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

From: gordon brown <Gordon.Brown@Colorado.EDU>
Date: Sat Dec 06 2008 - 14:15:26 EST

Dick and anyone else who wishes to respond to Glenn Morton's message that
I forwarded for him:

I think you should copy Glenn on your response (

Gordon Brown (ASA member)

On Sat, 6 Dec 2008, Dick Fischer wrote:

> Hi Gordon:
> Supply and demand set prices, it's true, but it is difficult to tell how
> much commodity prices are affected by hedging, pure speculation, and
> flight from currency. I would suspect that oil at $140+ was driven by
> forces far beyond the simple supply/demand curve. Now OPEC would like
> to pare down supply as a group, but the individual oil producing nations
> need to keep pumping to sustain their own individual cash flows. It's a
> scary time to be a commodities "investor." And it's a strange new world
> out there.
> Dick Fischer, GPA president
> Genesis Proclaimed Association
> "Finding Harmony in Bible, Science and History"
> -----Original Message-----
> From: [] On
> Behalf Of gordon brown
> Sent: Friday, December 05, 2008 10:04 PM
> To:
> Subject: RE: [asa] $4 gas is here to stay (fwd)
> ---------- Forwarded message ----------
> Date: Fri, 5 Dec 2008 21:00:57 -0600
> From: Glenn Morton <>
> To: "'John Burgeson (ASA member)'" <>,
> 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.
> 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."
> 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."
> 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
> 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
> 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
> 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
> 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.
> 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.
> And from
> ber=
> 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 Sat Dec 6 14:16:27 2008

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