Oil

ODAC Newsletter – Feb 25

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Libyan dictator Muammar Gaddafi’s threat to fight to the death rather than cede power set off a rising tide of violence this week which has seen hundreds, maybe thousands killed. The future of the regime and the country still hangs in the balance. The growing chaos has also spread to Libya’s oil industry as companies shut down production and foreign workers flee.

Geometric progressions: What you *will* learn from an oil shock

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What we have learned from past oil shocks (which few people outside the peak oil community have chosen to recognize) is pretty clear and simple – that the effect of oil on the economy, on individual lives, on the world as a whole is dramatically greater than can be expected by a direct arithmetical progression – that is, the effect of oil on whole systems is something like a geometric progression, increasing in complexity and impact well beyond what one would intuitively expect.

Spare capacity theory

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In truth, the spare capacity that the world cares about — that the oil futures market cares about — is not the inventory level. But rather, actual production capacity that can be brought on immediately. You can see the problem, from a price standpoint. If the world loses Libya’s 1.5 mbpd production for 90-120 days, and starts drawing down above-ground inventories, this only makes the inventory cushion that much thinner for any new supply disruptions. The question on the mind of the oil market therefore is not Mr. Fyfe’s 1.6 billion barrels of crude, but whether countries like Kuwait, the U.A.E. and especially Saudi Arabia or even Russia can lift supply. Immediately.