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Tertzakian: Look for oil price between $80 to $100 per barrel in 2011

Peter Tertzakian, Calgary Herald
… With improving market sentiment it’s not surprising to hear calls for $100-a-barrel being reiterated by analysts; it’s like listening to a chorus singing the same refrain from early 2008, the year when oil price last breached triple digits. The prophecy of the choir is somewhat self-fulfilling, and I too believe that price will cross the century line again, as early as next year. But when the herd mentality sets in it’s time to reflect on the fundamentals and consider if the indicators listed below justify the higher prices.

Demand growth: Right now demand for oil is one of the biggest factors that is in the market spotlight. Global growth this year has exceeded expectations: year-over-year demand has risen a whopping 2.3 MMB/d, to 86.7 MMB/d. The impressiveness of that jump is not completely ingenuous, because it’s a rebound off the bottom of the Great Recession. New oil consumption is heavily weighted to emerging economies, in particular China, but there has also been a bounce-from-the-bottom in the economically-challenged OECD countries.
(6 December 2010)

Analysis – Colombia defies “peak oil” but for how long?

Reuters via Forexpros
Half a century ago, Colombia helped plant the first inklings of a theory that became known as “peak oil” — the idea that conventional oil extraction has crested.

Today, Latin America’s No. 4 crude producer is defying expectations by increasing its output. But experts say the Andean country must now find new reserves to keep up production levels and sustain its ambitious growth targets.

The cause of Colombia’s rebound has less to do with geological maturity than with politics and security — which, in many emerging markets from Iraq to Nigeria are perhaps a greater constraint to boosting production.

The story plays out in miniature at the remote Rubiales oilfield in eastern Colombia’s Llanos Basin, at a now-bustling camp torched by Marxist guerrillas a decade ago.

After languishing for years with production at a trickle, the molasses-like crude output from the field — run since 2007 by Pacific Rubiales — is set to hit 200,000 barrels per day (bpd) by the end of the year, a 5,000 percent rise since 2003, company data shows.
(6 December 2010)

Black Hole For Oil Price Policy

Andrew McKillop, Raise the Hammer
The 2004-2007 petro growth cycle showed that oil prices close to or above $125 a barrel can be absorbed, and these energy prices, with related non energy commodity prices, drive global growth.

… Basic Keynesian theory is you can borrow money from the future and hope economic growth is strong enough, and concern about money depreciation and stability is low enough, to repay that debt, or absorb rising debt, later on. The official hope is that debt will not grow, due to growth.

If that fails, however, money depreciation or a change of currency, tricking the CPI figures, austerity cures and other weapons can be wheeled on stage, when public and political opinion gets too roused by rising public debt, higher taxes and austerity to pay for it.

One problem is very simple to state: maybe Keynesian deficit spending works, and maybe it does not. The jury is out to lunch on this one, and arguments on the subject stretch back more than 70 years.

Petro Keynesian growth stimulus to the global economy is different. Sometimes it works too well. Its outright and unambiguous success through 2004-2007 was quickly followed by failure. As we know, and Bernanke reminded us in August 2009, global growth turned south when oil prices went far north in 2008 – but were the two events linked?

The basic reason we don’t know is unpalatable to those, like Trichet and Bernanke who hope growth will soon return, to trim the soaring peaks of national debt. Due to another kind of peak, peak oil braking world oil supply growth and also slowing OPEC export supply growth, and exuberant Wall Street oil traders, it is simply not possible to stop oil price growth – totally unlike natural gas price growth.

High oil prices are driven by the same supply-side factors that trim world grains and food output growth. More bad news for inflation and consumer spending potential outside food and energy basics, is delivered by shortage inducing factors affecting supply of most metals and minerals. Through 2004-2007, peaking in 2008, even such basics as cement aggregates, iron ore, alumina and world bulk shipping charges climbed smartly in price.

What Jim Rogers calls the Commodity Super Cycle, now with an Asian resource demand turbo effect, in fact stretches back to well before Keynes invented his theories, including his debt based remedies for fighting recession. Long-term read outs from commodity price peaks and crashes, and global growth trends, is that higher prices for commodity resources have certainly levered up the economy, in most periods through the 20th century, if not in others.

Bernanke may be right to fear higher oil prices, but he can only claim to be right about 33 percent of the time. With present stakes so high, is that enough?

Oil Prices And Growth – The Twin Spiral

The simple answer is that higher oil prices can and likely will boost and bolster growth, but not for long, if we look at 2004-2007 performance. The Petro Keynesian growth driving paradigm and process is easy to set out. Wealth is transferred from global consumers to energy and resource producers, most of them lower income, who then rapidly spend more.

Classic debt based Keynesian programs in high income economies tend only to shift more spending power to the already rich, who spend a lower percent of their revenue gains, received through government tax cutting largesse and printing press activity.

OPEC ability to spend more when revenues rise is easy to forecast: not many OPEC states are in the Qatar or Saudi camp, where more personal consumption, at least for national citizens and not low paid economic migrants presents challenges for the imagination. Most oil exporter countries are in the Nigeria, Algeria, Iran or Venezuela camp.

The same quick reinjection of revenue gains, or windfalls to the global economy applies for revenue gains for exporters of iron ore or bauxite, rubber, coffee, sugar, or cotton exporting countries …
(6 December 2010)