Posted: Fri Jun 27, 2008 6:06 am Post subject: Re: Feedback Loop in Oil Pricing
There is no joy in Mudville's used truck lot tonight!
Quote:
Record fuel prices have ended America's love affair with the SUV.
But the break-up is proving to be more painful than anyone anticipated. Some U.S dealers have stopped buying used trucks. Lenders are bracing for losses. Automakers have slashed output, and Americans have seen the value of their big rides drop by thousands of dollars in recent weeks.
The decline in sales of the heavy sports utility vehicles and trucks favored by Americans for more than a decade has gathered momentum in the last month, leading to a glut on dealer lots and sharply lower trade-in values.
But unlike the last recession in 2001, discounting from Detroit is not showing signs of reviving demand.
"The auto downturn appears to be entering a problematic second phase," Lehman Brothers analyst Brian Johnson said in a recent note for clients. "In this phase, with gas prices remaining stubbornly high, demand for both new and used large pickups and large SUVs is falling precipitously."
For years, North America's truck market has been an outsized anomaly. Cars outsell trucks by a 5-to-1 margin in Europe and by 2-to-1 in Asia Pacific. But in North America, the popularity of SUVs and trucks made that ratio almost 1-to-1 last year, according to Automotive News.
Oh, somewhere in this indebted land solar energy is great;
A credit card paid-off somewhere, and a mortgage up to date,
And somewhere Hybrids charge, and wind power a delight;
But there is no joy in Mudville’s used truck lot tonight. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Fri Jun 27, 2008 10:25 pm Post subject: Re: Feedback Loop in Oil Pricing
Now Mr.Bill is a poet, too!! Very apt. Mighty Casey has indeed struck out.
Thank you, Aaron, for starting this thread. It seems to me there are a number of positive feedback loops that are now coming into play, driving prices higher at ever-steeper rates.
If I follow your point, your feed back might be called Production Cost Feed Back. Cube mentioned various Substitution Feedbacks.
I would add a few others to these, and I'm sure that other posters can think of more. First, we are engaged in at least two oil wars and heading into at least one other==causing what might be called a Conflict Feedback. These wars feed back to increase prices not only because they use and waste massive quantities of oil in their execution (not to mention wasted lives, infrastructure, ecologies...), but because they add to uncertainty, destabilize entire regions, and disrupt efficient extraction and shipment.
The higher the price goes, the higher the urge to go to war to get more of our oil that somehow ended up under their sand (or jungle, or ocean...)
And then there is the broader Export Land Model Feedback. As exporting countries realize just what a limited resource they have, they will start thinking about saving it for their grandkids (as a Saudi official recently put it)--in other words sitting on it till it is worth even more, and using it to keep their own populations from revolting.
I don't think that the recent run up has much to do with speculation, but certainly as people start to fully realize that they are dealing with a rapidly diminishing essential resource, if becomes quite rational to price future contracts quite high, and such pricing can of course feed off itself--Speculation (or Anticipation of Ever Higher Prices) Feedback.
I could go on, but its getting late and this is already too long a post. Do chime in as you think of others, critique the ones I posted, and suggest negative feedbacks (beyond the obvious, boring and depressing one--Demand Destruction--and the one that hasn't been working very well so far--investment in further exploration and extraction).
Joined: Nov 27, 2004 Posts: 175 Location: Federal City, USA
Posted: Tue Jul 01, 2008 3:18 pm Post subject: Re: Feedback Loop in Oil Pricing
dohboi wrote:
Quote:
And then there is the broader Export Land Model Feedback. As exporting countries realize just what a limited resource they have, they will start thinking about saving it for their grandkids (as a Saudi official recently put it)--in other words sitting on it till it is worth even more, and using it to keep their own populations from revolting.
Yes - the export land model will prove to be strong, but my suspicion is that the US's military heavy hand is stronger. The producing countries may want to hold onto the gooey stuff, but not at the expense of the US washing up on their shores. And the US can justify seemingly any action to its citizens, so there's always that. In this way, I would argue the US's military imminence is a strong negative feedback loop to the Export Land Model. _________________ Business as usual is about to get unusual.
Posted: Wed Jul 02, 2008 4:03 am Post subject: Re: Feedback Loop in Oil Pricing
"It's a slow-motion recession," said Ethan Harris, chief United States economist for Lehman Brothers. "In a normal recession, things kind of collapse and get so weak that you have nowhere to go but up. But we're not getting the classic two or three negative quarters. Instead, we're expecting two years of sub-par growth. Growth that's not enough to generate jobs. It's kind of a chronic rather than an acute pain."
Quote:
Harris expects tepid economic growth and a shrinking labor market to persist through the fall of 2009.
The national unemployment rate climbed a full percentage point over the last year to 5.5 percent in May, according to the Labor Department. That does not include people who are jobless and have given up looking for work, or people who have been bumped to part-time jobs from full-time. Add in those people and the so-called underemployment rate rises to 9.7 percent, up from 8.3 percent in May 2007, according to the Labor Department.
Goldman Sachs forecasts that the unemployment rate will peak at 6.4 percent late in 2009 before the picture improves, meaning that the painful process of shedding jobs may be only half-way complete.
A stable global economy is essential for The Export Land Model. That means they need to live symbiotically with a vulnerable US economy not crash it. Many forget that the US is the largest buyer of crude, but also the world's largest manufacturer, and the third largest country in the world. US exports are currently at histrorical highs.
And those GCC countries, for example, have their accumulated wealth from those oil sales, on which they depend economically, invested in global capital markets that would drop like a stone - or drop even further, faster as the case may be - should there be one of these hypothetical invasions of a large oil producing country.
Look at the mess that Iraq has become. Winning a shooting war is a lot harder than enforcing the peace. Much less hanging onto existing oil production as an occupying force.
Plus those countries that felt intimidated by any US threat could easily cut a deal and take shelter under the wing of another nuclear power like China or even Russia. Half of NATO, including the French's nuclear arsenal, would fracture under the pretence of another unilateral US-invasion. One could never rule out such a possibility, but in terms of probability I would think it is quite remote. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Joined: Jun 29, 2008 Posts: 82 Location: San Luis Obispo, CA / San Jose, CA
Posted: Sat Jul 05, 2008 3:16 am Post subject: Re: Feedback Loop in Oil Pricing
Its very interesting as well how market speculators are in the blame right now. I might also add that it is very 'expected' that speculators are in the blame right now.
I think market analysts have pinned the issue of EROIE without even realizing it. Right now it seems we are blaming the positive feedback looping of oil prices on the speculators, when it fact the speculators are mearly investing in what has been made obvious by the topic discussed in this thread.
Posted: Mon Jul 07, 2008 12:14 am Post subject: Re: Feedback Loop in Oil Pricing
More than feedback price loops, I think that simply the fundamentals (supply and demand) are so strong that the price can only go up. Sometimes drastically up, so much that feedback loops may be blamed.
However, there are external variables of how our civilization reacts to peak oil. These can be called positive and negative feedback loops, but IMO they're not that loopy (changing over time, becoming weaker or stronger). _________________ anagami.net
Posted: Mon Jul 07, 2008 1:50 am Post subject: Re: Feedback Loop in Oil Pricing
We can try to hammer that out a little further.
Something is profitable if my cost is less than what I can sell it for. for the primary producer who has upfront costs to get facilities up and running they may have some loans to pay on or something, but basically as long as the price supports labor and those basic financing costs with a nice little margin they are golden. Say 10%, although the mark-up in some industries is well over 100%. So, for the primary producer all is well as long as price supports their debt structure. They don't really need to produce more. So when the Saud's say there is plenty of oil in some sense they are telling the truth. They are making a fortune because their fixed costs of production are probably not increasing, they have the oil they need to get more oil out.....now if they need to ship their own oil away to have it turned into liquid fuels which they must buy on the global market then their own production is getting more expensive and that cost rise has to be passed on to the next link in the chain at some point. So, it would be very smart practice for a primary producer to own and maintain the technology and intellectual capital needed to have a completely closed supply chain for primary production. My understanding is that few oil producing nations have this, they have tended to rely on the multinationals for almost everything.
Pretend we have that loop closed. As scarcity sets in they still have to raise prices to cover their own fixed costs as production declines because revenue is price times widgets, and they are selling fewer widgets. But they are not having to pay more to produce another barrel (all other things remaining constant.)
So the primary producer once they have hermetically sealed their production life cycle they really do not need to care about the global price except to guard against excessive demand destruction. In fact once the expertise is in house they could probably finance their own maintenance.
But where does the feedback come in? Anyone not in primary production, or any primary producer exposed to the downstream global market is paying more for what they do. The question is what constitutes economic viability of Discovery and Development?
There is an unknown upfront cost to go out and look for oil, rigs, personnel, fees,... That cost is by no means a guaranteed recoverable. If you understand the geology of oil you know that discoveries have been dropping since the 60's not simply because oil was too cheap, but because most likely areas have been searched or the easily accessible areas have been searched. So, you have a risk premium on discovery right up front that reaches a peak and then declines, since in the early days we did not understand wlel the chances and in fact few places were researched so you had a good chance of big gains. That exponential decay in discoveries is probably proportional to the risk of recouping your initial investment and it is being driven as much by geology as economics. The risk of not getting back you investment is growing but it has probably reached a sill.
That is assuming that price was constant. But for increasing price you have it being a greater and greater up front investment in looking for new oil so that the potential loss is greater. I think Aaron is right on the ball here that the risk,
The technical definition of risk is magnitude times probability.
The risk of loss here is the cost of R&D times the probability of not finding oil (that is simplified of course.)
So we have a rising probability of not finding anything significant, or of finding something that does not justifiy the cost of development, and we have the price of everything that goes into development increasing.
Therefore the risk premium on R&D is increasing in both factors, with the caveats being technological and geologic.
I see that as it's own mechanism only loosely coupled to world production peaking, because there are many scenarios for how that could have played out. We are in one possible future, and relative scarcity of oil driving up price could make it so that the only way to get new oil to market is at a loss (ie we subsidize it.) well subisidies can work as methods for levelling the playing field and the invisible foot has used them before under the guise of the invisible glove. But when the thing you are trying to subsidize is a primary and unparalleled energy source which has already created an overshoot in the demand you cannot really subsidize it. Because you could only do it in this system by simply rpinting more money. Wealth is not entirely an illusion. It has a connection to the exploitation of physical resources and the most fundamental of which is energy. Energy and technology define the carrying capacity within limits set by nature. You can build a city in the desert if you have technology and energy. If one of them fails your city will look much different than you may want it to.
A bit long winded but I am trying to flesh out the connections there a bit.
Great point Aaron. How close do you think we are to a price where we start actually shutting down all other options? And, do you think that this process is detached from peak in such a way that it is not correlated? What I mean is, is it indepedent of peak, or is it linked economically so that in a wierd sort of way the market is saying that the paths to the future do not make it efficient to get that oil. I do not subscribe, neither does Warren Buffet to the efficient market theorom, saying that all markets are always efficient, but I think that they do tend to be relatively so. Is the thing you point out a trailing indicator of peak or could relative scarcity produce it even if there were 10 more Ghawars to be found?
The reason I think it is in this circumstance proof of peak is that demand growth in the 3rd world is so high. Meaning if someone could find more oil the market is there calling for it. So the only real reason for failure to find more is that there really is'nt that much more. Every other incentive, even very advanced technology is there. The world wants more oil. Price is telling us not only that scarcity is real, but it is is also showing us the inelasticity of demand. It is showing us there was a lot of user value in the oil that is already being supplied. Suppliers should want to extract that value because it is a market signal. Price has to continue to rise (even if it shuts out alternatives) until demand and supply are brought closer together otherwise shortages have to be the result. This is an causal relationship now driven by thermodynamics. It's not, 'How fashionable is a blood diamond?' scarcity makes the connection between energy and money less fuzzy. All the diamonds in the world won't nourish me if there is no market which values them in trade for food. But there is no food to be bartered for without energy to produce it.
That's enough rambling. Things are going to turn ugly here in the next nine months friends. I hope you have prepared well.
Joined: Oct 23, 2004 Posts: 5499 Location: New Jersey
Posted: Thu Jul 10, 2008 6:37 pm Post subject: Re: Feedback Loop in Oil Pricing
Interesting energy price/availability feedback example with aluminum:
Quote:
Aluminum hit record prices as China slashes output
By Joyce Koh, MarketWatch
Last update: 6:40 p.m. EDT July 10, 2008
(MarketWatch) -- Aluminum prices shot up to their highest-ever level after China's top 20 aluminum producers said they will cut output by up to 10% in order to save energy and help the country cope with power outages and higher costs.
Aluminum for delivery in three months rose as high as $3380 a metric ton a new record high. The metal closed at 3,222.50, up 6%, on the London Metal Exchange. Aluminum already rallied 39% so far this year due to earlier supply disruptions in China and South Africa.
Market Watch _________________ It's already over, now it's just a matter of adjusting.
Posted: Fri Jul 11, 2008 3:18 am Post subject: Re: Feedback Loop in Oil Pricing
Clowns to the left of me, Jokers to the right, Here I am, stuck in the middle with you.
Quote:
Declining gasoline purchases, due to higher prices, are hurting the federal fund that pays to maintain the nation's highways, the director of the Congressional Budget Office said on Thursday.
The fund is built on an 18.4 cent tax levied on each gallon of gas. It had been forecast to run out by 2009, but the fund is now shrinking more quickly, Peter Orszag testified to a Senate panel.
"Our March baseline did suggest that it would be exhausted in 2009 and an imbalance of roughly a billion and a half dollars would occur during that time period," he said of the CBO's projections on the fund's future.
"Since March, gas prices have caused gasoline consumption to decline. So the incoming revenue will be lower than what we projected in March and the imbalance in 2009 will be more significant," Orszag added.
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