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Is This A Sign That The OPEC Deal Is Doomed?

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Could Oil Prices Sink to $20 a Barrel

A barrel of oil has about six times the energy content of a thousand cubic feet of natural gas. The graph below compares the dollar price of a barrel of oil with the oil-equivalent cost of natural gas, calculated by multiplying the price (in $/1000 cu ft) by six.

Based on the NG equivalence, oil should be about 6 times the price of natural gas and given today's price of natural gas, that means oil should be $23 a barrel. That is another fact for the oil bulls to ignore, link found here. _SeekingAlpha

OPEC Crude Oil Production

There are two common questions regarding the price of oil: "Why is the price so high?" and "Why is the price so low?" With the ascendancy of Peak Oil Orthodoxy, a variant of the latter question is more common, "Why doesn't oil cost more?"

John Galt is suggesting in a Seeking Alpha article that oil is likely to sink into the $20 to $40 price range:

The fact is that the world is NOT running out of oil. World oil reserves have gone up every year, year over year since 99' to 00'. I've done my due dilligence and and know why, but I doubt many of the oil bulls have even bothered researching the data. They've all read TIME, Newsweek, and maybe even a book or two about peak oil. To them it's the alarmist, " where are we going to find more oil? We are running out!". If they ever bothered to look at the data they'd see 10 years of increased World oil reserves.

US Oil Consumption
2005 = 20.80 mbpd
2006 = 20.60 mpbd
2007 = 20.68 mpbd
2008 = 19.50 mpbd
2009 = 18.77 mpbd
2010 = 18.93 mpbd ( predicted)
2011 = 19.06 mpbd ( estimated)

So American oil consumption peaked in 2005, dropped 5 years in a row and "might" increase this year to 18.93 mbpd which is what we consumed over a decade ago in 1998. (Link to the EIA data.) The idea that we are using more and more and have less and less is simply not true.

...Why is it $70-$80 now? The reason is contango. If you can buy oil now at $70 today and sell it for $85-$90 in five years, the price is going to stay around $70. Somebody is betting on higher oil prices in five years.

Supply and Demand

I've seen this movie before. Supply and demand dictate that when prices soar demand goes down but we are told, "Nope, oil demand is inelastic." MasterCard (MA) showed a huge drop in gasoline sales in the Spring and Summer of 2008, miles driven were way down, even mighty China was using less oil but people still believe in peak oil and inelastic demand. If the "rich" US consumer is going to cut back on expensive oil, then why wouldn't the "poor" consumers in the emerging markets cut back?

On top of that, oil was over $100 for only five months and then promply crashed after that. Once oil hit $100 a barrel, demand dropped. The $70-$80 range seems to be the highest price oil majors can get without demand dropping off and without huge hits to world GDP. _SeekingAlpha

Mr. Galt is correct to focus on the demand side. Historically, the price of oil has gyrated wildly due to fluctuations in supply -- the discovery of vast new oil fields as the industry matured and oil exploration went "global." Now that OPEC has achieved a fairly stable price structure along with supply quotas, oil prices have remained within a fairly narrow range -- when looked at historically (most people are incapable of looking back further than 20 years or so).

The hyper-inflated sense of urgency over the impending shortage of oil supplies tends to cast a sense of doom over most energy analysis. A multi-$trillion transition from one energy infrastructure regime to another would normally take a number of decades. If the public (and many other people who should know better) can be railroaded into believing that the energy infrastructure regime transition ABSOLUTELY HAS TO occur over the next 5 years to avoid doom, then over half the battle is won for the doomers.

And never forget this: Peak Oil Doom only works as long as the ruling class accepts the idea of Catastrophic Anthropogenic Global Warming. Because if the ruling class is not drunk or paralysed by Carbon Hysteria, there are huge quantities of substitute fuels just waiting to be used cleanly and economically.

What you can see within the ruling class is stupidity piled upon stupidity. Obama Pelosi has nearly destroyed the economy, and is hard at work creating energy starvation by any means necessary.

By. Al Fin

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  • Anonymous on September 18 2010 said:
    This article should never have been published on the present site. It insults the intelligence of readers. Oil production peaked in the US in 1970, and will peak globallly for the same reason: profit maximization. As I told my students in Thailand, and will tell people in Sweden and Paris in a few weeks, geology is a constraint.But there is something absolutely correct here that needs to be emphasized, and our political masters need to be aware of: very very high oil prices are a danger to the global macroeconomy. And once again, when the oil price can go to 147 dollars a barrel, peak oil is irrelevant.
  • Anonymous on September 18 2010 said:
    While Mr. Banks is busy attempting to impress readers with his hectic global travel schedule, people living in the real world who solve real problems are developing new ways to solve the challenges of supplying energy to a growing world population.Mr. Banks is apparently most comfortable when sitting on his laurels, and repeating well-memorised aphorisms and fables of limits to growth.In the meantime, friends, there is a world to conquer.
  • Anonymous on September 19 2010 said:
    Hectic travel schedule. Interesting, because I dislike travel. Outside of that Mr Alfonso, your mention of well-memorised aphorisms tells me that you should attend my next lecture in Sweden or Paris, because I am going to give a brilliant lecture that sums up the entire oil situation, and it will only take about one and a half hours. The ladies and gentlemen who are fortunate enough to get my message can rest assured that they will be the smartest 'guys' in the room when the talk turns to oil.What about people who think that I am on the wrong frequency? Unfortunately we won't hear from them, because when standing in front of a backboard or whiteboard with a piece of chalk in my hand, I'm pretty formidable. People who look at CNN are told that there are many ways of looking at 'issues', but I don't listen to that nonsense. There is only one way, and that is the right way. You can't conquer a world with bunkum and fantasies.
  • Anonymous on September 19 2010 said:
    Mr Al Fin says that the lesson of the present contango is that "someone" is betting on a higher oil price. Wrong again! It's not someone, it's the MARKET. This will be one of the last remarks in my forthcoming talks in...well that's not important.And the market is right, assuming that the present or the next president does what should be done to get the US economy in the groove again. Incidentally, the destroying of the US economy was the work of George W. Bush, although I'm prepared to turn a part of the blame over to Mr Clinton for giving them plenty of help.
  • Anonymous on September 21 2010 said:
    what about the fact that there are no more easy barrels of oil left? at great cost do we get oil from here on out. on the contrary, shale discoveries and fracking are creating supplies of natural gas that will last for eternity. doesn't that make a case for cheap natural gas and expensive oil? Seem to me that it does.
  • Anonymous on September 21 2010 said:
    Hard to take this rant seriously, even if one overlooks the reek of egotism, and transparent political biases. Mr. Fin ignores the increasing cost of accessing these new reserves, for starters. But if he is so immune to evidence that he disbelieves in anthropogenic global climate change, hard to imagine why we should believe anything he says that requires analysis of objective data.
  • Anonymous on September 21 2010 said:
    The article is not talking about drilling oil so much as it is talking about transforming other carbonaceous resources into oil equivalent.As it states above, while Mr. Obama proceeds to build insurmountable obstacles to economic recovery, the conventional wisdom of the mainstream masses appears to a quasi-religious faith in hysterical dooms caused by plant food (CO2) and peak oil -- which can only be caused by political meddling such as comes from the Obama administration.The religions of peak oil and carbon doom are obviously opiates for the dull masses. To reach the opportunities you have to bypass the man behind the curtain as if he were not even there. 8)
  • Anonymous on September 21 2010 said:
    "requires analysis of objective data"Data can not be objective or subjective. Data can be a complete set of available information, or it can be a subset. Data can be selected to prove a point, or it can be collected in an attempt to discover the truth. Analysis of data can similarly be scientifically rigorous or simplistic. Proper analysis of extremely complex systems requires taking into account a large number of factors and applying statistical methods before any conclusions can be drawn regarding the statistical significance or the magnitude of variation that can be attributed to a particular source. If there is any thorough, objective, and scientifically rigorous analysis of available climate data, I would sure as heck like to see it. Everything that I have seen on the subject of "anthropogenic global climate change" has been blatantly biased in presentation and extraordinarily low quality from a scientific standpoint.
  • Anonymous on September 22 2010 said:
    I heard something like this article in the first lecture of my course on oil and gas economics in Bangkok. Some people don't know what logic is, and don't want to know, but I smartened my students up. I'm sure that this author is intelligent enough to get the message, and so I hope that he will be a buyer of the energy economics book that I should publish early next year, with the title ENERGY AND ECONOMIC THEORY. Remember that Al...ENERGY AND ECONOMIC THEORY.
  • Anonymous on September 22 2010 said:
    I'm with you, Roy. Natural cycles and feedbacks predominate.Demand for future petroleum appears to be vastly overstated by most analysts. That's why academics tend to speak the loudest -- it doesn't matter if they're wrong! Nothing in the real world is going to reach out and bite them in their ivory towers.
  • Anonymous on September 24 2010 said:
    Al, if you want to believe nonsense about oil, I don't mind at all, as long as our political masters decline to be as ignorant. What we don't want is those ladies and gentlemen coming to the conclusion that they can sit back with smiles on their faces until the oil price reaches the healthy value you predict.This site is dealing with some of the most important issues in the world, and I state again that it was a mistake to publish a paper claiming that the oil price is on its way to $20/b or thereabouts, and that in reality the demand for petroleum "appears" to be overstated. As an intelligent person, don't you realize how absurd that sounds.
  • Anonymous on October 10 2010 said:
    Let us see....Today's USA demand/usage is around 19 MBOPD +/-...We have somewhere near 7% to 10% Illegals within the USA, consuming energy daily...and, we are "importing" something near 7 MBOPD from OPEC etal..other amounts from "friends"..etal.This does NOT even touch on Natural Gas usage, which is super LOW, below $4/MCF, right now.. Thru reformation/cat paks, and compression, etc...such reserves can become BOE's...i.e., Liquid/refinable fuels.NOW...enters THE GREEN RIVER FORMATION; entirely within these USA western states! The technolgy is proven to tap these reserves TODAY!!! The last actual figure I heard on "costs" was $48/bbl produced, of high gravity crude...good stuff!.. These reserves are documented at 3.4 to 3.8 TIMES ALL OF OPEC reserves today!.. AND, this is not even considering our COAL reserves, which again using KNOWN TECHNOLOGY (from WW-II) can easily become any high-test fuel you wish!

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