Big Oil, like any other industry, must be able to make a profit in order to stay viable in the larger global economy. In fact, the number one modus operandi of corporations, above all else, is to make a profit. When push comes to shove, corporations will always choose a smaller profit over taking a hit on their balance sheet. This is important because the cost of producing a barrel of oil varies by source. It costs only $5 to produce a barrel of oil from underground such as the oil fields found in Saudi Arabia, but it costs $25 to produce a barrel of oil from deep sea drilling and $70 to produce a barrel of oil from tar sands and shale. Most of the cheap, easy to get crude oil has already been depleted and geologists are already scouring the ends of the earth to try to find more oil. Most of the oil that is produced today comes from deep sea drilling, tar sands, and shale.
Extracting crude oil from shale and tar sands is economically viable now because crude oil in the commodities market has stayed at elevated levels for quite a long time, currently at $105 a barrel and rising. Once the deflationary spiral resumes later this year, crude oil futures will reach a sufficiently low level that it will no longer be economically viable for Big Oil (and OPEC for that matter) to produce crude oil from tar sands, deep sea drilling, and shale. The result will be an oil supply crash in 2017 as Big Oil shuts down production of oil from tar sands, deep sea drilling, and shale, to protect their profits. This type of scenario has been unfolding with natural gas for 4 years as drillers cut drilling and production in response to falling natural gas futures. If it can happen with natural gas, it can also happen with crude oil as well.
Before the deflationary spiral resumes later this year, crude oil will keep rising as it is quite evident that it is tracing out a regular flat or an expanded flat. The peak for the year should be reached when the high point of the current business cycle is reached, which would be June 2012. Here is a chart of Crude Oil from the 2008 peak:
Here is a chart showing a close-up of the last 2 years:
The minimum upside target is $135.50 a barrel for a regular flat (90% retracement of Primary wave [A]) and the guideline target (for an expanded flat) is $170 a barrel. The reason for the flat or expanded flat scenario is because it is quite evident that Primary wave [B] up is tracing out a complex structure (most likely a double zigzag). A simple 3 wave structure for wave A, followed by a complex structure for wave B, fits the guideline for a flat or expanded flat quite well.
Gas prices at the pump will follow crude oil higher into the business cycle high point. The trend is already being recognized by the mainstream media, as gas prices have jumped to $3.53 a gallon (US average) with prices already as high as $4.25 a gallon on the West Coast. Although the mainstream media is expecting gas prices at the pump to hit $4.25 a gallon (US average) later this year, one must account for the scenario of crude oil reaching the $135.50 - $170 a barrel target. Factoring the higher crude oil prices that will unfold in the near future, there is a high probability that gas prices at the pump will hit $5 a gallon in much of the United States, with gas prices going as high as $6 a gallon on the west coast of California. Rising gas prices should act to bring about a fast and abrupt reversal in the job creation trend as businesses will likely take a big hit from rising transportation costs.
After the high is put in for the year, Primary wave [C] down will follow, resulting in a resumption of a deflationary spiral in crude oil prices, eventually creating an economic environment where production of oil from tar sands, shale, and deep sea drilling is no longer economically viable.
Since everything moves together in a deflationary environment ("All the same market"), crude oil futures will remain at depressed levels after the flat or expanded flat structure is completed, which is expected to be Cycle wave w of Supercycle wave (a). Here is a long-term chart of crude oil illustrating the outlook of crude oil during "The Great Deflation":
Cycle wave w is expected to be completed at the next business cycle low point in 2016 with a downside target of around $8 a barrel. With crude oil futures at depressed levels for a number of years, Big Oil will inevitably shut down production of oil from tar sands, deep sea drilling, and shale, in order to protect their profits. The result of a mass shutdown in oil production will result in a 75% reduction in oil supply, causing an oil supply crash in 2017.
The oil supply crash is one of the defining characteristics of the coming Bachmann Administration Period (2017 - 2024). The result of an oil supply crash is that economic and living conditions on "Main Street" will return to the level of the 1930s. The oil supply crash will also play a substantial role in the implosion of 90% of corporations and businesses on the planet since goods can no longer get transported long distances. The economy will become increasingly local. Mom and pop businesses will return to the forefront as corporations shatter like glass. Family farms and farmers markets will make a strong comeback as corporate farms shut down from being unable to transport their finished goods long distances due to an oil supply shortage.
Do you see a coincidence of the peak price in 2012 with a war in the Middle East, such as with Iran?
ReplyDeleteThere has already been a cold war between the United States and Iran in progress for several weeks, considering all the tough talk, all the aggressive gesturing, the military exercises, the economic sanctions that are about to be imposed on Iran by the US and EU, and the threat to block the Strait of Hormuz by Iran. The cold war can escalate quite a bit without turning into a hot war.
DeleteAny hot war involving Iran will escalate into World War III as China and Russia intervene on Iran's behalf. A war of that magnitude won't happen until we enter Supercycle wave (c) down, which under the preferred count, would be 2076 - 2118.