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Goldman Sachs Predicts End to High Oil Prices

By Al Fin | Mon, 22 October 2012 22:28 | 5

In an abrupt break from its earlier peak oil-esque predictions of near-future astronomical oil prices, giant Wall Street investment bank Goldman Sachs now predicts an end to the bullish oil price super-cycle.

Goldman was a lead forecaster during the 2003-2008 oil price boom when unexpectedly robust demand in Asia outpaced global supply and prices soared as spare capacity in the Organization of the Petroleum Exporting Countries fell close to zero and the refining industry struggled to meet demand.

But just after the bank predicted a "super spike" to $200 a barrel in 2008, financial crisis hit the global economy. Oil prices collapsed from a peak of $147 in July 2008 to below $40.

This year, Goldman was slow to acknowledge bearish trends in U.S. light crude, closing its trading recommendation to buy September 2012 U.S. light sweet crude futures at loss on paper of 10.8 percent.

"Goldman was a little out of kilter with their $130 (Brent) call. We have nudged up to that level on occasion but that's when you see U.S. gasoline go above $4 a gallon and that has a behavioural response," said Will Riley, who helps co-manage $284 million at the Guinness Global Energy Fund.

Gregory Cain, portfolio manager of Ebullio's eFED Commodity Fund, agreed that the market was becoming more and more aware of increasing supplies. _Reuters

In making this change, Goldman abandons other peak oil analysts making wild predictions, such as Canadian Jeff Rubin, to fend for themselves against the oil bears and wolves.

In a related story, we see an economy awash in oil, with "political peak oil" as the only type of peak oil to be seen over the next few decades.

As the U.S. defies oil-patch decline, the prestige of global peak oil theory must inevitably evaporate. Fracking has, as yet, barely gotten a toehold abroad; it faces high regulatory hurdles and exaggerated fears in many places. But no one really believes that China, to take only the most obvious example, will let itself be influenced by a few low-budget documentaries. The new talk of increasing American energy self-sufficiency sets a much more powerful example, as do the environmental numbers. China is just beginning to apply Western technology to its large reserves of shale gas and shale oil.

Academic economists never did buy into peak oil. It is hard to get them to accept a model of resource extraction that doesn’t give at least an implicit role to price signals. The University of Calgary’s John Boyce is one of the few economists who has put the Hubbert model to serious statistical tests. They are fairly obvious ones that, if peak oil had been taken more seriously by his profession, would have been performed 40 years ago. Hubbert’s curve turns out to be not much use as a source of predictive power—the ultimate test of any scientific hypothesis. It is not only that Hubbert’s own 1956 estimate of remaining U.S. oil was much too low—this turns out to be a general feature of his oil-extraction model, no matter where you look in the past and no matter what region you study.

...Part of the reason the peak oil hypothesis keeps hanging around, Boyce showed, is that Hubbert’s doomsaying successors operate with a pretty movable set of goalposts. When estimates of future oil reserves increase, theorists like Colin Campbell are quick to claim jiggery-pokery on the part of OPEC. (It is not that OPEC is above that sort of thing, and individual exporters have been caught red-handed fudging reserve estimates, but in general it is in the interests of folks sitting on oil for everyone to believe that it is scarce.) Less justifiable is the tendency to simply discard inconvenient data from the distant past that would throw off the model. Hubbert’s estimate of the U.S. peak was calculated using production figures beginning only in 1930, though he had access to a longer series, and later theorists have repeated the practice.

What is most comical about the popular peak oil phenomenon is that Hubbert was much more of a natural optimist than his acolytes. You would never know, seeing the uses to which his theory is applied, that his grand-scale vision of the human energy future originally had a happy ending. In the 1956 paper, he discussed both shale oil and the Canadian oil sands, showing that he understood their scale and promise. Moreover, he noted that “by means of present production techniques, only about a third of the oil underground is being recovered . . . secondary recovery techniques are gradually being improved so that ultimately a somewhat larger . . . fraction of the oil underground should be extracted than is now the case.” That is a clumsy but otherwise excellent description of fracking.

But all of that, Hubbert observed, is small potatoes. The title of the paper he delivered, which is something else his fans often skip over, was “Nuclear Energy and the Fossil Fuels.” Hubbert gave his talk in March; the world’s first commercial nuclear reactor, Calder Hall, would not be switched on by Queen Elizabeth II until October. But the geologist’s discussion of uranium and thorium was well-informed, and even at that early date it was clear “that there exist within minable depths in the United States rocks with uranium contents . . . whose total energy content is probably several hundred times that of all the fossil fuels combined.” On the scale of millennia, Hubbert said, “the discovery, exploitation, and exhaustion of the fossil fuels will be seen to be but an ephemeral event.” _Macleans

I was interested to learn how much of an energy optimist M. King Hubbert happened to be. One would never know that from listening to latter day peak oil doomers and their apocalyptic predictions.

But peak oil doomers -- much like carbon hysterics and resource scarcity catastrophists -- are pretty much in it for the doom, rather than for any rational reasons. Much less did the doomers join their particular movements of doom out of any ability to marshal facts, master trends, and put them all together in logical arguments and realistic scenarios.

So, should you be worried? Sure. But not about any type of peak oil other than "political peak oil."

Worry instead about the abysmal state of government leadership and bloated government bureaucracies and exploding government debt. Then go do something about it.

By. Al Fin

Leave a comment

  • John D on October 23 2012 said:
    Always do the opposite of what GS says. They make money by countering what they tell their gullible customers to do.
  • John M on October 23 2012 said:
    Of course, the laws of physics (such as mass conservation, limited mass, limited quantities of any resource, etc.) are temporal and continually changing, while the laws of economics (like the laws of God) are immutable and eternal. So we never need to worry about leaving future generations with depleted resources, or elevated climate because of elevated CO2 in the atmosphere.
  • gregory wade on October 23 2012 said:
    The author seems to be borrowing heavily without attribution:
    http://www2.macleans.ca/2012/10/18/awash-in-oil/
  • MrColdWaterOfRealityMan on October 23 2012 said:
    Of course, oil will never run out, because the price keeps rising. Sure. Makes sense to me.

    Too bad the folks at GS can't seem to figure out that oil supply (or natural gas supply or coal supply) does not equal energy supply. Details like physical net energy are just too *messy* for them to deal with.
  • Walter MacGregor on October 23 2012 said:
    Gregory Wade: The link to the Macleans article is clearly in the text of the article. Just click on it and you will discover that it works.

    There is enough controversy and disagreement over this topic without making false accusations.

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