by Numbersman » Wed 24 Dec 2014, 08:03:21
There is an interesting hypothesis (and much technical analysis and reporting) offered by a PO contributor "shorten oil". The main premise is that due to increasing costs to extract, ship, and refine oil, the useable energy in a barrel of oil is falling. Therefore, the price should be falling in proportion to the useable energy. There is another element to the commentary, which is that their organization, The Hills Group, has developed a pricing model that is highly correlated with historical pricing, and they claim, should predict future pricing.
I find this all quite interesting, especially in light of the personally unexpected drop in oil prices. I have developed some opinions, lightly researched, and lightly held, and would like to get feedback on them.
Some of this might sound dismissive of the claims of Shortonoil. I suppose that is partially true, but I also want to say I am impressed with the concept proposed and appreciative of the shared information and interactive discussion that Shortonoil provides to this forum.
One of my first opinions about the claims for a predictive pricing model based on historical prices is: Hogwash. I believe I can take any historical price set and fit it to a curve, with any degree of correlation I choose based on the degrees of freedom (complexity) I allow in my fitting model, be it a traditional math equation such as high order polynomial or something numerical and heuristic (rules based). Furthermore, if I did have a predictive model with even a slight edge of accuracy over random chance, I could essentially make unlimited amounts of money using leverage and financial instruments tuned to the probabilities and time periods.
The premise that oil usage should fall as the useable energy content falls seems logical and a strong perspective with which to look at the oil markets. One of the constructs offered by Shortonoil, that I really appreciate, is that we can think of high cost oil more like a battery - as an energy carrier and not an energy source. However, this mode of thought also seems overly simplistic, and dismissive of the many variables (changing conditions) of the "real world".
In a world of growing demand, where "new oil" is continually required, then the cost of producing a marginal barrel of oil rules the pricing jungle. In this case, the dynamic of energy content (or ETP model as Shortonoil calls it) would seem to rule.
But we have a self affected real world, where things bump into ceilings and constraints, and then behave in unpredictable ways.
If supply does exceed demand, then what happens? It would seem we are in that condition right now, and the price of oil has fallen a very surprising amount.
Here is my takeaway: For a marginal barrel of oil (new oil from expensive to get spot), the cost is high and remaining energy content is low. But for a legacy barrel of oil (from a massive deposit, relatively easy to get, and/or already paid for), the costs can be extremely low. So this explains to me the wild swings we have seen the price: a function of demand in an increasingly unstable system.
Predicting the price becomes essentially a prediction of whether demand will require the marginal barrel of oil, or whether we can live with the legacy (and shrinking) barrels of oil.
I see lots of reasons why demand is low, and reasons it could stay low or even shrink. Most of these were brought about by high oil prices, so as prices fall the question becomes "how quickly will lower prices restimulate demand?"
There is the "normal case" of hard fought growth, stimulated by socio-Eco systems dependent for survival on growth and linear projections into the future. I cannot discount this, because the Patriot Act and Quantitative Easing (massive money printing) both show the surprising extent to which the world superpower will go to preserving "normal".
On the other hand, there is the awareness that we live on a finite planet striving for perpetual growth, that will one say fall short and create cascading failures and massive instabilities.
The zigzagging price of oil, and the underlying binary modality that is driving it, appears to be a possible entre of these expected future instabilities.