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The Impact of OPEC on Climate Change

It is accepted that the Organization of the Petroleum Exporting Countries (OPEC) is a cartel that restrains oil production and keeps prices higher than they would otherwise be. Indeed, this is the premise behind the “OPEC Accountability Act of 2018” in the US Senate. This bill would address high and rising oil prices by trying to break OPEC. US pressure on OPEC — particularly on friendly governments such as Saudi Arabia that are seen as leaders in the organization — to “open the spigots” is not new. Nor is the control of oil exports by producing countries for political purposes. However, the environmental impact of high oil prices is only lightly considered.

There is little debate that motor vehicle industry changes to increase fuel efficiency were a historic and significant environmental advance. When OPEC action has led to increased prices, the quantity of oil in demand has fallen. This was starkly demonstrated when the Organization of Arab Petroleum Exporting Countries (OAPEC) — founded in 1968 — flexed its price-making muscles in the 1970s. Production cuts and an embargo against sale of oil to several countries raised the spot price of West Texas Intermediate (WTI) crude from $3.56 per barrel in mid-1973 to $4.31 later in the year to $10.11 in January. By the time President Jimmy Carter famously suggested we all turn down our thermostats, the price of WTI crude had reached $14.85 per barrel. The price finally peaked in mid-1980 at $39.50 — a 1000 percent increase in seven years. The price of gasoline more than tripled. In response, we got the Department of Energy, the Chevy Citation, and more fuel-efficient Japanese and German automobile imports.

More recently, the total vehicle miles traveled in the US fell in 2007 amid high oil prices and the Great Recession, and did not increase again until gas prices fell over the second half of 2014 ― from $3.69 per gallon to $2.12.

…click on the above link to read the rest of the article…

What Crashing Refining Margins Mean For Oil Markets

What Crashing Refining Margins Mean For Oil Markets

Refinery

Oil prices have plunged to one-year lows, but refiners in certain parts of the U.S. are not benefitting from cheaper crude.

According to new data from the EIA, refining margins for motor gasoline have fallen to five-year lows. “Flattening year-over-year growth in gasoline demand in the United States, combined with high levels of refinery output, have contributed to low or negative motor gasoline refining margins for refiners along the East and Gulf Coasts,” the EIA said on November 27. Gasoline refining margins have been declining since August.

In November, U.S. gasoline demand is expected to have averaged 9.2 million barrels per day (mb/d), down 262,000 bpd from a year earlier.

(Click to enlarge)

Meanwhile, prices for distillates, such as diesel, are much higher. The discrepancy is notable, and the markets for gasoline and distillates have diverged sharply this year. The forthcoming 2020 International Maritime Organization regulations on sulfur content in maritime fuels is set to push extremely dirty heavy fuel oil out of the mix for ship-owners. One of the most important replacements for fuel oil be diesel and gasoil – in other words, distillate demand is set to spike at the start of 2020. In anticipation of these regulations, distillate prices are seeing upward pressure.

With diesel prices on the rise and gasoline prices heading in the other direction, refiners might want to maximize diesel output. However, things aren’t that simple. As the EIA notes, for every barrel of crude oil processed in a refinery, it tends to yield twice as much gasoline as it does diesel. “As a result, although gasoline margins have been low recently, refiners cannot completely stop making gasoline in favor of other petroleum products, such as distillate,” the EIA said.

…click on the above link to read the rest of the article…

3 Things That Happened Just Before The Crisis Of 2008 That Are Happening Again Right Now

3 Things That Happened Just Before The Crisis Of 2008 That Are Happening Again Right Now

Real estate, oil and the employment numbers are all telling us the same thing, and that is really bad news for the U.S. economy.  It really does appear that economic activity is starting to slow down significantly, but just like in 2008 those that are running things don’t want to admit the reality of what we are facing.  Back then, Fed Chair Ben Bernanke insisted that the U.S. economy was not heading into a recession, and we later learned that a recession had already begun when he made that statement.  And as you will see at the end of this article, current Fed Chair Jerome Powell says that he is “very happy” with how the U.S. economy is performing, but he shouldn’t be so thrilled.  Signs of trouble are everywhere, and we just got several more pieces of troubling news.

Thanks to aggressive rate hikes by the Federal Reserve, the average rate on a 30 year mortgage is now up to about 4.8 percent.  Just like in 2008, that is killing the housing market and it has us on the precipice of another real estate meltdown.

And some of the markets that were once the hottest in the entire country are leading the way down.  For example, just check out what is happening in Manhattan

In the third quarter, the median price for a one-bedroom Manhattan home was $815,000, down 4% from the same period in 2017. The volume of sales fell 12.7%.

Of course things are even worse at the high end of the market.  Some Manhattan townhouses are selling for millions of dollars less than what they were originally listed for.

…click on the above link to read the rest of the article…

Foreword to Oil, Power and War

This month’s Museletter is my Foreword to Matthieu Auzanneau’s excellent new book Oil, Power, and War: A Dark History published by Chelsea Green Publishing. For information on where to get hold of a copy see the links at the end.

Foreword to Oil, Power and War

Come and listen to my story ’bout a man named Jed
A poor mountaineer barely kep’ his fam’ly fed
And then one day he was shootin’ at some food
And up through the ground come a-bubblin’ crude.
Oil, that is. Black gold. Texas tea.

Well the first thing you know old Jed’s a millionaire.
The kinfolk said, “Jed, move away from there.”
They said, “Californy is the place you ought to be,”
So they loaded up the truck and they moved to Beverly.
Hills, that is. Swimming pools. Movie stars.

(Paul Henning)

Perhaps the most instantly recallable verse on the subject of petroleum, the theme-song lyric to the hit 1960s television series “The Beverly Hillbillies” tells a tale of sudden wealth. It is a perfect touchstone for the real story of humanity’s experience with liquid hydrocarbons.

In the real story, riches consisted both of the billions accumulated by the great magnates of the petroleum industry—including John D. Rockefeller, J. Paul Getty, H. L. Hunt, and Charles and David Koch—and also the quickly growing economic output of industrial civilization once it came to be fueled by oil. This novel source of energy spawned entire new industries—notably the automotive, aviation, and plastics industries—while revolutionizing existing ones (agriculture, forestry, fishing, shipping, manufacturing, lubricants, chemicals, paints, dyes, cosmetics, road paving, and pharmaceuticals). It propelled humanity into an age of mobility and rising expectations.

…click on the above link to read the rest of the article…

For Whom is Peak Oil Coming? If you own a Diesel Car, it is Coming for you!

For Whom is Peak Oil Coming? If you own a Diesel Car, it is Coming for you!

At the beginning, the idea of “peak oil” seemed to be relatively uncomplicated: we would climb from one side and then go down the other side. But no, the story turned out to be devilishly complex. For one thing, there is no such a thing as “oil” intended as a combustible liquid — there are tens, perhaps hundreds, of varieties of the stuff: light, heavy, sour, sweet, shale, tight, dumbbell, and more. And each variety has its story, its peculiarities, its trajectory over time. Eventually, all the oil curves have to end to zero but, in the meantime, there is a lot of wiggling up and down that continues to take us by surprise. Mostly, we didn’t realize how rabidly the system would deny the physical reality of depletion, much preferring to “legislate scarcity” on the basis of pollution.

Here, Antonio Turiel writes a fascinating post telling us how the peak is coming “from below,” affecting first the heavy fraction of crude oil: diesel and fuel oil. That’s already causing enormous problems for the world’s transportation system, as well as for the owners of diesel cars, and the situation will become much more difficult in the near future. The light fraction, the one that produces gasoline, seems to be still immune from peaking, but that will come, too.(U.B.)

The Peak of Diesel Fuel: 2018 edition. 

By Antonio Turiel (translated from “The Oil Crash“)
Dear Readers,
Six years ago we commented on this same blog that, of all the fuels derived from oil, diesel was the one that would probably see its production decline first. 

…click on the above link to read the rest of the article…

Oil Sends A “Crude Warning”

Oil Sends A “Crude Warning”

As with many Americans, I am on the road with the family making the traditional holiday rounds. Of course, my family is more “The Griswolds” than “The Waltons. but even with all of the antics, comedy, and occasional drama, it is always an enjoyable time of the year.

However, I did wake up from my tryptophan-induced coma long enough to pen a few thoughts on the crash in crude oil and the message it is sending.

On Monday, I am publishing an article on the fallacy that “falling energy prices are an economic boost.” It isn’t, and we dig into all the reasons why in that article.

However, the short version is that oil prices are a reflection of supply and demand. Global demand has already been falling for the last several months and oil prices are now waking up that reality. More importantly, falling oil prices are going to put the Fed in a very tough position in the next couple of months as the expected surge in inflationary pressures, in order to justify higher rates, once again fails to appear. The chart below shows breakeven 5-year and 10-year inflation rates versus oil prices.

Oil prices also tend to lead the broad economic cycle as well. The chart below is one of the broadest measures of economic activity and is comprised of leading economic indicators, Fed regional manufacturing surveys, NFIB small business survey, ISM, CFNAI, and Chicago PMI.

Since most of the economic data we look at is trailing, and subject to heavy negative revisions, the collapse in oil prices suggests that coming economic reports will likely be materially weaker than currently expected.

Can I Have A Side Of Debt

But there is another enormous problem currently for the oil and gas sector currently at risk – the debt.

…click on the above link to read the rest of the article…

How to See the World with Different Eyes: Read “Oil, Power and War” by Matthieu Auzanneau

How to See the World with Different Eyes: Read “Oil, Power and War” by Matthieu Auzanneau

Folks, this book, Oil, Power, and War, is truly unbelievable: Matthieu Auzanneau did an enormous amount of work in digging out and reporting the whole story of the first half of the oil age, from its beginning all the way to the now, when we are reaching the global peak (and the fall may be much faster than the growth as Lucius Annaeus Seneca noted long ago).

I have to tell you, after having studied oil depletion for some two decades and having written at least three books on it, I thought I knew something about oil. But this book amazed me with the number of things I had missed.

Just an example: did you know that British planes of the Battle of Britain, during WWII, had a higher octane fuel than the German ones? That was an important advantage for Britain: a few extra octane points obtained by being able to start with a different oil source may have won the war for the allies!

Reading such a massive book will take you hours, but it is worth the effort. Afterward, you’ll see the world with different eyes. Congratulations to Matthieu Auzanneau and also to Chelsea Green for having translated it into English (something very unusual for the American book market)

Oil Crashes To One Year Low, Brent Below $60 As Saudis Pump Record Crude

Update:

  • U.S. CRUDE EXTENDS LOSSES, TRADES DOWN MORE THAN $4 A BARREL TO SESSION LOW OF $50.63 A BARREL
  • BRENT FALLS BELOW $60/BBL FOR FIRST TIME SINCE OCT. 2017

* * *

The first time oil tumbled two weeks ago when it crashed by 7%, Goldman – which has been telling its clients to keep buying crude all the way down from $80 – blamed it on “negative convexity” and other arcane reasons because the far simpler explanation, more supply, less demand, would be just too obvious for its brilliant strategists not to notice.

There was no “negative convexity” – Wall Street’s catch phrase to “”explain anything that can not be otherwise explained -overnight, when oil resumed its plunge, sliding to the lowest in a year and dropping below $51 after Saudi Arabia signaled its output reached a record high, while growing U.S. inventories stoked fresh concerns over a global supply glut.

WTI futures dropped as much as 5.4% from the Wednesday settlement (there was no Thanksgiving settlement price) and were set for a seventh weekly decline, dropping as low as $51.62/barrel the lowest price in one year.

Brent dropped below $60/barrel for the first time since October 2017.

And with Iranian export restrictions lifted after Trump provided most of its clients oil import waivers, traders are now focused on growing risks of a new glut of crude: Saudi Arabia’s oil minister said Thursday production from the world’s largest exporter climbed further this month after a surge in October, and U.S. stockpiles have risen for nine straight weeks.

Saudi Arabia is producing oil in excess of 10.7 million barrels a day, more than in recent years, Energy Minister Khalid Al-Falih said, giving the strongest indication yet that the kingdom has boosted output to record levels.

…click on the above link to read the rest of the article…

Does The U.S. Really Need Saudi Oil?

Does The U.S. Really Need Saudi Oil?

oil rigs

“Saudi Arabia — if we broke with them, I think your oil prices would go through the roof. I’ve kept them down,” President Trump told reporters on Tuesday. “They’ve helped me keep them down. Right now we have low oil prices, or relatively. I’d like to see it go down even lower — lower.”

Oil prices have indeed fallen significantly in recent weeks, and to be sure, Saudi Arabia has played a large role in that. Saudi production reportedly hit a record high 11 million barrels per day (mb/d) at times this month, and global inventories are rising once again.

But Riyadh is also clearly upset at being “duped” by Trump. Having been convinced by the Trump administration that Iran’s oil exports were heading to zero, or at least close to zero, Saudi Arabia ramped up supply to offset the losses.

The U.S. then surprised the market by issuing a bunch of waivers, allowing Iran to continue to export oil. Japan and South Korea may even resume buying oil from Iran in January, after cutting imports to zero in anticipation of sanctions.

Almost immediately after the waivers were issued, oil prices crashed. Saudi Arabia then promptly announced that it would cut production by 500,000 bpd in December, and the rumors of an OPEC+ cut really began to pick up.

Trump is happy about the slide in oil prices, but Saudi Arabia clearly isn’t. Saudi Arabia and its OPEC+ partners could soon take action to push prices back up. So, it isn’t clear that Washington and Riyadh have the same objectives, or that their tight relationship is resulting in lower oil prices.

…click on the above link to read the rest of the article…

Global Oil Price Deflation 2018 and Beyond

Global Oil Price Deflation 2018 and Beyond

Photo Source wongaboo | CC BY 2.0

One of the key characteristics of the 2008-09 crash and its aftermath (i.e. chronic slow recovery in US and double and triple dip recessions in Europe and Japan) was a significant deflation in prices of global oil. After attaining well over $100 a barrel in 2007-08, crude oil prices plummeted, hitting a low of only $27 a barrel in January 2016. They slowly but steadily rose again in 2016-17 and peaked at about $80 a barrel this past summer 2018. Now the retreat has started once again, falling to a low of $55 in October and remain around $56 today, likely to fall further in 2019 now that Japan and Europe appear entering yet another recession and US growth almost certainly slowing significantly in 2019. With the potential for a US recession rising in late 2019 oil price deflation may continue into the near future. What will this mean for the global and US economies?

The critical question is what is the relationship between global oil price deflation, financial instability and crises, and recession–something mainstream economists don’t understand very well? Is the current rapid retreat of oil prices since August 2018 an indicator of more fundamental forces underway in the global and US economy? Will oil price deflation exacerbate, or even accelerate, the drift toward recession globally now underway? What about financial asset markets stability in general? What can be learned from the 2008 through 2015 experience?

In my 2016 book, ‘Systemic Fragility in the Global Economy’ and its chapter on deflation’s role in crises, I explained that oil is not just a commodity but, since the 1990s, has functioned as an important financial asset whose price affects other forms of financial assets (stocks, bonds, derivatives, currencies, etc.).

…click on the above link to read the rest of the article…

“The Outlook For The Global Economy Has Deteriorated”: Oil, Copper And Lumber Are All Telling Us The Next Economic Downturn Is Here

“The Outlook For The Global Economy Has Deteriorated”: Oil, Copper And Lumber Are All Telling Us The Next Economic Downturn Is Here

Oil, copper and lumber are all telling us the exact same thing, and it isn’t good news for the global economy.  When economic activity is booming, demand for commodities such as oil, copper and lumber goes up and that generally causes prices to rise.  But when economic activity is slowing down, demand for such commodities falls and that generally causes prices to decline.  In recent weeks, we have witnessed a decline in commodity prices unlike anything that we have witnessed in years, and many are concerned that this is a very clear indication that hard times are ahead for the global economy.

Let’s talk about oil first.  The price of oil peaked in early October, but since that time it has fallen more than 25 percent, and the IEA is warning of “relatively weak” demand out of Asia and Europe

The International Energy Agency said on Wednesday that while US demand for oil has been “very robust,” demand in Europe and developed Asian countries “continues to be relatively weak.” The IEA also warned of a “slowdown” in demand in developing nations such as India, Brazil and Argentina caused by high oil prices, weak currencies and deteriorating economic activity.

“The outlook for the global economy has deteriorated,” the IEA wrote.

Meanwhile, the price of copper has been declining for quite some time now.  The price of copper also fell substantially just before the last recession, and many analysts are pointing out that “Dr. Copper” is now waving a red flag once again

The message of weakening demand on the oil front was reinforced by the falling price of copper.

…click on the above link to read the rest of the article…

Sino-Russian interdependence will be based on oil

Sino-Russian interdependence will be based on oil

Although Beijing is Moscow’s largest trading partner, while Russia only ranks in the second ten among China’s importers, the Kremlin is strategically the most important contractor because it supplies the most desirable product – oil – and Chinese demand for this raw material is growing. It appears that an increase in Russian oil exports to China will be at the expense of European consumers.

Chinese oil production has been falling since 2015, and yet enormous infrastructure investments and huge strategic petroleum reserves (SPR) boost the demand for it. No wonder then that in 2017, Beijing became the largest importer of crude oil, overtaking the United States. Currently, China’s consumption of product is approaching 13 million barrels per day. In the March Gefira we predicted that the PRC will have become the largest consumer of this raw material by 2025, accounting for 18-20% of the global consumption.1)And Russia has an important role to play because already in 2016 it became China’s most important oil supplier, replacing Saudi Arabia.

China has been buying more and more Russian oil in the last decade, even though the Kremlin does not increase its export volume, which is around 5 million barrels per day. In 2009, countries such as Poland and the Netherlands imported more Russian crude oil than Beijing, but in 2015 they were overtaken by China, which in 2017 had an over 20% share in the Russian exports of this raw material.

In recent years, an increase in the Sino-Russian trade balance has been noticeable. While a decade ago, the total turnover was less than 45 billion USD, in the last year this result was almost twice as high: 84 billion USD. During the November meeting of the prime ministers of both countries, it was announced that the target would be to reach the level of 200 billion USD, with the energy industry, mainly oil and gas, being the main factor in the balance sheet growth.2)

…click on the above link to read the rest of the article…

A Financial Professional’s Perspective

ShedConnect.com

A Financial Professional’s Perspective

What’s the current market volatility signalling?

Given the recent volatile gyrations of the markets, we thought it an opportune time ask a full-time financial advisory firm whom we respect for their take on the current environment.

As most PeakProsperity.com readers are aware, we highly advise investors to work in concert with a professional financial advisor whose strategy takes into account the “Three E” macro risks highlighted in our foundational series, The Crash Course.

If folks experience difficulty finding such a professional, we refer them to Peak Prosperity’s endorsed financial advisor: New Harbor Financial. The folks at New Harbor have been mindful of our analysis — as well as that of other experts we admire, such as John Hussman — for over a decade now.

We aked them for their latest evaluation of the current situation in the markets, how they’re positioned right now, and what guidance they’re offering to their clients.

Here’s what they have to say:

Environment

Risk in global stock markets is exceedingly high at the present time in our opinion. Much of the work that we do in evaluating risk levels in the stock market at any given time is derived from valuations, and other key market metrics like stock market breadth, sentiment, and technicals.  Valuations, measured the way that we think they should be, have never been higher. Both the cyclically adjusted price earnings (CAPE) ratio developed by Robert Shiller, and the margin-adjusted CAPE, as developed by John Hussman, are at or near historic extremes.  Valuations cannot be used to precisely time the short-term movements of stock indices, but over the long-term of 5 to 10 years or more, valuations have a very high correlation to actual realized returns over those timeframes.

…click on the above link to read the rest of the article…

Oil Rallies On Report OPEC+ Will Do “Whatever It Takes”, May Cut By 1.4MM Barrels

One day after Saudi Arabia revealed that it had not complied with its production quota in October for the first time since OPEC’s November 2016 meeting in Vienna, Reuters sent oil prices into the green with a report that OPEC and its partners were discussing a proposal to cut oil output by up to 1.4 million barrels per day in 2019 to avoid a surplus that could tank prices.

Opec

Unnerved by oil’s record 12-day losing streak, OPEC and OPEC+ are again talking about cutting production just months after Saudi Arabia and Russia agreed to pump more. The group is set to meet on Dec. 6 to agree on its policy for 2019.

West Texas Intermediate futures rose as much as 1.4% to $56.49/bbl on New York Mercantile Exchange, erasing an earlier 1% decline and briefly sending prices into the green – though the rally soon faded and prices slumped back into the red. If oil settles higher on the day, it would break what has been a record losing streak for oil prices.

OPEC

Still, the gains didn’t hold, as the report noted that least one OPEC member (Iran) still needed to be convinced to support the plan.

A supply cut of up to 1.4 million bpd was one of the options discussed by energy ministers from Saudi Arabia, non-OPEC Russia and other nations at a meeting in Abu Dhabi on Sunday, the sources said.

“I believe a cut of 1.4 million bpd is more reasonable than above it or below it,” one of the sources, who declined to be identified by name as the talks are confidential, said.

OPEC member Iran, as well as Russia, would need to be brought on board for the new plan, the sources added. One source said Iran does not want to have a production target in a new agreement as it is facing lower exports due to U.S. sanctions.

In comments that arrived after the report, OPEC chief Mohammed Barkindo revealed that he now believes the cartel is a central bank.

*OPEC CHIEF: OPEC+ WILL DO ‘WHATEVER IT TAKES’ FOR MARKET BALANCE

Matthieu Auzanneau’s: OIL, POWER, AND WAR: A Dark History

In Oil, Power, and War, French journalist Matthieu Auzanneau presents a comprehensive, provocative history of humankind’s relationship with oil. His account takes us from the first references to oil in ancient literature and scripture, to its current status as the lifeblood of the industrial economy, to its inevitable future demise as a usable energy source for our society. The book was first published in France in 2015 as Or noir (meaning “black gold”). This new edition is a nicely rendered English translation that extends the original narrative to the present.

The book uses the four seasons of the year as a metaphor for the life cycle of the modern oil era. The first season, spring, was preceded by a centuries-long “germination” in which all the factors that led to our current, utter reliance on fossil fuel slowly fell into place. For most of this time humankind’s use of oil remained small-scale, but it launched into an ever-upward spiral with the development of the first commercial oil wells during the late 1850s. Spring began in 1945, when America’s post-World War II economic boom propelled world oil consumption to meteoric new heights. Summer saw America lose her status as the world’s oil production powerhouse and become dependent on overseas oil. Today we’re 20 years into autumn, a season defined by the peaking of global oil extraction. We’re woefully unprepared for the winter we face, in which oil will begin its irreversible decline.

A Novel

The learning curve involved in humankind’s exploitation of oil was especially precipitous in the beginning. Auzanneau describes how those who produced the first oilfields did so at what today would be considered a reckless pace, not yet understanding that extracting the oil too quickly damages the reservoir, greatly reducing how much oil can ultimately be recovered.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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