Update on the 2017 Oil Supply Crash

This blog entry is an update on an earlier entry on the issue of Peak Oil and the oil supply crash that is coming in 2017. We are still on track for the oil supply crash to unfold in 2017. While virtually all "Peak Oilers" believe that the price of crude oil will go into an inflationary spiral after peak production is reached, in which Peak Oil is brought about through the process of exhausting a finite non-renewable resource, there is a case to be made that the oil supply crash will actually be caused by a combination of a deflationary spiral in the commodities market and corporate greed.

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.

Preview of the 2017 Oil Supply Crash

Peak Oil is one of the issues that will play a substantial role in the economic and social conditions that will unfold in the years ahead. The worst of the oil supply crash will take place in the first year of the Bachmann Administration Period, but there are a number of precursor events that will no doubt unfold before the crash occurs. The oil supply crash will also play a major role in economic and living conditions on "Main Street" being comparable to the 1930s during the Bachmann Administration Period.

Some nations will feel the effects of Peak Oil sooner than others. A case of point here is the Keystone XL pipeline. Last week. the Obama Administration opted to kick the can down the road by delaying approval of the pipeline until 2013 or later after a massive outcry of protests from environmental groups. A few days later, Canadian oil companies shifted their focus to Asian markets after the project was delayed in the United States.
 
The United States consumes 19 million barrels of oil a day, far more than any other nation on the planet, with well over half the oil imported from oil producers. Canada is currently the largest supplier of oil to the United States, but the delay of the Keystone XL project will substantially change the picture.

With Canadian oil companies shifting their focus to Asian markets, an oil supply shortage will begin to develop in the United States with supply projected to decline by 3% a year for the remaining part of the Obama Administration Period, with oil supply (for the United States) projected to fall to around 17 million barrels a day in 2016. In 2017, the deflationary collapse of crude oil prices in the commodities market will result in Big Oil shutting down production of oil from tar sands, shale, and deep sea drilling, in order to protect their balance sheets -- which will cause a massive oil supply crash. It is well within the realm of possibility for the supply of oil to decline by 75% in 2017 as a result of the crash.

Peak Oil is just one of many issues that the western world will be dealing with during the worst part of "The Great Deflation". This is another contributing element of the larger "Crisis of the Western World" period associated with Grand Supercycle wave [IV].

In the aftermath of the oil supply crash, the economy is expected to become increasingly local as most motor vehicles are effectively taken off the road. Being able to buy and grow food local is going to be key to successfully surviving through the worst part of "The Great Deflation". Bartering is also expected to become widespread as well not only during the Bachmann Administration Period, but also through the "Green Technology Age" as well as people in "Main Street" struggle to adapt to the plutocratic environment during Supercycle wave (b) (2021 - 2042).

Bears in control of Crude Oil

It looks like the bear market rally on crude oil has peaked and the next leg down is starting. In the last post about crude oil, I had predicted a peak in the $115 to $122 range. The bear market rally peaked a hair short of the target zone at $114.81 a barrel. Primary wave [3] down has arrived for crude oil.

Here's an intermediate term chart of crude oil.

We can see that when the ending diagonal was done, it was followed by a sharp decline downwards. The sharp decline isn't too surprising, given that it would take roughly a month to retrace the ending diagonal. The decline in progress, however, is likely too brief to be a Minor degree impulse, so its most likely Minute wave [i] of a leading diagonal. Notice the potential three wave structure of the initial decline from the top.

A leading diagonal has implications at the gas pump as well, since gas prices tend to follow crude oil. The implication of a leading diagonal is that gas prices at the pump could stay above $4 a gallon in many areas of the United States until perhaps early 2012. A rounded top pattern in gas prices at the pump is a very likely scenario.

The top of the bear market rally really does have all the expected characteristics of a large wave 2 in a bear market. In 2008, when oil peaked at $147 a barrel, there were calls by Congress for an investigation into speculation and price manipulation, but the pressure was brief. This time around, with the peak of the bear market rally approaching, the Obama Administration started calling for investigation into the role of speculators and price manipulation in the rise of oil. The difference is that there has been a stronger response from the government this time around, which indicates a stronger level of fear than in 2008. Not only has the Obama Administration called for an investigation into price manipulation, but also recently pushed to put an end of government subsides for Big Oil as well, arguing that Big Oil is doing fine without the subsidies as evidenced by stratospheric profits. On top of that is a speech by Obama in April 2011 on the subject, emphasizing the need for energy independence and cutting the use of foreign oil.

Expect the Obama Administration to continue putting pressure on Big Oil for a number of months, possibly into 2012, in spite of crude oil's decline from the peak. Only when crude oil starts the initial Minor wave 3 down will government involvement end.

We are seeing the effect of "The Great Deflation" in crude oil prices, and the forecast is for oil to continue falling. Here is a chart of oil from 2003 to 2022.

Recall that when Primary wave [1] down took place in crude oil, OPEC started cutting production in a frantic effort to put a floor on falling prices. There is every reason that the same thing will happen again when Primary wave [3] down unfolds in earnest.

Looking at the larger picture, Peak Oil occurred in 2008 at a global production of 86 million barrels per day. With Primary wave [3] down unfolding in oil prices, OPEC will cut production again to try to put a floor on falling prices. This will be accompanied by Big Oil shutting down production facilities as well. It costs roughly $25 to produce a barrel of oil from oil sands and from deep sea drilling. Once oil falls below $25 a barrel, oil companies will start shutting down production to avoid taking losses on their balance sheet. The result will be a chronic shortage of oil that will be evident during the Palin Administration Period, with production falling faster than the Hubbert Curve would predict. One of the consequences is economic and living conditions falling to the level of the 1930s by 2021.

Black Gold Mania

With a massive barrage of developments in the crude oil market taking place in the last few days, the analysis of the US Dollar Index will be deferred to a future post. Crude oil has been in the news for over a month, indicating that a blow-off top is in progress.

Looking at the larger picture, crude oil is in the midst of a Primary degree bear market rally. Here's the chart of crude oil from 2008 - 2011:

What we are seeing now is a repeat of 2008 when crude hit a high of $147 a barrel. As crude oil approached the final stages of a Grand Supercycle degree peak, the fear of "Peak Oil" was pervasive in media and politics and there were calls in Congress (particularly Nancy Pelosi, who was Speaker of the House at that time) for investigation into excessive speculation and fraud.

We are seeing it unfold again, just like 2008. Yesterday, President Obama placed the blame for rising oil and gas prices on speculators and called for an investigation headed by the Justice Department to look for fraud and manipulation. There is more information about the development here and here.

The calls for government intervention in rising oil and gas prices is not just happening at the federal level. Just today, Sen. Maria Cantwell and Sen. Patty Murray also called for increased regulation on oil speculation. There is more information about the development here.

Why would the Obama Administration call for government intervention on oil speculation now? The clue is the nature of blow-off tops in commodities. While blow-off tops in the stock market are fueled by hope, blow-off tops in commodity markets are fueled by fear. Fear is a stronger emotion than hope, which is the reason why we see parabolic tops in commodities but not in stocks. There is definitely a lot of fear in the air with economists and market analysts talking about the effect of social unrest in the Middle East on oil futures, and some contemplating what would happen if Saudi Arabia were to be affected by the same type of social unrest that has taken place in Tunisia, Egypt, Bahrain, Yemen, and Libya.

Here is the 6 month chart of crude oil:

As the chart indicates, a blow-off top is in progress. Crude oil is clearly tracing out an ending diagonal, which started with a massive thrust from a Minor degree triangle in late February. The initial thrust propelled crude oil past the 61.8% fibonacci retrace benchmark ($104 a barrel). The upside target for the ending diagonal is indicated by the blue box on the chart, which is $115 to $122 a barrel sometime in May 2011.

Crude oil is approaching a Primary degree peak, and the peak should be followed by a resumption of the larger downtrend. It's more than a coincidence that crude oil is approaching a critical juncture at the same time that the stock market is. Gas prices at the pump should keep rising into June 2011, retesting the 2008 high and hitting $4 a gallon in many areas of the United States.