Election surprise

The oil futures market was down in 2006 dropping from $75 at the beginning of summer to $60 at year end. Was this due to increase supply or diminished demand? No. The word on the street was that the Republicans were going to lower oil prices to improve their chances of relection. I sold all of my contracts and waited. Sure enough the price dropped continuously through the summer driving season and into fall up to election day. So much for market forces. Since then prices have been flat with some wild fluctuations but never moving far from $60.

Declining fields

The latest news has been a series of announcements that major fields are declining in production. First it was Burgan in Kuwait, then Canterel in Mexico and Ghawar in Saudi Arabia. I believe they each account for at least 60% of the total national output! Since they are the biggest oil fields in the world, many smaller fields will need to come on stream to replace them. If you look at Petroleum Review's list of every oil project the numbers are just not there (unless if you drink the CERA kool-aid). Maybe Saudi Arabia is cutting production to save for the future but the www.theoildrum.com lastest entry from Start Staniford has showed that they added production last year as well as expanding to 55 drilling rigs.

It's been 1.5 years since my last post. I'm happy to report that my predictions were very conservative and I wished I had listened to myself. I bought one oil future contract at $39 and panicked when it hit $45 and sold. I bought again at $42 and sold again around $47 thinking that the price was rising too rapidly due to speculators. I ended up buying 2 contracts in the mid 50s and sold during Katrina when it hit $62.

All in all I made about $15,000 during the last year or so. My prediction of $60 in 7 years seemed outrageous at the time and everyone laughed at me. Now we have been at $60 for months with no end in sight.

When will demand destruction start? $80? $100?. Demand dipped for a month or two but we are on track to see at least 1% growth in 2006. I suspect that gasoline will have to hit $4 or $5 gallon to get any meaningful conservation. 2006 SUVs will be driven until 2016 unless people turn them into very expensive boat anchors in their garages.

Perhaps it is time to buy a contract or two again....

Very rough conversion of price per barrel to $ per gallon

2003 $29 $1.50 2004 $37 $1.85 2005 $50 $2.00 katrina $70 $3.00 2006 $60 $2.50 2007 $70 $3.00 2008 $80 $3.75 (Bush leaves office) 2009 $90 $4.25 2010 $100 $4.50-$5 2011 $110 $5.25 2012 $120 $6 (presidential election) Scenarios that will cause above predictions to be incorrect: Iran bombing after 2006 elections? $120 $6.00 US Dollar collapse due to excess deficit - equivalent rise in oil prices. Other bad hurricane season - $80 or $90? Mexico or Saudi Arabia or Kuwait depletion rate exceeds 4%.

Oil Prices will rise next for 5 years. More Oil in 2009.

Houston-based investment banker and analyst Matt Simmons isn't concerned with the news of the day. He describes oil demand as a runaway train. Fundamentally, he sees the growing gap between supply and demand pulling this already taut oil market tighter still.

Globally, energy companies have plans to bring 6 million to 8 million extra barrels of oil a day on stream, but the timeline for those projects stretches out until 2009. And some of those projects could be delayed.

Pebble Bed Nuclear, buyer beware.

German scientists developed a new "safer" design for nuclear reactors in the 60s. Although addresses some of the problems of water reactors by eliminating the Chernobyl style meltdown, it still has big hurdles to overcome. Researcher in Freiburg Germany had a radiation releaase in the 80s when some of the pebbles broke apart after getting stuck. The Germans tried to hide behind the Chernobyl fallout, however when officials figured out that the fallout was from a different source, the government pulled funding. Problems with Pebble Bed

Problems
1 - No Containment, each of the 400,000 pebbles is the last defense.
2 - No plan for pebbles catching fire.
3 - Small design is good but how do you secure hundreds of small sites?
4 - Lower power output compared with water reactors makes them less attractive.
5 - Excelon pulled funding after concluding project was too risky despite support from the White House.
Three Mile Island alert

I've updated my oil predictions to include the latest data on the Caspian Sea oil and updated growth estimates. It looks like a serious shortfall by 2014. Buy Oil Futures for 2009 and help conserve by driving prices up. Making money is a side effect.

Years to Depletion govt est	2003 mb/day	2004 mb/day	Est. 2014 mb/ day		WORLD OIL
5	2.2	2.2			UK
10	23.4	23.2	4.0		N.America Norway
15	11.1	11.1	11.1		China and others
20	8.5	9.4	15.0		Russia and others
30	1.4	1.4	2.1		Equador
	1.1	1.2	3.3		Kazakstan
25	0.4	0.4	0.8		Turkmenistan & Uzbekistan
	0.3	0.3	1.0		Azerbaijan
19	2.2	2.4	3.3		Nigeria
20	1.5	1.5	2.3		Libya
37	0.9	0.8	1.3		Qatar
13	3.8	4.0	5.6		Iran
43	3.0	2.9	4.5		Venezuela
47	2.2	2.2	3.3		Kuwait
80	2.5	2.4	3.8		UAE
71	1.3	1.7	4.0		Iraq
77	9.8	10.5	14.0		Saudi Arabia
	1.8	1.8	1.8		Processing gains
	2003	2004	2014
Supply	77.3	79.4	81.1		Millions of Barrels/day
Demand	77.0	81.4	87.9		Millions of Barrels/day
		GAP:	-6.8		Millions of Barrels/day
Estimated increases in production:					150%
		Demand Growth:			1.0%

US Department of Energy Website has bogus graphs.

Check out: US Dept of Energy Oil Forecast

In figure 96 for 2002 total offshore + lower48 oil production was 4.6M barrels per day. Add Alasksa in figure 98 (1M barrels per day) and I calculate 5.6Mb/day. However figure 99 says that the total is 9.2MB/day. Does 4.6+1.0=9.2? (the true number for 2002 was 7.6MB/day, according to BP Oil historical trends since 1980 and oil reserve estimates).

These figures don't add up! The US DOE web site is totally misleading and should be audited. I love their statement that oil could be $16.49/barrel in 2025 and the highest it could possibly go is $34.90 per barrel. They are dreaming or worse.

Buy Crude Futures, Save the environment (and make money)

We all know that the price of oil is going to rise as demand overtakes supply. Buying a futures contract allows you to buy oil at $35 at sometime in the future, when the market rate will probably be $45 or $55. Buying 1 contract (1,000 barrels) of oil should cost $35,000. But since you buy it on margin, it only costs you $3,500. In 5 years you sell it for $45,000 or $55,000 and make either $10k or $20k. Not bad for a small investment. If the price goes down to $25/barrel you will lose $10,000. But if you go long, the chance of that happening is quite small.

If everyone did this,[people already are] this will drive up the price of oil and force people to conserve. It is a win win situation! You are banking on the fact that Americans are too lazy to conserve and GM is too stupid to make hybrid cars before 2007. If you can't change Americans, then just take their money.