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Why are gasoline (and oil) prices so low — and where are they headed?

Gail the Actuary, The Oil Drum
Why are gasoline prices so low? And why do they continue to drop? The recent drop in oil prices has truly been extraordinary. Gasoline prices are down almost as spectacularly, and the price of diesel is down is well. If we look at the graph, it doesn’t look at all like anything we have seen before. What is happening, and where is this headed?

I am becoming more and more convinced that the drop in gasoline prices has a huge amount to do with all of our credit problems (which in turn are related to limits on the oil supply). These credit problems are causing more and more defaults on debt and more and more bankruptcies. These defaults and bankruptcies have a double impact on oil prices–partly from reduced demand, and partly from distressed sellers disposing of futures contracts at low prices, because they are easy assets to sell.

We often hear that “soon” oil prices will hit a bottom, and start shooting back up again. I am less and less certain that this will be the case. Instead, I am concerned that we may be on a relentless path to a point far below the point where energy companies can expect to have any chance of making money. We may be on a path toward more and more bankruptcies and defaults of all types–energy companies, owners of commercial real estate, homeowners, financial institutions, auto makers, airlines, and many more. If this is the case, there will be a huge strain on governments, and some may find it necessary to default on their debt.

In order to ultimately get past this crisis, it may be necessary for governments to establish new currencies in which debt is severely limited, and at the same time unwind the debt in the existing currency. I expect that a huge amount of derivatives of all types will need to disappear as well, so that financial assets start bearing a close relationship to physical resources.
(8 December 2008)
“Gail the Actuary” is Gail Tverberg.

Saudi Aramco on 60 Minutes

JoulesBurn, The Oil Drum
The newsmagazine 60 Minutes aired an extended segment on Saudi Arabian oil last night. The topics addressed were the amount of oil remaining in the country and their strong desire to sell it.

The message from Oil Minister Ali Al-Naimi and Saudi Aramco officials was, not surprisingly, that they have decades of oil left and they are happy to sell it to a world which really doesn’t have any alternative.

While the presentation included the usual mix of superlatives and exaggerations to go with some great visuals, there was little real new information revealed. It is well worth viewing, however, as much to to hear what wasn’t said (or asked) as to hear what was.

The video can be watched below, or you can read the transcript.
(8 December 2008)
I found the segment on 60 Minutes to be disappointing. For all the money spent on transporting a news career to Saudi Arabia, the information was less than what you could get from spending a few hours on the Internet. -BA

Russian oil output to fall after 2020: national energy ministry

Nadia Rodova, Platts
Russia’s energy ministry believes that the country’s oil production will stabilize at 535 million mt/year (10.7 million barrel/day) by 2020, after which it will start falling, a ministry’s official said Monday.

Under the basic scenario of the draft energy strategy until 2030, the country’s oil production will reach 500 million mt/year in 2010, 530 million mt/year in 2015, 535 million mt/year in between 2020 and 2025, and 530 million in 2030, said Vitaly Bushuyev, the general director of the ministry’s institute of energy strategy.

“We need to be prepared for [the decline in output],” Bushuyev told an energy forum in Moscow, adding that international oil prices were likely to fall after 2012 to “the level of minimum profitability of the oil business.”
(8 December 2008)

Brazil’s new oil reserves still buried in doubts

Raymond Colitt, Reuters via the Guardian
Despite tumbling oil prices, Brazil’s government insists it will develop massive offshore oil deposits, but critics say geological
hurdles, regulatory uncertainty and depressed markets could delay the country’s hope for a fast track to oil wealth.

The largest discovery of oil deposits in at least 20 years could make Brazil one of the world’s top 10 producers and has triggered avid debates on how to spend the new-found wealth.

While the onslaught of the global financial crisis has cast a pall over Brazil’s dream of becoming an oil power, government officials remain optimistic.
(4 December 2008)
Suggested by Dr. Larry Hughes.

Contango Pays Most in Decade as Shell Stores Crude

Robert Tuttle and Alexander Kwiatkowski, Bloomberg
In the worst year ever for oil, investors can lock in the biggest profits in a decade by storing crude.

Traders who bought oil at the $40.81 a barrel on Dec. 5 could sell futures contracts for delivery next December at $54.65, a 34 percent gain. After taking into account storage and financing costs investors would earn about 11 percent, according to Andy Lipow, president of Houston consultant Lipow Oil Associates LLC. The premium, known as contango, is the biggest for a 12-month span of futures since 1998, when a glut drove crude down to $10.

Stockpiling crude may provide higher returns than commodities, stocks and Treasuries as the U.S., Japan and Europe endure simultaneous recessions for the first time since World War II.
(8 December 2008)