2006 April 17 Monday
Oil Goes Over $70 Per Barrel

How high does oil have to go to throw the US and world economies into a recession? 500,000 barrels a day are off-line due to rebels in Nigeria and the Bush Administration might attack Iran.

U.S. oil climbed to within 10 cents of a record high on Tuesday, extending gains above $70 a barrel as fears grew of possible military action against Iran and a major Nigerian supply outage dragged into a third month.

Picture yourself laid off in a deep recession while gasoline costs $4 per gallon.

Iran might use a cut in oil production as a bargaining chip.

While officials in the Iranian oil ministry have said they will not use oil exports as a bargaining chip, other senior officials have said they may use their country's "oil weapon" in a confrontation with the West.

"The concern," Mr. Bremmer said, "is that we'll move from simple diplomacy to coercive diplomacy against Iran, and Iran will actually play the oil card instead of just mentioning it."

Meanwhile, with most OPEC members producing at full capacity, these producing nations say they are effectively powerless to bring prices down.

There isn't any spare production capacity.

Chad might stop selling oil unless some big oil companies circumvent some sort of UN restrictions on its oil revenue.

Worries over supply from Iran, which pumps about 5 per cent of the world's oil, were compounded by African producer Chad, which demanded that a US-led oil consortium pay it at least $US100 million ($137 million) by Tuesday or else it would halt its output of up to 170,000 barrels a day.

Oil Minister Mahamat Nasser Hassan told Reuters in an interview at the weekend that Chad had asked Exxon Mobil Corp, Petronas and Chevron to put the funds into a state account, circumventing the World Bank's escrow account that was meant to ensure revenues benefit the poor.

In March 2006 Iran produced 3.86 million barrels of oil per day and Iraq produced 1.82 million barrels of oil per day. OPEC produced 160,000 barrels fewer in March than in February 2006. Imagine the world minus a few million barrels a day of Iranian oil. We may well find out what that is like. Now might be the time to switch to a job that has greater job security. Also, avoid taking in more debt. You might need the cash.

In inflation-adjusted terms oil was more expensive at its peak in 1980.

In 2005 dollars, the average price of crude in 1980 was just under $77 a barrel. Even that is somewhat misleading, though, because the economy is much more energy efficient these days, analysts said.

There are some big differences between 1980 and today. One difference is that we appear to be approaching the "Peak Oil" point of peak world oil production. (and I'd be curious to hear your views on those charts) What I want to know: How quickly can Coal-To-Liquid (CTL) technologies come on line to provide an alternative for liquid hydrocarbon fuel? To put it another way: How long do oil prices have to stay high and how long does production have to cease growing before capitalists become convinced the risks are low enough to justify building Fischer-Tropsch CTL plants?

Also, how high do prices have to get before we'll see a halt and even a reversal in demand growth? Can that happen without a recession? Seems unlikely.

Share |      By Randall Parker at 2006 April 17 10:42 PM  Economics Energy


Comments
Matt said at April 18, 2006 12:04 AM:

Was not Coal-To-Liquid tech used by Germany in ww2? If I recall correctly, South Africa under sanctions also used Coal-To-Liquid technology.

Wolf-Dog said at April 18, 2006 12:06 AM:

Note that the capital also the know-how, infrastructure, etc, are always in the hands of the oil companies. Now unless the oil companies decide to implement the Coal To Liquid method, nothing will be done on time. Also, the oil companies are already investing in the Canadian Tar Sands, as well as some other drilling, and so they will do everything possible to delay other rival methods.

This situation can change only if there is a national emergency which causes a non-partisan consensus.

Also, it is not true that the private sector can develop the commercial version of the Molten Salt Reactor or the Integral Fast Reactor, because General Electric does not have the capital to do a 100 billion dollar investment similar to the Manhattan Project in complexity (that might fail, wiping out General Electric.) This is not a small scale microchip development that might cost 100 million dollars. The oil industry certainly has the money to finance this nuclearization process, but they won't. Only the government can, but this will be only after there is a national emergency.

Note that Iran will probably start running out of oil within 20 years. The Saudi oil will probably peak within 20 years.

Meanwhile, due to the brief recession that is likely due to higher interest rates in Japan and the United States, it is possible that the price of oil will temporarily decline next year (if there is no war.) This is because some new oil fields will probably come on line due to the new efforts, and so we might have a temporary decline in the price of oil, which will probably cause every government to lower its guard and neglect alternative energy research. Afterwards, the price will go higher again.

Kenelm Digby said at April 18, 2006 3:15 AM:

Well, from where I'm standing it looks like Iran holds all the cards.

Engineer-Poet said at April 18, 2006 8:39 AM:

Just on the basis of feel, a coal-to-liquids plant does several times the processing of an oil refinery so it should be some multiple of the size, complexity and cost.  If that holds, implementation of CTL for X million bbl/day involves an investment bigger, and schedule longer, than building refineries of the same capacity.

Now add coal mines to feed these plants, and rail lines (single points of failure!) to move the coal from mines to plants.

Now add the pressure on other resources the plants require, such as water.

No, these things are not going to be built quickly.  They will be slow AND expensive AND difficult if they are built at all.

Dammit, where's my plug-in hybrid?  I want to be able to put up some PV panels and a wind turbine and drive on my own energy.  We could have had these things on the road in 1995, so why can't I walk into a showroom and buy one?

crush41 said at April 18, 2006 2:01 PM:

Is the Iranian leadership that desperate to flaunt international pressure that they will give up $180 million in oil revenue a day? If Ahmanjihad and Khamenei are that zealous, I see Iran as a very real threat in the future.

Randall Parker said at April 18, 2006 3:42 PM:

Wolf-Dog,

The oil companies do not have a monopoly on capital. The natural gas and electric utilities are logical candidates to raise the money to finance coal to gas and coal to liquid plants.

The Great Plains Synfuels Plant is located approximately 7.5 miles northwest of the city of Beulah, North Dakota. The facility lies within the Knife River drainage basin in the Missouri Plateau section of the Great Plains Region. The facility is constructed on approximately 535 acres of land.

In the 1970's, a consortium of energy companies obtained additional federally guaranteed loans to finance the construction of the Great Plains Synfuels Plant. Operations began in 1984. The consortium abandon the plant in 1985, and DOE assumed ownership in 1986. In 1988, DOE sold the plant to Dakota Gasification Company, a wholly-owned subsidiary of Basin Electric Power Cooperative.

The facility is co-located with the Antelope Valley Station, a coal-fired steam electric generating plant also owned and operated by Basin Electric Power Cooperative and the Freedom Mine, operated by Coteau Properties, a subsidiary of North American Coal Corporation.

Operations at the facility produce a synthetic natural gas from lignite coal. The coal gasification process involves the breaking down of the molecular structure of coal to produce carbon monoxide and hydrogen, that are in turn combined to produce methane.

I figure the plants will be built near coal mines. So the natural gas or liquid fuels will be piped out. No trains involved.

Engineer-Poet said at April 18, 2006 4:26 PM:

Lots of the coal is in areas with little water (like Montana).  If you don't ship coal out, you're going to have to pipe water in.  And that means finding the water.

That gets touchy.  "Whisky's for drinking, and water's for fighting."

Frank Namundoo said at April 19, 2006 4:34 PM:

Clearly, war makes money. any country which needs to upgrade their weaponse cannt destroy them, so use them in war. make an enamy. terrorism is good enemy of civilisation. also terrorism cannot be stopped with anger/war. so ultimately war is about oil, controlling the black gold. now that americans control oil, tey can charge the world anything they like. all americasn pay double now. so the real casualities of war is not iraqi man or soon to be iranian man. but only people all over world.

shame no one can see that the WTC was a setup, a trigger to start the total radical change in the world. shame no one sees that america perpetuates the cycle, and bullies the world to conform to its form of thinking. yet, the truth is NEVER told to me, you or anyone. Shame all are too blind to notice that we are losing the very freedom, whcih we claim tobe enjoying.


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