Dallas Fed: Oil Heading Back Under Par

“Absent supply disruptions, it will be difficult to sustain oil prices above $100 (a barrel, in 2008 dollars) over the next 10 years.”

Dallas Fed researchers Stephen Brown, Raghav Virmani and Richard Alm

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Since we have been spilling so many pixels on Crude lately, I wanted to point out this excellent piece from the Dallas Fed Research department on Oil prices. 

While I do not agree with all of their conclusions, I love any research piece that is cogent, well written, and filled with chart porn!

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Source:
Crude Awakening: Behind the Surge in Oil Prices 
by Stephen P. A. Brown, Raghav Virmani and Richard Alm
Federal Reserve Bank of Dallas, May 2008
http://dallasfed.org/research/eclett/2008/el0805.html

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What's been said:

Discussions found on the web:
  1. Vermont Trader commented on May 29

    Wow, I’m moving to Equitorial Guinea and getting into the oil business.

  2. BuffaloBob commented on May 29

    Key assumption: “most industry experts contend that oil resources are plentiful; it just takes time and money to get them out of the ground and into the market.”

    Mexico, Russia, North Sea all declining. No major fields found in 30 years. I wonder where these plentiful supplies are.

  3. Pool Shark commented on May 29

    Here’s another great prediction by a fed head:

    “[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

    So far the fed heads have done a ‘bang up’ job of predicting market activity.

  4. patagonia commented on May 29

    It never ceases to amaze me that time after time little or no blame is placed on the foreign policy of the current administration.

  5. Plentiful Supply commented on May 29

    Bufflo Bob: “I wonder where these plentiful supplies are.”

    The plentiful supplies would be under Irak and Iran.

  6. Mich(^IXIC1881) commented on May 29

    The first chart is interesting. It seems too massaged so that all fits a nice linear trendline. Maybe I am ignorant on this, but wouldn’t you want to keep at least one of the axis (preferably X) linear and have the trendline show up as a up-curve?

    Anyway, in the notes it says “GDP in USD, adjusted for purchase power parity”.. What does it mean? I understand showing all GDPs translated/exchanged to USD, but what does it mean to “adjust for purchasing power parity”?

    The reason I am asking all these questions is because I can’t put my finger on it yet, but Luxembourg being where it is and US being on the trendline, I just feel there is more to this chart than meets the eye.

    OT: what is up with the term “chart porn”? porn means prostitute, shouldn’t the term be “chart potpourri” or “chart medley”?

    Am I asking too many questions today? :)

  7. Mich(^IXIC1881) commented on May 29

    OK, i found the wikipedia entry about ppp, so no reason to explain that one …but the other comments/questions are still there.

  8. Tom F. commented on May 29

    “It never ceases to amaze me that time after time little or no blame is placed on the foreign policy of the current administration.”

    Yeah, right. If your head ever clears up from that crack-induced stupor you seem to be laboring under maybe it will dawn on you that our foreign policy has nothing to do with it.

  9. muckdog commented on May 29

    Over the next 10 years, all of us will replace our cars. If we made those hybrids that got 45+ mpg, oil prices would fall dramatically.

  10. Michael commented on May 29

    Lets stand this one on its head: The Fed Boys say “As incomes rise, economies use more energy for transport, heating and cooling and producing goods and services.”

    That’s backwards.

    It should read:

    Economies grow by using more energy, as well as more energy more efficiently.

    Now with that in mind, and if one believes there is a practical limit to the efficiency which can be wrung out of each barrel of oil, a real economy producing real things can only grow so much with X amount of energy and then it stalls.

    Guess which major country in the world hasn’t been growing its oil consumption?

    And where does that ultimately lead?

    (By the way, it leads to the same destination that all countries will ultimately go to when indeed peak oil is a distant spot in our rear view mirrors as we head down the slope ever more quickly)

  11. Darkness commented on May 29

    If everyone ride-shared to work in their current car, it would happen tomorrow. But I think the price pain has to get a lot worse for Americans to deal with any kind of inconvenience.

    And to Plentiful Supply, Iran is considered post-peak. Couple that with their state-induced population explosion, heavily subsidized gas prices, and gasoline-powered electricity production and one can possibly comprehend why they are desperate for nuclear power. They already consume 25% of their oil production internally. Speaking of brilliantly moronic foreign policy: Iran’s main troubles are within. If we left off the rhetoric about bombs that just strengthens the extremists’ position some serious shifts in power would start happening there.

    Iraq is a different story. The decade-long embargo severely damaged their fields, perhaps irrevocably…but technology may change that potential recovery at a later date. Probably will, in fact, but you have to stick that source out in the future. Even barring the war disruption, you can’t count it short-term.

  12. alexd commented on May 29

    A big part of the promblem is how long it takes to make novel means to obtain oil from shale and similar. (of which the US and Canada have ample amounts).

    Google this then do the math

    A.F.S.K Hom Tov

    This technology when and if in place changes the dynamics. But it is not short term.

  13. wunsacon commented on May 29

    Tom F., maybe smoking crack would help you perceive the obvious, like:
    – Iraq producing half as much crude as before the US invasion,
    – the “US supply disruption premium” added to the oil price, thanks to the US’s covert attacks on Iran, overt threats to attack Iran, and toppling Chavez a few years ago.

    If smoking crack would help you, then by all means, dude. Have at it.

  14. HK_Vol commented on May 29

    “It’s simple. Iraq produces half as much oil from over 3 m bbl/day to 1 1/2 now.”

    Uh, no.
    Pre-war PEAK oil produced in Iraq was 2.5 million barrels per day (usually below that – remember the embargoes?). Iraq has been producing 2.4 million barrels per day for the past 6 months. Q4 2007 production was up 12.2% y-o-y and Q1 2008 production up 20.44% y-o-y.
    http://www.brookings.edu/saban/~/media/Files/Centers/Saban/Iraq%20Index/index.pdf
    p. 39

    Biggest declines y-o-y have been in Norway and Mexico. Mexico’s production was down 5% in Q4 2007 and down 8% in Q1 2008. Norway’s production was down 7.6% y-o-y in Q4 2007 and down over 8% in Q1 2008. (eia data)

  15. Mary commented on May 29

    why are my posts never published?

    ~~~

    BR: Why do you post under 10 different names? Lilguy, Mary, jake, Mel, treza, ~ Nona, Crazy Uncle, EB, Gareth G and more.

    How about this — send me an email from your work address, along with your name and phone number, and we can discuss reinstating your posting privileges.

  16. rickrude commented on May 29

    WOW, what a sell off in oil futures/oil stocks,
    while the inventories are dwindling.
    Has the US finally liberated itself from
    reliance on oil ??
    Has the US citizen taken up cycling ??

  17. schnauser commented on May 29

    the article mentions that oil is stuck in backwardation, but listening to a don coxe call last friday he specifically called attention to a move into contango that is happening now. the point is that the shape of the futures curve for commodities as a group can tell you something about participants inflation expectations. in the 70’s the curves all moved into contango as buying up futures far out on the curve was one of the few ways traders made money in a period of unexpectedly high inflation. (equities and bonds got killed). until recently, bernanke could point to backwardation as a sign that inflation expectations had not yet come unmoored. but this is now changing. cogent, yes, but far too sanguine. the recently released fed minutes seem to agree with me. if oil goes under 100 bucks, it would be a gift, and I would (will) buy with every penny I can muster.

  18. wunsacon commented on May 29

    HK_Vol, 20% YOY Q108 growth got Iraq back (close to) pre-war volumes? I believe your statement. But, that’s still consistent with the theme of years of missing output, which indeed contributed to the price rise over the past several years.

    Rickrude, by asking those obvious question(s), you make a good point, IMHO. We’ll see. Like schauser, I suspect a significant price drop will be a buying opportunity.

  19. s0mebody commented on May 30

    Oil getting down to $100 would mean the dollar has to show some strength (or a global recession). I don’t really see why the dollar would show strength considering the people that sell us the oil are among the bagholders for CDOs, MBSs, etc. We gave them money and then evaporated it for them. How nice.

    Also, we’ll never know the “true” impact of it, but the NYMEX raised margin requirements for oil futures effective at the close of Wednesday.

  20. The American Mind commented on May 30

    Economics Links05.30.08

    A Dallas Fed analysis of rising oil prices finds the weakening dollar accounting for a third of the price increase from 2003-2007. Their conclusion: What’s the bottom line? Absent supply disruptions, it will be difficult to sustain oil price…

  21. rickrude commented on May 30

    my portfolio took a big hit ….
    maybe the powers that be want to teach
    us commodity bulls a lesson.
    The weekly inventory report was rather
    puzzling

  22. rickrude commented on May 30

    “Absent supply disruptions, it will be difficult to sustain oil prices above $100 (a barrel, in 2008 dollars) over the next 10 years.”

    -Dallas Fed researchers Stephen Brown, Raghav Virmani and Richard Alm
    …………………………………
    Someone tell those researchers to mortgage their house and short the oil stocks to prove they believe in their own verbal.

  23. Marcus Aurelius commented on May 30

    The current maladministration has nothing to do with it?

    Let’s see – Cheney has a meting with the Oil Barons (the President’s own, personal cronies), and within 6 years the price of oil has tripled (at minimum), and oil industry profits have skyrocketed. Not to mention the real motives (the stated motives having been exposed as rank lies) for going into Iraq with an expeditionary/occupation force.

    Crack-smoking?

    Indeed.

  24. D. commented on May 30

    “Biggest declines y-o-y have been in Norway and Mexico. Mexico’s production was down 5% in Q4 2007 and down 8% in Q1 2008. Norway’s production was down 7.6% y-o-y in Q4 2007 and down over 8% in Q1 2008. (eia data)”

    ———————-

    If I were Norway, I’d reduce my oil production considering the current oil price.

    They have a huge wealth fund and probably don’t know where to invest! Buy US treasuries the the USA is trying to delfate or keep reserves in the ground to better spread wealth over time? They have so much money coming in that they hired a philosopher to determine the fair way to distribute the wealth and invest it.

    Furthermore, because money has been so easy, Norwegians have been showing signs of losing their work ethic… not good for the long term outcome of their country.

    That’s why I don’t believe that oil prices can stay too high for very long. The price has gone up too high too fast.

    The current economy was built with oil around 18$-20$ per barrel. In the 90s, when companies were choosing and planning projects, they were using 18-20$ oil adjusted for inflation. We’re at the tail end of the cycle… the surge of commodities is a sighn of this. Commodities are the stranglehold in the system.

    The world economy will tank, demand will drop, and the new cycle will start with oil prices closer to 50$-70$. 20$ oil might gone but there’s plenty of 50$-70 oil to drill. It always takes some time to bring it on stream.

  25. Josh commented on May 30

    Funny, I didn’t see the graph that showed supply vs demand regarding yesterday’s WSJ article about declining exports from oil producers or today’s article about Venezuela importing petroleum products.

    Or Sinopec, China’s largest refiner today pledging to increase its oil processing and halt oil exports in the third quarter.

    Nope, just Fed speak for trying to bring down inflation expectations.

  26. bof commented on May 31

    to Mich(^IXIC1881)

    About Luxembourg: it is just an anomaly, as usual. This one I can explain:
    due to their different tax policy – gas and banking – from their neighbors, and to their tiny size, they are just like a big gas station on top of a just as big? bigger? bank building in the heart of Europe.

    Trying to use them for an analysis GDP / Oil consumption is a nice way to inflate their statistical singularity…

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