Archive for the ‘Peak Oil’ Category

Who’s Driving the Price of Oil Up Part 2

Saturday, May 17th, 2008

Maybe the weak US dollar can explain the recent increase in the price of oil? If this is the case, then the price of oil measured in a stronger currency, such as for instance the euro, should remain roughly the same.

Let’s have a look at it:

From January 1, 2007 to May 1, 2008, the price of oil is up a stunning 86% in dollars. In the same period, the price rose 57%, measured in euros. From this we can deduce two things. First, the weak dollar is clearly an accomplice in the matter. However, we need to find another explanation for the remaining 57% increase measured in euros.

The biggest villain is still at large!

Who’s Driving the Price of Oil Up?

Saturday, May 10th, 2008

I have to admit it: I’m a speculator. I own shares in the United States Oil Fund (USO). I even own call options on USO. Needless to say, I have made a nice return so far.

You have probably heard that speculators are driving the price of oil up.  It’s all over the news. The recent run-ups have nothing to do with fundamentals, it’s all speculation, they say. And it’s not hard to believe. Oil is seen as a safe haven, a hedge against inflation and an ever sinking dollar. Crowds of investors are even buying oil merely a speculative play, in hopes of parabolic price-increases.

But those investors have little influence over the price of oil, because of the way oil is traded. Oil, unlike gold, is not a commodity which is traded directly. You buy contracts for delivery of oil at a specific place and time. The contracts settle at a specific date, at which time you have to take physical delivery of the oil. The current oil price quoted by most media is the June 2008 contract. It settles on May 20. If you’re a speculator, that means you have a few days left to sell your contract.

In order to drive the price up, you need to strangle supply or increase demand. There is no way the speculators can do this. They can get a free ride up along with the price, but they do not affect the settlement price, unless they refuse to sell by the expiry date. One contract is 1000 barrels, so unless you have an enormous basement, this is not a scenario you’d want. In fact, I’d be pretty desperate to sell at any price as expiry closes in.

The only real customers of the oil are the refiners. If they refuse to buy oil at the prices demanded by the speculators, the speculators will surely cave. The reason they don’t have to is that actual demand for oil is high enough that all contracts are bought by refiners.

To sum it all up: No speculator is taking oil out of the market and storing it up for later in some giant tank farm somewhere. It’s the drivers who are driving, literally, the price of oil up. I am biking the price of oil down.

Why am I doing this? The average American is using close to 25 barrels of oil per year (Wikipedia), either directly or indirectly through their lifestyle. That sums up to 1950 barrels over the average life expectancy of 78 years. The good news is that you only need two contracts to cover this. The bad news is that those two contracts are trading at more than $125 000 each. In practice you are shorting a huge amount of oil, and have taken 6 digit losses already. Oil was $60 last year. When I started monitoring it back in 2004, it was because it had broken up above $40, and this made me worried. I’m merely buying protection, and at the same time cutting my own oil costs, because I’m too wimpy to keep shorting my own lifestyle.

The question is: Do you feel lucky?

The Oil Price Widget

Tuesday, July 31st, 2007

UPDATE: This widget no longer works. Please consider the Commodities Widget instead.

Apple Mac OS X (version 10.4 and above) has this neat feature called dashboard. It lets tiny programs, called widgets, run as an overlay to your screen when you press ‘F12’. There are widgets that show the current time in any timezone, hurricane advisories, stock quotes, your computer’s vital stats, and much more.

I’ve got a certain desire to stay updated on the price oil, since it’s often related to world events. For instance, a spike in the oil price might mean a hurricane is headed towards the Gulf of Mexico or that there is more unrest in the Middle East. So to satisfy this urge for oil price updates, I’ve created the Oil Price Widget. It works on Mac OS X Tiger and gathers information from 321energy.com, which is displayed in a small window on the dashboard.

The Oil Price Widget on my dashboard

Download: Oil Price Widget.

Instructions: Mac OS X 10.4 Tiger is required. If you’re using Safari, click the download link. When the widget download is complete, Show Dashboard, click the Plus sign to display the Widget Bar and click the widget’s icon in the Widget Bar to open it. If you’re using a browser other than Safari, click the download link. When the widget download is complete, unarchive it and place it in /Library/Widgets/ in your home folder. Show Dashboard, click the Plus sign to display the Widget Bar and click the widget’s icon in the Widget Bar to open it.

A (Very) Simple Oil Field

Tuesday, June 19th, 2007

Assume and are the amount of oil in the ground and the production rate respectively. We model the behaviour of the oil field with a system of linear ordinary differential equations (ODEs).

In clear text, this means that the amount of oil in the ground decreases by the amount produced, and the production capacity increases if it is small compared to the amount of oil left in the field, and decreases if it is large compared to this amount.

Now, the system is easily transformed into a single ODE by differentiating the second equation and inserting for from the first equation. This gives

which is has a simple analytical solution. The general solution is

Now we impose the initial conditions

which translates to some finite amount of oil in the reservoir, and the production capacity 0 at the time we start. These two conditions are used to determine the coefficients and . The solution is then

This solution reveals that the model has some obvious flaws. The first thing that becomes apparent when plotting the solution (or simply noticing the sine factor), is that the production becomes negative at times. Another flaw, is that if we integrate the production from the start to the time it becomes negative, the amount of oil extracted is larger than the amount that was originally in the field. Clearly, some modifications to the model are needed. A fix is to replace the first equation by

This new equation makes the system a lot harder to solve by hand. Using a computer program and Euler’s method for explicit time-integration, it was easy to plot the result, however.

This time, the integral is 1 (at least with numeric integration), and the production is never negative.

Compared to real-life oil fields, the model production is ramped up too fast. The model does not incorporate the effects of limited manpower, investment and equipment. A sharp cliff is present where the technical production capacity exceeds the geological capacity of the field. This cliff should not be observed in any well-planned oil project, since no-one would invest in bringing production capacity beyond what the field can handle.