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Guest Post: Is Oil Cheap?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Gasoline is expensive at the pump, but by one measure oil is cheap and poised to go higher.
I recently posed this question to longtime contributor Harun I.: could global hot money flow into the crude oil market, driving the price up even if demand declines? The basic idea here is that if equities, bond and housing markets soften or roll over (please see What If Stocks, Bonds and Housing All Go Down Together? May 24, 2013), global hot money will seek speculative gains elsewhere.
In an era of rising geopolitical tensions (see Syria), what better place to notch a speculative gain than oil and gold?
Put another way: Is oil cheap? Harun offered a chart of the crude oil/gold ratio (in effect, crude oil priced in gold rather than nominal U.S. dollars) and the following insightful commentary:
Very good question. I suggest we not make the error of just considering nominal price. For example, below is a chart I marked up about a week ago, the Crude Oil/Gold ratio. I like relative-strength charts because they are a better indication of high and low prices and they tend to oscillate within a range. Here we see a history going back to the 1970s.
At the highs and lows consider what this meant to the economy at that time. What I find rather interesting is that, currently the chart is indicating crude oil is relatively inexpensive. However, one trip to the pump says something entirely different. In fact, prices at the pump are not far off their peak from when this ratio was at its height.
Now imagine what would happen to prices if this ratio returns to its high. Remember this is relative, there could be a demand collapse and this ratio could still go to its historic high. What would that look like in the economy? Well much like the Great Depression, plenty of stuff but no money to buy it. Commodities are real and the effects of hot money are felt almost immediately causing demand to collapse quickly because the real people that make up the economy don't eat paper. If hot money flows into crude oil driving pump prices to $8.00/gallon it would devastate the economy even further.
The Fed is trapped. There were no good answers in 2000, 2008, or now. But the room has gotten a lot smaller.
The reflationary bubble in equities has acted as a hedge but it has not increased purchasing power. No wealth has been created for the middle class. This is why the Fed cannot lift off the accelerator. Therein lies the problem. How does the Fed square the divergence of the equity markets and its monetary stance? How can it continue to claim that they are not the cause of inflation or bubbles?
Where will money flow? It may foment mini-bubbles in all things tangible, classic cars, precious metals, art, etc., as the wealthy scramble to get out of cash. But there will be no place to hide. This will get messy, but the revealing of really big lies always is.
The chart above is cause for grave concern. The fact that it is indicating that energy prices are cheap and have no place to go but up is sounding an alarm. It is my opinion that the average person is in no place (in terms of purchasing power) to absorb a return to the relative highs on this chart.
Thank you, Harun, for the chart and the commentary. You see what happens when oil becomes expensive: the economy sinks into recession.
The conventional wisdom is that oil should decline in nominal price as global demand weakens along with the global economy.
In the hot-money-seeks-a-new-home scenario outlined above, demand could decline on the margins but speculative inflows--demand for oil contracts by speculators--push prices higher, potentially a lot higher in a geopolitical crisis.
The central banks that are creating all the "free money" that is available to large speculators fulminate against oil speculators, as if all the free money is only supposed to go to "approved" speculations in equities and bonds.
Unfortunately for the central bankers, they only create the money, they don't control what the financiers who get the free money do with it.
Despite the endless MSM hype about U.S. energy independence and U.S. exporting energy abroad, the U.S. still imports over 3 billion barrels of crude oil every year: U.S. Imports of Crude Oil (U.S. Energy Information Administration).
Demand for imported crude oil fell 4.9% from 2011 to 2012, tracking lower gasoline consumption and miles driven. But that's still a figurative drop in the bucket of oil imports. Anyone who believes the U.S. is impervious to geopolitical oil shocks is on a Fantasyland ride with an abrupt stop in terribly inconvenient reality.
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First!!!!!!!!!!
China's gold reserves grow and grow. But how much? Maybe AnAnonymous will do some digging and tell us sometime. :)
But until then we can ponder WHAT may happen if/when gold goes to FOFOA numbers ("$55,000") / oz. What would this mean should it come to pass? Fakery in gold from the PRC? Would India with its 22,000 tonnes get rich?
There are LOTS of things that would happen if we get a FOFOA-style reset. New blogger (and interesting ZH-er) "TwoShortPlanks" has joined the ever-growing list of people (inc. Jim Sinclair) predicting very high price of gold, in his case he predicts an impressive $134,000 per oz.
"My Glimpse Into the Hereafter"
http://tinyurl.com/obzzy2m
1 Gallon of Gas = 125,000 BTUs
Source: US Department of Energy
3,400 BTUs = 1 KWH
Source: US Department of Energy, Bonneville Power Mgt.
1 Gallon of Gas = 37 KWH
(125,000 BTUs in a gallon of gas divided by 3,400 BTUs in 1 KWH)
1 Gallon of Gas = 500 hours of human work output
(37 KWH in 1 gallon of gas divided by human work output in agriculture of .074 KW = 500)
What's 500 hours of your physical labor worth to you? 5 bucks? 100 bucks? 1000 bucks? (That's what garment workers in Bangladesh earn...)
It's very cheap now but it won't be forever so we should try use what remains wisely but we all know we won't...
Cogent +1
Ya thanks... the effects of the drugs wear off every now and then...
I have an excavator that can load 150 14 yard dumpers in an 8 hour day. It burns about $30/hr in diesel. It would take a single man about 20 years to do the same with a shovel. Oil is cheap.
We have a Deere 300 series. I guess the flip side is, if you don't run it, you could employ 20 men for a year, quick, someone tell obama.
I remain long sharecropping and black markets...
You are low-balling it by a lot. That 20 man-years is 5000 man-days. It would take 5000 men to do the same work as the excavator in one day.
UNEMPLOYMENT PROBLEM: SOLVED!!!
Is oil cheap..??
Yes - I need only a tiny bit to keep my bicycle chains lubed.
White lithium grease is also very affordable as I use so little over time.
My food costs are a different story, however.....
"My food costs are a different story, however....." yes, and unfortunately they are very much tied to the price of oil.
Think it was colin campbell who said current oil flows are the equivalent of 30 billion slaves working 24 hours around the clock.
no wonder we kill
Those stinkin European tourists don't mind payin $6 bucks a gal when they are payin over $8 there. Suddenly the USA is looking pretty good.
The world is full of people who know the price of everything but the VALUE of nothing...
You can never overestimate the contribution that cheap fossils fuels have contributed to modern civilization.
It's simply unpossible.
Ours is a Cat 330, I buy Cats because i like to get ripped off on parts.
.
Heh, try finding parts for a Hoyt-Clagwell.
Try finding pats on a 1960's Hulk...
Agree with this 100%. Try doing physical labor for a day and then see how much you can accomplish with a tractor burning diesel. No question, in my mind, that gasoline is cheap. It's priced cheaper than bottled water that I see everybody carrying around.
Spent Memorial Day remembering loved ones who served but lost their lives. Spent the weekend doing physical work putting in gardens primarily with shovel and wheelbarrow. Backbreaking labor.
150 years ago and earlier people would believe we were all kings and queens had they seen our lives: we live so easily/comfortably. I fear in another 50 years people will look back on us and think the same thing.
Enjoy today. Yesterday is past and tomorrow is promised to no man.
The real question isn't whether gasoline is "cheap," but rather if it is cheap enough for never ending 3%+ YoY GDP growth -- provided, of course, that renewable energy, nuclear fusion, and other assorted hypothetical energy "sources" don't supplant it.
It's gonna take awhile before oil is supplanted. We could easily go 100% renewable if the energy industry actually accepted change rather than fighting it.
On a side note, the provided chart combined with other well established data shows the proof of deflation of oil when priced in gold, but also proof of inflation of oil when priced in dollars. The Fed, as well as mark-up happy energy corporations, are inflating the price of oil.
in a related tangent, nice article on Sibel Edmonds
http://www.911truth.org/article.php?story=20130520114112307
Americans are never going believe a former FBI translater... besides... think of all the extra work required in rewriting history to include the Pentagon as a full partner in crime with Al Qaeda up to and including 9/11...
But according to Edmonds, this narrative is false. “Not just bin Laden, but several senior ‘bin Ladens’ were transported by U.S. intelligence back and forth to the region in the late 1990s through to 2001?, she told this author, “including Ayman al-Zawahiri” – Osama bin Laden’s right-hand-man who has taken over as al-Qaeda’s top leader.
No wonder Bin Laden didn't reach for his gun when the the special forces came... he was probably heading downstairs to put on some coffee for his American guests and discuss using up his and Zawahiri's frequent flyer miles...
love the last sentence.
one lump or two?
"What's 500 hours of your physical labor worth to you? 5 bucks? 100 bucks? 1000 bucks? (That's what garment workers in Bangladesh earn...)
It's very cheap now but it won't be forever so we should try use what remains wisely but we all know we won't..."
Asked by someone who does not work for Wal-Mart
Wow, that's likely your most intelligent post, EVAR!
And perhaps only his second or third ever that did not repeatedly (and mindlessly) harangue us about "US 'american' citizenism".
Make me laugh.
And yet that is what you chose to post. What is this grade school? When you are done here are you going outside to play tag?
Forgive him, for he knows not what he blobs-up.
But he still got four up arrows from his friends.
Dr. Engali asked of AnAnonymous:
More like a dung-spattered game of roadside slip & slide.
The insanitation runs deep in this one, I'm afraid.
I've been studying peak oil for years and many documentaries/ articles predict an impending dire outcome when oil output goes into terminal decline or there is some kind of supply disruption.
I have my own theory about peak oil. I believe that the human race has the technology to survive peak oil - and I believe we've had the technology for decades. In fact we have conquered far far greater technlogical feets then replacing the combustion engine. However, I believe the oil/ military/ banking ruling cartel of this planet who dominate oil suplies and petro dollar flows have made massive investments in oil and have massive vested interest in keeping us on oil - and they'll keep us on it for as long as the system will function. This ruling cartel don't care about the misery and poverty ravishing the world - they're simply getting richer and richer. And the more expensive oil gets the richer they'll get. Things will only change when collapse really sets in and this ruling class begins to realise they can't control the masses. Whatever new paradigm appears the ruling classes will use the wealth of the oil paradigm to dominate the new paridgm. Hey presto - the ruling class stays in power - we remain serfs!
Sorry but sometimes things are not a big conspiracy...
We will survive Peak Oil, barring all-out Nuclear Exchange, our survival will be in spite of technology, not because of it...
The game goes on because there is *no other game*....
from the biased perspective of an ex prosecutor / criminal lawyer, it seems that for just about anything with significance, there is always a conspiracy reason and non conspiracy reason running parallel. Take oil. Of course its impact is so profound, probably one of the most profound elements to ever effect us, that it would have both. But as we built out entire world on it, power would accumulate around the dirty pipes, so would money systems. And as it innevitably started to give (not without decades of warning from honest geologists) many folks benefitting (including countries) would build convenient lies around the truth to keep the current game alive for as long as possible. THe more important crude is, the higher the chances. It's not that peak is a lie, far from it. It's just that practically every element of our economic and international policies have become one.
Although I didn't like him as a player, Gary Neville has a point.
He is talking about technologies that render oil obsolete. Its impossible to prove, which is the problem. And if you could prove it, you would have to be killed.
As a physicist I can assure you that there is no magic technology awaiting us. Oil is just about as far as a naturally occuring material involving chemical process can go for energy density. Next up the scale are nuclear processes and we know where that leads. Spare me the Thorium propaganda, please. What remains is solar, wind and smattering of other alternatives that fit particular niches.
The only "technology" that will render oil obsolete is a complete change in the way that humans evaluate and discount their world, i.e. their value system. Do you think that 2.5 million years of evolution can be changed in 100 years?
Sorry Flakmeister, but I call bullshit on your claim, even though you are an educated man.
+1 for Gary Neville. He was spot on with his comment.
Oil is now obsolete as a fuel, as the technology now does exist and is replicatable.
http://en.wikipedia.org/wiki/Stanley_Meyer's_water_fuel_cell
Proof by Replication: Current @ 0.5A - http://www.youtube.com/watch?v=u9XrLOudwRw
Spot on Alchemist,
Read about this guy https://en.wikipedia.org/wiki/Nikola_Tesla - reportedly invented free energy and took it to GE but it was suppresed. Was quoted as saying something along the lines of "Of course, I created a solution to the worlds problems, only for you to suppress it"....
Great, I was wondering where someone was going to bring up Tesla. Look, Tesla was a very sharp guy, but he did not find anything that was not going to be found out anyway in short order. It was a time ripe for inventions.
As for any claims Tesla made, remember the story of Fermat and his last theorem?
Yep, sure thing, they say that one is born every minute....
Sorry, but you are clinging to cornucopian claptrap that violates the Laws of Themodynamics...
Should not be importing any but for O. Lets continue to give money to people that wish to destroy us.
Since we do not price oil in gold the answer is clear to me.
Gold has held it's value while those that sell oil are demanding more dollars because they are worth less...
And if that is not the definition of inflation....
Ignore money for a second, money (especially fiat money) is simply a mechanism for power and control over resources (inclduing the human kind). Think in term of calories or Joules. If you were going to go out and recover and refine some oil (still the single most fungible source of energy and commodity chemical-both of which improve your standard of living), how many calories (or how much energy) would be required to complete the task? Would it be easy and require a minimal invest of calories, or would it be difficult. Now go talk to an engineer in the field for your answer. ignore everybody else.
well put. it's funny how the money messes folks up
Yea i'll drink to that, at $2 gal. ......not.
I've thought about the economics behind valuation for awhile now, and I realized some things about supply.
The ask price (supply) is determined mainly by two factors: 1) How abundant/scare the item is, and 2) The efficiency of labor to prepare and transport the item. For example, if the labor needed to produce plastic droped due to an increase in efficiency, then the ask price for plastic would drop because it costs less to produce it.
Yet another proof that engineering is the core driver for economic growth.
To link up to the oil discussion, the price of oil would drop if drilling efficiency increases through better engineered drilling rigs.
Oil is expensive in relation to the current world economic situation. Demand has been dropping, and prices will soon catch up.
http://dareconomics.wordpress.com/2013/05/29/around-the-globe-05-29-2013/
"Demand has been dropping" - oil is still the most easily transportable energy source and source of commodity chemical that improve our standard of living. With 7+billion people on the planet competing for a better standard of living, demand has never been higher.
Yep....
If he had said that "demand to fill SUV gas tanks for cruising to the local big box retail development" is down, then I would agree... Otherwise, the BRICS want MOAR....
Resource wars are heating up because of it too.
they were already so hot, steel was "melting" back in 2001
then explain this chart
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WRPUPUS2&f=W
Bogus accounting aside, stop being so U.S.-centric. Let's see the same data for all distillates derived from oil for the earth over the last 50 years. You do expect to live for more than 50 years don't you? Not sure how that chart communicates anything about the quality of life or standards of living either. So, again, I guess that does not mean anything to you. It does to me.
US centrism is like alcoholism. you learn it from your father, you usually deny it, and it's difficult to cure
wait till the japanese have to bail from their currency and buy gold...then you will see oil v gold drop. Oil is so last century.
Too funny... Did it take you long to reason this out?
For some time price is lowered when oil prices started to go up because of the money printing. Something similar happened today. In a few minutes the price down by more than 1%, sometimes more. It can be easily monitored.
Oil goes up because Fed prints $, since oil is related to $. Artificial price cut in high frequency trading in moment, similar to gold. And not forget fracking, it is highly dependent on high oil price.
Importing more oil to refine into products for export. If the USA were not a net exporter of refined petroleum, there would be no need for imported oil.
The price of oil is a number based on speculation, nothing more than the price of Netflix. Even with demand cratering, and no real hope of a pickup, there is the belief that the demand will somehow materialize.
And Amazon will turn a profit.
The true economy does not matter as long as there is an endless supply of near free money that can chase yield, nomatter how small the gain. A penny of profit is still profit.
The difference this time is that income and wages have not transitioned along with inflation. After previous inflationary episodes like the 1970s, incomes and wages rose to absorb some of the higher cost of living. It was actually relatively easy to fnd a $35k job in the 1980s. Most middle management jobs paid at least that. There were also hundreds of thousands of sales rep positions that could get you into the six figure rage without much work. $35k in 1985 went a lot further tha $35k today. In 2013 you would count yourself lucky to land an upper management job that pays $40k.
You wrote:
Do you simply make shit up? The US imports on a NET basis (for internal consumption) about 10 million barrels a day...
A point that energy ignorant Americans fail to realize is the US imports as much oil as the Eurozone does so inspite of producing significantly more and having a smaller population...
WTF is on that chart????
If you post a bloody chart, it should have a NAME AND UNIT on both axis.
learn how to read, fool "chart of the crude oil/gold ratio "
OIL should be pegged at $200 barrel and gasoline should be pegged at $10/gallon. That should dissuade people from wasteful ways of life, which GWB once called un-negoatiable.
If we're just going to start throwing numbers around I'll go with $0.89/gallon and $35bbl. That would be a great price and help the economy too. People could just drive around for the hell of it and go "cruzing" like back in the day.
Simply do a ~ 5 for 1 reverse split on the dollar as that is just about the only way what you propose is going to occur...
check out this energy - macro correlation
it's completely counterintuituve
Recessions Start When Gas Price Growth Goes Negative
http://chartistfriendfrompittsburgh.blogspot.com/2013/05/recessions-start-when-gas-price-growth.html
Is oil cheap?
Too fucking right it is compared to the dealers price today of skittle shitting, rainbow coloured unicorns with solid gold horns sticking out their foreheads.
I nearlly fucking spat my coffee out as the fucking dealer said optionals were extra, like the silver infused piss sack would cost £12,000 quid, fuck, I couldnt even afford the optional alloy wheels.
Robbing bastards
Is oil cheap? Depends on the cost of the marginal barrel. What is that cost?
Many different answers at ZH on that one. Here's a thought:
Cost of well in the Bakken $8,000,000 (8 x 10 to the sixth)
Most of the well's production in the first two years. Round it up to 800 (8 x 10 to the second)
Must make $10,000 per day. So, produce 200 barrels per day on average at $50 or 100 barrels at $100. That's just to break even on well costs.
Don't they get 80 barrels a day or so from the Bakkens?
It is almost meaningless to discuss the Bakken in terms of average flows.... Rule of thumb is roughly 1000 bbpd falling off to ~80 after 3-4 years and then slowly into oblivion. Most of the cashflow from the well is within the first 2 years....
Here are the "typical" No. Dak. DMR curves
http://www.theoildrum.com/node/9954
There is good reason to believe that these curves are "optimistic" and don't represent "typical". Read to find why....
"U.S. Imports by Country of Origin" (~1981-present)
http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_m.htm
and this: "China's Iraq Oil Strategy Comes Into Sharp Focus" by Chris Zambellis 5/9/13 @ www.jamestown.org/
http://www.jamestown.org/regions/middleeast/ scroll down story line
thanks for the jamestown article
it is funny, the Cheney vs Chow strategies. Hard to believe that a country might chose the country that didn't destroy its people, its country, its government, its infrastructure, and any pathetic remnant of trust.
and it costs less too. no bodies to bury, no amputees to push around, embassies don't cost a trillion....
By definition if oil is priced above its free market value then it is expensive. Oils price is controlled by those ith money who manipulate the price, not the market for oil. So, by definition the price is expensive.
Bullshit on two counts - 1) priced in what? 2) if you are asserting that there is no market for true price discovery (which most around here probably agree with) then how the fuck can you assert anything about what the price (regardless of the fiat you price it in) would be?
In such cases, resort to simple economics, I see 7+ billion looking for a better quality of life, the energy and commodity chemical derived from oil make that possible, so unless that demand is going away, it still cheap, priced in any fiat, or chickens, or labor, or cans of beans. If you have oil, you can get shit done in a hurry and improve your quality of life, period.
You overlook the consequences of a wasteful energy program. Your quest for quality of life increases is an in vain one. The mind tricks the body and in the end you suffer more as you live more. If you were to be able to say, live 200 plus years comfortably, you might have a story. But you only have the 100 year story of dependence for many, and the high life for the few.
Well, speak for yourself, my quality of life has been improving and will continue to do so (so long as my tribe and I keep the plants alive anyway).
Well plant away, but don't forget to grow a brain as you stay alive, or the pain of time will idle on, by and by, until you...
don't worry, you evolve or die no matter what. Same as it ever was...
Not so, a real God comes along and changes everything in a heartbeat, leaving the unknowns to fend for themselves. They don't fare to well by the way, and I pay much attention to them too.
ah, but if you read the comments above you would know that oil is a very special commodity. Very little substutute and the whole world is completely dependent. The money boys take a back row seat to geology, population, politics and war
Don't it always seem to go that you don't know what you've got till it's gone.
May the Gods help us all when that day finally arrives... in the meantime we need to get working on those thorium reactors like the Chinese...
Looks like about a 15 year credit step function there.
on off on off.
Another 10 years of "cheap" energy. I.e. lowered demand.
"Fracking" will save us!
A comedian/historian Robert Newman jokingly puts human slaves and oil into the same category called "cheap energy".
When (and if) cheap manual labor begins stealing work away from fossil-fuel powered machines, we'll know that oil's once again expensive. Until then, oil is cheap.
When pushing a metal box on wheels from behind will be more economical than filling it up with gas and pushing a pedal, we'll know oil's expensive. Until then, oil is cheap.
When crops are fertilized with pot ash and processed organic human remains, we'll know oil's expensive.
When plastic bottles start costing more than glass bottles, we'll know oil is expensive.
Oil may be priced inconveniently high, but it can be priced much much higher and people will still willingly depend on it. They will consume less, that's for sure, but still, consume via a fossil fuel powered infrastructure.
When it comes to alternatives, such as wind, solar and nuclear - they're all manufactured via the use to old infrastructure. On their own, they are not economically viable. Solar panels are cheap, if you use oil to dig up silicone, melt it and built factories where all the components come together. Wind turbines are cheap, if you make plastics and electronics out of oil byproducts. Nuclear plants are cheap, if you lay foundations and mine for uranium using huge gas powered trucks. Take oil away, and you'll discover all these fancy side-products will cost hundred times more and very very few will actually pay for themselves.
Oil is cheap and will be. When the cheap stuff runs out we'll go back to the last best known source of cheap energy - human slaves. We're already doing it in the 3rd world. Practicing, sort of speak, for what's to come.
I don't know about that, my side of salmon today didn't come in a styrofoam package. It was the old fasion paper rap. Tree -vs- oil I guess.
There's no such thing as a simple calculation, when it comes to something like the effect of price on oil consumption.
You can say there are no substitutes, and in many applications that will be true. How much waste is there though, right now? How could that even be calculated?
no.
oil is a commodity.
there is unnecessary overhead involved though.