Current Events

Join us as we watch the crisis unfolding

March 6th, 2008

The New York Times

Monday, March 3, apparently began with a tremendous boost. Internet reports, attributed to Jed Mouawad in the New York Times, contained this passage:

"Still, today's market climate is markedly different from the energy crises of the 1970s and 1980s. These were brought about by sudden interruptions in oil supplies, like the 1973 Arab oil embargo, the Iranian revolution of 1979, or the outbreak of war between Iraq and Iran in 1980. Since 2000, oil prices have more than quadrupled as strong growth in demand from the United States and Asia outstripped the ability of oil producers to increase their output."

Hot dawg! The Times in general, and Mouawad in particular, indicate that this one is different. This time, the wolf really is at the door. I sent Mouawad a congratulatory e-mail and welcomed him to membership in the Hubbert Society. I reacted too quickly.

Why is this oil crisis different from all other oil crises?

The printed copy New York Times that appeared in my driveway Tuesday morning had a subtle but important difference. The last sentence was separated and moved to a location three paragraphs earlier. It lost the connection: "Why is this oil crisis different from all other oil crises?"

Further, the Times story stated, "Global oil consumption is still expected to increase by 1.4 million barrels a day this year, driven by demand in China and the Middle East." According to the Energy Information Agency, world oil production is now down a million barrels per day from the 2005 peak www.eia.doe.gov/ipm/t11d.xls (MS Excel spreadsheet). Where does Mouawad think he's going to find an additional 1.4 million daily barrels?

Storage in those big oil tanks that you see near oil refineries amounts to a world capacity of about one billion barrels. It seems like a lot, but world production is roughly 75 million barrels per day. Storage amounts to a two-week supply. Day traders in oil watch closely the ups and downs of storage. For those of us who try to qualify for the capital gains tax, production and consumption are identical. Exactly identical.

Should I retract my offer to appoint Mouawad a member of the Hubbert Society? Does the Hubbert Society encourage closet membership? The Hubbert Society doesn't actually exist, but we know who's wearing the white hats.

The "hook" for Mouawad's story was the momentary price of oil ($103.95) which is above the inflation-corrected peak price of May 1980. As I have complained before, correcting oil prices for inflation is a highly circular exercise. Energy prices are a major cause of inflation. (At a Shell station in San Diego this evening, regular gasoline was $3.79 per gallon.)

The OPEC meeting today, March 5, left their production quotas unchanged. My guess was that they would have announced a small reduction. It wouldn't have been to support the oil price, it would have been a coverup for the gradual reduction in OPEC production capacity. However, OPEC is walking a thin line in between maximizing their income and being blamed for initiating the Second Great Depression. While the OPEC delegates meet without changing anything, I imagine them telling stories about the Good Old Days when Sheik Yamani could make the world tremble.

When Mouawad, the New York Times, and the world in general finally agree that peak oil has happened, I'll lose my financial advantage in holding stocks in oil companies. As Burt Malkiel pointed out in A Random Walk Down Wall Street, a good strategy fails when too many people use it. I'll sell my oil stocks to the Hubbert newbies and try something like call options on potato futures.

A reader pointed out that my previous Current Events entry incorrectly named the Federal Reserve Board as an innovation prompted by the First Great Depression. The 1930s New Deal programs that are still in place include the Federal Deposit Insurance Corporation, the Federal Housing Administration, the Securities and Exchange Commission, and Social Security. My apologies, during the early 1930s I was wearing diapers.