Your Ad Here
2004 August 20 Friday
Will Oil Prices Hit $70 Per Barrel?

The August 19, 2004 oil price peak of $48.70 per barrel may be cheap compared to even higher prices which may be in store.

No market goes up forever. But Philip Verleger, a respected energy economist, warns that over the next several years, the price pressure will probably get worse. "Prices may rise to $50 per barrel, or $60 per barrel, or even $70 per barrel," he writes in a recent report to clients. "They will likely remain there until growth in petroleum demand slows down enough to match available refining, logistical and productive capacity."

Note that in inflation-adjusted terms during the Iranian hostage crisis the price of oil hit $75 per barrel in 2004 dollars.

Higher oil prices cut economic growth.

High Frequency Economics says that every $10 increase in the price of a barrel of oil lowers its GDP growth expectations by six tenths of a percentage point. All of which feeds back into increased nervousness on Wall Street--and perhaps at 1600 Pennsylvania Avenue.

Not all economists agree on how much smaller the GDP will be for each additional $10 per barrel increase in oil prices. David Wyss, chief economist for Standard & Poor's, sees the economic threat to the economy from high oil prices as being exaggerated by others.

Every $10-per-barrel hike in oil prices reduces economic growth for the next year by about 0.25% to 0.35%, largely by reducing real consumer disposable income. At S&P, we have lowered our consumer disposable income forecast for 2005 to 3.6% from the 3.9% we projected last month, largely because of costlier oil.

...

Even if oil rose to $75, it wouldn't cause a recession. It would merely lower growth, to 2.4%, from the 3.6% expected in our baseline projection.

But Stephen Roach thinks just $50 per barrel oil may be sufficient to cause a recession.

"The oil price is firmly in the danger zone," Stephen Roach, chief economist at Morgan Stanley in New York, wrote in a note to clients. Should prices reach $50 and stay there for several months, this would be "in the ballpark with full-blown oil shocks of the past" that have caused recessions, he said.

Roach doesn't see this economic recovery as being particularly strong and in his writings he repeatedly points to jobs figures, consumer debt, the trade deficit, and the federal deficit as factors that weigh against a robust recovery. So part of his pessimism on the potential effects of higher oil prices may be a consequence of his view of the weakness of the current economic recovery.

Surging demand from China and production cuts caused by fighting in Iraq are contributing to high prices.

China is now the world's second-largest oil consumer, and its imports are up 40 percent year-on-year to the end of July, according to recent data.

Before the latest round of violence in Najaf, Iraq had been exporting roughly 1.7 million barrels of oil per day, although volumes have fallen recently to about 900,000 barrels per day, according to a source within the Organization of Petroleum Exporting Countries who spoke on condition of anonymity.

One of the arguments for the war in Iraq was that it would allow Iraqi oil field production to be scaled up tremendously. Well, even before the latest intensification of fighting in Iraq the Iraqi oil fields were still poducing less than they were in Saddam Hussein's final days. The political stability needed to enable substantial investment in Iraqi oil fields remains a distant prospect.

Energy ecnomist Philip Verleger mentioned above has an article on his web site making his argument that current US energy policy undermines US attempts to stop terrorists. (PDF format)

However, the United States and other countries have taken a different approach to the problem. In lieu of adopting energy policies that support the war on terrorism, they have fallen back on other plans that have been tried before and failed. One of these programs involves attacking terrorist financing. This approach echoes the unsuccessful attempt to cut off funding for Colombian drug lords, where international cash flows were scrutinized, bank deposits seized, and organizations closed down. This kind of effort disrupts but clearly does not stop the flow of funds. In the end, Americans, Europeans, and Asians are as vulnerable as ever to attack.

Meanwhile, the energy policy pursued by the United States has contributed to an increase in world oil prices, likely boosting the cash flow to the terrorists. A policy of aggressive ly acquiring crude for the Strategic Petroleum Reserve, directed by the Department of Energy, has raised oil prices by between $3 and $6 per barrel, thus augmenting Saudi Arabiaís income. At the same time, policies that provide tax subsid ies to anyone who buys an SUV weighing more than 6,000 pounds have contributed to the 1.8 percent per annum increase in gasoline consumption. Lastly, in considering the energy bill now awaiting final passage, Congress has refused to adopt any measures that would encourage greater fuel economy in automobiles or SUVs. This situation sends a very clear message to the world : US Energy Policy Supports Terrorists and Opposes the War on Terrorism.

Verleger makes arguments very similar to arguments I've made here repeatedly. For my own arguments on energy policy and terrorism see my previous posts Saudi Arabia, Terrorism, Democracy Promotion, And Energy Policy, China Energy Consumption Growth Complicates Anti-Terrorist Efforts, Energy Policy, Islamic Terrorism, And Grand Strategy, and Luft And Korin On China's Rising Demand For Oil And Saudi Arabia.

Share |      By Randall Parker at 2004 August 20 02:23 AM  Economics Political


Your Ad Here
Comments
Invisible Scientist said at August 20, 2004 5:16 AM:


Sorry for repeating myself again, but unless we start a Manhattan Project for energy,
the consequences will be very dire. The survival of the United States is now at risk.

Once again, I would like to bring to your attention the improvements in nuclear technology.
The evolutionary design of the Integral Fast Reactor, allows 1000 % improvement in uranium
fuel efficiency, and burns all of the long term nuclear waste, leaving behind only low level
waste with half-life less than 300 years, making Yucca Mountain and other storage ideas
unnecessary. This design will thus be more competitive than the coal-fired plants.
With such nuclear energy, the world can convert water into gasoline and hydrogen (by heat)
efficiently enough, not to mention the possibility of charging the electric fuel cells for cars.

http://www.nuc.berkeley.edu/designs/ifr/
http://www.decentria.com/ifr.html
http://www.nationalcenter.org/NPA378.html
http://www.newton.dep.anl.gov/askasci/phy99/phy99xx7.htm
http://www.anlw.anl.gov/anlw_history/reactors/ifr.html

D.J. McGuire said at August 20, 2004 6:32 AM:

There are two myths I feel the need to puncture here.

1) The high price of oil is damaging to the US: short term, OK. Long term? I don't think so. The higher oil prices rise, the more economically competitive alternative energy sources become. The transition might not be pretty, but it will happen. The only reason to jump start it is if we have a significant national security reason to do so.

As for national security, here's another myth.
2) If the U.S. stops importing oil, we will dry up the terrorist funds: Not quite. The terrorist funders don't care who pays for their oil, and Communist China is more than willing to buy whatever oil we leave on the table.

Shifting to alternative fuels will lower the price of oil since overall demand will fall once we're out of the import game. This will cut back on terrorist funds, but it won't dry it up entirely. More to the point, Communist China has a vested interest in keeping the terrorists in business - as proxies against us, or to use their words, "some kind of check on U.S. power." The Middle East can run out of oil tomorrow, but the PRC would still be there.

Victory in the terror war will come not with freedom from oil in the U.S., but with freedom from Communism in China.

Invisible Scientist said at August 20, 2004 8:42 AM:

If the US becomes the leader in new alternative energy sources, especially new nuclear
reactors, then China will almost certainly adopt the same thing, for its own good.
Dick Cheney recently went to China, partly to encourage the Chinese leaders to have a fresh
look at the newest American nuclear power plants, to make them buy
the latest Westinghouse reactors to get started. China and Taiwan are also exploring the
possibility of using zinc-air fuel cells for cars, that can be charged with electricity.
If China also becomes independent of oil, the Middle Eastern terrorism will diminish.

The dangerous issue in China is not their new brand of Communism,
but their new Capitalism, in the sense that the new Capitalism
in China allows tremendous freedom for private enterprise, except that any attempt to
challenge the government is forbidden. It is because of this new form of Capitalism that
China is so hungry for raw materials, and if their economy collapses, this can lead
to fascism and extreme nationalism, instead of Communism, even though it won't be
advertized as such. At that moment, the danger of tension would materialize. But otherwise,
the Chinese are FAR LESS aggressive than the other nations, given the brutality of Europe
during the last 2,000 years.

Engineer-Poet said at August 20, 2004 11:16 AM:

D.J. McGuire implicitly asks if there is a national security reason to try to replace oil.

If the existence of the Strategic Petroleum Reserve isn't proof that disruption of foreign oil supplies is a threat to our national security, and therefore a program to make us independent of foreign oil would improve our national security, is any evidence sufficient?

The argument that the third world would soak up any supplies freed by the US is a good one, but it ignores the fact that we have causus belli against Saudi Arabia.  It wouldn't take much of an effort via guerrilla fighters to disrupt the Saudi oil apparatus as is happening in Iraq, cutting off much of their economic surplus.  If US consumption had been cut, any resulting increase in world oil prices would hurt the likes of China far more than the west.  It would also give them a strong incentive to follow our lead, buying the technology that we had pioneered.

That is, assuming that we don't drop the ball and let them pioneer it.  With Bush & Co. in the White House it looks all too likely that this will happen.

Randall Parker said at August 20, 2004 1:49 PM:

D.J.,

What I have argued for ad naseum is research to develop forms of energy that will be cheaper than fossil fuels. If we can develop, for example, a really cheap way to make photovoltaics then the photovoltaics can be sold around the world to anyone who wants cheaper energy. More advanced technology can displace oil using only market forces.

I agree that just forcing Americans to use only more expensive domestic energy will not reduce world demand for oil enough to put a big dent in Al Qaeda's purse. But the solution is to develop tech that makes it cheaper to use other forms of energy and also develop tech that allows us to use less energy to accomplish the same things.

Philip Nelson said at August 20, 2004 3:50 PM:

I would remove some of the restrictions on building and running refineries, drilling for oil, making cars, etc. There is plenty of oil in the world- the problem now is a shortage of it, not a scarcity of it. Let market forces do their work without government interference.

By the way, there is a great deal of oil in oil shale in the US; the trouble up until now is that extraction of it has been too expensive to be viable. If oil prices keep increasing, that significant source may become economically feasible. And from what I have read, I do not believe oil scarcity will ever be a crisis; rather, it will simply become more and more expensive to extract over time. Thus alternative technologies would come into their own economically before we ever had a really serious problem, and without government interference.

Fly said at August 20, 2004 6:15 PM:

Philip Nelson: ďThus alternative technologies would come into their own economically before we ever had a really serious problem, and without government interference.Ē

I agree with you overall point. However I do believe the government can play a role.

Most important the government can support basic energy research. Industry is good at development but isnít so good at basic research. (Bell Labs was an exception but that was because as a monopoly the Bell Company acted more like a government agency than a private company.) There are many promising new technologies that could benefit from government research funds.

Second, the government can provide demonstration projects showing the feasibility of new technology. These range from solar power plants to energy efficient housing.

Third, the government can act by providing testing and rating services. Water heaters, air conditioners, insulation, etc. can be evaluated and ranked for consumer information.

Fourth, the government can regulate in situations where the market place fails to solve problems. Air and water pollution have been significantly abated due to regulation.

I also agree that the world isnít close to running out of fossil fuels. However, I do think that burning such fuels hurts our environment. I donít support the Kyoto Protocol and believe the Global Warming problem is over-hyped but I believe at some point the world must switch to renewable or nuclear power. The sooner we can do that economically the better.

Invisible Scientist said at August 21, 2004 3:56 AM:

Right now, the US still extracts 50 % of its oil domestically, but the US has only a few
more years of oil left to extract at this rate. And bringing the sand or shale oil on line
would take a decade or more. This means that in 5 years, the domestic oil production of the
US may actually decline, making the high price of oil unbearable for the US, especially
given that the annual trade deficit is running at 5 % of the GDP, while the total gov't debt
that the foreigners are holding is approaching 40 %.
This is why we do have an emergency situation for oil, because
the Far Eastern and Third World countries are about to increase their already significant
demand for oil by an order of magnitude. So it is not exactly true that there is no
scarcity of oil; in addition to shortage, we shall also have a scarcity in the not so far
future.

Fleming said at August 22, 2004 7:55 AM:

There won't be any R&D for alternative energy if the economy is in a deep depression from $100/barrel ++ oil prices. If oil jumps above $100 quickly, there won't be enough time to adjust. If prices rise more slowly, the US economy will cope, with some suffering.
With a rapid price jump above $100/barrel, speaking of a muslim dominated dark ages would not be hyperbole.

Invisible Scientist said at August 22, 2004 1:29 PM:

If there is a rapid oil price jump to from $100 per barrel, then despite the deep
depression, a Manhattan Project is possible if the GOVERNMENT intervenes. Otherwise,
you are correct, there may not be enough money for R&D. But it is during depressions
that gov't intervention materializes, one way or another, left wing or right wing.
The Manhattan Project happened during the Roosevelt administration, not exactly a right wing
guy. But a right wing conservative would have also embraced the Manhattan Project given the
evidence that the Nazis were working on the nukes.

But once again, either with new generation nuclear energy mentioned above, or even with
biodiesel fuel which is getting close to the current price of gasoline, things are not
that bad. $100 per barrel would be a good price to make these technologies become
more apparent. A lot of progress has already been made. We just need to ignite a public
awareness of these improvements.

Invisible Scientist said at August 22, 2004 1:30 PM:

If there is a rapid oil price jump to from $100 per barrel, then despite the deep
depression, a Manhattan Project is possible if the GOVERNMENT intervenes. Otherwise,
you are correct, there may not be enough money for R&D. But it is during depressions
that gov't intervention materializes, one way or another, left wing or right wing.
The Manhattan Project happened during the Roosevelt administration, not exactly a right wing
guy. But a right wing conservative would have also embraced the Manhattan Project given the
evidence that the Nazis were working on the nukes.

But once again, either with new generation nuclear energy mentioned above, or even with
biodiesel fuel which is getting close to the current price of gasoline, things are not
that bad. $100 per barrel would be a good price to make these technologies become
more apparent. A lot of progress has already been made. We just need to ignite a public
awareness of these improvements.


Post a comment
Comments:
Name (not anon or anonymous):
Email Address:
URL:
Remember info?

      
 
Web parapundit.com
Go Read More Posts On ParaPundit
Site Traffic Info
The contents of this site are copyright ©