There must have been a point in 2008 when you snapped and changed your habits to cater to record gasoline prices.
Remember the public outrage when gasoline prices hit $4-5 per gallon? My sympathies go out to my readers outside the U.S. who were paying more than double those prices. Naturally, there has been a good deal of reasons for oil falling more than $100 per barrel since. Today, oil is once again trading below $40 per barrel.
Which leads me to one phrase in particular that I've heard being tossed around too often...
Demand Destruction
Demand destruction simply refers to the lower demand of a commodity due to a period of tight supply and/or higher prices.
In other words, prices reached consumers' breaking point. Habits changed. I even recall several specific readers that completely altered their lifestyle in the face of $147/bbl oil.
Once prices began to collapse, the go-to excuse was demand destruction. At first, it was hard not to fall into that belief. After all, just look at how oil prices plunged in such a short period of time:
Personally, I'm not buying it.
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Taking Advantage of a Demand Slump
Let's take a closer look at our demand slump.
Take a second and look at the numbers from the Energy Information Administration. As expected, our petroleum consumption levels fell to 18.61 million barrels per day during the second week of October. That comes out to a decline of about 8.6%. For some, this decline justified the destruction claim.
The problem is that consumption has been on the rise since those October lows. During the first week of January, consumption was back over 20.1 million barrels per day. Although we're still 5% below levels compared to year ago, I'm not the only person who's become bullish on oil. Both the U.S. and China announced they were refilling strategic reserves, clearly taking advantage of the cheap crude prices.
Can you blame them?
World Oil Demand
Even if global oil consumption falls by one million barrels per day in 2009. our outlook remains bullish.
Consider these points:
Approximately 86% of the world's energy is derived from fossil fuels. Don't get me wrong, dear reader, I have my own hopes for alternative fuels in the future. Sadly, I don't see renewables making up that share for decades to come.
Aging fields that are in depletion, particularly the giant oil fields, means we're going to have to make up that production from somewhere. Producers are forced to drill deeper and in remote regions around the world.
Lower oil prices has delayed new projects and forced companies to drastically slash exploration budgets. Without that development, how can we ever expect to make up for the depleting fields around the world.
These problems will add up to some serious supply problems over the next few years.
We also can't make the mistake of solely focusing on U.S. consumption.
I've been asked what would signal a return to higher oil prices. My answer is always the same: Keep a eye on China's consumption levels.
When Chinese demand turns around, you can bank on higher oil prices. I mentioned earlier how China is taking the time to refill their crude stockpiles. If they're comfortable taking advantage of bottoming crude prices, there's no reason we can't do the same.
Looking Forward for Profit
As I was sifting through a mass of Energy and Capital columns recently, one in particular gave me pause. It was a quote from my colleague Chris Nelder. Several months ago, "When the world is upside down, buy!"
I believe that statement is even more true in today's market, especially once an end to this recession is in sight.
Believe me, there's only one way those energy stocks will move in the next two years. Next week, I'm going to show you why many of those energy companies may have bottomed out already.
Until next time,
Keith Kohl
P.S. I know what you're thinking. If we can't pin the blame on demand destruction, why have the markets been this volatile? I agree whole-heartedly. Well, dear reader, not only should you know who the real Criminals of the Financial Crisis are, but also how you can defend your portfolio from their corruption.
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Now the Bakken field typically produces over a thousand bpd from a single platform.
Thounder Horse is projected to produce 250,000 bpd on strata down to 29,000 feet below the sea bed (in 6,000 feet of water).
What are the implications of those multiples, particularly for all the new stata available around the world?
IF that is true, and I believe it is - if we are to remain a 21st century civilization, then WHY ARE WE NOT DRILLING FOR OIL??????
Our Government has decided we do not need oil or coal..the president said he was going to destroy both. All the predicted oil fields are off limits for drilling, we have a predicted 1 trillion barrels in the shale deposits in the Green River Basin BUT NO ONE IS DOING ANYTHING ABOUT GETTING THE OIL OUT.
We may be able to make some money investing in oil from somewhere else but what good will the paper money do is if we live in an 18th century environment? No oil, gas, kerosene, heating oil, plastics etc. We will be farming with horses, travelling by horse back and wagon, heating with wood, lighting with coal oil (maybe) or by burning olive oil or some such.
Welcome to a USA as a third world country! It is either that or get rid of the stupid leadership in the present Government in Washington.
In response to Mr. Nichols' question "Why are we not continuing to discover and produce?", the answer is "We do not have to, yet." No matter that "Big Oil" enjoyed record profits, the margins weren't that great,the recent market down-turn, combined with nationwide job losses, and lower retail sales equals an economy bent on self-destruction. The American worker without an income cannot pay his debts, The financial institution, left with the bad debt, cannot loan capital it does not have,[escpecially at these rates], Industrialists having paid out record dividends, cannot continue to operate with sales down and investment nonexistent, so the employees are sent home to await the process server, and to keep checking the mail box until the denial of benefits letter arrives. You know "a mule and forty acres" sounds pretty good, is there anyone left that could make it pay?
In mostly all western European countries a bottle of one and half litres of water costs 0.70 Euros. In order to compare both prices you need to buy 106 bottles of water to get 159 litres, equivalent to a barrel of crude oil, so 106 x 0.7 euro = 74.20 euro
Now we have to change euro to dollar so, 74.20 euro x 1.4 = 103.88 dollars.
As you can see, you have to pay 103.88 dollars to get 159 litres of bottled water, but you only need 35 dollars to get a barrel of crude oil.
80% of the income of countries like Saudi Arabia, Iran, Kuwait, Arab Emirates, Iraq, Venezuela, and almost the rest of the oil exportersÂ’ countries is based on the sale of this raw material.
Oil is a very scarce good and the leaders of these countries must act with caution and responsibility in order to benefit their economies because their political stability and well-being of their citizens depends on it.
The oil reserves in operative oilfields started declining years ago but the world needs and demands more and more oil year after year. In the last 20 years, we havenÂ’t discovered any important oilfields and the new ones are very difficult and very expensive to operate. Most of them are placed in far open sea and in very deep water sea. The other ones are placed in land but in abysmal depths with low capacities. Take a look at the above chart. During the 1960s, for instance, we consumed about 6 billion barrels per year while finding about 30-60 billion per year. Those consumption/discovery ratios have nearly reversed themselves in recent years. We now consume close to 30 billion barrels per year but find less than 4 billion per year. Oil markets are no longer mainly reliant upon the consumption patterns and trends in the United States, Europe, and Japan like before. The markets of the emerging countries have started to play a major and significant role which is likely to grow in the future.(BEIJING, Jan 13 (Reuters) - China's crude oil imports in December were at 14.37 million tonnes, customs data showed on Tuesday, confirming an earlier Reuters report.
For the year, crude imports increased 9.6 percent to 178.88 million tonnes, data published on the website of the General Administration of Customs showed (www.customs.gov.cn).
Imports of refined oil products totalled 3.63 million tonnes for December and were up 15 percent from a year earlier to 38.85 million tonnes for 2008, the Customs said.)
$100 barrel is too cheap for something that moves the world and that is so scarce.
How long do you think that the price could remain here? 6 month? 1 year? year and half?
How lower could it go? $30 pb? $25 pb? $20 pb? Less? Ok, now please tell me, do us, japan,
and Europe want to recover the crisis making cars and building houses? do they want to recover the employment? in order to revive the economy they must put money in it, then the people can get employment and buy cars and houses, it means opened factories and banks, it means money in hand, and IT MEANS OIL DAMAND, this is the true reality, Geopolitical conflicts with Iran in Persian gulf and strait of hormuz , problems in Venezuela, in Arabia Saudi, Israel- terrorist attacks in oilfields, etc .etc. natural disasters in gulf of Mexico, India, China, all these MEAN OIL DAMAND, but the world must go on and on, so no matter how long it takes, we will see oil at $147 0r $200 or maybe more, who knows!
Best regards