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Oil, Gold and the US $


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In reply to: mailhep on Friday 01/04/05 03:43pm

G'day mailhep


The Golman Sachs prediction must be seen as prejudiced - they stand to profit from a market boom in oilers.


Markets are based on real needs and perceived needs, and as the $ of oil appears to move in accordance with changes in the weather or politics it would appear that the perceived need is dominant. Oil "crises" based on spot market speculation will impact on emerging economies like Africa and Asia and could ruin them.


Global demand for energy is linked to global growth, and with Japan and the EU in a holding pattern the collect growth of the G7 countries is bleak.


What should be noted is that whilst US oil stockpiles are high countries like China have no stockpiles, and are more exposed to these market spikes. With the navy guarding the sea lanes the balance is suddenly in the US' favour.


Like the tech boom the oil market may be just another bubble ready to pop.

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In reply to: rog on Sunday 10/04/05 10:31am

Hi rog,


Global demand for energy is linked to global growth, and with Japan and the EU in a holding pattern the collect growth of the G7 countries is bleak.


You'll find, if you look at the historical data, that growth in aggregate, global oil demand correlates more with GDP growth in emerging markets than GDP growth in mature economies.


Think about the Asian crisis in the late nineties and what happened to spot oil - yes, there is a connection.


Then, invert that picture to allow for current China and India GDP growth.


And think about this statement: Oil demand becomes highly income elastic once subsistence thresholds are breached.


A large part of the world is industrialising at an extremely rapid rate. Oil is indispensable to industrialised economies. And OPEC is already approaching capacity constraints.


Where is all the oil going to come from?


And, at what price do you cease to buy it?


Where demand for a commodity is price inelastic (as with oil) very small imbalances between supply and demand make for very large price moves (a product of the slope of the demand function).


My "bold view" is that Goldman Sachs have erred on the side of caution.



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In reply to: jerry on Sunday 10/04/05 11:29am

G'day Gerry


1) newly emerging or slow growing economies will be weakened by rising oil prices; Japan is already feeling those effects


2) the present oil rise will increase incentives to produce more energy


3) increased demand in the US is linked with increased GDP


4) rising oil prices due to a rise in demand cannot cause a recession


5) a recession would lead to lower oil prices


Growth driven oil price increases will lead to a boost in supply and eventually lower oil prices.


The Golman Sachs prediction was dependant on a major producer, such as Saudi Arabia, ceasing to produce.


Jason Schenker of Wachovia Securities said: "Of course we could go to $105, if Saudi Arabia's reserves were destroyedÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦ but the probability of that is so low, it's not worth publishing on the front page of a report."







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QUOTE (rog @ Sunday 10/04/05 12:42pm)

Hi rog,


I haven't actually read the Goldman Sachs report so I don't know the exact basis for their claims.


What I do know is that, looking at the aggregate global data, Asia accounted for a full 76% of the growth in oil demand at the global level during the ten years to 1998.


That is, almost all of it.


This record growth correlated with Asian GDP growth but also reflected the growth in vehicle stocks in the Asian Tiger Economies which recorded fantastic expansion during the period. This is one aspect of what I'm talking about when I speak of a subsistence threshold effect.


This effect also has the characteristic of a ratchet. Once there is investment in oil consuming plant within an economy oil demand becomes downward sticky. It's either that or back to the bicycle, the ox-plough and a peasant-populated, agrarian economy.


For the modern economies oil demand is also downward sticky as a result of the average age of vehicle stocks (but also other oil consuming plant) which prevents any rapid demand adjustment - holding everything else constant.


This downside stickiness is reflected in the extreme price inelasticity of oil demand.


An increment to the GDP of the US, Europe, Japan - or any of the advanced economies - will have very little effect on global oil demand in comparison to a similar increment in less-developed economies. Industrialisation requires oil - it is very simple. And, as in the ten years 1998, the current growth in global demand for oil is being driven by economic growth in the less developed economies - now China and India.


But we know that it is the developing economies that are the swing driver of oil demand - and as a consequence the oil price - because the late 90's Asian economic contraction proved this to be the case. The sub US$10 a barrel oil price followed quickly on the heels of the Asian economic crisis.


My argument is that during the ten years to 1998, a period of dramatic expansion in the Asian Tiger economies, oil supply received a one-off fillip on the back of technological improvements to oil exploration and production - 3D seismic surveys, directional drilling etc... But oil supply during this period was also assisted by a period of OPEC incoherence where cartel members - particularly Venezuela - rampantly breached quota levels.


This time round, there are no dramatic technological innovations in the pipeline that I can see assisting supply growth. Moreover, the OPEC cartel is approaching capacity constraints - there isn't that much more productive capacity available within OPEC. The classic prisonerÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s dilemma faced by cartel members which eased the plight of consuming nations in the recent past is all but finished.


Against this background, global GDP is in a continuing expansion on the back of dramatic - technology driven - productivity gains. But also free trade which is directing the greatest portion of global economic growth into the less developed economies (most notably China). Note that it is in these economies where the income elasticity of oil demand is highest - on the back of the subsistence threshold effect outlined above.


How high can the oil price go? The pertinent question might in fact be: How many bicycles are there in China?


Your statement that a rise in oil demand cannot lead to a recession is quite simply wrong. Oil demand lags economic activity - this was the evidence that emerged from the 1990's Asian crisis. And this is why the oil price can spike viciously before the drag experienced in the real economy - as a result of the price spike - kicks in.


Car pooling sounds cool, but any attempts to improve consumption efficiency are, in my opinion, likely to be swamped by the broad market dynamics that regulate the oil price.


OK, so how much contraction in the real economy is required to retard aggregate global oil consumption growth sufficiently to contain crude prices?


Well, this is an interesting question. China, India, and still-developing countries elsewhere, have tremendous comparative advantages in production on the back of cheap labour and other structural economic factors. In the presence of free trade, the dent in aggregate global economic output will, in my opinion, have to be very severe to contain economic growth in these countries sufficiently to dampen aggregate oil consumption growth.


What IÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢m trying to say, but not expressing well, is that the dent to economic activity in developed countries that will be required to sufficiently offset accelerating industrialisation in China, and elsewhere, to contain aggregate oil demand is likely to be huge.


It is obvious to most observers that the capital goods cycle in China is quite simply out of control. Large portions of the worldÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s most populous country are recording fantastic economic expansion and are increasingly energy hungry. I do not think this will be easily tamed.


Whichever way you twist it, holding technology constant, oil is in a long-term uptrend.


Of course, a hard economic landing in China might keep the genie in the bottle for just long enough to bring alternative sources of supply (Canadian tar sands for example) to market in volume.


Anyway, my view is that sheÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s going, inexorably, skyward.



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In reply to: jerry on Sunday 10/04/05 02:32pm

The basic crunch to the problem is what products should be produced and by whom. As all products consume energy and materials and are designed for different lifespans, which shall we produce and by whom. The ideal product is one that is well designed, is well priced and and has a long lifespan. Not easy to find due to currency differences and labour costs. With a dwindling supply of raw materials, decisions need to made as to who makes what and at what cost and what quality. I could go on, but this is what needs to be sorted out.

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In reply to: uptrend on Sunday 10/04/05 11:04pm

G'day uptrend


If left to operate freely market forces will decide who makes what etc.


I am not sure which dwindling resources you refer to, even the current oil price is not high enough to indicate any real shortage of raw material, more a demand on insufficient production infrastructure.





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QUOTE (rog @ Tuesday 12/04/05 08:39am)

If left to operate freely market forces will decide who makes what etc.

I am not sure which dwindling resources you refer to, even the current oil price is not high enough to indicate any real shortage of raw material, more a demand on insufficient production infrastructure.


Presumably, the ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“freely operating marketÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ÂÂ, if it has not already, will at some point in the future supply the optimal quantum of productive infrastructure.


I was always under the impression that, at least for non-OPEC suppliers, oil from any field is extracted at the maximum rate possible - a function of the use of DCF analysis in project financing models. The reason being that the barrel of oil left in the ground is less valuable than the barrel extracted today.


Of course, at a high oil prices project economics may change. But I wonder what the industry-average, marginal cost is for the incremental barrel of oil produced by way of "accelerated extraction" from the reserve? DoesnÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t it stand to reason that the cost must be much higher than the marginal cost of the incremental barrel obtained at the current (or normal) rate of extraction for any given productive reserve?


Moreover, if your reserves are approaching depletion, further capital spend to accelerate production may not be economically viable.


The economics of oil producing assets will vary case by case. But I think that, in general, any incremental capital spend to accelerate the rate of oil production is likely to be most economic in the presence of large reserves (healthy economic targets) that have not already been significantly depleted. And this must, ultimately, operate to limit the amount of oil that can be brought to market by means of "accelerated production" at any given price for the commodity.


Of course, if there is no upper limit to the price of the commodity there will ample supply at all levels of demand. That is, as long as there remains a resource to exploit and the desired rate of oil production does not breach what is technologically feasible.


Meanwhile, demand is raging and much of the existing oil production spectrum is already at peak production, or in actual production decline - using existing infrastructure and technology.


Dips and pull-backs, but ultimately up!


My view only.




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In reply to: jerry on Tuesday 12/04/05 10:57pm

G'day Jerry



Meanwhile, demand is raging


An emotive term, "raging"?


As I was saying, when market forces come into play, the higher the price the less the demand, prices will fall as orders are filled and stockpiles reach capacity.


Read what the IEA has to say about "demand response"




The $100/bbl forecast was also made in the early '80s when money was cheaper, the $40/bbl in 1979 was equal to $100 in todays terms. This scenario frightened Saudia Arabia, who reasoned that high prices would push Western markets to seek alternaative forms of energy. After earlier undercutting the OPEC price of $34/bbl (about $80 in todays money) in 1985 Saudi went for market share and pushed prices down to $12/bbl.








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QUOTE (rog @ Wednesday 13/04/05 07:20am)

Hi Rog,


Yes, "raging" is an emotive term, but I'm enjoying this argument. http://www.sharescene.com/html/emoticons/smile.gif


Look, I don't disagree with the notion that price will operate to ration the resource. Higher prices must lead to some softening of demand - everything else being equal.


The last time I looked at the IEA numbers, 2Q 98, they had aggregate oil demand at 72.8m barrels per day (from an old report, they may have retrospectively revised that number by now though).


I note from the link you provided that the IEA are now forecasting average consumption through 2005 at 84.27m barrels. That's quite an increase - 15.76% in 7 years (CAGR 2.11%). And yes, I mixed a quarterly data point with a forecast year-average to get this growth number but I'm too lazy to do the work. But, in any case, growth in consumption has been pretty healthy of late.


World oil use will average 84.27 million barrels a day in 2005, 50,000 a day less than estimated last month, the Paris- based agency said.


At this rate of growth, aggregate oil demand seven years from now will be 97.55m barrels a day - up 13.2m barrels a day from current consumption. That's consistent with an increment to global supply of another 1.4 Saudi Arabias (at current levels of production).


Saudi Arabia, OPEC's biggest producer, pumped 9.35 million barrels of crude oil a day last month, 11 percent more than the same period last year, according to Bloomberg estimates.
From the link above.


And, over this period we can expect production decline across much of the existing oil production spectrum as oil producing areas approach maturity. Which means, taking a guess, we will probably have to find new production equivalent to another couple of Saudi Arabias to meet demand.


I don't think I'm being brave to be long-term bullish on oil.


Moreover, your argument that price will temper demand growth would seem to support a bullish view, unless of course you see high oil prices severely constraining economic global economic growth going forward.




PS: DonÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t trust my numbers, I pulled them up at speed for the sake of making an argument ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ any numbers from me have a tendency to be flakey but especially when IÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢m shooting from the hip.

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In reply to: jerry on Wednesday 13/04/05 10:32am

Gday Jerry


Do I detect a trace of "peak oil theory" in your thinking?


My experience is that when various experts begin their "reasoned" argument with a conspiracy theory they have already entered the realms of fictional fantasy.


For an insight into OPEC and non-OPEC fundamentals try http://eia.doe.gov/ and in particular http://www.eia.doe.gov/emeu/cabs/opecrev.html#view







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