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Prices & supplies - June 29

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The Coming Mystery Of The Missing Barrels Of Oil

Bruce Pile, Seeking Alpha
We have been conditioned throughout the oil age to count our supply of energy by the barrel. And over the first half of oil's production curve that's been a fair and accurate way of doing it. But as we go through the topping of the curve, things are going to change drastically. There are two big factors that will be doing this and both are little appreciated.

The first is net exports. You have to consider that, post peak, the global production decline rate must be modified by the rising internal consumption rate by the growing economies of the oil producing nations. A rising oil price enriches the producing economies and creates growing oil demand, cutting the amount of oil they put on the market for the importing nations. This has been modeled by Jeffrey Brown, a geologist, and is known as the ELM (Export Land Model).

... The other big factor that will distort our traditional barrel counting is net energy. For this, I refer you to my Instablog post "The Alternative Energy No One Is Thinking About". If you attempt to draw up a quantified projection of how the makeup of our barrels is changing as we approach the net energy cliff, you could draw something like this:
(26 June 2009)

Oil: What price can America afford?

Steven Kopits, E & P
Saudi Oil Minister, al-Naimi, has warned that under-investment in oil capacity may lead to a return to $150/barrel oil, “or even worse.” The Paris-based IEA has also warned of price shocks due to resurgent demand and restricted investment. Will a high price environment truly emerge, or are price spikes followed by brutal recessions more likely, as experienced in the last year? And what is more important, the absolute price of oil or the rapidity of the price increases? A tour through the historical record may provide some insight.

In the last 37 years, the US has suffered six recessions. From the beginning, oil played a central role.

...In every case when oil consumption breeched 4% of GDP, the US has suffered a recession, and indeed, the current US recession began within two months of oil hitting the 4% threshold, that is, when oil reached $80/bbl.

Suggested by EB contributor driller, who writes:
Steven Kopits of Douglas Westwood Energy research notes in a new report that in the last 37 years, the US has suffered six recessions. From the beginning of each, he says, oil played a central role. In every case when oil consumption breached 4 per cent of GDP, he notes, the US has suffered a recession. Indeed, he says, the current US recession began within two months of oil hitting the 4 per cent threshold, when oil reached $80 per barrel.

Kopits also notes that a sustained rise in the oil price of 50 per cent or more has always been associated with recession, and this applies to the current recession as well.

From his research, then, it seems there are three rules by which to avoid recession caused by oil prices:

Oil prices should not increase by more than 50 per cent year-on-year.

Oil price increases should not be so great that a potential demand adjustment should have to reach 0.8 per cent of GDP on an annual basis, as shedding demand at this rate has generally been associated with recession.

Kopits notes that these rules can be applied to three alternative approaches to oil and climate policy - both high on the Obama Administration agenda.

The US government can either prioritize climate policy with economic impacts secondary; prioritize climate policy while taking a cautious approach to the economy; or prioritise economic well-being, with climate policy secondary.

He notes there are advantages and disadvantages with each policy. But, at the end of the day, it is not up to Kopits. He rightly says that the administration has to decide whether climate change is the most important matter at hand, in which case any energy-induced recession is worth the price; or whether the health of the economy is of paramount importance, and any climate policy must be subordinate to that.

But he makes a strong case for heeding the lessons of history, noting that the oil price is rising, and the recession threshold is $80 per barrel. KS
(19 June 2009)

European gas war looms as Ukraine seeks cash to pay Gazprom for July deliveries

Carl Mortished, The Times
A summer gas war is brewing in Ukraine, threatening another cut-off of Russian gas supplies into Europe and a worsening of the cash squeeze on Gazprom, Russia’s biggest company.

Eleventh-hour talks are under way between the European Union, the International Monetary Fund (IMF) and the European Bank for Reconstruction and Development to secure a stop-gap loan of $4 billion (£2.44 billion) to pay for Ukraine’s gas needs.

Naftogaz, Ukraine’s utility, has no cash to meet the payment for next month’s gas, which falls due on July 7, and European power companies fear that Gazprom will shut the taps on gas transit pipelines that traverse Ukraine, putting in jeopardy efforts to fill storage tanks for the coming winter...
(23 June 2009)

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