 | DrumBeat: October 24, 2006 | The Oil Drum | DrumBeat II-10/24 (and the "are you going to Boston?" coordination thread as well) |  |
Fuel Prices As We Go over the Top...?
Posted by Libelle on October 24, 2006 - 11:14am in The Oil Drum: Canada
Topic: Economics/Finance
Tags: industry, natural gas, prices [list all tags]
We already have an example of a (nearly) isolated
market that has definitely gone over the top of production, and that is
the North American natural gas market. Production peaked several years
ago, and a slow decline has begun, in spite of record drilling.
This phenomenon has occurred at very close to the same time for almost
all the major basins on the continent. If we look at the NYMEX
wellhead gas price for the last 75 years, we can see that the
price was very low indeed until about the time of the first production
peak in 1970, and
then rose to an reasonably steady $2US per thousand cubic feet, which
held until about 1999. During this period, it was relatively easy
to meet any production shortfall by drilling new deposits. (One
thousand cubic feet of gas has very close to one million BTU of heating
energy, which is also close to one gigaJoule.)
Since 1999, the price has risen by a factor of about four. It should come as no surprise that this has occurred as the limits to gas production became impossible to ignore. Drilling rates rose dramatically, while production reached a plateau and began to decline slowly.
Nevertheless, the president of the Americal Chemistry Council said
recently: "Make
no mistake, the natural gas crisis hasn't gone anywhere.", and the
bets are on increasing
prices once again.
The question that arises is why the price has fallen so far in an
era of dwindling supply. The answer lies partly in the mild
winter of 2005/6 and moderate summer of 2006, but the steady shutting
down of industry has a large and on-going influence on consumption and
on price. Industrial users of gas pay the lowest prices,
and are the first to shut down or move their production facilities
overseas as
the price rises. This acts as a brake on the rise. U.S.
industrial consumption of gas fell 22% between
1997 and 2005, and the U.S. has lost three million
manufacturing jobs
since 2000. Canada will not have been immune to this type of
change. The deindustrialisation of North America is already under
way, even though "Peak Oil" (and gas) is only just beginning to enter
mainstream public debate.
Industrial consumption is still very large, so there yet remains a
considerable fraction of the gas demand that can gradually be destroyed
at relatively low prices. Will this allow production to decline
by say twenty per cent without the price going any higher than it
already has? Adding to this effect may be a decrease in gas
consumed
to make electricity, as deindustrialisation destroys electricity demand
too. Will the result be that gas depletion remains partially
hidden from public view by the economic downturn that it has helped
cause? A collapse of the debt bubble and hence of the US dollar
would no doubt cause a major reduction of consumption by all
sectors. It is not too difficult to envisage a situation in which
real prices do nor rise much, or even fall, while a major decline in
gas production is officially explained by economic factors, rather than
depletion.
What do you think the reaction in Canada would be to shortages when we are exporting 50+% of our natural gas to the states and can't reduce our exports thanks to NAFTA?
I am not sure if that prodcution is still shut in or not.
Oct. 16 (Bloomberg) -- Citadel Investment Group LLC, the $12 billion hedge fund manager, T. Boone Pickens and the Merchant Commodity fund expect natural gas to rebound from a historic losing streak.
Hedge funds amassed a $3 billion wager on rising prices in New York futures markets as gas plunged 74 percent in the past 10 months, the biggest drop of any commodity. Chicago-based Citadel added to its bet in September by taking over trades from Amaranth Advisers LLC, the hedge fund that's closing after losing $6.5 billion in the gas market.
Demand for gas, used for furnaces and power plants, will outstrip supply as production from U.S. wells declines in 2007, say the chief executive officers of energy producers Devon Energy Corp. and EOG Resources Inc. Natural gas will average $9 per million British thermal units over the next 12 months, says EOG's chief, Mark Papa, up from less than $6 last week.
``If you told me I had to go long or short today, I would go long,'' betting on higher prices, said Pickens, whose Dallas hedge fund is up 120 percent this year. Gas may reach $10 this winter if cold weather depletes inventories, he said on Oct. 11 in New York. He declined to predict when his fund might get back into the gas market after exiting earlier this year.
Natural gas may rise as high as $12 per million Btu by March, said Michael Coleman, founder of Singapore-based Aisling Analytics Pte Ltd., which runs the $386 million Merchant Commodity hedge fund.
Falling Supply
While demand for gas to run power plants is increasing in North America, supply isn't growing, said Michael Morris, chief executive of Columbus, Ohio-based American Electric Power Co., the second-biggest U.S. electricity producer. Prices fell earlier this year after the fifth-warmest winter on record and a cool summer that reduced demand for electricity to run air conditioners.
The amount of gas pumped from U.S. wells is likely to decrease 1 percent this year, and supplies from new wells are declining at a faster rate than five years ago, said David Khani, an oil and gas analyst at Friedman, Billings, Ramsey & Co. analyst in Arlington, Virginia.
Daily U.S. production of natural gas fell to a 12-year low of 49.8 billion cubic feet in 2005 because of damage to plants from hurricanes, according to the U.S. Energy Department.
``The critical part is the production capacity of natural gas wells, and that is flat at best from the past winter,'' Devon Chief Executive Larry Nichols said in a telephone interview. Prices may rise ``dramatically,'' especially if winter is colder than normal, he said. Devon, based in Oklahoma City, is the second-largest independent U.S. natural gas producer.
http://www.prosefights.org/gas/gas.htm
:)
Is there a decline in jobs that require pure manpower as in "lifting" and "forging"? Yes. Do we suffer collectively from that decline? No.
We do have a growing number of poorly educated people who are being made obsolete in the changing workforce of the 21st century. That is a problem of education, though, not one that is driven by limited and declining natural gas resources. If you want to keep the US ahead of the world, take care of better schools for everyone instead of sending hundreds of billions of dollars into a war that should not have been fought in the first place. And if you need to employ millions of people in jobs that require relatively low levels of education, have them install solar panels on your roof. Everyone who can climb a ladder can do that kind of work AND it solves the energy problems of the future.
I agree... the only jobs that will definitely stay here are those which require physical presence. And the people doing them will be the only ones without any means to ever leave their communities. Everyone else in the future will be able to choose where they want to work... on snowy planes or in buzzing Asian cities or on tropical islands.
If I wanted to, I could go to Singapore tomorrow. Or Australia. Or back to Europe. All I have to do is to apply for a job in any of these places or to open a business of my own. Granted, not everyone has the desire to move and to live on foreign shores. But those who have, usually value the experience. And often they come back to home and bring what they have learned with them.
What I am trying to say is that a world open to everyone who has set their mind to exploring it (quite literally) is not a bad thing.
And I would also think that among the tens of millions of Mexican immigrants in the US there are many who are homesick and who would rather like to live with their families rather than spend their lives on the run from one minimum wage job to the other or one farmer's field to the other.
I met a guy from the Philippines who works in the US to support his kids. He gets to see them once every year, at most. Do you think he is doing it because he has a choice? The man's heart brakes every time he talks about his kids and how he is afraid that his brother's family where they live is not treating them like their own. On the upside: his janitor's salary allows him to send his son to college to become a white collar worker... and the son will probably send his son to university to become a doctor or let his daughter be an attorney...
If you go to Singapore, you will see thousands of laborers from Malaysia work on construction sites...
I could go on. The short version is that people move to where the work is. Desperate people move further and endure more hardships than fat people with homes and social security checks. I don't mean that in a derogatory way, it is simply the result of the survival pressure that people are under. Hunger is a cruel mistress. When she talks, you listen.
I move to where I like because I can and because it is fun. I have made myself a home on three continents and maybe I will make that four by the time I retire... No, I do not think that the reasons I move for are typical. But I do think that moving is essential part of humanity. We were nomads and we can always be nomads if we have to.
Of course, we're not talking about moving among First World nations where the populations all have comparable incomes. But then that's not where the jobs are being outsourced to anyway.
There is abolutely nothing wrong with this picture, unless your economic credo is that you can only profit if someone else starves. I think the world as a whole has reduced such 18th century thinking to rubble. We all profit from China and India taking over the industries that we can't run profitably any longer.
Now, I take it from your post that you are probably not a billionaire...?
I also represent a growing fraction of the world's population that understands the necessity to move around. My point was that there are many reasons to be mobile. Being part of the jetset is the unlikeliest one, though. It is much more likely that either you are starving or that your level of education is needed somewhere else. In my case it is the latter. In the case of my parents it was the former. We did not make the world this way, we just adapted to it.
Infinite, I do see your points as being valueable, but I think you've read one too many Thomas Friedman articles on the wonders of cinnabons. I guess you have a positive outlook on "globalization", you seem to have a romantic vision of efficiency, profit and order for all... Whereas I see globalization simply as labor arbitrage and squeezing the last few bucks out of an industrial system that is bound to collapse (in any form, whether run by global capitalism or so called "marxist socialism".)
First off, sure, you have to be smart to be a billionaire (at least a self made one, if you look at the Forbe 400 list you will find that although many are self made, there are quite a few that inherited.) On the other hand, becoming filthy rich is way less a function of "smarts", than it is of hard work, taking advantage of every opportunity and, of course, greed. I would put way more stress on greed than "smarts"... In fact, I would bet that you could be a total fucktard and still become a billionaire simply by pure greed (of course, I'm not saying a greedy mentally deficient individual could achieve such a feat--there is obviously a nominal base of intelligence to make money). My point is simply that I think you're wrong to stress "smarts", since there are millions upon millions of people that are way more smart then the vast majority of billionaires. In fact, billionaires usually employ people that are far moer intelligent than them.
You misunderstood BrianT. Perhaps you need to get down from the saddle and actually discuss things as opposed to stating your opinions as facts from high atop hi-ho silver. My understanding of what BrianT was saying is that we are all on the same boat. We are all homo sapiens, we are all related and we all live on "spaceship earth". Our space ship may be easy to get around right now, and may have enough resources for everyone to plow around in military vechicles in urban environments, but eventually this free for all will end. Just because people have been crying wolf since whale oil, doesn't mean that resources are infinite and that prognosticators will forever be wrong. In case you didn't notice, this blog's focus is energy depletion and our "future".
BrianT's point was that once TSHTF billionaires and the unemployed will both have problems, albeit different ones. For instance, billionaires will be concerned with having even tighter security, contingents of body guards and militarized homes then they already do... They will be afraid of the masses of enraged Americans who were told by Reagan in the 80s that it was Morning in America... When people find out it is actually Dusk in America, the public will want to eat the upper class alive.
Perhaps you disagree with my perspective on this, since you obviously seem joyfully optimistic about our future (despite massive, never before experienced challenges for our species on the very near horizon...) To go down the list briefly with no depth:
- spiraling wars in the middle east (already in progress)
- global oil production depletion (no one knows--not a good thing)
- global warming (again, no one knows--not a good thing)
- unprecendent debt levels (growing rapidly monthly)
- overpopulation (approaching 7 billion--more people have been alive in the last 200 years than cumultively in all of human history)
- mass extinction
- ecological degradation (rainforests all around the world be burned and chopped down, coral reefs dying, etc.)
I could go on but you get the jist of it.While you seem to enjoy doing the "hey look how stupid feckless unemployed 20 somethings are compared to our brilliant billionaires!" I would rather side with BrianT and simply agree that we are products of only two things... Our environments and genetic dispositions. (Not to mention millions of years of natural selection.)
"potential of a billionaire"?????
So I assume you are saying that essentially there is a billionaire gene? Or there must be a rearing technique to enhance the "billionaire potential"?
Those are rhetorical questions, because obviously both have to be true. In order to get a billionaire you need A) the disposition to become one B) the environmental know how to function in the world to impress people, network, makes deals, etc with all the other BS required. Plus, the obvious desire to do so...
Again, I'm just writing this to make it known to all that I agree with BrianT, and think your arrogance is now apparent to anyone to see.
BrianT tries to say we're all in this together and you go out and write that he must not be a billionaire and that billionaires are smart? Wow.
hrmm...
"Whereas I see globalization simply as labor arbitrage and squeezing the last few bucks out of an industrial system that is bound to collapse (in any form, whether run by global capitalism or so called "marxist socialism".)"
Labor arbitrage existed everywhere at all times. It is not limited to moving jobs across borders in the late 20th century. Labor intense industries always moved to where the cheapest labor was and they always created high concentrations of low earners. What seems misguided to me is that some people in these posts complained that they can't be the low earners. I always ask myself why someone who has reasonable chances to move up to the middle class would want to hang on to the bottom of the system kinds of jobs. The Chinese who are taking these will certainly encourage their children NOT to follow Mom and Dad to the factory but go to school, then college and become an engineer or better.
As for the collapse of the system... I have yet to see any signs of that. Capitalism is happily producing one record result after the other everywhere in the world. One can argue that some of it is ecologically not sustainable. I would agree with that, but then, there is no law of physics that I know (and I am a physicist) which states that similar gains can not be had with less waste of energy and resources. America is 50% less efficient than Europe and Europe is probably 50% less efficient than it could be according to the laws of physics. We have plenty of solar radiation to satisfy our children's and grandchildren's hunger for energy. Real limits exist, but we aren't even close, yet.
My billionaire story was meant to be hyperbole... apologies that people misunderstood my sense of humor. Since I don't dine with billionaires, I know nothing about them first hand. But the fact that they are billionaires and most people are not kind of leads me to believe that they are doing something differently... :-)
:-)
http://www.tompeters.com/entries.php?note=009333.php
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Are you aware of any examples of insurance companies getting involved with this?
In fact we have a growing number of EDUCATED people who are also being made obsolete.
Good posting although I disagree with your assesment about education. I took and eventually passed the CPA exam in the early eighties and we were allowed 2 sheets of paper and one pencil that were collected before you could leave. Now you are allowed a calculator and unlimited supplies.
Nowdays with all the accounting and technical software any "idiot" can replace jobs that took greater understandings and education.
We need more technical programs like I had, in public schools. Technical arts from grade 6 through 12 gave me my welding and foundry abilities, and now pay me almost as much as being a CPA, with less hours of work.
People making less in this economy are forced to pay higher gas prices they can ill afford.
I would like to disagree. We sometimes have an oversupply of people with the wrong skills. Educated people can compensate for that by changing professions, albeit it is very rare that a PhD chemist or physicists has to change fields. He or she might have to move somewhere else to find work, though.
Obviously CPA jobs can be outsourced, but a friend of ours who is a physical chemist who joined a bank, got a CPA on the job and specialized on market analysis (because of her mathematical skills in stochastics) and is now a high-earner in a large European Bank. Her job is not only safe but will probably take her soon to New York, Tokio or anywhere else she wants to go. All she has to do is to ask...
Congrats about you decision to go into welding and foundry work. Especially if you can do specialty welds (UHV) or artistic pieces, that sounds like a safe job to me. It is safe because it is specialized and if you add the experience, you are hard to replace.
That is a general statement about job security: if you can do something that only a few thousand people in the world can do, your job is usually safe. If you sell hamburger... well, then you can be replaced rather easily, if necessary with a machine.