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World Crisis scenarios for the 21st Century – Peak Oil. (update 12)

Posted by Adrian on June 5, 2008

World Crisis scenarios for the 21st Century – Peak Oil (update 12)

A lot of commentary in regards to the recent high oil price (on the 22nd of May in touched $135.00), the bulk of the commentary is the blame towards the futures market, for pushing the price upward. I am trying to understand the blame game here, is it a healthy dose of objectiveness in the market? Or, money worries (funds losing bets on the premise prices would decline). I would say fund money worries, hey?

Without being too alarmist and trying to be as objective as much as possible, it is hard not to be alarmed at the higher oil price. In which high oil prices and food prices have contributed as much as they could to current global inflation. Oil particularly is the fear factor here, breaking points are now evident in Europe, note recent riots (fishermen) in Belgium and France on high oil. The US has enjoyed cheap oil for a long time, apart from the sporadic oil shocks in the 1970s, an upward inclining oil price at some point is going to hurt real bad. It would be an economic spill on effect that has never really been endured in history. Oil in the sense has been the driver of such growth in the last decade, car industry, interconnected mail services (global courier networks), transport, freight transport (shipping, trucking etc) and emerging economies.

So, we have some bizarre commentary from the deniers of the implications of higher oil costs, mixed with pure arrogance. There is this crazy theory that the world will adjust, the American consumer will adapt to oil at $4.00 a gallon and somehow (fingers crossed) we will just sit it out until a massive oil field is discovered. I wouldn’t even analyze that ‘logic’, but some economists and commentators have come out and indicated at that hypotheses.

Of course a hypotheses of adaption (especially an oil dependent world with no back up energy source) is a delusion of reality, the blaming of the futures market is equally bizarre. Especially when a market that most certainty does not want to lose money, is not that leveraged and does not bet extraordinary amounts in volatile futures trading. Is hardly manipulating the oil price.

With that been said, the indicators that will drop the oil price, maybe substantially is the paranoia that the Federal Reserve has of oil countries dropping the USD peg. The Fed is essentially in a FUBR situation, low rates at 2.00% which is just far too low in an global inflation equation. It is making the situation far worst; Ben Bernanke has suggested that rates will pause and he is concerned about inflation. Oil dropped on this suggestion, that the Fed will not cut any further. Of course the credit crisis is about to swing back around again, so it is a scenario that market/social nightmares are made of. In the meantime oil has dropped to $121 a barrel (in Asian trading).

This is a slight sell off, I would have expected a substantial drop down to $110, or lower. Especially on reports that Brazil has one of the biggest oil fields in the southern hemisphere, but as a Bloomberg article reports the costs are phenomenal in extracting the oil,

“The Tupi deposit and nearby offshore prospects probably will cost $240 billion to exploit, said Peter Wells, director of U.K. research firm Neftex Petroleum Consultants Ltd. and a former Royal Dutch Shell Plc exploration manager. The total exceeds the $136 billion estimate for Kazakhstan’s Kashagan field, led by Eni SpA, and would be enough to fund the U.S. space program for 14 years.”

“Petrobras will probably face stiff challenges in this endeavor, as there are significant hurdles to overcome in terms of acquiring basic materials, people and rig equipment,” said Stephen Ellis, an analyst at Morningstar Inc. in Chicago.

Petrobras will revise its $22.5 billion-a-year capital budget because it was drafted before engineers realized the size of Tupi’s recoverable reserves, which may be equivalent to 8 billion barrels of oil, Gabrielli said. At $240 billion, the price tag would be more than the annual economic output of Thailand, Ireland and Malaysia.”

South America, particularly Brazil with high inflation and a commodity based economy running at full steam. It will be interesting over time to watch how they economy will shape up, especially if China starts to slow and Brazilian exports slow.

In my opinion, two things could bring oil down to a realistic level of $100 – $110. The US increases interest rates immediately and strengthens the US dollar. China cools quite dramatically (from the US recession) and demand falls off. These two events could stabilize the oil price. Overshadowing those two scenarios is of course a global recession, which could send oil lower.

But regardless, oil is becoming more and more scarce. The window of opportunity may present it’s self in a global slowdown, if that is the case society should try and develop an oil alternative as quickly as possible (preferably NOT biofuels from food crops). As there may be a future reprieve in the climbing oil price.

In the meantime, oil will climb onward to $127 – $129.

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3 Responses to “World Crisis scenarios for the 21st Century – Peak Oil. (update 12)”

  1. Paula said

    The U.S. should really try and import from Venezuela. They have and endless supply over there. Last I heard, they were paying about 50 cents per gallon. We can afford to pay 2 bucks at least. Come on. Do it for the oilheat users, so they won’t die frozen. Have you seen what they have to go through in order to fill up. Paying upwards of $3,000. We should really push bioheat. A B5 blend of oil can do many things. While working for NORA, I learned that B5 produces NO greenhouse gases, reduces emissions, and conserves 400 MILLION gallons of oil.

    Check it out for yourself: http://oilheatamerica . com/index.mv?screen=bioheat

  2. Adrian said

    Thanks for your post. Thank you also for the link in regards to bioheat.

    There is bio alternatives that won’t push food prices through the roof – hemp oil comes to mind.

    We can solve this with innovation.

  3. […] profits. On top of this, of course there is inflation and the high oil price. As pointed out in World crisis scenarios for the 21st century – Peak Oil (update 12), the higher oil price most definitely will effect the global transport, courier services such as […]

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