Sunday, August 20, 2006

Net Oil Exports Revisited: The No Down Payment Disaster and a Proposed Triage Plan

by Jeffrey J. Brown

Net Oil Exports Revisited

I've written several articles and posts based on "Khebab's" excellent technical work. This was my first article, posted in January, 2006, on The Oil Drum:

Hubbert Linearization Analysis of the Top Three Net Oil Exporters

My concluding statement from this article: "It would seem from this case that these factors could interact this year produce to an unprecedented--and probably permanent--net oil export crisis."

I thought that it would be interesting to compare the decline since December in world crude + condensate production to the decline in production from the top 10 net oil exporters (based on the 2004 list of top exporters).

As of the May, 2006 EIA numbers, the world is down 1.3% since December, an annual decline rate of 3.1% per year, but the top 10 oil exporters are down 3.0%, an annual decline rate of 7.2%.

Note that consumption is growing quite rapidly in most of the exporting countries, and note that in most cases domestic consumption is satisfied before oil is exported. In the captioned article, I showed, using my "Export Land" model, how a 25% drop in oil production and a 20% increase in consumption (over a five year period) would lead to a 70% drop in net oil exports.

I estimate that net oil exports from the top exporters are probably down by 4% to 5% (over a five month period), an annual decline rate of as much as 12% per year, which suggests that exports from the top exporters are falling about three to four times faster than world oil production is falling

As I have been relentlessly pointing out, I think that we are looking at a series of bidding cycles for declining net oil export capacity, with the oil going to the high bidders and with the losers having to reduce consumption. Leanan, on The Oil Drum, has documented several case histories of poorer countries having to reduce consumption. Soon, the developed and rapidly developing countries will be bidding against each other, instead of bidding against regions like Africa.

However, we are beginning to see clear signs of stress here in the US, among poorer households and among financially overstretched homeowners. Consider some recent numbers from the 8/21/06 issue of Barron's.

"The No-Money-Down Disaster"
Lon Witter, Guest Column, 8/21/06 Barron's


  • 32.6% of new US mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000
  • 43% of first-time home buyers in 2005 put no money down
  • 15.2% of 2005 buyers owe at least 10% more than their home is worth
  • 10% of all home owners with mortgages have no equity in their homes
  • $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007

At the end of 2003, 1% of Washington Mutual's (WaMu's) option ARM (adjustable rate mortgage) loans were in negative amortization (the borrowers were borrowing more money each month, not even paying enough to pay the monthly interest charge in full). At the end of 2005, 47% of WaMu's option ARM's were in negative amortization (55% by value of the loans).

WaMu is booking these negative amortization payments as earnings. In prior times, loans where borrowers were making less than the interest payments would be classified as non-performing loans. In January-March, 2005, WaMu booked $25 million in earnings from negative amortization payments. In the same period in 2006, WaMu booked $203 million in earnings from these payments. These borrowers are increasing their mortgage balances as property values have started falling, so the default risk on these loans is extremely high.

Mr. Witter estimates that a simple revision to the mean suggests a 30% drop in residential property values in the US over the next three years. This is without considering in the effect of further increases in energy prices.

A Proposed Triage Plan

I believe that vast expanses of American Suburbia are going to become virtually abandoned in the years ahead. Alan Drake has noted that a good deal of suburbia was so poorly constructed that a lot of it is biodegradable. Alan has outlined how we can go back to what we used to have: electric trolley cars connected to electric light rail lines.

CBS Sunday Morning, on 8/20/06, had a segment on "tiny houses." They profiled a home designer and builder who specialized in building very small functional homes of about 100 square feet. You can find more information on his website.

What this builder has realized, and what millions of Americans are just beginning to also realize, is that anything over 100 square feet or so per person is not a necessity; it is optional consumption, a want, instead of a need.

The US is not Switzerland, but Alan Drake has described how Swiss per capita oil consumption in the Second World War was about 0.15% of current US per capita oil consumption. They did it primarily by electrifying their transportation system.

I propose a sort of triage operation: "tiny" homes and multifamily housing along electric mass transit lines. In my opinion, it is the only way that we can preserve some semblance of a civilized society. The suburbs are, by and large, a lost cause.

Jeffrey J. Brown is an independent petroleum geologist in the Dallas, Texas area.
His e-mail address is