Radical Noesis - Thinking outside the box

One of the things driving the "spike" in oil prices is the Goldman Sachs' report which predicts prices of over $100 a barrel. The report points to a variety of factors that will cause this "super spike" including decreasing reserves, a global depression, increasing demand, and the political instability in oil producing nations (read that in part as the Bush "democratization" plan).

Consumption is up and growing - in the United States, in China, and in India to name a few. Essentially, supply is not meeting demand. In a response, to the rising oil prices, OPEC is promising to increase production by 500,000 barrels a day. 500,000 a DAY!. While this may quell market fears and temporarily reduce prices, that is not guaranteed. Further, it will only increase the other situation - rapid depletion of oil reserves. In other words, it moves the time frame of "the end of oil" backward. Not like, we are having much luck predicting that given the issue of over-reporting of reserves.

That over-reporting, and the lack of finding replacement reserves is likely a major part of what is driving the dramatic increase at this point. Shell released a report the end of March that they had replaced less than half of the oil they had drilled. This follows on earlier reports by Shell (and other major companies) that they had over-reported their reserves by up to 30%.

Meanwhile, there is more shake up among the big oil companies as Chevron agrees to buy Unocal for $16.4 billion. This gives Chevron oil interests stretching from "from the waters off Indonesia and Myanmar to Congo and Brazil", and makes them the 5th largest US oil company.

One item in the US to watch out for is the refinery argument. There have been no new refineries built in the US for about 30 years (or so I have read). When gas prices started going up most recently (before the spike), the US news was saying the increase was because of formula transition from the winter fuel mix, and the lack of refinery capacity. The argument of why there had not been increased refinery capability added was NIMBY (not in my back yard). While there is likely some truth in that, it is also not a particularly wise investment to build new refinery capacity for a resource that is diminishing. However, there may be movement to build new refineries - particularly if Bush does another gimme and underwrites the cost with our tax dollars (or actually yet more deficit borrowing).

What is real is that gas prices are jumping and other prices are creeping up. Market speculation is driving the spike, but there may be a realization there that there is less oil that assumed. Goldman Sachs, regardless of the double speak of their report, is pointing towards a global economic recession. That seems like a safe call given everything we know. It also means that it is unlikely that another 1/2 million barrels a day from OPEC is likely to significantly drive prices back down. We'll see.