to other currencies, presumably mainly Euro

2) the U.S. will largely withdraw from the Middle East (I even think there is no point in starting yet another shooting war as it would cause too much damage to their own economy)

3) the Middle East will be donimated by Europe, Russia, China, who will have access to cheap oil in non-US currency for an extended period

Victor

PS: The Financial Times is confirming that Saudi Arabia is producing in excess of 10mm bbl/day and shipping the stuff into the increasing inventories around the world. (I think the price target of $100/bbl or $90/bbl is a distraction - the target must be substantially lower in order to render all the new expensive supply uncompetitive)

www.ft.com/intl/cms/s/0/512b72c4-a57d-11e1-a77b-00144feabdc0.html

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Victor, I'm not sure, I'm

Victor,

I'm not sure, I'm in no way an expert in oil geopolitical history (and scientific/technology background more than economics).

Also think that the facts are correct (publications and reason for Akins being fired), and that the threat wasn't very serious (and not done directly), but indeed a way to cover up the fact that high oil price was also a US strategy. But for me in the balance here there might be more the US public opinion, that is making sure that for the public (it occured in 1975 so right after 1973), it stays as "the Arabs/OPEC are the bad guys imposing these prices", and not us, or even for the whole western public opinion.

And again these high oil prices were necessary to start Alaska, GOM, North sea, so not sure if they were "artificially high", also the result of the OPEC production quotas being very real at that time.

If we look at :

[img]http://www.wtrg.com/oil_graphs/PAPRPNT.gif[/img]

and :

[img]http://www.bargaineering.com/images/in_posts/oil-production-vs-oil-prices.gif[/img]

or :

[img]http://www.economicpopulist.org/files/u1/World%20Oil%20Production%20and%20Average%20Price.png[/img]

We have this kind of flat price period 74 79, with OPEC quotas and Alaska/GOM/North Sea not online yet :

[img]http://static.seekingalpha.com/uploads/2009/12/17/saupload_crude_oil_prod_2009.png[/img]

Then the crash dur to Iran 79 revolution, but Alaska coming online with North Sea :

[img]http://gailtheactuary.files.wordpress.com/2010/12/north-sea-oil-production.png[/img]

Then around 85 OPEC production comes back up (Reagan deal with Saudis, Irak /Iran in need of money for their war (and being broke afterwards), also the period when OPEC members all started increasing their reserves to increase their prod quotas I think).

And then the Bushes era (by the way in this doc and book "la face cachée du pétrole" there is also the episode where Bush (the first) was the one that ended the "saudi oil glut" while being Reagan vice president and more or less on his own (and this for US domestic production interests that got quite wiped up by this increased saudi prod/sudden price decrease), or also below :

Then the gulf wars (with the first one a lot about Saddam being pissed about Koweit producig too much).

And then more or less a steady increase both in prod and price leading to today period.

As to the future frankly I don't know, but again quite clear to me that we are around the peak, so that I think it won't go well at all (even though I don't prepare anything). But overall don't think the US will largely withdraw from the middle East at least in the short medium term, especially from Barhrain, KSA, Djibouti, etc, even Irak if more or less direct (a lot of black water type guys there still, Exxon in Kurdistan, etc)

And seems to me it's somehow still for a while either the US with Europe there, or the Chinese or Chinese + Russian.

Anyway ... where are you from ?

(me from Paris)

Edit : sorry not sure how to insert images here, but the URLs should be valid

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People Saying How They "Feel" About Oil

Victor:

The remarks from Jeffrey Christian about Non-OPEC oil supply (if true, as your reported) are an excellent example of how most people, when they claim to be telling you something about global oil supply and oil prices, are really jut telling you how they feel. Christian has no body of work behind him that woud support his position. So, it matters not what Jeff thinks. It doesn't matter what I think either. However, the data shows conclusively that not only have flows stalled, and fallen in Non-OPEC over the past decade--especially when we remove Russia--but the data also shows why: the cost to bring the marginal barrel on has raced to the upside, as the resource base descends into lower, and lower quality oil.

There is some indication, in my view, of the Hotelling Rule in OPEC, or scarcity rent if you will, in OPEC supply. Even the Saudi's have suggested that it's not prudent to sell as much oil as possible and as quickly as possible. They clearly understand the Hotelling Rule: the value of oil in the ground is appreciating at least as fast, if not faster, than the prospective return that could be obtained using the capital proceeds from such oil sales. Brazil also has noted this too, in a governmental/political context.

Non-OPEC however is dominated by profit-maximizing enterprises. Christian's commentary is in addition, just silly because Non-OPEC (ex Russia) is free market oil production.

The work on Non-OPEC production this past decade is vast. The team at Barclay's in particular have done great work, and there were indications as early as 2004 that Non-OPEC was headed for production problems due to real--not imagined, sentiment based--reasons. Namely, geology.

Best, G

PS: Are you sure Jeffrey Christian really made those remarks? Not that it matters. Just curious. What matters is the data of course, and the historical production record, and the context. Not what anyone says casually.

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Gregor Macdonald wrote:The

Gregor Macdonald wrote:

The remarks from Jeffrey Christian about Non-OPEC oil supply (if true, as your reported) are an excellent example of how most people, when they claim to be telling you something about global oil supply and oil prices, are really jut telling you how they feel. Christian has no body of work behind him that woud support his position. So, it matters not what Jeff thinks.

[...]

PS: Are you sure Jeffrey Christian really made those remarks? Not that it matters. Just curious.

Well, it was an internet discussion forum (this one, to be precise), and so I couldn't take his fingerprints and a DNA sample to confirm it was him. But, yes, I do believe it was him as he is obviously rather competent. Just to make sure we know what we are talking about, here is his comment:

Energy is an interesting area to discuss. I happen to not be a 'peak oil' believer. Yes, we will hit oil output limits, and annual output will decline globally at some point, but the major constraints on production at present are political, not geological. Russia, Venezuela, Mexico, Nigeria, and some other major producers have seen sharp declines in their oil output over the past decade. In each case, the declines reflected human actions, political or otherwise, and not geological constraints on production. We also have reasons to believe that Saudi Arabia has vastly more oil resources than is commonly believed and assumed.

I do have a problem with your reponse though:

Quote:

when they claim to be telling you something about global oil supply and oil prices, are really jut telling you how they feel.

because you also write

Quote:

The team at Barclay's in particular have done great work, and there were indications as early as 2004 that Non-OPEC was headed for production problems due to real--not imagined, sentiment based--reasons. Namely, geology.

Well, this is how Barclay's feel, isn't it? You should not forget that they have a lot of skin in the game, and so you should be prepared to see a lot of marketing and not so much resaerch that would deserve the name. In fact, I think it is very tempting to think "peak oil" and then "price must go up" and then go out and look for confirmation of this idea. Of course, you find all the industry sponsored 'research' that is out there for a purpose. Precisely for this purpose.

But then, surprise, surprise, you actually admit that Jeff is right:

Quote:

Even the Saudi's have suggested that it's not prudent to sell as much oil as possible and as quickly as possible. They clearly understand the Hotelling Rule: the value of oil in the ground is appreciating at least as fast, if not faster, than the prospective return that could be obtained using the capital proceeds from such oil sales. Brazil also has noted this too, in a governmental/political context.

So we can add Brazil to Jeffrey's list. I am glad you agree that OPEC plus Bazil have not been pumping at the geological maximum production rate for the period of 2004-2011. In fact, Saudi Arabia just nicely demonstarted this by increasing from about 8mm bbl/day to beyond 10mm bbl/day.

Do you also agree that the estimate produced by Hotelling's rule, depends both on how the proceeds of the potential additional production are invested and on what will be the future price of oil? What is your estimate of US$ real interest rates for the coming decade? If you were an oil producer with spare production capacity, how would you manage your production and how would you invest your proceeds?

So I think you just contradicted yourself head on. In the article you claim "OPEC has lost the Power to Lower the Price of Oil", but now you are telling me that they (i.e.OPEC, and you include Brazil while Jeffrey adds Russia and Mexico) don't produce at the geological limit, but rather according to some financial and/or political considerations.

This tells me that they have not necessarily lost their power to lower the price, but that they have decided to limit production and to aim for a higher oil price for some period of time (that would be roughly 2004-2011).

This is a huuuuge difference, isn't it? Because the financial and/or political considerations may change. In fact, they certainly will. (Oil in the ground is as good as gold in the vault. It would be wrong to think that oil in the ground were as good as dollars in the bank - it is much better.)

Sincerely,

Victor

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Thanks Victor. Let me

Thanks Victor. Let me clarify. In the most simple direct way.

So, the assertion that Non-OPEC production has been limited by meangingful factors other than geology is not a view I agree with, or a view that has empirical support. I did mention Brazil, but, Brazil's take on this is more prospective, and political. In other words, in the case of Brazil, it's not that they hav,e a trailing record yet of bringing on new supply more slowly. Rather, it's that when they  stood before all their newfound, but very high priced supply, they made political statements saying they would develop it more slowly. But this is rather moot because their new supply is slow, by definition.

As for Barclay's I try not to impute anything necessarily good or bad to a research team based on association alone. I just really happen to like their work, and it also lines up really nicely with the independent work also done on Non-OPEC the past decade. Including work that I have done. Just a note: I have been studying Non-OPEC for a long time, and radically different persons and institutions have come independently to roughly the same conclusion about Non-OPEC supply. That is, Non-OPEC supply not of liquids, not of biofuels, but of crude oil.

Yes, no one disputes that Saudi built *some* spare capacity the past 5 years, and they are using it. Also, I use standard accountings from EIA and IEA to gauge total OPEC spare capacity, which although low, does still exist. Say at around 2+ mbpd.

But, you would have to read Part II of this piece to understand more fully why I say OPEC can no longer lower the price of oil on a sustained basis. It's because of a more complex interplay between price, and the marginal barrel from Non-OPEC. So, my assertion in the piece is not quite so linear.

Overall, it ultimately becomes somewhat unsatisfying to adjudicate these views in short comment threads. But, let me just say that one tries to suss out large factors will which really do kick production higher or lower for sustained periods of time, vs many smaller factors. As for Non-OPEC, sustained prices above $90 will indeed bring on new supply that either arrests declines in some regions, turns declines into advances in others, and may overall slow the decline experienced by Non-OPEC. Meanwhile, OPEC has *slightly* more discretion in this regard, but, again, it's important not to convert that into my implying that OPEC has lots of discretion.

Something that really helps: working with the data sets over a long period of time will show that war, strikes, new discoveries, political desicions, and even price, do not kick production higher or lower from the larger trend. It is only when geology or techniques for extraction change dramatically that production trends finally change. I remember when I started out, I was much, much more concerned with the Dollar, political decisions about production, OPEC cartel policy, and so forth. Now I am much less interested in these, and many who find my work frustrating do so because I am now very much on the side of geology. It's ironic, because I talked so much about the USD factor years ago. Now, I no longer think about it much, as one example.

As many who work in this area will tell you, often assertions which appear to be contradictory are not. That is because each region, and each country, will contain conditions or factors which run counter to the overall characterization. So, Brazil is the one exception within Non-OPEC, in that they have clearly given voice to the Hotelling Rule. But has that affected Non-OPEC production? Nope. Not in any meaningful way. Conversely, many hold the view that the US has some draconian set of enviro regulations preventing increased production here. But, that's neither true nor much of a factor either. Non-OPEC is a big category. But overall, it's easy now, given the past decade, to answer whether the systained Non-OPEC trend reflects geology or political decisions.

Best, G

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Not Quite Right...

Victor,

you placed this quote from Jeff Christian:

Jeffrey Christian wrote

Energy is an interesting area to discuss. I happen to not be a 'peak oil' believer. Yes, we will hit oil output limits, and annual output will decline globally at some point, but the major constraints on production at present are political, not geological. Russia, Venezuela, Mexico, Nigeria, and some other major producers have seen sharp declines in their oil output over the past decade. In each case, the declines reflected human actions, political or otherwise, and not geological constraints on production. We also have reasons to believe that Saudi Arabia has vastly more oil resources than is commonly believed and assumed.

[...]

Over the past year or so we have been focusing on an alternative energy scenario, in which oil production rises over the next decade or so, natural gas production rises, natural gas takes market share, clean(er) coal technologies come into play, LED lighting and flat screens cut energy consumption in half for many lighting and screen applications, other energy conservation efforts reduce the growth rate in energy consumption, and nuclear power increases its share of energy supplies... and all of these things lead to a period of three to 10 years of lower oil and energy prices. 

There are a mash-up of strange ideas and language in there.  With some simple inquiry into the geology and dynamics of oil field production one cannot be a believer in or a denier of Peak Oil any more than one could be a believer in or denier of to, say, gravity.  So I am going to presume Jeff meant that he does not believe we are hitting geological production limits right now.  

Even then. the important piece of information is not the actual number of total barrels produced but the total net energy delivered from those barrels.  The marginal cost of a barrel produced is a convenient, if crude, approximate for EROEI.

But the second mash-up I am having trouble finding a gentle rationale for...

To say that clean(er) coal, LEDs, natural gas electricity generation and growing use of nuclear power will lead to lower oil prices is just...silly.

Oil is not used to generate electricity to any appreciable degree, except on Hawaii.  There's no relationship between electricity consumption, prices or efficiency measures and the price of oil of which I am aware.  They are entirely separate energy markets for all practical purposes.  70% of oil goes to transportation and 30% goes to industrial uses as feedstock for plastics and chemicals.  So when someone conflates these markets I immediately question if they really know what they are talking about.  The quoted passage is a flag for me.

Next, the idea that oil production will rise over the next decade is still under some serious doubt in my mind, in part because the declines in existing fields will continue to offset the stingy gains labored out of the shale beds, in part because the shrinking wedge between the price of oil needed to support new production and the price that kills economic growth will serve to stifle production, and in part because the environmental costs of some of these new plays are creating additional local friction.

Remember, as soon as the shale drilling stops, the production declines are extraordinarily rapid. Already there are rumors from the Eagle Ford play that drilling is dlowing down rapidly....the US price for oil is no longer supportive of that play, is how the thinking goes.

Maybe we'll get more oil out of the ground in ten years, maybe not.  But if we do, I can assure you that it will have a much higher average cost per barrel to produce than oil today.

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Yeah!

Dear Chris,

thanks for coming here 'in person' to comment. Since Jeffrey wrote it on this very blog (in the thread on the Harvey Organ interview a few weeks ago), perhaps you can just email him and ask him to comment - he is very nice and helpful although sometimes rather busy.

Once you are here, perhaps you can comment on

1) What do you think are Iraq's reserves, their average sutainable production rate over the next decade, and the cost of this production?

2) What is OPEC's true spare capacity (once the necessary repairs and upgrades have been done in Iraq and elsewhere) and how long can this be sustained for?

3) What is the reason for OPEC countries and other such as Brazil, Russia, Mexico not to produce at full capacity? Would changes to the form of the payments they receive lead them to reconsider these decisions?

4) How did US demand respond to the elevated price since 2009? How did European demand respond?

5) There have been plenty of diplomatic and military events involving oil producing countries during the past decades, for example, sanctions, war and chaos in Iraq, partly sponsored civil war in Libya, sanctions against Iran. Do you think

a) these actions tend to increase production and to secure cheap supply

b) these actions tend to decrease production and to 'preserve' supply for the future

c) even if no single entity has an all encompassing geopolitical master-plan, each of these actions has a purpose beyond the storyline reported in the media

d) all these actions are just coincidences of world poltics and we shouldn't suspect that oil plays any role

I'd be grateful to hear your opinion on this.

Victor

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Attempt at answers

Victor,

My attempt at answers inline…

Here are some questions that people should ask:

Saudi Arabia. They claim they can produce 12.5mm bbl/day. Until about a year ago, they typically went up to 8mm. The US/UK based oil multinationals have always tried to ridicule the 12.5mm and suggested that the 8mm was already the limit. Now we see them happily pump 10mm. The true answer is probably that with some upgrades, they can go even beyond 12.5mm. Why should they tell the world how much they really have?

A: They should tell the rest of the world how much oil they have & what their maximum flow rates are so that they can remove their primary political weapon & leverage from world affairs & make themselves completely at the mercy of consumer markets that they have less influence in. :)

Iraq. Before WW2, it was mostly covered by the Red Line Agreement. Then it was under Soviet influence and technically never fully up to date. They got drawn into the Iran-Iraq war in 1979. Then the second gulf war in 1990/1 and a decade of sanctions. Then 2003. Iraq is still largely unexplored and 'thanks' to three full-scale wars within 25 years, seriously underdeveloped. If peak oil were so threatening, where are the efforts to get Iraq onstream? They can probably produce some additional 10mm bbl/day for a decade. When I watch the news, however, I don't get the impression that it was that urgent.

A: That’s why I am a “Cheap” peak oil guy. I think that Peak Oil is a scientific fact. The only question is how much & what types of oil did we start with? Without knowing that, we won’t know until well past peak when exactly we peaked. I think that we "may" have peaked in the last couple of years, but the data shows a plateau Take a look at http://www.theoildrum.com/node/7258 Specifically this chart

http://www.theoildrum.com/files/World Oil Production and Average Price.png

World Oil Production and Average Price

I would say that we have plateaued, but have we plateaued due to geological constraints? Or do those nasty unpredictable secondary factors come into play? Also is the plateau permanent or temporary? Also how does one define Oil production when they say we have peaked? All very important questions when trying to determine what prices are going to do. Also notice the avg price each year (in 2009 dollars). I wonder if any secondary factors played a role in the price fluctuating from $10 to $60 back to $20 up to $95 & back down to $60? And notice that those peaks and valleys have occurred not just in the last decade , but this chart goes  back to 1970. And if you go back further in time you will see similar gyrations.

In fact, go study the history of oil and learn about Rockefeller wanting to destroy his competition because he hated the volatility. He knew that if he controlled all aspects of production he could produce oil at a consistent profitable amount. Look at the Texas RailRoad Commission & how they controlled world wide production. Yes, they  paid attention to geologic constraints, but they paid more attention to domestic producers in Texas that greased their palms.

Again my point in asking my questions of Gregor is how can you dismiss all the secondary factors and not include them in your analysis?

Finally, you should ask why is oil priced and oil trade settled in US$. That's quite a privilege for the dollar, isn't it?Firstly, today oil trade is settled in US$ because it was the case yesterday. But originally, when the US$ went off gold convertibility, it was the main swing producer, Saudi Arabia, who basically had the power to decide. They went for US$. Why?

The key to this question is the gold/oil ratio. Note that this ratio has been in the range 10-25 since WW2.  As long as the gold/oil ratio remains reasonably low, say <= 20, the oil producers can invest a small portion of their export surplus in gold at a very favourable price. That's enough to agree to settlement in US$.

A: Because the Saudi’s wanted gold & US military hardware. Gold to protect them against paper currency and weapons to protect against various threats.

Now the difficulty for the U.S. is that with the introduction of the Euro, there has no longer been any further international support for a low gold price. Take a look at the Washington Agreement in 1999. In fact, the gold price in US$ has been rising since spring 2001.

So, unfortunately, the U.S. can keep the gold/oil ratio low only if they accept (and actively maintain!) a high oil price in dollars. Of course, this cannot go on forever simply because the economy wouldn't survive it. But they managed to pull this off until the end of 2011 which is quite remarkable (and quite reckless as well).

This is why a potential new Saudi policy favouring a low dollar oil price is so explosive. Oil can easily go down by 30% or more, say to $70/bbl or less. But try this with gold ($1200/oz) and the system might run out of reserves. So the train is heading for a massive concrete wall.

A: I got my popcorn ready :)

Gak

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Attempt at answers

gak, can you please please stop using "mm" for million barrels?  mm stands for millimetre..  The correct prefix for million is M, which means Mega.

It just annoys the hell out of me........!

Mike

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mmmmmm!?

Damnthematrix wrote:

gak, can you please please stop using "mm" for million barrels?  mm stands for millimetre..  The correct prefix for million is M, which means Mega.

It just annoys the hell out of me........!

Mike

Mike,

m is the Roman numeral for 1000, as in mcf or mmbo. It's an oil patch thing; s.o.p., get over it

Stan

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mmmmmm!?

Stan Robertson wrote:

Mike,

m is the Roman numeral for 1000, as in mcf or mmbo. It's an oil patch thing; s.o.p., get over it

Stan

No it's not......  it's M.  C for a hundred, X for ten, V for five.  But then some people think V is for victory, and X is what you sign when you can't write.......

But we don't use Roman numerals......  Remember?

m is milli, as in millimetre (mm)
c is centi as in centimetre (cm)
d is deci as in decilitre (dL)
k is kilo as in kilogram (kg)
M is Mega as in Megabyte

A million barrels a day is Mbbls/day....  and why there are two b's is beyond me!  Must be an oil patch thing!

Mike

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Uhm, ok :)

DtM,

I am pretty sure that if you take a close look at what I wrote, the only time I used mm was when I directly quoted Victor . I don't change what people write when I quote them.

Hopefully the chart I linked was up to snuff :)

Gak

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I won't argue with anyone on Peak Oil but watch this as part...

...of your due dills.

http://physics.ucsd.edu/do-the-math/

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various

I plead guilty of writing "mm" for millions. I have no problem switching to "M" if you like that better. I actually do like it better.

Secondly, in case someone thinks I am denying that fossile oil is a finite resource - no, I actually know that once you burn it, it is gone. That was not the question. The question is whether you can (1) date "peak oil" around 2007/8 and then (2) conclude that the oil price will only go up from here (about $105/bbl for Brent), except for some <6 month oscillations due to financial market activity. That's what I am calling bullshit on.

In case you are interested in a quote from the gold trail on this topic. Here is FOA:

FOA (1999-08-06 11:14:24 ID:10496)

[...] It should be clear, by  now that the supply of oil to the marketplace was never based on the amount of oil that could come from the ground. Politics and international money values have everything to do with how oil is sold. And these attributes are in a state of constant flux! They don't control the amount of oil, rather the value of oil.
After all these years and an actual hot war in the middle east, the oil price never went up and stayed up in dollars. As WWC #10461 points out , tanks are as full as ever. Now, suddenly right after the EMU, the price of oil starts rising, as it pulls up the Euro! At the same time, the gold market is sliding into a crisis that, as Mr. Turk wisely observes, has never been seen before?
While many wait for the oil price to come down from "competition" and "the Euro to sink because it could never work", the world reserve currency is being abandoned right before their eyes!

A lot of this is actually even more true today than it was in 1999 when he wrote it.

Sincerely,

Victor

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Someone's getting warm about Euro & Oil!!

Excellent article by Joe Wiesenthal at Business Insider. You can read the whole thing here http://www.businessinsider.com/why-the-euro-has-been-falling-2012-5  

Here are the important bits as it relates to this thread:

Citi's Jeremy Hale last year:

Oil prices have been positively correlated with EUR/USD for some time. One reason is the perceived asymmetric policy response by the ECB and Fed to higher oil prices, where the ECB typically responds more hawkishly. Another is that trade flows/ exports to the oil producers favour Europe over the US.

Another key reason he cites is that revenues from oil (accrued to Mideast oil producers) are frequently banked in Euros, creating upward pressure.

So when oil is rising, it's seen as more likely that the ECB will increase (or at least not loosen) monetary policy. And that makes the Euro strong. And when oil is dropping (as it has been lately) the odds that the ECB will cut rates goes up. And that makes the Euro weak.

Hmm sound to me like currency pairs and producers preferences for a particular currency over another (no pun intended Victor!) may have something to do with what producers do.

And how bout this quote:

So rather than seeing EUR/USD as some kind of proxy for the health of the Eurozone (which has been mess for a very long time) think of it as having to do more with the price of oil, and how the price of oil affects monetary policy and currency flows.

Finally, if you're still not convinced that oil is more important to the euro than the crisis tensions, check out this same chart going back to 1999, since long before anyone thought there might be a Eurozone crisis. The similar movement in the euro and oil is uncanny.

And the chart he references.

US Euro FX & Brent Oil Price 1999-2012

So Gregor (or anyone else), please explain again  how secondary factors aren't relevant? And yes, Gregor I did read part II and I agree with 95% off what you wrote (and in general with what you write),  but I still haven't seen you make a convincing case for why secondary factors don't matter. I think it has been proven that they do.

Gak

P.S. I hope that you email Victor part II so he can comment on it. 

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comments on Skrebowski

Dear Robert Essian,

I'd like to comment on the article by Skrebowski you linked. He writes

"On the latest budget projections Saudi needs an oil price of $90-100/b for its revenues and expenditures to balance and if it is not to run deficits and consume financial reserves. It is likely that many, if not all of the other, Opec members have revenue/expenditure breakeven oil prices comparable to those of the Saudis.

This means that, whatever the public statements, most Opec members now require oil prices around $100/barrel to balance their books and will seek to secure higher prices by restraining supply if necessary. However, under sufficient economic pressure oil prices would fall with severe impacts on Opec budgets."

I'd say he is totally misunderstanding the situation. Since Saudi Arabia only gets paid in dollars, but since they cannot acquire a decent amount of gold at the usual price (gold/oil ratio between 10-25), they have decided to spend all their surplus on various gadgets that are on sale for dollars, including but not limited to US manufactured weapons.

Should the revenues accrue in a different currency, their budget would look differently. Btw you shouldn't look at their budget, but rather at (1) their trade account and (2) at their production costs.

They could equally well produce at $60-$70/bbl (at which they stil produce profitably - hey, they can probably go for $30-$40/bbl), then purchase gold for a small part of their revenue and forget about spending all that money on gadgets.

He also says

"but there are few, if any, prepared to forgo current income in the hope of greater income at a later date"

as I said I think that basically all of OPEC, plus Mexico, Brazil, Russia, are doing precisely this. Producing at less that the geological limit just because the oil in the ground is much better than dollars in any bank. Only gold in the vault is as good as oil in the ground.

Then, if I am right (btw I am not the first to notice this possibility) and their production has been less than the geological limit for the past 30-40 years, then of course, your estimate of their peak production rate and of their reserves is off as well.

Skrebowski 's article is actually a good example for not realizing that many of his assumptions are the consequences of political decisions rather than necessarily geological limitations.

Victor

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gold/oil ratio

Gak,

here is my suspicion about why Weisenthal's correlation holds:

The gold/oil ratio changes very little (btw: Think about this. There is no reason why this should be the case. In fact, you would expect that the oil price is related to the general price level, but we know the gold price is not. The gold price is independent of economic considerations and only driven by the demand for savings that are free of counterparty risk). So oil is close to gold.

Now it happens that the Euro has a higher correlation with gold than the dollar (if all three are measured in an independent currency, whatever that is). This is because the major theme of the 21st century so far has been the declining global role of the dollar which is being replaced partly by gold and partly by the Euro. Therefore the Euro correlates somewhat with the oil price. In fact, the Euro is the only major currency backed by a gold "reserve" (quotation marks because of the floating price) - some 20% of the outstanding monetary base at current prices by the way, whereas the dollar is backed by gold only at less than 1% of the monetary base (this is because the Federal Reserve has no gold - the U.S. gold belongs to the government and not to the currency).

Finally, why doesn't the Euro trade lower? This is because the global central banks are shifting their reserves from dollars into euros, knowing that the Euro will survive the coming financial crisis when the dollar loses its reserve role, but the dollar might not. I don't think the solid performance of the Euro (still more expensive than purchasing power parity) is due to the oil price. It is rather a consequence of central banks buying Euros for dollars.

Sincerely,

Victor

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can you please please stop using "mm" for million barrels? mm s

Perhaps a little historical information will reduce the aggravation a bit.

When I was a kid just beginning to learn about such things 65 years ago, the metric system was basically unknown in the USA except in science to my knowledge. In commerce Roman numerals were universally used as abbreviations of scale. If I recollect correctly, after the use of M for megahertz and megabits became common in the popular press, M for thousand changed to m for thousand, presumably to not be mixed up with M for million. According to the rule of unintended consequences, mm could be interpreted as meaning millimeters when it was intended as, and context indicated that it was intended as, a scaling abbreviation, not a units of distance indicator. The larger picture, I suppose, is that languages grow like Topsy, and are not necessarily internally consistent.

Best,

JoeM.

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Oil Patch Acronyms

G'Day JoeM,

You just have to get used to the oil patch acronyms.  I've never had to use mmbbl/d before, but I always used mmcf/d for measuring the output of a gas wel (million cubic feet per dayl.

Wouldn't it be grand to use mmbbl/d heaps.  The biggest well I've come across in the Middle East is 100kbbl/d. Might as well get used to the acronymns.  The oil patch has heaps.  These are just a few.

Regards,

Woomera

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Someone needs to tell the Saudis....

Gregor,

Did you get a chance to take a look at this article?

http://www.businessinsider.com/barton-biggs-saudi-arabia-bankrupt-iraq-iran-2012-5 

Snippets relevant to this thread:

Barton Biggs, the storied hedge fund manager who runs Traxis Partners, recently had an interesting encounter recently over lunch with a Saudi businessman who explained to him the real motivations behind Saudi Arabia's ramp up in oil production and why oil prices will likely continue to fall as a result for an extended period of time.

I don't know if the Saudi was blowing smoke at Barton or providing purposeful disinformation (either one possible), but this is what I am  talking about when I question how you can ignore secondary factors. The article continues:

"You have to understand our geo-political equation and vulnerability,” he said calmly but intensely. 

“Our two most dangerous enemies are Iraq and Iran. Both are Shia, and both are trying to destabilize the Arab world and our Sunni kingdom by funding terrorism. Our only weapons against them are our wealth and our oil. Their current vulnerability is their financial fragility. Their financial reserves are a fraction of ours, and they desperately need money to prop up their economies.

The ruling council has decided that over the next two years we have a brief window of opportunity to impoverish and weaken them by driving down the price of oil. Iraq and Iran need to produce and sell their oil at well over one hundred dollars a barrel. In the next twenty four months, we will gradually increase our production with the objective of breaking the price of crude down to sixty dollars a barrel.

So now that oil has been under $90 for several days, I guess we have to wait to see if oil stays under $90 more than three months as you stated in your article it could not (part II).

Good luck!

Gak

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Damnthematrix
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It's time

JoeMilkedACow wrote:

Perhaps a little historical information will reduce the aggravation a bit.

When I was a kid just beginning to learn about such things 65 years ago, the metric system was basically unknown in the USA except in science to my knowledge. In commerce Roman numerals were universally used as abbreviations of scale. If I recollect correctly, after the use of M for megahertz and megabits became common in the popular press, M for thousand changed to m for thousand, presumably to not be mixed up with M for million. According to the rule of unintended consequences, mm could be interpreted as meaning millimeters when it was intended as, and context indicated that it was intended as, a scaling abbreviation, not a units of distance indicator. The larger picture, I suppose, is that languages grow like Topsy, and are not necessarily internally consistent.

Best,

JoeM.

It's time the US joined the 21st Century.  It's the only country I'm aware of that doesn't use the SI system.  It avoids crashing satellites into Mars for starters....

Mike

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