Both OPEC and the IEA put out their latest estimates of global liquid fuel production today. The numbers are up again, and have now incontrovertibly passed the previous highs of July 2008:
This is particularly so when one considers that July 2008 was essentially a one month spike to that level - and we have now had three months above that level. Clearly, the slowdown in the global economy in mid 2010 is over, and we are now recovering growth in economic activity again. Oil usage is following suit.
Putting this in context - here's the data from 2002 on. This shows the recovery after the 2001 tech-crash recession, the onset of the "bumpy plateau" in 2005, and the "bumps" up in 2008 and again now.
It's interesting to note that the rate of increase since the depths of the slowdown in 2009 is almost as great as the rate of increase prior to 2005:
(These lines are hand fits). Between 2002 and the start of 2005, the rate of increase was about 3mbd/yr. Over the last two years or so, it has been about 2.25mbd/year. I suspect that we are going to find that even that rate of increase cannot be sustained too much longer without prices going higher.
At the moment though, it still looks like the current production levels are being achieved at significantly lower prices than during the 2005-2008 oil shock:
Obviously, the length of time that production can continue to increase at something similar to present prices is intimately tied to the questions of OPEC, and particularly Saudi, spare capacity that we discussed yesterday.
19 comments:
Hi Stuart.
I know you've covered the food prices in the past, what do you got on China?
In the Swedish media I read that it's the 'worst wheat harvest for over 60 years'(Worst, then, than the 'Great Leap Forward' under Mao if this is true).
The source is the state media, akin to the BBC. So I deem the reports to be taken seriously.
I also know, which I think you've covered, that although food prices are very high, it's unevenly distributed. Sugar is way up over 2008 levels but some commodities, such as rice, is actually a bit below.
If this is true, then how do you think this will affect food prices?
And what does your information/data tell you on China? Are these reports to be trusted?
Here is the link(Originally Swedish but I Google Translate'd it for you):
http://bit.ly/eisZsF
There's a lot of focus on oil but the food disasters of late are worrying me more. And we cannot rule out early effects of climate change.
Perhaps this, and I am just speculating wildly now, may be a bigger primer on oil price this year as food prices skyrocket, than any of the underlying production data, at least for this year? We know that food follows oil, but what about the other way 'round?
Not to mention the civil unrest risks etc.
WTI doesn't work as a benchmark anymore though because Cushing is landlocked & the spread between it & Brent & other crudes is at an all-time high recently. ($13 today)
The average for WTI in 2008 was $100. Which is where we are now once you sub in a new benchmark (and we stay here for a year).
(WTI is actually better oil than Brent)
A a corollary to this the relationship between WTI and US gas prices should be breaking down. (Haven't checked)
WTI doesn't work as a benchmark anymore though because Cushing is landlocked & the spread between it & Brent & other crudes is at an all-time high recently. ($13 today)
The average for WTI in 2008 was $100. Which is where we are now once you sub in a new benchmark (and we stay here for a year).
(WTI is actually better oil than Brent)
As a corollary to this the relationship between WTI and US gas prices should be breaking down. (Haven't checked)
Hey Stuart, missed your posts on the leakage. I note that spare capacity accounts for a lot of the gains seen 10 years ago; according to John Williams at WTRG SC was 1 mb/d in 2003, EIA says 1.9 mb/d. Gains that are SC led aren't quite the same as bringing fresh oil online, in surplus of overcoming declines, no? Then after SC was exhausted you had the major crash of Cantarell, and who knows what else? This will be a fruitful avenue to explore.
ALSO! OPEC total quota was set at 28 mb/d at their July 05 meeting; this was slashed to 26.8 mb/d in Nov 06, and further cut to 25.8 mb/d for Feb 07, all of this in the face of prices raising from $48/bbl (US spot) in July 05 to $63/bbl in May 06. A subsequent drop to $50/bbl in Oct 06 may have prompted Cut #1, perhaps they thought this would be the new price floor; things only really took off on a definite curve up from April 07 on. And of course these quotas are just guidelines for how big of a mockery the member nations want to make of the very concept of prorationing...still, it is notable that they voluntarily took 2.2 mb/d off the market; how much of a gradient would that have put in the plateau if they stuck to pumping full out?
Don't know if this was picked up on at TOD; it's difficult to ascertain when OPEC issued their country-by-country quota data, as usually they just give out the total and leave it to analysts to suss out what the individual nations will pump. Nevertheless they should have made announcements about that total, assuming the historic numbers are to be trusted - I've also happened upon the fact that the percent of the total assigned to each member nation didn't change from July 2000 to July 2005, which makes the whole set of data a bit suspect.
At the moment though, it still looks like the current production levels are being achieved at significantly lower prices than during the 2005-2008 oil shock
I think a case can be made that the economics of conventional crude oil haven't deteriorated much but are they actually improved? I doubt it.
And of course we have US Federal Debt increasing at 14% per year and nominal GDP raising at 4%. Those kinds of exponentials don't take long to blow up in a bad way. Everything we see could be a sham.
Emil:
On reflecting on your comment, I think I do want to shift my effort toward more coverage of food issues - more over coming weeks.
The slope of the increase does suggest ramping up of spare capacity to meet rising demand so as to moderate the price increases. They did allow prices to drift upward but at a not too alarming rate after the initial recovery to $65. Obviously, the big question is, "What next?"
And Stuart, the line you didn't draw is from the 2005 peak to now, an increase of about 3.8% over 5.5 years or only .7% per year!
Meanwhile, Chinese demand is up 10% y/y!
Stuart,
What do we (and by "we" I sure don't include me) know about the consistency of liquid fuel over that time period? I know that's gotta be really complex, and to my mind would not only include energy content, but net energy, or if possible net liquid fuel.
Stuart,
ignore debt at your own peril :-)
Cheers,
"Clearly, the slowdown in the global economy in mid 2010 is over, and we are now recovering growth in economic activity again. Oil usage is following suit."
IMO equities, treasury yields, oil, gold and agricultural commodities are topping, while the dollar is bottoming. Commodities top on fear of scarcity, and that is what we are seeing. The emotional content of news coverage is a strong contrarian indicator.
I think the counter-trend rally is almost over, meaning reversals in all the major trends of the last couple of years. Phase I of the credit crunch was bad enough. None of the problems have been solved since, and the underlying financial situation is now significantly worse than it was before October 2007. Phase II, which should begin shortly, should be significantly worse than what happened between October 2007 and March 2009.
It's all part of the same on-going crisis that will still be with us for years to come, as the mountain of debt deleverages. Rallies (which are probabilistically predicatable) are just interuptions that get people reinvested in the markets and in the psychology of expansion. Trends in the real economy follow the market, so the fundamentals look somewhat less awful than they did two years ago, but that is both largely illusory and very temporary.
Look to demand for oil products to fall as people's purchasing power evaporates. Prices could fall a very long way, first on a reversal of the current speculative bubble (a mini ponzi implosion) and then on weak demand, and therefore a temporary supply glut.
A demand collapse sets up a supply collapse though, since it kills investment. Prices should take a moonshot a few years into the future once that dynamic plays out.
Cheers,
Nicole
Hal's comment is particularly relevant. A significant component of total liquids is natural gas liquids, and these appear to have an energy density of 70 to 75% that of crude oil. See http://europe.theoildrum.com/node/4829
Because the portion of "other liquids" (mostly NGLs) in total liquids has been increasing over time, when you weight the components of total liquids by gross energy content you get a somewhat lower increase than the gross numbers imply. See http://michaelaucott.blogspot.com/
The net energy of the total liquids is what really counts. And determining this seems to be hampered by a huge lack of data. It's pretty clear though, that one component of total liquids, ethanol, is especially low from a net energy perspective.
Thanks, Mike. I wonder how hard it would be to get those numbers out for the NGLs and ethanol and apply a .75 factor to them and then replot the curves. Not sure how you would do net energy, though, because it doesn't subtract from the production, but from whatever fuel you used to produce the liquid production.
Enjoyed your blog.
Can someone tell me how we can count as "liquids" (and even "oil" in the mass media) substances that are gasses at normal room temperature and atmospheric pressure, and for which the primary current uses are in heating and cooking? Am I missing something?
Ken:
We have some version of this discussion here every month :-(
My core reason is pragmatic - three different agencies produce free estimates of "total liquids". The definitions are the same ones they have always used historically (and include biofuels and NGLs). If you want to get more restrictive, you can look at crude+condensate, but only the EIA estimates it, and they are a couple of months behind. If you want to look at something like "net liquids", or "net energy" you are basically going to have to do a major study of your own because no agency makes any effort to estimate such a thing on a regular basis.
Also, as I've repeatedly noted, if you look at the trends in crude+condensate, they are not qualitatively different. Cerrtainly NGLs and biofuels are growing faster than C&C. But still, I think there's not much doubt that the C&C line is also going to exceed the 2008 peak - we're just going to have to wait a bit longer till we know for sure, and know exactly when.
There are also reasonable arguments for including some of the components of "total liquids". For example, biofuel is, by and large, going into fuel tanks and being burned moving vehicles - so it's certainly not crazy to include that in the measurement (as long as we understand that's what we are doing - measuring both crude, and it's immediate substitutes). Similarly, some butane is included in winter gasoline, so it's not clean to exclude all the NGLs from "liquids" either.
Nicole:
You'll be unsurprised that I disagree. I think US deleveraging is likely to be reasonably orderly going forward. Is it a drag on growth - sure. But I think we've had the worst of the US financial crisis behind us.
I am also guessing that the worst of the European situation is behind us. Obviously, it's not fully resolved, but I think markets have had the opportunity to come to terms with it, and I don't expect massive surprises from there.
I guess China is the one big area that I feel uncertainty. I don't feel comfortable calling whether the massive growth there has now entered the bubbly phase, or whether it still has a long way to go. Some kind of crash there could certainly throw things into reverse.
Absent that, I expect a big oil/food price shock over the next year or three, which will probably trigger another growth slowdown, or even another recession.
I know you've always felt that excessive debt was going to trigger TEOTWAWKI, but I continue to think, although debt is important, it's much less important than real constraints - at the end of the day, debt is just an accounting device not a physical thing, and so given some time it can be readjusted.
So far, I think my views have been a much more reliable guide to action than yours. I suppose this could be the year you are finally right, but I doubt it. (I seem to remember you previously claiming 2010 was going to be the year the other shoe finally dropped hard).
Thanks for the reply re: NGL's, Stuart. Although, I believe it distorts the true picture to include them, and they have been growing tremendously, while crude + condensate has yet to reach the old highs.
The key really is that we have had six years without any statistically significant increase in petroleum production even if you throw in the ethanol. The longer it goes on, the more and more it looks like Peak Oil in the rear view mirror.
Ken:
I think the best way to think about it is that 2005 marked the onset of the "bumpy plateau" of oil production around the peak. It is now difficult and expensive to raise oil production much higher.
However, it also seems likely that the highest bump on the bumpy plateau is ahead of us rather than behind us.
"I am also guessing that the worst of the European situation is behind us. Obviously, it's not fully resolved, but I think markets have had the opportunity to come to terms with it, and I don't expect massive surprises from there."
Stuart, I don't see much evidence for such statement, saying it from the middle of Europe and one of the least indebted European countries, the Czech republic. FYI, public debt of the Czech republic is somewhere around 40% of the Czech annual GDP, despite of that seemingly low number (in comparison to many other EU countries) there have been significant austerity measures taken and still there is a big annual budget deficit remaining that is about to worsen the situation.
Big strikes are about tu break out soon here. There have already been ones conducted by police forces and fire brigades due to cuts and lowering of their wages. Approximately 3000 doctors is about to termiment the employment at the end of this month as a protest against the long-term underfinancement and immense amount of overtime work hours. Just for your information, the Czech republic has around 10,5 million inhabitants. This will mean one thing: collapse of the Czech health system. Even the army (its doctors, cars, field hospitals! and helicopters) is being called to help in this situation. There have been cuts for the Czech Academy of Science and several cuts in the reconstructing and modernizing of railway tracks processes. Cuts in culture et cetera. Good thing about our country is there is almost no shadow banking - due to our very conservative national bank and the local bank crisis from the 90's. Anyway, my point is quite clear, even though the situation may seem pretty ok here it is in fact getting worse and worse (count the high rate of corruption, clientelism and kleptocratic manners too, not only Transparency International has something to say about it...).
And the situation in our country is nothing in comparison to Greece, Portugal, Spain, Ireland or Italy. One cannot get rid of debts via strategy "rob Peter to pay Paul". Such strategy means only postponing and very likely worsening the situation. In fact, almost nothing has been solved and we are just about to enter a new round of the still ongoing crisis. I think Stoneleigh has something to say about it, different economic analysts agree on that too even though the images each one of them draws differ quite a lot.
I wish you are right but I am afraid that it is not the case.
So long,
Frantisek Marcik
The Oil ConunDrum
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