Commodities and Oil

The press is slowly catching on to the global commodity story and the expanding impact on people’s lives. The real story is still the fact that the price of oil has increased four fold over the past decade, yet global production is clearly stalled at 87,000,000 barrels per day. If anything, it is getting less elastic as the industry is scrambling to patch over localized declines.

The current headlines are about food prices and that is more a scare than a tangible problem. A huge investment is taking place this spring and we can count on bumper crops this fall and a return to normal pricing there or at least a sharp increase in stocks.

Other commodities are all ramping up production and we have already seen price abatement. They will get cheaper with any slowdown or just the advent of new supply already financed into the pipeline. As far as they are concerned we should be more concerned with China’s and India’s ability to absorb the planned increases.

This all means that everything except oil will be in a strong supply position after the next three years of investment build out. We can actually dismiss them unless we have to buy potash this year at $400 per ton. Don’t worry though, they are doubling capacity.

Oil is the problem. We are going to displace at least 15,000,000 per day of oil production somehow over the next three to five years one way or the other. I must admit this is more a gut figure rather than a brilliantly calculated estimate based on doubtful statistics. I am also putting out a scary time frame to underline that this is not necessarily caused by dropping production as by reallocation.

It will happen very painfully if oil abruptly runs up to $300 per barrel. In that case the private car everywhere will be run of the road to release the oil for necessary industrial and agricultural use. It is our real strategic reserve. If this type of oil shock materializes, it seems likely to happen this summer. It will start with a production shortfall of a couple million barrels that is impossible to cover.

In the mean time, the trucking industry is preparing to switch over to LNG fuels which will not be short supply for a long time. I suspect that many other diesel based operators will do the same. This will single handedly switch out millions of barrels of oil from the market and may account for much of that 15,000,000 per day reallocation that is needed.

The auto industry is already switching over to hybrids and other patches that can reduce the reliance on oil. Most of our current rolling stock is destined to be either scrap a lot earlier than usual or hanger queens. Do not be surprised if rationing becomes necessary.

I am currently optimistic that this can all unwind slowly over several years. It then allows all the adjustments to be made in a normal flow of business mode. It also allows huge additional oil resources to be brought on stream to cushion the developing transition to a non hydrocarbon sustainable energy world. The very best solution is maintaining the current level of 87,000,000 barrels per day over a couple of decades while the resource is continuously reallocated by price to the most important uses and slowly squeezing out inefficient uses like the automobile.

In that case, we could expect oil to be completely out of the transportation business fairly quickly. Let us hope it does not turn out to be a crash program.

Mono Cock Dreaming

I am sure everyone is aware that the price of oil has ended up at a price of around $114 a barrel after climbing steadily through the slow season. This surely means that the summer market will bring prices running between $120 and $140 a barrel. This means that the pump price is going to be between $4.00 and $5.00 per gallon.

This has all happened without an oil shock anywhere. In fact it is amazing how quiet all the global oilfields are. It is as if they are all trying to keep their heads down. Right now the market smells a million barrels per day short with more to come. This current price adjustment is meant to contract demand. Do you feel contracted yet? Right now the industry is working harder and harder to maintain the current supply volumes.

I personally wish the shoe to never drop. The red hot problem is that we can expand production in only a very few locales. This is while global production is setting up to actually tumble. Current global production is 85 million barrels per day. A mere ten percent decline over the next three years which is totally likely plus a modest bit of fresh production means global production is suddenly below 80 million and steadily declining.

That pending decline is going to come straight out of the personal automobile. That is our real strategic reserve. Ration coupons for all is on the way. As I have said before, the price of oil will get worse and stay bad for a long time. A shock will put it over an unsustainable $300 per barrel for a brief spell. In the meantime, start thinking defensively about your use of gasoline. My own family shifted our own usage sharply downward over the past three years and we are glad we did.

We have now reached the threshold for wholesale conversion to better methods and technologies distained in the past. The news is now full of fresh new engineering advancing efficient new strategies. So the cavalry is on the way at a gallop. So let us give them free rein for they will replace that faltering production with solutions that have nothing to do with another oil well.

While this is all happening, the single best thing that industry can do is to shift fully over to mastering high volume carbon fiber fabrication technology, ending the default use of steel in all traditional manufacturing. Yes, I love steel, but that is because I can mold it under my hands with hammer and anvil. I have not had to do that however, since I left the nineteenth century behind and went to University.

Clever module making with carbon fiber means that we can assemble an automobile from a handful of precision fitted units (try that with steel panels!) that are themselves nearly indestructible and can be even reused over several models and over perhaps decades. After all, if an extra effort is made to be perfect, it is very close to been immortal. Carbon fiber demands nothing less to begin with.

The object of course is to rip as much weight out of the automobile as possible. Carbon fiber can bring the weight of the vehicle down to a level that makes even present hybrid technologies and electric cars competitive. It is not hard to trick out a battery driven system that is good for almost a hundred miles. Carbon fiber could easily double or triple that range.

The auto industry has embraced change and is working on many possible improvements, particularly in propulsion which they know their manufacturing ability gives them a huge edge. After all, a small efficient gasoline engine is ideal for powering a light weight carbon fiber vehicle.

The point I want to emphasize is that very strong carbon fiber laminates can be used to make super strong vehicle shells that can handle both high performance and safety. Why should not every passenger in a vehicle be in a carbon fiber mono cock. It only needs the desire to accept long operational lives to amortize the initial expense.

How about making a fitted mono cock that is good on any running gear for the life of the user and easily mounted. A bit crazy and obviously impractical but should we try to go there? I think we should.

I like the idea of locking in my personal shell onto a road car that is capable of letting me survive a high speed crash. It would be perfect for the autobahn.

We need to explore ways in which a couple of hundred pounds is sufficient to carry a two hundred pound driver at speed on the highway. Do this and even do it cheaply and the use of gasoline must plummet. Many good design concepts have already been played with. They just have not been picked up on by manufacturers who really want to sell you a boat and cannot stop their engineers from adding weight.

It is worth recalling that many designs that are apparently flimsy in steel are very sturdy as carbon fiber.

Alternative Energy Economy Begins

Here we are in early 2008 and at the same time as the credit disaster in the US is fully developed, slashing US purchasing power as reflected by a lousy christmas for retailers, the price of oil merrily goes along close to $100 per barrel.

US oil demand is surely in decline, yet in an off season the price is steady at its high. I suspect that when the history of this period is written, that we are experiencing a significant reallocation of resources in the face of declining options.

We have had the first substancial market break, heralding the commencement of a protracted down swing in securities. The banks are writting down their capital reserves which then makes them carefull lenders. There will be plenty of good credit looking for a home over the next few years. And the Fed is scrambling to find a way to lessen the impact to provide a soft landing.

And I think that for the first time since the depression, cities are getting into the housing business. Rather scary folks, isn't it?

As I have posted earlier, oil supply has lost its elasticity. We have had forty years of convenient oil out of the middle east and have forgotten that even this fabulous resource reaches a point in which its daily production must go into decline. And today all the available evidence is saying just that. It is telling that one of the great institutuional naysayers, Cambridge Energy Research Associates, are now stating global production declines of 4.5%.

In fact we have already felt the bite of that decline and we are watching our oil stocks shrink. That is why the price is so bouyant. Remember that the price is currently twice what it was a mere year or so ago. The open question now is how long can we drag this out before aggressive rationing by both price and regulation is imposed. Obviously, George bush is hoping to tip toe out of office before this load of bricks lands on his head. My sense is that we will be seeing major high prices for oil this summer in spite of everyone's best intention. It may even develop into a crisis atmosphere, particularly if the markets respond by going into a steady decline.

Anyway, this will continue the capital movement of resources into alternative fuel strategies upon which I comment heavily.

As I have previously said, we are entering a world of $100 to $300 oil. This will make the automobile inconvenient to operate except as an occasional luxury. And every alternative becomes viable to impliment. So although there will be pain, there will also be great capital intensive transitions to be involved in.

Keith Kohl on Tightening Oil Supplies.

I am quoting Keith Kohl's newsletter here in full. Much as we are now looking at a clean out of the credit markets that is very dangerous, the real global problem is that a squeeze is developing in the supply side of the oil industry and there is little we can do to evade it. None of the analysts have the guts to tell us the truth. A fill up has to hit $500 to force the automobile driver off the road. It is in the process of happening in a sort of slow motion. I do not like to promote fear and panic, but we have time to share this knowledge with others so that it is not a surprise and folks can prepare for it.

Remember that in the 1970's, oil went up ten to fifteen fold. A comparable today would be for it to go to ten times $20.00 or $200.00 to $300.00 a barrel.

Don't you wish a national leader would just come out ant tell people to prepare for a world of $500 fill ups instead of this "I am all right Jack" attitude.

This is from the Energy and Capital newsletter usually advertised on my blog - thank you Adsense:)!

Tuesday, September 18th, 2007

From Desert Sands to Oil Sands
By Keith Kohl

Baltimore, MD--Oil prices today reached as high as $81.90 before settling back down, but the time to mourn the death of cheap oil has already passed. The real question is, "Where do we go from here?"

If you haven't noticed yet, oil is really on the move. But what's the problem? Shouldn't we be running around like crazy?

Don't hold your breath just yet.

The Oil Crunch

For starters, oil is still very cheap.

I know we're at record prices now, but I've said this before: "If you think $80 a barrel is expensive, wait until it breaks $100 or more."

The truth is that we can't predict how expensive oil will get once the peak global production sets in. But we can say one thing for certain: It's going higher.

I couldn't stop laughing recently after reading one oil exec predicting that prices would hit $150 a barrel within 20 years. Well, at least he narrowed it down to two decades. It made me want to send him my own ridiculous prediction that it would rain at least one day over the next three years.

Seriously, though, what's going on here?

Every meteorologist I've spoken to over the last year has been adamant that this hurricane season would be catastrophic. Even FEMA released a statement saying the 2007 hurricane season could be "nearly as destructive as 2005."

Okay, we should have known this season would be weak if FEMA said that, but then again, we still have more than two months left in the 2007 season.

At least we haven't bombed Iran yet. I can only imagine the price jump from that. Oil would go past $150 a barrel in a heartbeat.

So shouldn't oil prices should be decreasing because of the shortage of monster hurricanes and bombs over the last few weeks?

Here's what's happening . . .

The oil market is still tight. Over the last three months, US crude oil supplies dropped 10 out of 11 weeks.

Don't think it's all rainbows and sunshine from here on out, though.

This week, the EIA is expected to announce that stocks of crude will fall by about 1.75 million barrels. Last week, they dropped by 2.25 million barrels.

Now take into account that our demand (not just in the US, but the world as well) is going to keep growing. Global demand is expected to reach well over 88 million barrels of oil per day. My Energy and Capital readers know exactly how I feel about conventional oil.

But where does this leave us? Sitting on the sidelines, watching the oil prices go haywire, is hardly my idea of fun.

Our Oil-Stained Future

Let me show you where our future oil demand will be satisfied.

Numbers don't lie, unless, of course, we're referring to the dubious oil reserves that OPEC claims they have. Does anyone else remember this chart from my article last May?

When these OPEC members dramatically increase (and in some cases double) their reserves in just seven years, I can't help being skeptical.

But I don't want to focus on reserves. The truth is that we'll never know how much the OPEC oil fields are struggling until they release the data.

However, I know EXACTLY where the US will get its oil.

We know that US oil production is spiraling down the drain. That's no secret. As the world's largest oil consumer, we'll have to look elsewhere. And don't let people fool you, our savior will NOT be Middle Eastern oil.

According to the EIA, our petroleum imports have been rising steadily. From 2001 to 2006, they rose from 11.8 million barrels per day to 13.6 million barrels a day. That means our imports grew roughly 14.6% in that time.

If I asked you where we got most of our oil, I'd bet a number of you would immediately think of the Middle East. I mean, even Greenspan recently said our presence in Iraq is motivated by oil.

But you might be surprised to learn that our addiction to Middle Eastern oil is decreasing.

Consider the following from the EIA . . .

Between 2001 and 2006, our imports from OPEC countries dropped approximately 6%. Since the 1960s, OPEC's total share in our petroleum imports has dropped by about 30%.

In fact, three of the top five exporters increased their petroleum exports to us between 2001 and 2006--Mexico, Nigeria and Canada.

I won't get into the geopolitical mess that is Nigeria. And if we take into account the serious troubles at Cantarell, there seems to be no chance for Mexico to keep up production.

Canada, however, is a different story. During the last five years, petroleum imports from Canada have increased 25%. With the kind of growth the oil sands are experiencing (especially in light of $81.51 for a barrel of oil), there's no doubt in my mind where we'll meet our future demand.

More importantly, oil companies are realizing this too. There'll be trillions of investment dollars pouring into these unconventional sources. The problem for us, however, is finding the companies that are going to benefit from this surge of investment. On Thursday, I'm going to show you some of the things to look for, and (more importantly) some of the pitfalls to be wary of.

Until next time,

Keith Kohl