[We should not be fooled by last week’s momentary drop in oil prices. It is but a blip on the radar screen of Peak Oil’s see-saw economics. The fragility of those economics could cause prices to soar again at any moment, leaving us thinking that $50 a barrel oil was “the good ole days.”—CB]
Last weeks oil price drop was cyclical and hopeful--
Not a trend
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August 23rd 2006, 11:11 [PST] - New York - There is a lot of optimism that oil will soon fall below $70 after dropping from nearly $78 to $70 last week. But one trader on the floor of the New York Stock Exchange was quoted on MSNBC as saying that if oil goes below $70 he will buy futures “with both fists.” Reports were breaking everywhere last week predicting this week would see oil continue to drop. But as Iran insisted it will continue to pursue uranium enrichment, that was enough smelling salts to bring the market back to reality.
It is possible a new floor has been set at $70.
Last year, when oil markets recovered from Hurricane Katrina after the U.S. released oil from the Strategic Petroleum Reserve (SPRo) and European reserves were sent to the U.S., massive amounts of put options were purchased over multiple months. This, more than any other factor at the time, artificially brought the price of oil down from $70 highs to just above $50. As Oilcast.com noted back then, a new floor was set for oil at $50.
The market has never turned back since.
What we have now is the end of the summer driving season and a slowing economy, which both factor into lower demand. The recent dip in prices is largely cyclical. OPEC has recently lowered its demand forecasts as Saudi Arabia and Venezuela lowered their production output. Many factors played into these production cuts, but it is likely that concerns of Peak Oil are forcing nations to re-evaluate how they manage their oil production. Oil will be worth more tomorrow than it is today, so why squander it?
One of the big factors as to why the price of oil had been dropping is that oil storage is full across the world. Why? Because everyone is anticipating a supply shock of some sort. Supply disruption is on everyone’s mind and rightfully so.
But thus far we continue a balanced teetering act. The crisis in Prudhoe Bay appears to be less severe than initially anticipated, at least for the time being; although there is evidence that production may never again reach the 400,000 barrels per day it was producing (which is now at 200,000 bpd).1
All this has spurred optimism in a market that has a five-second span of attention.
The same scenario was true with natural gas supplies this summer, but only for a second. With gas storage full in anticipation of a bad hurricane season, prices dropped drastically as storm activity remained dormant. But then a nationwide heat wave forced withdrawals from stored capacity – which has never happened in the summer before this year – causing a big upswing in the price of natural gas. Over the weekend a natural gas pipeline in Turkey was blown up by PKK rebels.
Oil dropped in price last week because everything managed to stay relatively steady – for a moment. Add in slightly lower demand forecasts (which still translates into growth, just slightly less than expected) and you have a recipe for unwarranted optimism.
So now the oil-optimists are predicting $50 oil – the good ol’ days!
Don’t hold your breath, and don’t pray the wrong way. The truth is $50 is too low for a barrel of oil, and if we ever see this price again it will do even more psychological damage to an already delusional American public. I can already hear the American consumer saying, “What problem? What energy crisis? I’m paying $2.50 at the pump again. I’m loving life!”
As the rhetoric of delusional optimists peaked last week, Chris Skrewboski, editor of the Petroleum Review journal, said in Australia that gas prices could rise to $2 a liter by this Christmas; equivalent to $120 a barrel.2
For the poor, high prices are devastating, which is the terribly sad reality of how the money works within the global capitalist system. What a poignant statement was made when the U.S. Government asked oil companies to donate oil to the American poor last winter, and only Hugo Chavez’s CITGO responded. That truly says it all.
The energy reality is much more fragile now than ever before. A supply shock could happen from many different angles – whether political or geological – and it appears that the elite are attempting to find the least painful ways to destroy demand while there is still time before inevitable supply shortages force the issue.3
$80 and $100 oil will come soon. Goldman Sachs’ prediction of $105 oil by 2007 is on target.4 The floor may go lower than $70 if factors can teeter steadily: If there’s no hurricane, no militant kidnapping in the Niger Delta, no bad news about Ghawar or Cantarell or Iran, no increase in demand, no supply disruption and no pipeline explodes, maybe oil can fall slightly in price.
But we couldn’t even make it through the weekend.
The only way an extended period of falling oil prices could occur now is if the airline industry’s decline went into warp speed, drastically reducing jet fuel consumption even more so than we’ve seen thus far. Airlines may be the first sacrifice in “operation slow burn.” As Tom Whipple recently noted:
“Buried in the downward pressure on oil prices was the notion that should someone succeed in blowing up an airliner, the resulting drop in air travel would result in less demand for jet fuel.” 5
5 Peak Oil Review, Vol. 1, No. 33, August 21, 2006
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