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Oil crisis hiding in plain sight; pump prices and crude still way ahead of year ago levels

Bill Paul, Energy Tech Stocks
It’s time for a reality check. Oil prices are not plunging. Compared with this time last year, U.S. pump prices are more than 80 cents a gallon higher, while spot crude prices are roughly $30 a barrel higher.

Even if crude falls another $30 a barrel, that will still only put its price at roughly year-ago levels after a summer when Americans drove a lot less than the year before, precipitating all the talk about “demand destruction.”

It’s not just foolish to track oil prices on a day-to-day basis, instead of on a year-to-year basis the way corporate earnings are measured. It’s also dangerous, especially when day-to-day declines are used to explain why equities should go higher, as well as why the U.S. Federal Reserve doesn’t have to worry as much about inflation.

What’s happening now is generally what happens every year when the peak U.S. summer driving season is over and refiners are preparing to switch over to winter blends whose main additive costs less.

Virtually every other media outlet has called the recent decline a plunge. Stock markets, too, have proclaimed it so. But the percentage loss is so far roughly in line with the percentage losses in 2006 and 2005. In neither of those years did anyone think oil prices were “plunging.”
(8 September 2008)

Charlie Maxwell to Barron’s: $300 oil is inevitable

Kirk Lindstrom, Seeking Alpha
According to a Monday, September 8 Barron’s article titled “What $300-a-Barrel Oil Will Mean for You”, Charles (Charlie) Maxwell, Senior Energy Analyst at Weeden & Co., thinks $300 oil is “inevitable.”

With three or four new Saudi oil fields coming on line soon, Charlie thinks supply and demand are roughly in balance for the next two years. Charlie predicts oil prices between $75 and $115 for awhile. After that, he sees prices soaring again.

Other key comments from the Barrons interview:…
(7 September 2008)
The Barron’s article is only available to subscribers: What $300-a-Barrel Oil Will Mean for You. It begins:

CHARLES MAXWELL, WHO BEGAN HIS CAREER in the energy business in 1957 working for Mobil Oil, is no stranger to Barron’s readers. In an article he penned nearly four years ago, Maxwell predicted that oil prices would move sharply higher by 2010, and then higher still. Maxwell, 76, got the timing and trend right, though his top price of $60 a barrel by 2010 proved far too low. “Oil is unique in that when it begins to disappear, there really aren’t any good substitutes, which there are for so many other commodities,” Maxwell says. “It’s that lack of substitutes that …


An urban legend to comfort America: demand for oil creates new supply

Fabius Maximus
This is the third post in a series examining “urban legends” about energy that comfort Americans.

… Chapter 3 – Demand creates supply, by raising prices

This is core belief of mainstream economists, a bastardized version of Say’s Law that says, “Supply creates its own demand.” (Lord Keynes so described Say’s Law in his General Theory of Employment, Interest and Money, 1936. See this for additional analysis).

In brief – a full explanation requires drawing supply/price and demand/price curves – modern economics sees that increased demand forces up prices, which over time brings forth new supply. We often see this dynamic at work in daily life, and esp in disasters. A demand for pumps after a flood pushes up prices; pumps are brought in to meet this new demand. Unfortunately, conventional oil is a special case.

The supply curve for oil does not always rise with increased prices. The supply is finite in a way different from other minerals. Oil is found in a relatively small number of places which have special geological history and rock formations. It is a organic liquid – it flows away and gets eaten by microorganisms. This is the foundation concept of Peak Oil. At some point our production of conventional oil will peak – as it already has in so many of the world’s largest fields – and then will begin a decline (perhaps after a plateau).

Estimates of the decline rate have risen in the past decade, from the roughly 3% based on the experience of the “lower-48″ American fields, to the 8% – 15% seen in fields harvested for much of their life with advanced methods (e.g., water flooding in Ghawar, nitrogen flooding in Mexico’s Cantarell).

Peak Oil as a transitional period

Peak oil is the transitional period following peaking of global conventional oil production, in which the world moves to new energy sources. There are three major elements to this transition. These forms of energy are more expensive than conventional oil. Hence the oft-state belief that they will force energy prices down from current levels misses the point. Rather it is higher oil prices, following peaking of conventional sources, which drives the transition to these other sources.
(8 September 2008)

Soros: The perilous price of oil

George Soros, New York Review of Books
The following is adapted from testimony given by George Soros before the US Senate Commerce Committee Oversight Hearing on June 3, 2008.

… The rising cost of oil, coming on top of the credit crisis, has slowed the world economy and reinforced the prospect of a recession in the US.

The public is asking for an answer to two questions. The principal question is whether the sharp oil price increase is a speculative bubble or simply reflects fundamental factors such as rapidly rising demand from developing nations and an increasingly limited supply, caused by the dwindling availability of easily extractable oil reserves. The second question is related to the first. If the oil price increase is at least partly a result of speculation, what kind of regulation will best mitigate the harmful consequences of this increase and avoid excessive price fluctuations in the future?

While I am not myself an expert in oil, I have made a lifelong study of investment bubbles as a professional investor.

… So much for bubbles in general. With respect to the oil market in particular, I believe there are four major factors at play which mutually reinforce one another. Two of them are fundamental and the other two are “reflexive” in the sense that they describe tendencies in the market that themselves affect the supposedly fundamental conditions of supply and demand.

First, the cost of discovering and developing new reserves is increasing, and the depletion rate of aging oil fields is accelerating. This goes under the rather misleading name of “peak oil” -namely that we have approached or reached the maximum rate of world output. It is a misleading concept because higher prices make it economically feasible to develop more expensive sources of energy. But it contains an important element of truth: some of the most accessible and most prolific sources of oil in places like Saudi Arabia and Mexico were discovered forty or more years ago and their yield is now rapidly falling.

Second, there is a “reflexive” tendency for the supply of oil to fall as the price rises, reversing the normal shape of the supply curve. Typically, as the price of a product rises, producers will supply more. For oil producers who expect the oil price to rise further, however, there is less incentive to convert oil reserves underground into dollar reserves aboveground. Oil producers may calculate that they will be better off if they exploit their reserves more slowly. This has led to what may be described as a backward-sloping supply curve. In addition, the high price of oil has enabled political regimes that are both inefficient and hostile to the West to maintain themselves in power, notably Iran, Venezuela, and Russia. Oil production in these countries is declining.

Third, the countries with the fastest-growing demand-notably the major oil producers, together with China and other Asian exporters-keep domestic energy prices artificially low by providing subsidies. Therefore, rises in prices do not reduce demand as they would under normal conditions. This may be considered one of the fundamentals, although, under budgetary pressures, government policies are gradually changing.

Finally, demand is reinforced by speculation that tends to reinforce market trends.

… So, is this a bubble? The answer is that there is a bubble superimposed on an upward trend in oil prices, a trend that has a strong foundation in reality. It is a fact that, absent a recession, demand is growing faster than the supply of available reserves, and this would persist even if speculation and commodity index buying were eliminated.
(25 September 2008)