RE: [asa] $4 gas is here to stay (fwd)

From: gordon brown <Gordon.Brown@Colorado.EDU>
Date: Fri Dec 05 2008 - 22:03:47 EST

---------- Forwarded message ----------
Date: Fri, 5 Dec 2008 21:00:57 -0600
From: Glenn Morton <glennmorton@entouch.net>
To: "'John Burgeson (ASA member)'" <hossradbourne@gmail.com>,
     Gordon.Brown@colorado.edu
Subject: RE: [asa] $4 gas is here to stay

  Gordon, You can post this reply from me. Burgy, if he doesn't you can do
it.

In July, I saw that the demand for oil was dropping like a rock. I sold out
all my oil investments and then after it had fallen by 30%, I thought it was
safe to buy back in. Boy was I wrong.

Here is what is happening. The world has NOT found a sudden new supply of
oil. The GDPs of the world are plummeting like birds shot out of the sky.
For every 10% drop in GDP, oil consumption drops 5 %. That is what the Wall
Street Journal says. If that is true, we have dropped 5% in oil
consumption. The general feeling is that there is a 2 million bbl/day over
supply. This is a measure of how little economic activity is going on; it is
not a statement on peak oil

Russia, the world's largest oil producer is now in permanent decline

"Today the markets know that Russia needs at least $1 trillion in investment
if it is to maintain, let alone increase, its oil production. Just five
years ago, output was increasing so fast -- energy giants Yukos and Sibneft
were posting annual production gains of 20% -- that even the Saudis were
worried about their own global dominance. But in the past year Russian oil
production has started to wane. Leonid Fedun, a top official at Lukoil,
Russia's No. 2 oil producer, admitted back in April that national output had
peaked and was unlikely to return to 2007 levels "in my lifetime" and that
"the period of intense oil production [growth] is over." Without foreign
money and expertise to extract offshore oil and prolong the lifespan of
existing wells, Russian production will fall dramatically."
  Roger Howard, An Ode to Oil, Wall Street Journal, Nov 29, 2008, p. W2

I would post pictures, but the antiquated asa email list doesn't allow that,
but every economic indicator is really bad.

"The Economic Cycle Research Institute's Weekly Leading Index, a compilation
of such bleeding-edge indicators that has in recent decades been a good
gauge of economic turning points, is still sinking. Last week its annualized
growth rate dropped to the lowest level in its history, dating back to
1949." Mark Gongloff, "'Beige' Report Should Show Even More Red," Wall
Street Journal, Dec 3, 2000, C3

In the 1990 recession the index fell 10 percent. After 911, it fell 11
percent. Today it is down 30%.
I have a chart of the median sector of the economy ( a measure some use to
monitor the economy). Compared with previous declines, this one is the
mother of them.

Note how much the US manufacturing and service sectors have fallen, in the
past 2 months.
http://www.dallasfed.org/research/update-us/2008/images/0807c2.gif

The page that gif is on says
"In response to the downgraded economic outlook, commodity prices-oil in
particular-have tumbled (Chart 5). Import price inflation, even when
petroleum is excluded, has slowed and price pressures across the board have
all but disappeared." http://www.dallasfed.org/research/update-us/

A BusinessWeek article just published says that the 3rd qtr US GDP fell 0.9%
and the 4th qtr is expected to decline 1%. This compares with previous
declines in previous recessions. They sound optimistic when they say that.
But what they don't seem to acknowledge the incredible drop in activity. US
Factory orders have dropped 5% in October;German factory orders dropped
6.1%. Car sales have frozen up--who needs a new car when they might not have
a job? Taiwan's export orders dropped 12%.

Consider China's construction. China was the driver behind the rise in many
of the commodity prices

" According to Macquarie Securities, China's construction industry, which
accounts for a quarter of fixed asset investment and employs 77 million
workers, is expected to contract by 30 percent in 2009, casting doubt on
whether China will continue to grow at all. Chief economist for Hong
Kong-based Asianomics, Jim Walker, told Bloomberg that China's growth in
2009 could be down to the zero to 4 percent range, with a 30 percent chance
of negative growth."
http://www.wsws.org/articles/2008/dec2008/chin-d05.shtml

Yeah, that is a socialist source.

So, what will happen? I am hanging on to my oil investments, because I
know how this works. As prices plummet, exploration is stopped, projects are
delayed and fields are shut down. Here are some of the news reports

The credit crunch is going to do some really awful things to the price of
oil in the not too distant future. Projects by the bucketload are being
delayed or dropped. Here are some of those projects. The first is an example
of a Gulf of Mexico field that simply died because of the low price.

"Callon Petroleum Company has decided to suspend operations under way to
develop the Entrada Field located on the Garden Banks 782 Block in the
deepwater of the Gulf of Mexico. The Entrada Field is owned 50% by a
subsidiary of Callon, which is the operator."

"The Company drilled the GB 782 # 3 well to a total depth of 21,100 feet and
the well needs to be sidetracked back toward the original GB 782 #2
discovery well. The significantly higher than expected costs incurred to
date and commodity prices which have declined to less than half of their
levels when development operations began in mid-2008, has resulted in a
serious decline in project economics. After reviewing all of these factors,
the Company has decided to suspend development efforts. Under current
economic conditions the Company does not anticipate returning to the
project." Callon Suspends Development on Entrada Field in GOM
Callon Petroleum Company Friday, November 28, 2008
http://www.rigzone.com/news/article.asp?a_id=70083

Some of the contractors are going to have hard times, meaning they will lay
people off and the expertise wont be there to find the oil in the future.

"Over the past few weeks, several major oil producers have announced delays
of important projects, or have scaled back their expansion plans in the hope
that market conditions will help them secure better deals from contractors.

State-owned Saudi Arabian Oil Co. (SOI.YY), or Saudi Aramco, the world's
largest oil company by production, for example, recently reviewed its
900,000-barrel-a-day offshore Manifa oil field expansion. This decision
could affect firms like Halliburton Co. (HAL), the world's second-largest
oilfield services company, which won a large three-year contract for that
project.

On Nov. 6, ConocoPhillips (COP), the third-largest U.S energy company by
market value, and Saudi Aramco officially halted bidding on its
400,000-barrel-a-day refinery at the Yanbu Industrial City, in Saudi Arabia.
Both companies cited the uncertainty of the financial markets as the driver
of the decision, but analysts saw the delay as a move by both firms to wait
and take advantage of lower operating costs.

Royal Dutch Shell PLC (RDSA) also recently said the company would defer to
an unspecified date a decision on whether to expand its Canadian oil-sands
operation. It said the delay will give overheated costs there time to
moderate." Isabel Ordonez "Lower Oil Prices Give Power to Producers in
Contract Talks " Dow Jones Newswire November 20, 2008
http://www.rigzone.com/news/article.asp?a_id=69842

The Sauds are shelving plans to bring new fields on line--no money.

"Saudi Arabian Oil Co., the world's largest oil company by production,
shelved plans to upgrade its aging onshore Dammam oil field at a cost of
$1.2 billion amid falling oil prices, people familiar with the plans said.

In a statement emailed on Nov. 22, Saudi Aramco informed companies
interested in developing the field that the "requisition has been canceled,"
the people told Zawya Dow Jones." Oliver Klaus, "Saudi Aramco Shelves Plans
for $1.2B Dammam Oil Project" Dow Jones News Monday, November 24, 2008
http://www.rigzone.com/news/article.asp?a_id=69907

Below I asterisked the statement about peak oil may be now because of the
credit crisis. Once we get behind the decline curve, we will have a huge
problem of catching up.

"In Saudi Arabia, Saudi Aramco is reportedly renegotiating contracts on its
$15 billion Manifa project that was originally scheduled to add 900,000
barrels per day in oil production in mid-2011. This action is intended to
reduce Saudi Aramco costs, but will increase the likelihood of bankruptcy of
its subcontractors and will delay the start date of new production.
. . .
In the UK, plans had been made for additional underground natural gas
storage beneath Portland, Dorset, so as to have more ability to store extra
gas for winter and prevent price spikes. This has now been suspended, for
lack of funding."

.
"The net impact of all these issues is that oil production has already
started to decline. Plans for future investment have been cut back, so it is
likely that oil production will stay low for quite some time. ***Even if
prices should rebound, lack of credit will limit the ability of the oil
supply chain to increase production. For these reasons, world oil production
is likely past its peak."***
Gail the Actuary, "Impact of Credit Crisis on the Energy Industry - Where
Are We Now?" The Oil Drum Dec 1, 2008 www.theoildrum.com

Don't count on more oil in the near term. Spending is way down.

LAUREN KRUGEL, "Oilpatch spending plans soften" Dec 1, 2008

Petro-Canada said last month that it and its partners in the Fort Hills
oilsands development would push a decision on the mining portion of the
project into next year and defer its accompanying upgrader indefinitely. It
will flesh out the details on Dec. 11.

. . .
Canadian Natural Resources (TSX: CNQ) said last month it would spend about
half as much next year as it did in 2008, mostly due to construction
wrapping up at its Horizon oilsands project.
Half of CNQ's $4-billion 2009 budget has already been committed and the rest
is flexible and can be deferred if necessary.
In October, Suncor Energy Inc. (TSX: SU) cut its capital spending target for
2009 by a third to $6 billion, with most of that focused on its Voyageur
oilsands expansion.
Talisman Energy Inc. (TSX: TLM), which earlier this year streamlined its
worldwide operations into a handful of core areas, has said it would likely
slow down its spending in 2009, but has not yet provided details.

So, what does this all mean? The world loses 5.6 million bbl/day of
production each year simply due to pressure decline in the wells. That means
we need to put online 5.6 million bbl/day of new production just to stay
even. If the world is over supplied now by 2 million bbl/day, that means
that in a year or so with less activity, the supply and demand will be back
in balance and the price will skyrocket again. The previous oil price
spike found the weakest point in the economy--the mortgages. When it spikes
again, it will find the second weakest part of the economy and cause another
crash.

I would point out that I have written about oil prices swinging wildly as we
go into the future. It is what happened at the very beginning of the oil
industry. This article was written for The Oil Drum last year. It predicted
that there would be price crashes. This is merely the first of several as
oil scarcity drives the economy into the dirt.
http://home.entouch.net/dmd/oilecon.htm

I would also point people to an interview a friend just sent me about a guy
who has been mocked but was right about subprime and the current market
collapse. He sees worse times ahead--save for energy--see the last question
in this interview. http://www.forbes.com/feeds/ap/2008/12/03/ap5775256.html

And from
http://www.reuters.com/article/marketsNews/idUSN0441115020081204?pageNumber=
2&virtualBrandChannel=0

Oct 16--a solar panel manufacturer said it won't build a new plant
200 + US oil rigs will be idled in the 4th quarter--the decline rates on
onshore wells is tremendous so this will quickly cause a reduction in
supply.
Nexen, Value Creation Group, Shell,Suncor have all have delayed upgrades in
the tar sands--the estimated break even for Canadian oil sands is $90/bbl
Oct 29, a Thai refiner has delayed a $1.5 billion upgrade to their refinery
Nov 4, BG delays an upgrade to Karachaganak field which would have added 40
million bbls per year of additional oil
Nov 5, Sunoco stops an upgrade to the Tulsa Oklahoma Refinery
Nov 6, Conoco and Saudi Aramco deep six an upgrade to a Saudi Refinery
Nov 12 Harvest Energy delays a 1.2 billion dollar Canadian upgrade to a
refinery. It would have boosted output by 190,000 BBL/day

Nov 17, BP says it will close its Australian solar panel plant --These
things make no money at $60/bbl and even less at $44.

And there are others. Oil is coming back. I am not sure about the economy.
While many may have thought me nuts to buy a ranch (even my family thought I
was a bit wacked out), the fact is that the high oil prices were the
trigger and the mortgages were the bullet in the chamber. As oil prices went
up, people suddenly couldn't afford their high spending ways. They couldn't
go out to eat, they also couldn't afford their mortgages and still buy the
gas to go to work. Up where my ranch is, a poor part of Texas, last summer
an electrical worker told me that there were lots of people getting their
electricity turned off because they had to choose between that and buying
gas to go to work. Fun times are ahead. My advice? Get out of debt, buy a
ranch.

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Received on Fri Dec 5 22:04:16 2008

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