Downstream Demand Destruction for Oil
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One of the most pronounced trends in the Western world since the onset of the global financial crisis has been the plummeting demand for petroleum and
[See the full post at: Downstream Demand Destruction for Oil]You say you are still waiting to hear how plummeting demand for crude can contribute in the short-term to rising prices. There was an interesting interview on Dylan Ratigan last night with Frederick Kaufman, who has a book that will be released in October called Bet The Farm. I have attached a link from an article he wrote in Harper’s in 2010. It explains how and why commodities have been steadily rising. Ever since Goldman Sachs started its Commodities Index Fund. So, yes, there is an explanation why oil and food and every other commodity you can think of have been rising seemingly inexplicably.
https://frederickkaufman.typepad.com/files/the-food-bubble-pdf.pdf
Or, more simply, no matter what was and is expected, both refining capacity and consumption have been rising faster in the developing world — which actually is developing these days — than they have been falling in the west. When this ceases, prices may well fall. Until then….
For all X, where X is a real number, (X+4.2-3.0) > X.
isst,
I understand that leveraged speculation by the banking/energy complex has played a huge roll in elevating commodity (oil) prices both before and after the GFC. Indeed, that is a main part of my argument for why prices will face a lot of resistance in the short-term (within 5 years). Couple plummeting demand with bank deleveraging, and you have a recipe for price collapse.
FrankRichards post=2210 wrote: Or, more simply, no matter what was and is expected, both refining capacity and consumption have been rising faster in the developing world — which actually is developing these days — than they have been falling in the west. When this ceases, prices may well fall. Until then….
For all X, where X is a real number, (X+4.2-3.0) > X.
I don’t think it’s that simple. See points a) and b) above. We don’t live in a linear world governed by linear equations for linear crises. Prices will not respond predictably or proportionally to the IEA data on refining capacity and consumption.
I never claimed linear. Proportional in this context is synonymous with linear.
Nor do I deny either the fear premium nor bankster manipulation. I do claim that on a 12 or 24 month time scale, both have been roughly stable since ’04 or ’05.
What I do claim is that all other things being equal (see above), then as long as developing world demand rises faster than developed world demand falls, and supply increases, no matter what the demand, take 5+ years to happen and are wicked expensive in both fixed and variable cost, the price of crude is going to go nowhere but up.
I admit that I expected no supply increases at all. But y’all expected a financial implosion at least 2 years ago.
This trend is pretty big.
[HOVENSA Announces Closure of St. Croix Refinery
Company to Work Closely with the U.S. Virgin Islands Government to Ease Transition
ST. CROIX, U.S. Virgin Islands Jan. 18, 2012 — HOVENSA L.L.C. announced today that it will commence shutdown of its refinery on St. Croix, U.S. Virgin Islands. Following the shutdown, the complex will operate as an oil storage terminal.
Losses at the HOVENSA refinery have totaled $1.3 billion in the past three years alone and were projected to continue. These losses have been caused primarily by weakness in demand for refined petroleum products due to the global economic slowdown and the addition of new refining capacity in emerging markets. In the past three years, these factors have caused the closure of approximately 18 refineries in the United States and Europe with capacity totaling more than 2 million barrels of oil per day. In addition, the low price of natural gas in the United States has put HOVENSA, an oil-fueled refinery, at a competitive disadvantage. ]
https://www.hovensa.com/These ecosphere destroying corporate monsters with the earthquake inducing and land despoiling fracking have actually (and definitely not deliberately) done some good if they can cause refineries to close. I know of a Gulf refinery where the pay was extra because people working in a certain vicinity of the cracking towers would definitely get bone cancer.
I hope the cheap chinese PV cells energy bonanza destroys the natural gas land poisoning as well.Half the refining capacity on the populous US east coast is set to disappear
Soon enough, half the refining capacity on the populous Chinese, Indian, Brazilian, South Asian and other coasts will also disappear. The world imported the glamorous waste-based economy from the US, it is foolish to believe the rest of the world can succeed dodging thermodynamics when the mighty Americans are unable to do so.
Oil refiners have been failing for years, so are now the auto manufacturers. We live conservation by other means, by the credit-hollowing out of economies. The EU is in the process of becoming car-free. Next up is UK, then Japan and ultimately the US.
Refiners lose money because their own return on the use of petroleum isn’t profitable. Drivers have lost money from the get-go! They never made money, ever! Only a small fraction of the world’s drivers has ever earned a penny by actually driving. The rest have had to borrow to drive; motorists x billion$ = systemic bankruptcy.
We humans discovered fuel before we knew what best to do with it.
As for a speculative support for high prices: each market has specs on one side or the other of any given trade. Gold and silver traders accuse ‘spec shorts’ of manipulation.
History suggests that the market has been flooded with crude to keep prices low. Fuel has been a ‘loss-leader’ for cars, highways, houses and towers, military goods, finance insurance and other ‘investments’. Extraction companies profit by booking reserves which convert to shares which are the purpose of drilling. Companies lose money at the wellhead while making fortunes on Wall Street. Look to the shale gas industry which follows the same model.
Today: the flows are diminished, wellhead prices have to be high due to an absence of ‘easy’ crude anywhere in the world: vaunted Bakken wells produce an average of 84 barrels per day. These are stripper wells.
Otherwise, the deflation model holds: peak demand is real. The oil we can access is worth more than what wasting it returns.
That’s a tough dynamic to live with … and we won’t. We are all Greeks now.
it is a little deceptive to address this oil refining problem and not talk about the fact of surpassing peak oil. Anyone talking about this problem should at the very least talk about the fact that the largest oil field on earth, the one producing a clear majority of the oil, is pumping less oil and that oil pumped has had a salt water content above 25% and rising 2% each year.
Now to say oil exists in North America that could supply a refinery towards the indefinite future is lunacy. Be a detective, examine the facts. Each refinery you speak of is old, really old (some past 100 years). Refineries have placed little money into maintenance. No speculator has come up with money for a new refinery. Conclusion despite having made a tonne of money, even their own CEO s see no great future in this business.
Lets plot along a line of thinking that oil will become significantly depleted. In this scenario countries will take by force oil they need to remain independent. Even though oil is pulled from the ground its price will be set between who has enough money and if it can be resold/re-manufactured into a product that the public can afford. Oil would more and more become a infrequent commodity, not priced too far beyond the publics ability to pay for it but at times reserves would run out. If these things seem to be happening maybe we are past peak.
The demand is too low so we can’t make money at our refinery. The demand is just fine if oil is $3 a gallon but the demand is not fine if oil is $6 a gallon. Face the reality that the consumers of the product are only there at a certain price and scarcity will move you to a different group of consumers. Accept that scarcity will not cause prices to go up past consumers ability to pay. In fact if you run in a mass production mindset you are in trouble. If, due to maintaining market share, certain levels of sales have to be met, and you know the consumers threshold; refineries could end up in a price war that is unwinnable because the consumer will not consume much $6 or higher oil.
The assumption is that all oil fields are like Ghawar or other aging Saudi giants. You just drill a few holes and a million barrels a day of oil rush out of the ground. There have been almost no discoveries of that type in 40 years.
Most new fields are smaller, in water, and more recently, deeper water, have more technical challenges, must deal with more regulatory compliance, or produce a lesser quality oil, such as the Canadian tar sands bitumen.
The idea that the price of oil will fall below the costs of production, refining, and transportation is absurd. And those costs are skyrocketing. Yes, USA demand is dying. What else would you expect in the middle of a hyper inflationary depression.
No matter how many refineries close, that will have very little effect on the cost to explore, drill, produce, and transport oil.
As another poster mentioned, Asian demand is picking up the slack for Western demand destruction. But if, at some point, total worldwide demand for oil drops significantly, with a 15% contraction in USA GDP, then relatively high cost oil fields would be shut in, and the overall average cost to produce oil would drop. But by then, the dollar will have completely failed as a currency, and the dollar price of oil will be meaningless.
One thig you have to consider is that the very same people issue the credit as who “own” the Oil, namely the Rockefellers, Rothschilds et al. If said owners of it all no longer have vast quantities to sell, so why would they issue credit to buy that which they no longer have?
With the disappearance of the product that all the credit is based on, the notes representing that credit hold no value. You can’t really predict whether the nominal price will go up or down because you have no idea whether the folks issuing the credit will issue worthless notes on stuff they do not have or if they will stop issuing credit because they no longer have anything to sell. Nor can you predict precisely when people using these notes will stop believing they hold any kind of real value and dump them or use them for heating the Mcmansion.
Far as the Chinese go, they came in a Day Late and Yuan short to the Industrialization game, they got to the Party just around the time the last Keg of Cheap Beer went Empty. They are stuck with a ton of productive capacity that they bought on credit to use Oil that just ain’t there anymore. They are going to go Belly UP in magnificent fashion here. Or as I often put it, the Chinese are
RE-Your mention of Chinese ‘toast’ reminds me of a funny Gary Larson cartoon, in the ‘Far Side’ series.
There is a parrot in a tree, and he is looking down at two safari hats sitting on a pile of quicksand in the middle of the jungle. He saying something like ‘Stanley, let go, you’re pulling me under’.
So let’s walk through this. The Chinese get in a bind, if they are not already in one, and their people are starving and rioting. They try to sell some of their huge pool of US Treasury Bonds. Presumably, as they sell, bond prices fall and yields rise. What happens to the USA?
Alternatively, Ben B. could buy up all of the what the Chinese sell. In that case, the market for treasuries vanishes, and the dollar is………….? (hint: your favorite word).
Logically, you would think Ben B. would be trying to negotiate some sort of world power sharing agreement with the Chinese to avoid this problem. With our demand for oil dropping, you would think that would help matters, since there would one less point of contention.
“Historically, financial speculators accounted for about 30 percent of oil trading in commodity markets, while producers and end users made up about 70 percent. Today it’s almost the reverse.
A McClatchy review of the latest Commitment of Traders report from the Commodity Futures Trading Commission, which regulates oil trading, shows that producers and merchants made up just 36 percent of all contracts traded in the week ending Feb. 14.
That same week, open interest, or the total outstanding oil contracts for next-month delivery of 1,000 barrels of oil (about 42,000 gallons), stood near an all-time high above 1.486 million. Speculators who’ll never take delivery of oil made up 64 percent of the market.”
https://www.mcclatchydc.com/2012/02/21/139521/once-again-speculators-behind.html
The high price of crude oil is certainly a strong piece of evidence in favor of the hyper inflation case. But what makes it even more dramatic is the oil to natural gas ratio. You can see up to 3 years of this ratio plotted at stockcharts.com, with the symblo $wtic:$natgas.
You can see that the ratio broke out of a lengthy sideways consolidation phase last November, and has not even paused since.
The oil:ng ratio is a very good proxy for an inflation/deflation fear index. Here’s how to read the ratio. The first thing you need to know is that the btu equivalent for the two fuels, when sold 42 gallon barrels (oil) and 1000 cubic feet (gas) is a 7:1 ratio. In other words, one 42 gallon barrel has about the same number of btu’s as 7000 cu. ft. of natural gas.
For the 20 years from 1980 to 2000, the ratio averaged 9:1. In other words, oil fetched about a 30% premium. At the current prices, $2 for ng and $103 for crude oil, the ratio is over 51:1. Incredibly, oil is fetching a 600% premium. This ratio is saying that a hyper inflationary blast off is imminent.
If you are a TAE deflationist, ask yourself, ‘when were deflatkion fears the strongest in the last couple of decades?’ Everyone knows that, in late 2008 and early 2009. And at that time, the oil:ng ratio dropped all the way to 6:1, below par, signalling extreme deflation fear.
So there you have it. Investors are o afraid of holding fiat currency, they are buying crude oil at a 600% premium to ng.
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