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Discussion: (48 comments)

  1. cattle, hogs, wheat, corn, soybeans, soybean oil, cotton, coffee and sugar are all renewable resources..

    1. And likewise the metals can be recycled because they are not burned up as is oil, natural gas, coal, etc.

  2. Of course there is a fallacy in the arguement re metals, most metals are recycleable, and in particular iron has been heavily recycled for a long time. (The new US steel industry of mini-mills is based largely on recycling scrap steel). Copper is also recyclable, (in fact that is why so much is stolen). According to the steel recycling institute 92% of steel is eventually recycled, making iron/steel the most recycled commodity. Also aluminum with its high energy content makes economic sense to recycle.

    1. hitssquad

      “most metals are recycleable”

      And? The proportion of metal “produced” from recycling is dwarfed by new metal because mine output continues to skyrocket (which it’s been doing since at least as far back as the year 1800).

      “aluminum with its high energy content makes economic sense to recycle.”

      That depends on how little you value your time. Every year or two, the canners manage to shave off a bit more mass from the cans. As a result of these economizing efforts, it now takes at least 35 aluminum can to make up just one pound of aluminum. It might make more economic sense to save the labor by simply landfilling the used cans and making new ones from freshly-mined bauxite.

      1. It might make more economic sense to save the labor by simply landfilling the used cans and making new ones from freshly-mined bauxite.

        It might, but does it? Why do you suppose aluminum producers use recycled cans if they’re a more expensive source than new ore?

        And where would that freshly mined bauxite come from?

        1. hitssquad

          “but does it?”

          I just said: “that depends on how little you value your time.”

          “Why do you suppose aluminum producers use recycled cans”

          …Because people who value their time sufficiently little sell aluminum cans at sufficiently low prices to attract buyers. There might also be government subsidies and legal-forcings involved.

          “And where would that freshly mined bauxite come from?”

          …From under your feet. The earth’s crust is more than 8% aluminum (meaning your personal share of pure aluminum alone is over 150 million tonnes). The challenge isn’t to find aluminum ore. The challenge is to refine it.

          1. …From under your feet. The earth’s crust is more than 8% aluminum (meaning your personal share of pure aluminum alone is over 150 million tonnes). The challenge isn’t to find aluminum ore. The challenge is to refine it.

            Are you aware that there is no bauxite mined in the US?

            But then I suppose you aren’t in the US or you would have described my personal allotment of aluminum in tons, not tonnes.

          2. hitssquad

            @Ron H. “there is no bauxite mined in the US”

            That’s irrelevant since it only costs $36/ton. The data is usually in tonnes, and doesn’t discriminate with regard to nationality. The in-place natural resources are also all under your feet, regardless of your location on the globe. Yes, the entire globe is under your feet.

    2. So?

  3. PeakTrader

    We’ll continue to diversify away from crude oil.

  4. While I tend to agree with the argument I think that the ‘adjusted for inflation’ part is questionable because inflation is understated. What matters for an individual is after tax purchasing power in real terms. I do not see that increasing over the past 30 years or so. When the USD goes from $35 per ounce of gold to $1,600 per ounce of gold inflation is a lot higher than the government claims.

    1. PeakTrader

      So, since gold fell from $850 in 1980 to $250 in 2000, inflation was much lower?

      U.S. living, labor, and environmental standards improved substantially from 1982-07. Inflation was most likely overstated, over the long-boom.

      And, since 2007, demand has been too low. So, instead of disinflation, we had deflation, although living standards improved at a much slower rate?

      You continue to confuse asset prices with prices of goods & services.

      1. The whole inflation/deflation argument is flawed due to the present working definitions. Prices are subjective and vary based on demand. If you’re basing you’re measure of inflation on prices in the market, you might as well be trying to measure the blueness of the sky based on the opinions of people looking at it over time, all over the world.

        The money supply has continually increased since the beginning of the Federal Reserve, so there is inflation. How that inflation will manifest itself in the market is anyone’s guess (but there are some reasonably better guesses).

        1. hitssquad

          “The money supply has […] increased […], so there is inflation.”

          No. Increasing the money supply doesn’t necessarily result in inflation, just as decreasing the money supply doesn’t necessarily result in deflation. The other factor needs to be considered: the total value of goods and services in society.

          1. hitssquad

            No. Increasing the money supply doesn’t necessarily result in inflation, just as decreasing the money supply doesn’t necessarily result in deflation. The other factor needs to be considered: the total value of goods and services in society.

            Increasing the money supply doesn’t necessarily result in inflation, unless it’s increased at a higher rate than the increase in the demand for money.

            Over time this has been the result of increasing the money supply.

          2. Power corrupts. Give the Fed the power to create purchasing power out of thin air and it will do so no matter what the demand for money happens to be.

          3. No. Increasing the money supply doesn’t necessarily result in inflation, just as decreasing the money supply doesn’t necessarily result in deflation. The other factor needs to be considered: the total value of goods and services in society.

            You are confused. Prices for most items are supposed to fall as investments are made and productivity increases. The fact that computer chip prices fall does not mean that there is inflation any more than the fact that the price of wheat goes up means that there is inflation. When the Fed uses its monopoly power to create purchasing power out of thin air it creates inflation. You are missing that because the new purchasing power may flow into asset classes like stocks or bonds or investment in higher order goods that are used to create consumer goods.

      2. So, since gold fell from $850 in 1980 to $250 in 2000, inflation was much lower?

        Not at all. Gold fell because it had run up from $35 to around $650 in a few years. (The $850 figure is BS because there were only a few contracts traded at that price on only one day. The monthly high was near $650.) After the peak the central banks took the opportunity to start dumping their gold reserves and that kept pressure on the USD price for the metals for a long time. The price did go down in the USD but rose in many currencies.

        The price of gold, oil, corn, etc., can go down for a while even in a highly inflationary environment because the paper markets can put downward pressure even as the supply of money and credit is growing rapidly. But over the long run the price action will reflect the underlying reality.

        1. PeakTrader

          So, when prices go up, there’s inflation, and when prices go down, there’s inflation.

          It seems easy for some to ignore the quantity of goods & services produced, although it’s difficult to measure quality, along with new products, which continues to be understated, even after late and little adjustments.

          1. So, when prices go up, there’s inflation, and when prices go down, there’s inflation.

            Inflation has to do with the supply of money and credit. When they go up you have inflation regardless of what happens to the prices of a specific commodity.

            It seems easy for some to ignore the quantity of goods & services produced, although it’s difficult to measure quality, along with new products, which continues to be understated, even after late and little adjustments.

            We expect that productivity improvements will cause a slow decline in prices. That is normal and what was seen throughout the 19th century. It is only after the world went on a fiat money system that created continued inflation.

    2. MacDaddyWatch

      HAHAHAHA…

      Everybody is onto you. First Malthus…then Ehrlich…and now…Vangel.

      The world has passed you by.

  5. Bull fuddy! We are going to pay the price of oil that Saudi Arabia and the OPEC nations say we are going to pay.Saudi Arabia said they need oil at $90 per barrel to break even.So surprise surprise oil will not and has not budged below $90 per barrel for a good long while now.Even if the US becomes so called energy independent we will still pay what the OPEC nations say we are going to pay.OPEC is not concerned one bit about the US production capacity rising.Saudi will just produce less oil to keep the price pegged at least $90 WTI .The reason gasoline has dropped a few cents recently is because Brent oil has come down some.

    1. If the Saudis are so powerful, why stop at $90/barrel? Why aren’t they unilaterally raise it to $110/barrel? Or $150/barrel?

      1. hitssquad

        They can easily do that if they first wipe out the competition via random price drops to near their $2/bbl production cost.

        1. They can easily do that if they first wipe out the competition via random price drops to near their $2/bbl production cost.

          Assuming that OPEC has the monopoly power you suggest – and they don’t – what would keep new competitors from jumping back in when OPEC once again raised their prices?

          1. hitssquad

            “the monopoly power you suggest”

            Are you referring to their ability to produce oil at $2/bbl?

            “and they don’t”

            What makes you think they don’t?

            “what would keep new competitors from jumping back in”

            …The same thing that always did: the long development times, and not wanting to lose their investments again.

        2. They can easily do that if they first wipe out the competition via random price drops to near their $2/bbl production cost.

          Of the entire production the Saudis may have a few hundred thousand barrels of production that has a cost of $2 per barrel. The marginal fields are quite expensive and need close to the current rates to remain in production. Some of the newer fields need prices that are higher than $125 per barrel.

          1. hitssquad

            “Two years ago GE announced that it was making a $500 million sale to the Saudis”

            That’s 14 cents per barrel produced just this year alone. It doesn’t support your claim that “they needed $100 oil just to break even.”

          2. That is a tiny expense for a portion of the project for equipment that will use millions of dollars worth of energy to keep pumping water into the aquifer. The maintenance and depreciation cost of that equipment is around 10% of the original cost and the operations cost is much higher. Saudi Aramco did not just build a small plant to help with production. It built an entire compound in a desert environment where 50C temperatures are common and it needs to spend millions of dollars a month just to prevent the sand dunes from overrunning the office areas, housing units, and the airport and highway that it built. If you have ever been in that environment you would know exactly how the sand shortens the life of machinery and how much money has to be spent to protect housing the pumps, turbines, and motors to prevent abrasion. Do you see all those flat areas on the map? Millions of tons of sand had to be moved to create them. And millions more will have to be moved to keep them from going back to their natural state. Only a fool would think that is a low cost operation.

            As usual, you are writing out of absolute ignorance. There is no Saudi cost accounting data released to the public and nobody has a clue about the exact cost of their production. But the capital costs and technical papers show that costs are much higher than the $2 per barrel figure. Actually, in the technical papers the Saudis have stated that their well drilling programs were designed to ensure a steady 2% decline rate. If we accept that claim we have to conclude that the fields are near the end of their useful lives and that the claims of increased Saudi capacity are unlikely to come true.

            If you paid attention you would know that what the Saudis say to the public and believe privately is not the same.

            http://crudeoilpeak.info/wikileaks-cable-from-riyadh-implied-saudis-could-pump-only-9-8-mbd-in-2011

          3. hitssquad

            @Vangel “There is no Saudi cost accounting data released to the public”

            From the paper you and I have been discussing:
            “Measuring upstream costs is made difficult by many factors, including joint products, imprecise reserve data, and a host of others.75 However, approximations can and have been made for Saudi Arabia by a number of sources, shown in table 5.”

            @Vangel “the fields are near the end of their useful lives”

            Also from the paper you and I have been discussing:
            “Geological data are no less convincing. For one thing, despite the Simmons claim that Saudi Arabia has been extensively explored, its drilling density is approximately 14 wells per 1,000 square miles of prospective area versus about 900 for the United States in 1970, the year U.S. output peaked (table 6). While not proof that any particular level of oil is undiscovered, it is strongly suggestive.”

          4. Newly discovered oil will not change the fact that the Saudi peak is here just as the newly discovered Alaskan oil did not change the American peak. Whether the ultimate recovery turns out to be 180 Gb or 240 Gb will not materially change the date of peak production. The big problem for the Saudis and the world is the shape of the decline curve. Unlike Texas the Saudis strained their fields by using water drives that left behind useful oil behind the leading edge of the water drive. While the higher pressures helped keep production rates higher they did so by stealing from future production. The image is using two straws to drink your milkshake instead of one. Yes, the volume you drink per second will be much higher but you will not wind up getting more of the shake than is in the container; you will simply run out sooner.

          5. From the paper you and I have been discussing:…

            Let me be clear. I do not think much of the paper you are discussing. For one, the paper claims that the Saudis have ‘discovered’ 284 billion barrels. But we know that is not true. The Saudis were showing around 170 billion barrels in the early 1980s only to ADD more than 100 billion to the total when OPEC quotas were tied to REPORTED RESERVES. In the industry we recongize reserves when the reporting company uses the drill bit to find them and drills test wells to prove that the oil can be extracted profitably. That did not happen.

            Also, the paper was talking about how the Saudis were trying to lower costs by shutting in the high cost fields. Well, some of those high cost fields are now being touted as increasing KSA capacity even though the projected production levels were never reached.

            What I am saying is that you are going to have to do a lot better than using an outdated paper in which several contradictions are found and which provided projections that have yet to come true. The KSA ministers have been telling the world that their program of prudent field management ensures drilling that will only lead to a 2% decline per year. Well the fields in question have been around for more than half a century. That means that they are very close to the end of their role as a cheap source of petroleum and that you are going to need prices over $100 to justify much in the way of spending in the Kingdom.

        3. Are you referring to their ability to produce oil at $2/bbl?

          The Saudis aren’t able to to produce very much, if any, oil at anywhere near $2/bbl. Most Saudi oil is much more costly to produce. You need to ask yourself some serious economic questions here. You are missing some important concepts and scales. You might start by familiarizing yourself with global oil information provided by the CIA World Factbook and the EIA.

          What makes you think they don’t?” [have monopoly power]

          Of the 115 countries in the world that produce oil, the Saudis currently provide 11% of the total. They can’t come anywhere close to supplying the total global demand for oil, so even if they gave it away free, they couldn’t control most the whole market – something that’s required for monopoly control. Other producers would still be in business supplying the world with oil at higher prices.

          In addition, it is that oil money that keeps the unpopular Saudi family in power, so reducing national income by the ridiculous amounts you are suggesting would be suicide for them.

          …The same thing that always did: the long development times, and not wanting to lose their investments again.

          I don’t know where you’re getting this stuff, but it’s been a long time since OPEC has had any real ability to control world oil supply, and therefore prices. As for long development times, they don’t exist. When marginal oil producers go out of business the wells, pipelines, equipment and infrastructure don’t just vanish into thin air. It’s easy to start them back up when the price of oil makes it viable.

          You might want to stop listening to that Jeff Rubin character, because he talks like a political hack, not like an economist. In the YouTube video link you provided, he makes some very deceptive statements.

          For example he mentioned the $0.07/gal price for Saudi utilities and the $0.25/gal for gasoline in Venezuela without bothering to explain that those are government subsidized prices, and have no relationship to real market prices.

          I had to stop watching when he started talking about CO2 emissions. Apparently he had given up any pretense of discussing economics by that point.

          1. hitssquad

            “The Saudis aren’t able to to produce very much, if any, oil at anywhere near $2/bbl.”

            Did you read Table 5 Estimates of Saudi Production Costs?:

            Table 5
            Estimates of Saudi Production Costs
            Source Date $/Barrel
            Adelman 1968 $0.41
            CGES 1993 $3.25
            Stauffer 1994 $1.21
            CERA 2001 $3.96
            IEA 2001 $1.85
            Appert 2003 $1.026-$5.11
            Baqi 2004 <$3
            Adelman 2005 $2.11
            Source: Michael C. Lynch, “The Economics of Oil and Gas Supply,” forthcoming 2006; datafiles available with the author.

          2. Table 5
            Estimates of Saudi Production Costs
            Source Date $/Barrel
            Adelman 1968 $0.41
            CGES 1993 $3.25
            Stauffer 1994 $1.21
            CERA 2001 $3.96
            IEA 2001 $1.85
            Appert 2003 $1.026-$5.11
            Baqi 2004 <$3
            Adelman 2005 $2.11
            Source: Michael C. Lynch, “The Economics of Oil and Gas Supply,” forthcoming 2006; datafiles available with the author.

            If the Saudis can produce oil that cheaply why is it that they are spending hundreds of billions on very expensive pumping facilities that pump seawater deep into the desert to keep reservoir pressures high enough so that production does not decline, more billions on water separation facilities, and drilling very expensive horizontal wells that are orders of magnitude more costly than the wells that they used to drill in the 1960s? And your citation may be true for the cheapest few hundred thousand barrels of production but not for marginal fields that have been idled because they needed $100 oil just to break even.

          3. hitssquad

            @Vangel “your citation [only applies to] the cheapest few hundred thousand barrels of production”

            Source?

            “they are spending hundreds of billions”

            Per year? Source?

          4. Source?

            The International Energy Agency World Energy Outlook 2008 stated that the Saudi cost was $4 to $6 per barrel but also stated that enhanced oil recovery costs varied from around $32 to $82. Well, even the best of the Saudi fields, Ghawar, uses enhanced recovery techniques and the other fields that the Saudis are rehabilitating were idled because of large pressure drops and high costs.

            I know that you are not very knowledgeable about the topic but if you look around you will find that Saudi Aramco, the operator of the great Ghawar field is taking 7 million barrels of oil from the sea per day, moving it via a pipeline to stations where massive pumps are injecting it into the reservoir to maintain pressure. About half that comes out with the oil and has to be separated mechanically from the oil. Ghawar is the best field the Saudis have. The pumping and separation of that water costs more than the baseless $2 claim that you are repeating. The other fields are worse and far more expensive than Ghawar. Two years ago GE announced that it was making a $500 million sale to the Saudis as part of the capital spending plan that was needed to increase Shaybah’s production. All that it got was a few services, some compressors, motors, and gas turbine-generators. The plant construction, pipes, and other equipment from other sources has to come from the rest of the budget. All of these expenses have to be accounted for when you are talking about production costs and when you look at them there is no way to have Shaybah production come out at the levels that you are quoting.

            I think that you are showing a great deal of ignorance about the issues. You cite some claims without realizing the implications of what Ron tried to show you and ignore all of the known information about operational activities and capital spending. No wonder you are off by so much.

    2. hitssquad

      “Saudi Arabia said they need oil at $90 per barrel to break even.”

      Jeff Rubin says the Saudis power utilities pay only 7 cents per gallon for the oil they burn, which works out to less than $3/bbl. Other sources say the Saudi production cost is $2/bbl.

      “Saudi will just produce less oil to keep the price pegged at least $90 WTI .”

      That would be stupid when they could wipe out all their competition by randomly dropping the price to, say, $10/bbl, which would still be 5x the production cost.

      1. Jeff Rubin says the Saudis power utilities pay only 7 cents per gallon for the oil they burn, which works out to less than $3/bbl. Other sources say the Saudi production cost is $2/bbl.

        Do you have some links to those sources?

        That would be stupid when they could wipe out all their competition by randomly dropping the price to, say, $10/bbl, which would still be 5x the production cost.

        If that were to their advantage, one can only wonder why they haven’t done it.

        How is it possible that the Saudis can produce oil so much cheaper than everyone else in the world?

        1. hitssquad

          http://www.youtube.com/watch?v=QhsMr49AKM8
          “Jeff Rubin on Oil and the End of Globalization [FULL]”
          “AllanGregg·902 videos”
          https://www.google.com/search?q=crop+circles+in+the+desert+saudi+oil
          “Crop Circles in the Desert: The Strange Controversy Over Saudi Oil”

          “one can only wonder why they haven’t done it.”

          They’ve done it many times. Look at any history of oil prices.

          “How is it possible that the Saudis can produce oil so much cheaper than everyone else in the world?”

          They happen to be on top of a natural-resource of easier-to-produce oil. Please explain what natural laws are violated by that.

      2. Jeff Rubin says the Saudis power utilities pay only 7 cents per gallon for the oil they burn, which works out to less than $3/bbl. Other sources say the Saudi production cost is $2/bbl.

        $2??? Given the fact that the Saudis have to bring sea water and pump it into the aquifer to keep production from collapsing and drilling long lateral wells that are very expensive I doubt that anyone who knows anything buys the unfounded claims. Ghawar used to be very productive and very cheap. But those days are long gone. Marginal Saudi production needs $85-$125 per barrel to be economic, which is why all the production promises the Kingdom has made have not been realized.

        1. hitssquad

          “Marginal Saudi production needs $85-$125 per barrel to be economic”

          …Then it’s a mystery why they were selling any oil at all in 1998.

          1. “Marginal Saudi production needs $85-$125 per barrel to be economic”

            …Then it’s a mystery why they were selling any oil at all in 1998.

            Not at all. In 1998 Ghawar, which did not require $85 oil and still doesn’t, was very profitable at $10 a barrel. Now that the Saudi production is on the wrong side of Hubbert’s Peak the Kingdom needs $90 to prevent its better marginal fields from being idled. Because the price is well below $125 it cannot develop the less productive fields.

            You do understand that the costs change with time and are very dependent on where a field is on the production curve, don’t you?

  6. morganovich

    this is not a valid index to use for this.

    it’s based on rolling futures and therefore suffers from contago issues which make it a wasting asset.

    this index will drop every month if prices are flat as the premium flows out of the futures before re-buy.

    thus, it is not measuring what you think it is.

    if we look at a spot price index, like the CRB, then we see a VERY different picture.

    http://en.wikipedia.org/wiki/File:CRB_Index.png

    prices for this index are up a great deal, even in inflation adjusted terms.

    the CI (constant commodity index) was 191 in 2002 and is 554 today.

    also: why the obsession with inflation adjusted commodity prices? that whole notion is circular. commodity prices rise which drive up inflation which you then take back out? what sort of reasoning is that?

    1. CRB is a commodity FUTURES price index, and not adjusted for inflation in the Wikipedia entry.

      1. morganovich

        mark-

        that’s not the issue.

        the issue is that the dj/aig index is a traded index that is made up of rolling futures contracts and therefore has a constant downward bias in is even before inflation adjustment due to contango.

        this will cause such an index to drop in value even if the prices of all the components stay constant.

        therefore, you cannot use it as a long term price gauge and get useful data.

        i find that may people make this mistake around futures and spot prices.

        if you want to really measure prices, then you need to use a spot index.

        http://www.un.org/esa/desa/papers/2012/wp110_2012.pdf

        if you look at the inflation adjusted non oil commodity price chart on p7, you’ll see just how much effect this contango is having on your data.

        in real terms, prices are about where they were in the early 70’s and have been rising sharply since the late 90’s.

        there is also a very interesting bifurcation between ag and non ag commodities. (p8)

        metals have been climbing (in real terms) since about 1990 and are roughly flat with 1900.

        ag looks a great deal like the 80’s but has had far less increase of late. this is perhaps unsurprising due to both the advances in crops (hybrids, etc) and the huge amount of subsidy this space sucks up.

        crude oil (p10) is very near the highs.

        note that these are log scales.

        i’m not arguing that malthus was right. the guy was a clown and even flat prices prove him wrong, but the chart you laid out is double counting inflation as it takes out cpi but is also constantly declining based on interest rates (which are affected by inflation) in the contango losses from a rolling futures index.

        for a great look at just how this works, build an overlay chart of percentage changes in the vix index and the VXX rolling futures basket.

        even with a flat vix, the vxx will lose money every year.

        1. morganovich

          eg:

          in 2010 the vix was down 19%, the vxx, made up of rolling vix futures (like the aig index) was down 71%.

          in 2011 the vix was up 42%, the VXX was down 5.2%

          in 2012 the vix was down 5.4%, the vxx was down 77%.

          this is, admittedly, a situation with very extreme effects from contango, but it serves as a good illustration of why such indexes cannot be used to track long term price trends. the commodities futures are are more liquid and better priced, so the effect is more muted, but it’s still a major issue and is resulting in decadal comparisons that are not showing what you think they are.

          (it’s also been one of our best shorts ever though i think the meaty part of this decline is now done as the vxx is down from over 1800 to 20, but, given the inevitable continuation of this logarithmic decline, the VXX will keep approaching zero asymptotically)

  7. hitssquad

    Also of note, world annual copper production rose more than 12-fold over the same period.

    World mined-copper production by year:
    1934: 1.28 million tonnes
    2012: 17 million tonnes

    This is especially interesting when we consider that copper (unlike, say, oil) isn’t consumed. Other than a paltry amount that evaporates (and even this could eventually be re-mined from the surface of the earth) and is otherwise “lost” (such as at sea), all copper ever mined has simply been collected. Each person’s share (out of all 7 billion of us) is close to a tenth of a tonne now, and this per-capita share is growing faster each decade.

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