Monday, August 27, 2012

Kiss Cheap Oil Goodbye?

Peak oil might be argued, but it's becoming more clear that Peak Cheap Oil is increasingly a reality.    Brent Crude is $112 and WTI is $95 at a time when the entire world is either in a recession or entering one.  This round of economic weakness is arguably due to $110 WTI oil prices starting back in February of this year (the effect lagged by 6 months)    Gasoline prices in the US are nearing $4 per gallon and diesel fuel is over $4 per gallon--when the US economy is barely sputtering.

We are in a time that, when the world economy begins to recover, oil prices spurt higher and kill off said recovery.  Right now, the global economy is sputtering and oil prices are very high.  It's entirely possible that oil prices will bring another economic downturn and trigger the last leg of the financial crisis marking the end of a 40 year old world-wide debt super-cycle.  China is a big part of the final collapse as it's reaching it's limit of bad debt along with the rest of the world.  The implication is that we face an outright economic depression and $30 oil at some point.  This of course is inconceivable to most people at the moment.

From Ambrose Evans-Pritchard at The Telegraph,
Britain, the eurozone, and parts of Eastern Europe are in outright recession. China has “hard-landed”, the result of a monetary shock and real M1 contraction last winter. The HSBC manufacturing index fell deeper into contraction in July.
The CPB World Trade Monitor in the Netherlands show that global trade volumes have been shrinking for the last five months. Container shipping volumes from Asia to Europe fell 9pc in June. Iron prices have fallen by 30pc since April to $103 a tonne.
So we face a world where Brent crude trades at over $100 even in recession. Fears of an Israeli strike on Iran may have spiked the price a bit, though Intrade’s contract for an attack is well below levels earlier this year.
Iranian sanctions may have cut supply by more than the extra 900,000 bpd pumped by Saudi Arabia. Japan’s increased reliance on oil since switching off most of its nuclear reactors has played its part.
Yet the deeper force at work is the relentless fall in output from the North Sea and the Gulf of Mexico, endless disappointment in Russia because of Kremlin pricing policies, and the escalating cost of extraction from deep sea fields.
Nothing has really changed since the IEA warned four years ago that the world must invest $20 trillion in energy projects over the next 25 years to feed the industrial revolutions of Asia and head off an almighty crunch. The urgency has merely been disguised by the Long Slump.
We learned in the 2006-2008 blow-off that China is now the key driver of global oil prices, with consumption rising each year by 0.5m bpd -- now a total 9.2m bpd in a world market of 90m bpd. Demand is broadly flat in Europe and America.
So what will happen when China latest spending blitz gains traction? The regions have unveiled a colossal new spree on airports, roads, aeronautics, and industrial parks: a purported $240bn each for Tianjin and Chongqing, $160bn for Guangdong, $130bn for Changsha, and so forth. Sleepy Guizhou has trumped them all with $470bn. Your mind goes numb.
What will happen too when car sales in China surpass 20m next year, as expected by the China Association of Automobile Manufacturers?

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