Thanksgiving stuff(ing)...

 I suppose this is a kind of Junkbox, but specifically targeted to today.

First, if you're struggling for things to list when your turn at the table to be thankful comes around remember these 5 economic trends. Dibs in this one:

5) Debt burdens keep on falling. The ratio of Americans' income going to meet debt obligations has plummeted in recent years, as consumers have both reduced debt burdens (by paying them down and in some cases defaulting) and benefited from lower interest rates. The debt service ratio was only 9.89 percent in the second quarter, hovering near an all-time low of 9.84 percent from late 2012 (the data go back to 1980). That ratio was 13.5 percent in the third quarter of 2007, before the crisis. Congratulations, America! You're making progress in getting your household debts to a more manageable level.

Even though I have been following economic numbers, this reminder was a pick-me-up. Maybe it's because they can't pack enough doom-mongering in farm publications right now.

To be fair, I am convinced one thing about this ag downturn that will be unique for my lifetime at least is remarkably low odds for a massive government bailout, like the infamous extra AMTA payment.

This conviction is certainly coloring my plans for the next few years, which have proven to be a little trickier to map out with dual goals of enough retirement income and a manageable debt for Aaron. Looking at the spreadsheets, I really needed just one more year of $5+ corn to arrange the numbers in a smooth, trouble-free path. 

But since when has my ability to plan been that accurate? Like many of my generation, working past 66 probably won't kill me. 

I do think that high costs will force down rents faster than experts think. In short, DuPont and Monsanto will eat landowners lunch as well as operators. Rents are, in the end, residual, and with lenders poised to say "no" much earlier, 2014 rents could show a significant drop.

*****

I filled up for $3.09 recently (see above).  I could get used to this. But I wasn't aware of one of the factors in the price drop.

Many Gulf Coast refiners are taking advantage of the boom in shale-oil drilling in the Midwest and producing ever more diesel for export to Europe and Asia. That's a lucrative business. And that refining process also produces more gasoline for domestic consumption. So, as The Wall Street Journal reports, refiners can still make a profit from exporting diesel abroad even if they're creating a glut of gasoline here at home. [More]

I also think it might be part of refiner and oil producer plans to do what they can to keep prices low if the EPA goes through with the mandate revision. Nothing would cement the idea of ethanol making gas prices higher than gas selling with a "2" in front of it right after the mandate was eased, IMHO.

Nonetheless, thanks Europe!

*****

I could do this if I wanted to...

*****

Meanwhile, back in Africa, the lack of industrialization to provide jobs is threatened by an emerging pattern of premature deindustrialization. 

The economic, social, and political consequences of premature deindustrialization have yet to be analyzed in full. On the economic front, it is clear that early deindustrialization impedes growth and delays convergence with the advanced economies. Manufacturing industries are what I have called “escalator industries”: labor productivity in manufacturing has a tendency to converge to the frontier, even in economies where policies, institutions, and geography conspire to retard progress in other sectors of the economy.That is why rapid growth historically has always been associated with industrialization (except for a handful of small countries with large natural-resource endowments). Less room for industrialization will almost certainly mean fewer growth miracles in the future. [More]

There simply will not be as many "factory jobs" anywhere in the world, let alone Africa. This reinforces my belief that forcing industrial agriculture into sub-Saharan Africa would be devastating to local economies even as they make money for investors, since  our type of ag is very labor-light (and getting more so).

*****

Go watch the game. Or The Wrath of Khan.

Further into irrelevance...  

I was getting ready for fall speeches, now that harvest is finished. (Whew!) One of the curious trends I will be sharing is gasoline consumption.  In short we may be talking Peak Gas(oline).

 Of course, note that the scale makes the "hump" more dramatic than if it was based at zero, but still, it seems to me the advances in engines and stricter mileage requirements are having a big impact.

Now add in this unexpected trend:

 

(Apologies for the lack of source links - I forgot to load them with the pics)

In short, even with a recovery clearly in progress, we may not see gasoline consumption rise back to former intensity.  in fact, with even a few more CNG vehicles, although facing an uphill battle for acceptance, demand for gas could be dull at best.

That has big implications for the RFS. Also the upcoming changes in the RFS focused on biodiesel. Hence when Scott and Darrel did the math on the ethanol impact for corn, the arrived at a unexpected place, IMHO.

The biofuels era that began in 2006 helped propel corn and other crop prices to a new higher level that has been sustained for nearly six years. One might be tempted to conclude that this new era is coming to an end as corn consumption for ethanol levels out and corn production begins to catch up. Instead, it actually appears that the new era of higher crop prices could be extended well into the future as a result of the RFS for advanced biofuels that in all likelihood can only be met with a rapid expansion in biodiesel production. To gain some perspective on the potential size of this expansion, consider our projection of 3.113 billion gallons of biodiesel production in 2015. This would require about 23.5 billion pounds of feedstock when total consumption of fats and oils in the U.S. currently totals about 28 billion pounds annually. Consumption of tallow and grease, another biodiesel feedstock, is thought to be near 10 billion pounds per year. At the projected level for 2015, biodiesel would account for over 60 percent of fats and oils consumption from all sources. This compares to about 20 percent in in 2012. The new price era, then, would not be extended by rising corn demand, but by rising vegetable oil demand. Whether this scenario actually is realized depends crucially on the evolution of biofuels policy here in the U.S. and energy policies in Brazil. We will be monitoring these issues closely in the future. [More]

I just don't see how policy makers will let fuels compete this directly for food - unlike corn, which is largely for feed, we're talking human consumption of vegetable oils. Demand for same is strong, driven by oil-deficit nations beginning to upgrade diets. No longer is oil a drag on oil-commodity prices - it is often the driver these days.

The persistent assumption - and I admit it still seems reasonable - is corn production will resume what we thought was a permanent acceleration of yield, thanks to biotech, better tools and our immodest brilliance. Climate change may brutally revise those expectations for many of us, but it will take a couple more clunker national yields before we will address it, I would venture.

The battle over the ethanol mandate could replace Afghanistan as our longest war. And it may be not so much resolved as just quietly fizzling out. Oddly, perhaps the same as Afghanistan ends. Maybe the longer the conflict, the fuzzier the end.

Mispeak Oil...  

A funny thing happened while we were looking for Peak Oil. It kinda went away. 

Maybe.

Sorta.

At any rate, debate has been rekindled by three interesting articles, all of which are serious reading.

First, the highly acclaimed environmental journalist for the Financial Times, George Monbiot, throws in the all-natural towel:

The facts have changed, now we must change too. For the past 10 years an unlikely coalition of geologists, oil drillers, bankers, military strategists and environmentalists has been warning that peak oil – the decline of global supplies – is just around the corner. We had some strong reasons for doing so: production had slowed, the price had risen sharply, depletion was widespread and appeared to be escalating. The first of the great resource crunches seemed about to strike.
Among environmentalists it was never clear, even to ourselves, whether or not we wanted it to happen. It had the potential both to shock the world into economic transformation, averting future catastrophes, and to generate catastrophes of its own, including a shift into even more damaging technologies, such as biofuels and petrol made from coal. Even so, peak oil was a powerful lever. Governments, businesses and voters who seemed impervious to the moral case for cutting the use of fossil fuels might, we hoped, respond to the economic case.
Some of us made vague predictions, others were more specific. In all cases we were wrong. In 1975 MK Hubbert, a geoscientist working for Shell who had correctly predicted the decline in US oil production, suggested that global supplies could peak in 1995. In 1997 the petroleum geologist Colin Campbell estimated that it would happen before 2010. In 2003 the geophysicist Kenneth Deffeyes said he was "99% confident" that peak oil would occur in 2004. In 2004, the Texas tycoon T Boone Pickens predicted that "never again will we pump more than 82m barrels" per day of liquid fuels. (Average daily supply in May 2012 was 91m.) In 2005 the investment banker Matthew Simmons maintained that "Saudi Arabia … cannot materially grow its oil production". (Since then its output has risen from 9m barrels a day to 10m, and it has another 1.5m in spare capacity.)
Peak oil hasn't happened, and it's unlikely to happen for a very long time. [More worth reading]

The tipping point for him was a report by Leanardo Maugueri of Harvard (funded by BP, ahem).

But wait - there seems to be some doubt about Maugueri's numbers. In fact, considerable doubt. A rigorous criticism was published by an equally respected science journalist, Chris Nelder.

To his credit, Maugeri acknowledges that his analysis “is subject to a significant margin of error, depending on several circumstances that extend beyond the risks in each project or country,” and he details numerous important caveats. And to the extent that he reveals the assumptions underpinning his forecast, his transparency is laudable. In the final analysis, however, it is insufficient. He fails to provide adequate justification that his assumptions, being widely divergent from most other industry estimates, are remotely realistic.
We must conclude that the key assumptions about reserve growth and its effect on decline rates in Maugeri’s report are muddled, speculative and unverifiable. And sprinkling those assertions with repeated declamations about how peak oil is a non-issue, insisting repeatedly that the only real constraints on his scenario have to do with political decisions and geopolitical risks, suggests that his report is more about grinding a political axe on behalf of the oil industry than offering a serious or transparent analysis. Finally we must note that Maugeri is well known for his hostility to peak oil, as is BP, which funded his report. After taking real-world risks, costs, and restrictions into account, the case for peak oil—which is about production rates, not production capacity or reserves—seems far more realistic. [More]

Finally, The Oil Drum, the blog for oil geeks, picks up the thread and adds the best comments to boot.

Summary Maugeri's analysis and conclusions are critically dependent upon the decline rates applied to existing and future fields, and yet he does not explicitly say what these decline rates will be. However, Maugeri’s assumptions can be derived from his Table 2, which projects gross and net capacity additions over the period to 2020. Doing so suggests he uses an average annual decline rate for all fields of 1.6% over this period, which is less than half of the IEA and CERA estimates for 2008 (4.1%/year and 4.5%/year respectively). The discrepancy is even greater since the IEA and other analysts project an increase in average decline rates over the 2011-20 period. If we replace Maugeri’s 1.6% decline rate assumption with the IEA estimate of 4.1%, the projected loss of production capacity over the period to 2020 increases from 11 mb/d to 26.5 mb/d. In turn, the projected global production capacity in 2020 reduces from 110.6 mb/d to 95.1mb/d (a reduction of 14%). Since average decline rates would be expected to increase over this period, this projection must be considered optimistic. [More]

While I think I'm trying to be impartial, I probably am carrying my own biases into this fray, but Sorrell's point about decline rates vs. depletion rates is abstruse but convincing for me.  I have never been fascinated with Peak Oil because I wasn't sure what it really meant in everyday terms. Clearly the US production boom has made it seem like there is no real problem in the immediate future (for us anyway).

But looking at actual output trends as the critics do, I can't swallow the enormous production increases predicted in the Maugueri report. The larger picture is the linkage to climate change. If we get better and better evidence that CO2 is an major and immediate problem, the amount of oil we can pump is merely a measure of how fast we can drastically alter the environment for the worse.

In fact, those numbers are really depressing. It is not rocket math either.

Which is exactly why this new number, 2,795 gigatons, is such a big deal. Think of two degrees Celsius as the legal drinking limit – equivalent to the 0.08 blood-alcohol level below which you might get away with driving home. The 565 gigatons is how many drinks you could have and still stay below that limit – the six beers, say, you might consume in an evening. And the 2,795 gigatons? That's the three 12-packs the fossil-fuel industry has on the table, already opened and ready to pour.
We have five times as much oil and coal and gas on the books as climate scientists think is safe to burn. We'd have to keep 80 percent of those reserves locked away underground to avoid that fate. Before we knew those numbers, our fate had been likely. Now, barring some massive intervention, it seems certain. [More]

While skeptics don't think the 2℃ is all that scary, more of us are growing uncomfortable with the 0.8℃ we've already managed to produce. Not to be a doomsayer, but I just don't see much happening until way too late. And given the current state of domestic and global policy debate, the first few decades will be spent assigning blame to win elections even if we do decide we're in trouble.

Not all pennies are the same...  

A truly curious economic research finding: we react differently to a gas price increase when it is caused by taxes than when it is simply supply/demand driven. In fact, we cut consumption more for a penny increase in taxes compared to a penny in intrinsic gas price.

That's from a new NBER working paper by Shanjun Li, Joshua Linn, and Erich Meuhlegger. As the authors note, this has some interesting implications. It suggests, first, that estimations of the revenue that can be raised from petrol tax increases that are based on elasticities with respect to petrol prices will overstate assumed revenue gains. On the other hand, it means that reductions in consumption driven by tax changes should be less painful than those driven by movements in the price of oil. If America is interested in cutting its dependence on oil, then weaning consumers off petrol via tax rises will be easier on the economy than simply letting market-price variation do the work.
The paper suggests that more work is needed to understand the causation, but they point toward one logical factor: consumers may be more likely to read tax changes as permanent. A household that observes what looks like a permanent increase in petrol costs due to tax rises will quickly adjust its behaviour to minimise the burden—by driving less or purchasing more efficient vehicles. The household may delay such action when market movements send prices up as it waits to see how persistent the change will be. That delay represents more profit for producers and more of a hit to other household consumption than we'd get with a straightforward tax hike. [More]

Regardless, I think we are learning we will cut consumption when the cost increases. In fact, between Boomers slowing down, young people driving less and later, and better cars we may surprise ourselves how low we can go.

On the other hand, that's not good news for volume based gas taxes, unless we raise them commensurately.

Baby, we are drilling...  

Once oil companies began including the full costs of sourcing in developing nations, the economics of producing at home, or at least countries with functioning democracies, looked a little better.

Now, in a sense, the choice has been made for them. Big onshore fields in the world's most prolific hydrocarbon provinces are increasingly the preserve of national oil companies, state-owned behemoths like Saudi Aramco and Russia's OAO Rosneft and OAO Gazprom. For foreign majors like Royal Dutch Shell PLC and BP PLC, their former heartlands in the Gulf sands are now largely off-limits.
Shut out of the Middle East, they have responded with a huge push into new areas, both geographic and technological. Over the past few decades, they have built vast plants to produce liquefied natural gas, or LNG. They have drilled for oil in ever-deeper waters, ever farther offshore. They have worked out how to squeeze oil from the tar sands of Alberta. And they have deployed technologies like hydraulic fracturing, or fracking, and horizontal drilling to produce gas from shale rock.
Wood Mackenzie, an oil consultancy in Edinburgh, says that more than half of the international oil companies' long-term capital investments are now going into these four "resource themes"—a huge shift, considering how marginal the companies once considered them.
There are also drawbacks to the new focus on nontraditional kinds of hydrocarbons. Environmentalists strongly oppose shale-gas extraction due to fears that fracking may contaminate water supplies, the oil-sands industry because it is energy-intensive and dirty, and deep-water drilling because of the risk of oil spills like last year's Gulf of Mexico disaster.
There are financial considerations, too. While conventional assets are relatively easy to develop and historically have offered good returns, projects in some more technically difficult sectors—like deep-water and LNG—typically take longer to bring on-stream, and are higher cost, meaning returns are lower.
But there is an upside for the majors. "The silver lining is the shape of the profile of these projects, which is different than conventional ones," says Simon Flowers, head of corporate analysis at Wood Mackenzie. LNG ventures, for example, can deliver contract levels of gas at a steady rate over 20 years. "So the returns may be lower, but overall you have a more dependable cash-flow stream," he says.
By pursuing these nontraditional fuels, the oil companies are committing themselves ever more deeply to the wealthy nations of the Organization for Economic Cooperation and Development. Wood Mackenzie says $1.7 trillion of future value for all the world's oil companies—52% of the total—is in North America, Europe and Australia. The consultancy has identified a "significant westward shift" in oil-industry investment, away from traditional areas like North Africa and the Middle East "towards the Brazilian offshore, deepwater oil in the Gulf of Mexico and West Africa and unconventional oil and gas in North America." And then there's Australia, far out east, "which is in the early stages of a spectacular growth phase." [More]

While I was impressed with the possibilities for domestic natural gas production, once again I was several beats behind the march away from the Mideast.

It would be ironic if after pouring enormous resources of every kind into that area, it becomes a auxiliary supplier for the US.

Meanwhile, the mismanagement of Russia's resource-based economy seems to have been noticed by its citizens.

First, political optics are particularly important in Russian politics. Mr. Putin has always promised stability, and this was based to a significant degree on his perceived invincibility and the power of deterrence that his rule, via the “power vertical” system, conveyed. There was a sense of inevitability to his policies, reinforced by the strength of both his personality and of the political machinery supporting him. Mr. Putin, therefore, looked to elections as in part a legitimizing ritual in a political order that – as it moved ever further away substantively from Mr. Medvedev’s declarations of fealty to democracy – has come to occupy an increasingly thin border between limited democracy and full authoritarian rule. Yet, with the regime’s invincibility now severely dented, critics and opponents will undoubtedly be emboldened in opposing government policies, challenging the pervasive corruption, and demanding a fairer distribution of incomes and resources at a time when Russia’s one-dimensional, resource-driven economy, is confronting growing challenges.
Second, Mr. Medvedev’s future itself has become cloudy. He had to deliver the votes during the parliamentary election if he was to be given the prime ministership. He had already lost whatever credibility he had with the electorate with the closed-door decision to switch the two top governing positions. Now, despite all of the administrative advantages that the ruling party had – where it could mobilize workers; control the television medium; use its judicial connections to fine Russia’s leading independent vote monitor, Golos, for alleging electoral violations; employ other connections to mysteriously shut down communications broadcast from independent radio stations such as Ekho Moskvy, and blogging platforms such as LiveJournal; as well as the widespread, scathing allegations of thousands of violations of electoral rules by external and internal observers – United Russia still had a relatively poor showing. Mr. Putin has a history of not tolerating politicians who do not deliver as he expects.
Third, the election is also an indicator of a brewing legitimacy crisis in Russia. As the late Harvard scholar Samuel Huntington wrote, “performance legitimacy” plays a critical role in authoritarian regimes. When Mr. Putin was able to deliver growth and increasing public goods to the population, the legitimacy of his rule seemed solid because he reinforced it with an image of personal vigour and determination. Given Russia, however, is confronting massive structural problems due to its reliance on energy, with the vast Reserve Fund used to prop up the economy during the recession now largely depleted, and a demographic time bomb of extremely low birth rates, a shrinking population and a disintegrating health care system, not to mention an outflow of funds to Western safe havens, performance legitimacy is an increasingly less viable option within Mr. Putin’s social contract that trades freedom for security. [More]

While not the only vehicle, I think this is another piece of evidence that the Internet will increasingly play a bigger though as yet undefined role in public policy development and politics. And I mean everywhere.

[Note: Re-reading this, I realized it maybe should have been two posts, but one thing reminded me of the other. And you learn to write it down immediately. This is how 60+ year-old minds work.]

[Oh yeah - yours will too.]

Gold and inflation...

One of the favorite indicators of inflation hawks has been gold prices. But as Scott Sumner points out, gold is a case unto itself.

Again, I don’t doubt that there are individual investors fooled by news stories of massive monetary base increases and huge deficits, who think that high inflation is just around the corner.  Not many average investors know that the same thing happened 15 years earlier in Japan, with no inflationary consequences.  But I believe the best point estimate of the market’s consensus inflation forecast comes from the CPI futures market, as well as the TIPS spreads in the T-bond market. [More]

As he explains in the cited post, demand from India and China, along with decreasing production means the global gold market is not dominated by inflation fears here in the US, but by much larger forces. In fact, my suspicion is as newly, albeit moderately,  affluent citizens in developing economies look for somewhere to stash extra moola, they stay pretty close to tangible wealth, not unlike our own forebears who bit on dollars to see if they were real gold.  It will be a while before they trust arcane investments like say REITs or swaps.

A more powerful mover of inflation in the US would be oil prices.  And speaking of which, the rally continues.

Benchmark oil settled up $1.19 at $89.19 a barrel on the New York Mercantile Exchange. It's the second time in less than a month that oil has reached the level where it was in the fall of 2008. There are widespread expectations that the price will hit $90 a barrel by year's end and head toward $100 a barrel by next spring when traders begin looking ahead to the summer driving season. [More]

Still, I think we have passed a tipping point on oil being able to dominate our economy. Higher prices would not have the effect we have previously endured as Americans are getting better at curtailing use on their own.  And it's not like we have full employment with people being paid to commute vast distances just to get the bodies.

Nonetheless, I'm filling every tank up right now.

Just when you thought it was safe...

To ship from NOLA, this happens.

The biggest grain-shipping port in the U.S. may be disrupted by the spread of the BP Plc oil spill in the Gulf of Mexico, threatening to depress domestic prices by encouraging importers to buy from South America.

More than half of the grain inspected for export from the U.S., the world’s largest grower of corn and soybeans, is shipped from the mouth of the Mississippi River, according to the Port of New Orleans. Traffic has yet to be restricted through the main deepwater channel, the Southwest Pass, used by ships carrying commodities such as oil, coal and grain.

BP and Transocean Ltd. are struggling to cap a damaged undersea well leaking 5,000 barrels of crude a day since the Deepwater Horizon drilling rig exploded April 20. The edge of the spill began washing ashore in Louisiana late yesterday and may reach Florida’s coast early next week.

“As long as the main Southwest Pass remains open, it is unlikely to have too much impact” on grain prices, said Anne Frick, a vice president of research for Prudential Bache Commodities LLC in New York. “If that is closed and exports are disrupted, it would probably be a bearish development for U.S. soybeans, soybean meal and corn.” [More]

My first thought is that all the locks and dams we can finagle from Congress won't help this type of problem. It's just that grain growers think they understand river problems and focus on them.  It would be helpful to see some comparative risk statistics as to how our export exposure problems rank.  Maybe off-shore rigs constitute a bigger risk event than slow locks. And this particular event looks to be a whopper.

Since an explosion almost two weeks ago on the Deepwater Horizon rig, a disaster scenario has emerged with hundreds of thousands of gallons of crude oil spewing unchecked into the Gulf and moving inexorably northward to the coast. The responsibility for the cleanup operation lies with the owners of the well, led by 65 percent shareholder, London-based oil company BP Plc.

BP said last week that it was spending $6 million a day on the clean up but admitted this figure would rise sharply when the slick hits land.

Neither the company or its 25 percent partner, explorer Anadarko Petroleum, have put an estimate on total costs, although BP CEO Tony Hayward told Reuters in an interview on Friday that he would pay all legitimate claims for damages. [More]

Too much of our policy effort center on issues we like, and which ones provide off-season farmer entertainment - farmers to DC, barge rides - as opposed to market risks that have much greater potential to wrench prices unexpectedly.

I could see the irony...

After listening last weekend to Dan Basse (AgResource) talk about 2B+ corn carryovers in 2011 and beyond, and sensing the slightly higher chance of a return to recession as stimulus spending falls from favor, I find one policy switch reason by the NCGA on climate change legislation curiously timed.

 "Finally, this analysis indicates HR 2454 will result in diverting productive farmland into afforestation (newly planted forests) or perennial grasses solely to gain offset credits. Although our analysis shows dramatically less acreage diversion than noted by the U.S. Department of Agriculture, it still diverts land needed to feed and fuel a hungry world and therefore affects both food security and energy security." [More]

This is not unreasonable by any means, but how high would the corn carryout have to get (or how low would corn prices have to drop) before cries for "set-aside" begin bubbling up in meetings?  

For that matter, how many of us are looking forward to the release of Conservation Reserve acres?

The large decline in winter wheat seedings may be problematic for corn and soybeans and other spring planted crops. The six million acre decline in winter wheat seedings along with additional acreage released from the Conservation Reserve Program opens the door for large increases in the acreage of spring planted crops. While a few more corn and cotton acres may be needed to accommodate the expected rate of consumption in 2010-11, a large South American harvest implies no need for more soybean acreage. Favorable growing conditions, then, could result in a surplus of one or more crops in 2010.

An additional concern for crop prices is the continued lackluster performance of the national economy and the persistently high unemployment rate. These factors do not bode well for demand prospects for agricultural commodities for food or fuel consumption. The lack of economic growth, along with emerging indications that Iraq could substantially increase oil production over the next several years, may prevent an increase in crude oil prices that would support the biofuels industry. [More]

As usual Darrel states it about as dryly as humanly possible. (I fell asleep in mid-sentence).  But it is also is an indicator he may be closer to the truth than most.

What if we get a really good growing season? I don't think E-15 will soak up that much corn very quickly, if at all. (Good article in current issue of Farm Futures - not available on line yet). I had a discussion with a broker from TX who said his getting gas retailers to switch will not be a cakewalk. It does present some infrastructure puzzles. More tanks? Tough beans for pre-2001 car owners?



My guesses are 2.2B bu. and/or $2.40.

My Annual Bad Guy Oil Review...

Was riddled with errors as I skipped over an entire column and read 2008 figures as 2009.  I have pulled the chart pending correction when I get home.

Sorry for the lapse.

Thanks, Kevin.

Meanwhile, back in the oil patch...

We haven't checked in with the Peak Oil debate for a while, and this could be a good time to do so.

Fatih Birol, chief economist of the OECD's International Energy Agency (IEA), has pulled in his prediction for when world oil production will peak to only 11 years from now.

In an interview with The Independent, Dr Birol said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated.

The reason for the change? The IEA has found that production from existing oil fields is dropping a lost faster than they predicted.

The IEA estimates that the decline in oil production in existing fields is now running at 6.7 per cent a year compared to the 3.7 per cent decline it had estimated in 2007, which it now acknowledges to be wrong.

The faster existing field production declines the faster new fields must be discovered and developed just to break even. The problem: world oil discovery peaked in 1965. In spite of all the technological advances since 1965 the discovery rate is less than a fifth the peak rate and less than a third of the yearly oil consumption rate. [More]

Of course, exactly what Peak Oil means to our economy and culture is debatable.  But it is hard to try to fit the consumption increases we know are coming in Asia with declining oil production and not envision much higher oil prices sooner than later.  Not to mention inflation and the value of our heavily leveraged dollar.

This is good news I think for all kinds of alternate energy, but especially ethanol, as the comparative economics get better as oil prices rise.  Dirt cheap natural gas has to be helping too.


But the niggling question I have with "problems in the oil fields" reasons is how many of them would magically find a solution should oil wander back into triple digits?

Grain, hold the ice...

Even if you think global warming is hogwash, this might be a good time to clean the pig.  Big $$ are being bet on the possibility of drilling for oil under the former ice-cap as it simply melts away.

In fact, lines in the sea are already being drawn to see who can create the most outlandish undersea geological argument for territorial claims.  Note some the of the big players are the descendants of the Vikings.

[More]

More surprisingly the estimate of reserves is climbing.

In new findings, the U.S. Geological Survey estimates the Arctic may be home to 30 percent of the planet's undiscovered natural gas reserves and 13 percent of its undiscovered oil.

A team of scientists at the USGS collaborated with international researchers to conduct the first-ever comprehensive assessment of undiscovered oil and gas reserves within the Arctic Circle.

"We tried to put some boundaries on the range of possibilities and resources available in the Arctic," said geologist Donald Gautier, lead author of the survey, which is published this week in the journal Science.

Using geological analysis and probability modeling, researchers mapped out sedimentary rock deposits to estimate the amount of undiscovered oil and gas beneath undersea continental shelves. This survey, the first of its kind, could help oil and gas companies locate new troves of fossil fuels. [More]

But it is the map showing a real honest-to-goodness Northwest Passage that intrigues me.  What will this route mean to global shipping?  What will to mean to Canada?  Above all, could we realign grain shipping patterns in unexpected ways?

As environmentalists and scientists debate the effects of global warming and sea ice melting in the Arctic, shipping experts are quietly weighing how quickly — and how dramatically — international commerce might see a silver lining.

The Arctic has become a lighting rod of debate as Arctic nations, including Russia, Denmark, Canada and the Untied States, jockey to take advantage of highly lucrative natural resources beneath the fast-melting ice. About 90 billion gallons of oil and 1,670 trillion cubic feet of natural gas are buried underneath ice north of the Arctic Circle, according to the U.S. Geological Survey.

But melting sea ice would open new, previously treacherous and non-navigable passageways over Asia and North America, shortening some routes by thousands of miles. For example, access to the currently blocked Northwest Passage over North America would reduce a trip from Yokohama, Japan, to Rotterdam in the Netherlands to just 5,618 miles, according to Scott Borgerson, an ocean governance expert at the Council on Foreign Relations, a New York-based think tank.

That's a far cry from the popular 11,209-mile trip that requires ships to pass through the Panama Canal.

"It's not a matter of if but when," Borgerson said last week. "It's going to be sooner than later." [More]

Since the ice disappearance has overtaken all estimates to date, "sooner" may be much sooner. Throw in oil money to spur the development of special ships and equipment for navigating the Arctic, million of acres with more degree-days from climate change, and suddenly Canada is building a railroad north to load wheat, corn, oats, canola, bananas*, etc.

*Checking to see if you're paying attention.

Energy-independence Update...

It's been a while since I checked how our massive ethanol push has helped us become more independent from BGO (Bad Guy Oil*).  After all, when all other arguments for ethanol subsidies peter out, this one wraps it in the flag and brings home the subsidy bacon every time.

I last checked on progress toward replacing filthy foreign oil with wholesome ethanol in December 2007 so now we are pumping lots of ethanol we should see some serious replacement:

*Bad Guy Oil is oil from SA, Algeria, Kuwait, Lybia, Iraq, Venezuela.  The definition is mine and arbitrary.  Lybia dropped out of the Top 15 last year. Arguably, we could throw Columbia in that category.

Some notes:

1. God bless the Canadians.
2. Mexican production declines are a big problem for them and the US.
3. You can't muscle out low cost producers like SA.
4. Wait until low oil prices kick in.
   

Ethanol does not replace Mideast oil.  It replaces high-cost oil from anywhere else - even domestic.

Batten down the hatches, or something, mateys...

I have been puzzling about this for several days.  How do a handful of yahoos in a rubber dinghy board and capture a gigantic oil supertanker?  I mean, I have trouble getting into a ski boat at the pier on a small lake.

So here's what I have learned to date:

Admiral Mike Mullen, chairman of the US Joint Chiefs of Staff, said the pirates were well trained.
"They're very good at what they do," he told a Pentagon briefing in Washington.

"Once they get to a point where they can board, it becomes very difficult to get them off, because, clearly, now they hold hostages." [More]

Okey-dokey, with you so far.  But how the heck do they get aboard?  Isn't this behemoth 4-5 stories tall?

The gangs’ methods vary little, even when taking a 320,000-tonne monster like the Sirius Star. Gunmen typically approach on small speedboats, opening fire on the bridge until the ship’s captain submits and allows them on board, usually throwing down a ladder. The average reaction time between spotting the pirates and being boarded is 15 minutes...
In recent months the pirates’ arsenal has grown more deadly, with rocket-propelled grenade launchers and possibly shoulder-mounted missiles used to threaten the crew. Pirate groups have hugely extended their reach from the coast with the use of “mother ships”, larger vessels from which they launch speedboats after they have identified their prey. While some known mother ships have been identified, other attacks are launched from ordinary dhows, traditional sailing boats hijacked from fishermen.[More]

Ships I'm familiar with of that size have steel storm covers for their windows and portholes. Given the electronic auto-piloting, how hard would it be to just cover up and plow on?

Obviously I'm missing something here. But this system looks like sending your kid sister through the tough part of town to deposit your lottery winnings, and then wondering what went wrong.

The Hummerski...

The Russians, who were famous in my time at least for mammoth, and staggeringly inefficient architecture, machinery, and politics are interested in buying The Hummer.

Oleg Deripaska, Russia's richest man, has been in talks with General Motors about purchasing the Hummer brand, the US military's Humvee inspired gas-guzzler.

The Russian oligarch was in discussions with GM, according to Reuters, though any sort of final deal is a long way off. GM is looking to avert a complete financial catastrophe with Hummer sales off 40% in June. A spate of brand selling could be on the cards if the company is to try and make a turnaround.

The drop in Hummer sales has largely been attributed to the increase in gasoline prices as American drivers exchange their beloved SUV's for Toyota Hybrids en masse. [More]

Interestingly, while the connection to cheap gas seems obvious, Russian oil may have peaked.

Most of the oil produced after the country's 1998 financial collapse has come from drilling and re-drilling old Soviet oil fields with more advanced equipment - squeezing more black gold out of the same ground - and efforts to develop new fields have been slow or non-existent.

That strategy is potentially disastrous, said Valery Kryukov, who researches oil companies in western Siberia for a government-funded think tank.

"If the situation which exists now stays the same, oil production will start to decline seriously in two years," Kryukov said in a phone interview from his offices in the city of Novosibirsk.

The implications extend far beyond Russia's borders. Last year, Russia was the world's second-largest oil producer. If its output begins to decline or is hampered by inept or corrupt business practices, the price of oil could begin climbing again. [More]

Lemme see - what are the odds of corruption or ineptness in today's Russia?

Question 37: Compare and contrast...

We're running out of oil.

With production running at 86 million barrels per day, that means we are consuming 31 billion barrels of oil every year. It is a sobering thought that by the time the Sun sets upon the whole of the North Sea, it will have produced enough oil to fuel planet Earth for just 2 years. To keep the oil party going we need to discover a "new North Sea" every two years and the last time we managed that rate of discovery was in the late 1980s, 20 years ago. We have been living off savings since then, and the bank balance is running down. It is not possible to get an oil overdraft or to create an energy instrument to magic oil and energy out of nothing. There is no choice other than to reduce our oil consumption and it is much better that we do this in a controlled way than to let high energy prices and inflation rip through our economies - which is exactly what is happening now. [More]

No, we're not.

There is more than twice as much oil in the ground as major producers say, according to a former industry adviser who claims there is widespread misunderstanding of the way proven reserves are calculated. [More]

Well, my goodness, what's a farmer to think?

Pretty much anything you want. I have discovered in conversations and on this blog, people make up their minds first and justify it with cherry-picked facts later. Actually, we really do.

As a consequence, we rarely have conversations or public discourse that change minds. Instead, my guess is most of you responded positively to one example above and negatively to the other instantly.

Consider the great issues facing us today: climate change, income inequality, religious fanaticism, resource allocations, etc. Thanks to information technology, bozos like me can marshal facts and graphs to persuade and contradict. But I am not sure anyone is affected anymore.

My great worry about the future of this country - and even the world- is the decreasing number of people who can and will change their minds, and the unworkable society such reluctance creates.

So did anybody change their mind about the future of oil?

Hard to find a happy ending...

To the oil picture. (Unless, of course you own some wells) As the argument rages on - with powerful logic on both sides - between speculation and fundamentals as the cause for commodity price increases, I think I am wandering between the camps debating a which is the chicken, and which is the egg.

First, the case for oil, which may be the core driving commodity. The fundamentals all seem to eventually point to China.

Are such projections plausible from the point of view of potential demand? During 2006, China used about 2 barrels of oil per person. For comparison, Mexico used 6.6-- Chinese oil consumption could triple and they'd still be using less per person than Mexico is today. The U.S. used almost 25 barrels per person. According to the data collected for a new research paper by Max Auffhammer and Richard Carson, there were 3.3 passenger vehicles per 100 Chinese residents in 2006, compared with 77 in the United States. Yes, I would say that these astonishing numbers for potential future Chinese oil demand are not at all inconceivable. [More of a very readable analysis]

At which point, who wouldn't want to place a bet on oil prices? Just like stodgy old money returning to farmland (Prudential just bought a chunk near me, I heard yesterday), where are you going to get the returns we've seen in the commodity markets?

I think we can rule out the mortgage industry, for example. While many farmers would like to cast commodity speculators (or perhaps today better labeled "investors") as oily wheeler-dealers, if you depend on a pension payment for your retirement income, these guys are White Knights.

The big question we producers are all trying to wrap our mind around is how do I know when to get off this rocket? While we will likely be fixated on wheat production and corn yields, because of asset allocation of index funds, maybe we should concentrate on oil, the Leader of the Pack.

There are two good reasons for this. as has been noted before, high oil prices protect the ethanol industry better than any subsidy, so some of those future plants might actually be built if oil continues to climb. That corn/acre source issue seems secure to me.

Second, though I expect oil demand to begin to drop here in the US (we will drive less and more carefully) everything I have seen indicates to me developing countries can more than absorb our drop. This is China's demand growth curve, for example.


Further, even if we struggle through a long bout of "recession-like" conditions, it doesn't look like the rest of the world will follow. Our share of the global economy probably has peaked.

The question now is whether investors have taken too much comfort in the Fed's ability to keep markets functioning. While the Fed's willingness to lend to financial institutions should prevent another Bear Stearns-like calamity, some observers believe the last two months' rally reflects a rosier view of the markets and the economy than is warranted. [More]

Bottom line: learn to farm and live with as little fuel as possible. Apply fertilizer with an eyedropper. Study electricity fundamentals and deploy its power every chance- our link to our only cheap energy: coal. Finally, expect a ferocious margin squeeze starting in about 2010 as costs rise to pressure the maximum prices grains can be sold at.

But I'm ruling out a calamitous collapse of oil prices, such as many believe will echo the 70's. Like grains, oil could drop a bunch and still be painfully high. It will simply take lots of misery to force the oil supply and demand curves to intersect in the future.

The problem with the oil bubble...

Some observers are starting to chance predictions of a collapse in oil prices, but is it really a "bubble"?

Oil prices climbed to their highest level ever, reaching over $108 per barrel this week. And Americans are feeling this price spike at the pump, with gasoline averaging $3.22 per gallon. An analysis released by the investment firm Goldman Sachs suggested that oil prices might soar to $200 per barrel. Does this make sense?

Not really. Although U.S. crude oil inventories have fallen, gasoline inventories are at their highest since March, 1993, notes Tim Evans, an energy futures analyst at Citigroup's Futures Perspective. World oil production was up 2.5 percent in the first quarter of 2008 over the same period in 2007 while world oil consumption rose by just 2 percent. In fact, world production is projected to be 3.3 percent higher in the second quarter and 4.1 percent higher in the third quarter than the same periods a year ago. On the other hand, world demand is projected to rise by just 1.6 percent over the next six months. [More]

Bailey, with whom I usually agree wrote this in early March - and already it looks wobbly. He is not alone. In my commentary last week on USFR I mentioned that the oil fundamentals seem to have less effect on price than before. One reason I suggest for this apparent flaunting of fundamental market economics is the delay factor allowed by dwindling but still-ample credit. We'll change habits only after our cards are maxed out.

One viewer added a salient - however unsettling point:

With respect to your commentary at the end of the first segment this past
week, the law of supply and demand says that as price rises demand only
drops when price exceeds the equilibrium price. Perhaps the equilibrium
price has not yet been met.

If true, and the equilibrium price is still somewhere above current prices, what the heck is going on? Many folks put it down to speculators, but this effect cannot last forever. Sooner or later, they want their price-boosting investments dollars back. This is the great cry from those looking backwards to historic price actions, but again, the identification of a speculative bubble is not universal.

“The Oil Bubble: Set to Burst?” That was the headline of an October 2004 article in National Review, which argued that oil prices, then $50 a barrel, would soon collapse.

Ten months later, oil was selling for $70 a barrel. “It’s a huge bubble,” declared Steve Forbes, the publisher, who warned that the coming crash in oil prices would make the popping of the technology bubble “look like a picnic.”

All through oil’s five-year price surge, which has taken it from $25 a barrel to last week’s close above $125, there have been many voices declaring that it’s all a bubble, unsupported by the fundamentals of supply and demand.

So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren’t, why have so many commentators insisted, year after year, that there’s an oil bubble? [More][Tyler Cowen comments here]

But part of that analysis rests on the demand for gasoline being the key to oil demand. That seemingly basic fact is more in doubt than before, as farmers everywhere are discovering with every fuel load.

Meanwhile Murti says demand for middle distillates, like diesel, gasoil, heating oil and jet fuel and kerosene is racing up. The difference in prices between gasoline and middle distillates, known as a crack spread, has been exceptionally strong signaling tightness in global refining capacity.

Just a year ago US RBOB spot gasoline prices were worth some $92.60 per barrel while NWE jet was priced in at some $83.3, a discount of over $9 per barrel. Today that same jet fuel is nearly $30 more expensive than RBOB, and has led to U.S. refinery Valero switching production by up to 7 percent from gasoline to gasoil.

Murti attributes that strength to resilient non-OECD demand growth as well as numerous global power problems, all of which have led to increased usage of diesel and gasoil-fired generators. [More]

If true, watching US car sales pattern shifts and driving habits may not be the best way to gauge demand. Moreover, it a key difference between today's energy economics and other oil price spikes. If industrial activity takes over (thanks to expanding global economies) from consumer use as the demand leader, will old price patterns hold? I think not.

One key will be to watch to see if the spread between diesel and gas widens. Until refineries change the distillate output mix, we could see some strange disconnects between gas and oil prices.

And some blistering diesel costs.

A chance to end an argument...

With oil prices climbing relentlessly - much to the dismay of analysts who thought demand would tail off above $100 or so - most of the clamor is understandably unhappy. And the forecast is even more alarming.

But in her inaugural post at Biofuels Update, TP editor Jeanne Bernick shares some new perspective from one of my favorite ag economic myth-busters, Bruce Babcock, who told legislators:

" ...that changes in federal biofuels policies now will not have a dramatic effect on food prices in the short term. And in the longer run, corn and food prices will be determined largely by the price of crude oil."

Biofuels proponents will undoubtedly seize on this opinion as a reason not to touch the the government training wheels for the ethanol industry, since it wouldn't help food prices much.

I think that would be reading it backwards. Here's the key conclusion for me:

Second, in the long run, if gasoline prices rise even higher and signal that we need alternative fuels, the corn ethanol industry will expand well beyond current projected levels even without government subsidies, unless production is somehow capped. [More]

What we are staring in the face is a gold-plated (or oil-smeared) opportunity to bullet-proof the ethanol industry from the whims of legislation and popular belief. We could lose the subsidies and never look back.

Best of all we can start working at our real profession - growing things people want to buy - instead of trying to manipulate government officials and consumers with spin and pathos.

Just think about it. Critics can write or say anything they want, and we won't even have to listen. We'll just answer to the market.

The Farm Bill - farm future disconnect...

The paragraphs pouring out of Washington about the farm bill debate are more convoluted than Roswell-conspiracy theories. The best, IMHO, is our own Jim Weisemeyer, although his latest coverage has petty much exhausted the football-game metaphor, I must say.

President Bush, the referee whose whistle calls have not yet been heard by all the crowd noise, is still the number-one power broker in this game. Reason: he can and would veto a farm bill that is close to either the House-passed or Senate pending farm bill.

Those who doubt Bush holds the farm bill power lever should consider what one contact told me this past week:

"Anyone who thinks President Bush isn't engaged in the farm bill should talk to the CEOs who recently gathered in Washington and heard Bush answer questions about the farm bill. He no longer needs economic advisors to tell him about the bill’s shortcomings. He knows them and lists them... and if you think he won’t veto a bad bill, you haven’t heard him like I did."

What do General Motors and the Senate farm bill have in common? GM announced it had lost $39 billion during the third quarter. The Bush administration's SAP on the Senate farm bill listed a $37 billion mess -- it charged the Senate farm bill contains nearly $22 billion in budget gimmicks, and nearly $15 billion in new taxes and that "If the bill were presented to the President in its current form, his senior advisors would recommend that he veto it."

Sen. Conrad repeatedly said the veto threat was not from President Bush himself but just from "ill advised advisors." [More by subscription]

(Hey - Maybe Jim's an Illinois fan still coming down from the weekend miracle!)

But while ag writers are understandably fascinated with the arcane and prose-worthy machinations in Congress, more than a few economists and executives are brooding over oil.

After the CEO of Total (the French oil major) last week, two more CEOs of an oil major came out this Thursday to give stark warnings that mean that peak oil is happening right now. In addition, the chief economist of the International Energy Agency (the IEA), one of the main cheerleaders of the "there's more than enough oil" camp until now, is giving an extraordinarily pessimistic interview in the Financial Times, following the recent publication of their latest World Energy Outlook. [More]

I know, I know - peak-oilers have tended to be on the "enviro-fringe", and technology will find us some more oil just in the nick of time. Hey- look what happened in Brazil last week:

The discovery, while welcome news in a world where big oil strikes are rare, won't likely affect oil prices, mostly because the field will take years to develop. Even if Tupi contains the high estimate of eight billion barrels, the world consumes about 86 million barrels a day, so it may contain about three months of supply.

But the strike indicates there may be more oil locked in ultradeep waters of the world, said Roger Diwan, a partner at PFC Energy, an oil-consulting firm. "It's not going to be a one-off. There may be more oil in these places than people thought," he said. He said a field of that size could end up producing about 500,000 barrels a day of oil.

The Tupi find could turn Brazil, which became self-sufficient in oil last year, into a "country that has an exporting quality like Arab countries or Venezuela," said Dilma Rousseff, the chief of staff for President Luiz Inácio Lula da Silva. [More]

The two seemingly unrelated developments may actually be icons for the future and the past of farming. Despite my long-held desire to see less government (and lobbyist and consultant and ...) involvement in my work, my attention is wavering on this messy legislative imbroglio.

However, $100 oil has captured my imagination. It seems to me the rapid increase in energy problems and the consequent impact on economies will overwhelm whether 85% or 100% of base acres are elegible for the ACR.

Consider the case of Brazil. If Brazil goes on to be an oil exporter, how vigorous will their efforts in ethanol be? If oil isn't a national problem, how much of your productive capacity can be devoted to other enterprises like, say - agriculture?

The oncoming wave of technologies to boost ag production - especially corn - requires an enormous appetite from the energy sector to prevent a price drop. $100+ oil strikes me as a good guarantee for that demand. Sustaining a world of $4 corn will not ensure the wide profits we are seeing now forever. We are already bidding up inputs to bring our margins closer to pre-ethanol levels. But gross receipts per acre approaching $900-1000 does make DCP's look trivial.

In short, the odds of the energy problem boosting our industry past the need for entitlements is increasing with every passing gasoline price hike.

Business as usual...

The trouble with farming today is it is so routine and predictable. Stuff like this would never happen:

• The White house issues a veto threat that scorches the very paper it was lasered upon. Some sample rants:
• The Administration supports continuation of a strong farm economy and of conservation programs that protect America’s natural resources. Regrettably, the Committee bill does not provide for the effective and efficient achievement of these goals in a manner consistent with wise stewardship of taxpayer dollars. Unfortunately, the bill shifts the balance of support in a more potentially trade-distorting direction, continues a defective safety net, lacks real farm program reform, and uses $37 billion in increased tax revenue and gimmicks, including timing shifts and artificially ending programs, to finance significant increases in spending.
• The Administration also strongly objects to the bill’s attempt to hide almost $7 billion in long term costs for most of its proposed Food Stamp policies by sunsetting the provisions after five years. It would be senseless for States to implement these program changes only to phase them out later. The Committees actions are clearly intended to merely mask the long term budgetary consequences of its actions.
• The Administration also strongly opposes the prohibition on packer ownership and the provision regulating production contracts because they would unduly interfere with the freedom to contract, require the divestiture of assets by entities that have operated lawfully, limit opportunities for farmers and ranchers to participate in marketing alliances, and increase prices for American consumer.
• Oil heads toward triple digits.
• Grains go along for the ride.
• Ron Paul, a libertarian candidate who stands for outlandish things like limited government, and individual rights, and oh, less torture raises $4.3 million bucks in 24 hours.
• ADM prospers, despite ethanol.

Ya know it's just the same ol, same ol'.

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