Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Rat's Nest - Chronicles of Collapse -- Ignore unavailable to you. Want to Upgrade?

To: Wharf Rat who wrote (8092)	7/8/2008 10:35:49 AM
From: Wharf Rat	Respond to of 24231

Peak Flows - Part 2 By Jim Brown Updated: Monday, July 07 2008 10:07:PM It's the flows stupid! Peak oil should be renamed to peak flows. Peak oil is seen by the majority of the public, at least those who have at least become conscious of the term, is the date when we run out of oil. Since oil is "everywhere" with new discoveries being announced every week they ridicule the preachers of peak oil as being out of touch or on the lunatic fringe. "Why everybody knows we have enough oil to last the rest of the century." Nobody, and I repeat nobody expects oil to disappear in this century. They will still be exploring and producing 100 years from now. The problem is peak flows. When the quantity of oil coming out of the ground begins to decline as expected in 2010 those 2.5 billion emerging citizens will still be trying to grab the brass ring of the cheap energy society. Only it will no longer be cheap. Demand will continue to rise as each decade sees another billion added to the population but oil production will be declining. Growing demand along with declining production. It will be the end of civilization, as we know it. I know that sounds like sensationalism but it is true. Every single barrel of oil will be the object of a bidding war. Cheap oil has produce the civilization we have today. In the history of our planet the biggest boom has been in the last 100 years since oil production and the internal combustion engine revolutionized the way we live. 50% of the oil ever consumed has been consumed in the last 30 years. Take away that life blood of industry and transportation and the world will be a very different place. Once the decline begins and the bidding war starts, mankind will have to make some very important decisions on how they want to use the remaining oil reserves. Since transportation consumes 90% of the oil produced today that will remain a very big segment. However, we also need to consider the oil used for pharmaceuticals, plastics, fertilizer, pesticides, fabrics, paints, coatings, lubrication, etc. There are said to be more than 100,000 products made from oil and oil byproducts. Which segment is no longer going to get their share? As oil production declines there will be a constant battle by the manufacturing sector to acquire enough oil to continue making their products. Dow Chemical said last week that the cost of oil to make their 2500 product families will reach $40 billion in 2009 compared to $9 billion just five years ago. This is with oil at $130 a barrel. What about $250 a barrel and a price we will see as soon as peak flows is proclaimed. You have heard me warn about the airlines long before the current crisis. How many will remain flying at $250 oil? People ridicule me when I claim $200 or $250 oil. I get emails all the time calling me the equivalent of Chicken Little. They use to email me back in 2005 when I was calling for $100 oil in 2008. I can't tell you how many people told me I was crazy and oil would be back in the OPEC basket range at $30 before the year was out. Let me tell you how to calculate the price of oil. Today we have demand at 87 mbpd and "assumed" production capacity of 88.5 mbpd. We have never produced over 87 mbpd so we don't really know if that assumed production actually exists. If demand is 87 mbpd and production of 87 mbpd then price should remain fairly constant. We have an equal number of buyers and sellers. Obviously this is a little more complicated since there are different grades of oil, light, sweet, heavy and sour. That is what is driving price today but let's disregard that for this discussion. Once oil flows peak and begin to decline the pricing picture changes. With just a million barrel per day decline the current oil price mechanism will explode. With demand of 87 mbpd and production of only 86 who gets left out? Obviously some segment of the industry will be shorted. Today somebody will not be able to find oil. Tomorrow somebody else will not be able to find oil. Remember a drop of a million barrels per day is 7 mb per week, 30 mb per month, etc. It is not a temporary problem but a permanent problem. Every day that passes thousands of buyers will bid higher than the day before in an effort to buy some oil. If they can't buy oil their businesses cannot run and products cannot be made. Refiners will try to lockup as much supply as possible to assure their ability to make gasoline, diesel and jet fuel. As each day passes and the accumulated market shortage grows more severe the prices people are willing to pay will rocket higher. What price is too high to prevent your company from going out of business for lack of oil? Think of it as though you were one of 100 people shipwrecked on a desert island. The only water source on the island was a small spring fed pond and the spring only produced enough water each day for 25 people. The accumulated water in the pond could supply everyone for a couple days but eventually it would be gone and the spring the only source. The 100 people would begin to consume the pond water on demand as soon as it was found. As the size of the pond begins to shrink and they realize there is only a few days of accumulated water remaining they would implement rationing. Everyone gets a reduced amount each day as the supply diminishes. As the pond becomes a mud hole and the people realize that the daily supply cannot support everyone the law and order quickly breaks down. Arguments flare as everyone tries to justify their daily allotment. When that fails brute force prevails with the strong taking what they need. The weak form alliances with the strong and those that can't provide a needed service eventually die off. As the remaining alliances begin to struggle as supplies dwindle wars would break out. Again, the strong would survive and fewer service providers would be allowed to exist. Eventually only enough people would survive as there was water to support them. Every drop of water would be rationed and spread among those left as though it were more valuable than gold. In reality it is move valuable since all the gold you could carry would not be worth the daily ration of water to keep you alive. In the real world there are 6.6 billion people and millions of businesses that depend on our 87 mbpd of global production. Once that production begins to decline every single one of those businesses will instantly begin vying for their share of the reduced supply. Initially dollars will be the bargaining chip to acquire needed supplies. As the decline becomes more pronounced in the range of 2-3 mbpd those dollars will not be enough to guarantee supplies. This is when the worth of the business will become critically important. Those who can afford to pay more will quickly squeeze out those who cant. If you can't afford to pay $200 per barrel there are plenty of companies who can. You lose, permanently. A company like Dow Chemical could afford to pay $200, $300 or even $400 for their oil because their products are indispensable for civilization and they could raise their prices to compensate. At $200 per barrel thousand of businesses will fail for lack of oil. At $250 hundreds of thousands could fail. This is demand destruction at its finest. The higher the price the more elite the group that can afford to buy it. Over $200 I expect to see countries get into the act. China can't afford to have tens of thousands of fledgling businesses fail. Their cash cow as a global manufacturing center depends on cheap oil. China's subsidies keep most of the industries running. At some point they will not be able to maintain the subsidies and be faced with either shutting down the industries or acquiring oil on the global markets. Once dollars become insufficient as a bargaining chip the strong will rise to power just as in my island example. Alliances will be formed with the initial trade offs being protection in exchange for oil. China, India and even the U.S. will begin positioning themselves for global conflict over oil. Since the U.S. consumes 25% of current global oil production yet has only 4% of the population we stand to feel the pain the most. Fortunately we have the strongest military and we will need it to survive. Dollars will no longer be enough to buy oil. Business will have to rely on their governments and military to supply oil. Soaring global inflation and depression will crush demand but geopolitical factors will also slow production and exports. Countries who were exporters in the past will quickly reduce exports in order to save the oil for their own future use. What little oil they do release will garner such a high price that no revenue will be lost. How quickly can this happen? This could literally happen within 12-24 months of peak flows being reached. With 2010 the current target for peak oil we could spiral down into this morass of global problems by the end of 2012. That would be the end of the next presidents first term. In my wildest dreams I can't imagine that either Obama or McCain have a clue to what is facing them. From Obama's comments about putting a windfall profits tax on oil companies when oil was over $80 proves he has no long-term clue. Just like Bush was surprised by 9/11 less than a year into his presidency the next president should see the writing on the wall by his second year in office. Over the next four years the world is going to become a very turbulent place if the geologists are right about their 2010 predictions for peak oil. I know that lengthy commentary was repetitive for many readers but from the emails I have been getting lately there were quite a few new subscribers that had not been exposed to the true picture. $150 oil will eventually be replaced by $250 oil and it could be a very sharp move when it comes. As investors we want to remain invested the energy sector because oil will only become scarcer and more expensive. When we get the next short term correction in crude prices we need to establish some long term positions in the USO to capitalize on eventual rise in prices. The expected oil surplus in 2009 should give us one last chance to buy low but that all depends on that surplus actually happening before depletion overtakes it. Jim Brown rightsideadvisors.com