2007 July 24 Tuesday
How Many Months To $100 Barrel Oil?

Goldman Sachs Group analyst sees $100 per barrel oil as possible this year.

Jeffrey Currie, a London-based commodity analyst at the world's biggest securities firm, says $95 crude is likely this year unless OPEC unexpectedly increases production, and declining inventories are raising the chances for $100 oil. Jeff Rubin at CIBC World Markets predicts $100 a barrel as soon as next year.

``We're only a headline of significance away from $100 oil,'' said John Kilduff, an analyst in the New York office of futures broker Man Financial Inc. ``The unrelenting pressure of increased demand has left the market a coiled spring.'' New disruptions of Nigerian or Iraqi supplies, or any military strike against Iran, might trigger the rise, Kilduff said in a July 20 interview.

World oil production has gone down in the last year even as prices have risen for several years running. So far high prices haven't produced more supply. Given the growing number of countries that are now post-peak in oil production that's not too surprising.

The oil industry's leading figures admit to rising costs for finding and producing in new oil fields. We do not find new reserves as fast as we use up reserves. This is beginning to bite us in a big way.

The cost of finding and pumping oil is rising steadily, convincing analysts such as Rubin and Deutsche Bank AG chief energy economist Adam Sieminski that higher prices will last. Shortages of deepwater drilling ships and rigs has pushed daily rents to records, and the skilled workers needed to run rigs, weld pipes, pilot vessels, fix refineries and build oil-sands projects command ever-higher wages.

``Three years ago we were calling for $30 oil, then $35 and then $40 oil,'' said New York-based Sieminski, who last week raised his forecast for the average price of oil in 2010 to $60 a barrel from $45.

``I've gotten tired of increasing these forecasts in $5 increments,'' Sieminski said in an interview. ``Something has happened. Costs have continued to escalate, and the geopolitical situation has gotten worse.''

We need to start preparing for a post-oil era. The money getting wasted in Iraq would be far better spent on conservation measures and energy research. So far the demand curve for oil has seemed pretty inelastic. If oil demand remains inelastic then $150 to $200 per barrel oil is about 4 to 5 years away. What I want to know: Will we reach a point where people start making huge lifestyle changes to cut their energy usage? When will this happen? At what price of oil will demand start collapsing?

Share |      By Randall Parker at 2007 July 24 12:47 AM  Economics Energy


Comments
Jerry Martinson said at July 24, 2007 4:06 AM:

I think political support for mixed-use and higher density development and infill will likely increase in the US as the gas prices rise to $5/gallon. This can cut car trips and make bus service much more practical. But this will take 30 years to have a major effect. Say PHEVs start phasing in to 50% of market by 2015, it'll still be 2020 by the time a big chunk of the fleet is switched over. The process of siting many more intermodal wearhouses next to rail lines will take 20 years to have a major effect on reducing long-haul truck traffic. The railways have to invest a lot to double or tipple the average speed too. This will take 20 years.

The problem is that while all these things should cut demand by 1/2 or more and make clear economic sense at $5/gallon, they'll take 20 years to do so. In the mean time, the tower cranes rule over Dubai and we all get enjoy getting extorted by Hugo. Because the only way we can cut significantly cut demand in the short run is to not go to work. If we just would've kept listening to those hippie crackpots in the mid 80's after the previous energy crisis waned, we'd be in a lot better shape.

Kenel m Digby said at July 24, 2007 4:30 AM:

The free-trade enthusiasts never cease to tell us how the rise of China has been an unqualified boon, in their words it 'enriches us all' - but not as much as it 'enriches the Chinese'.
The fact is that the price hike is completely due to the billion plus people of China wishing to cash-in on their wealth and enjoy a 'first world' level of consumption.
The iron law of supply and demand, as it manifests through the pricing system - nothing more, nothing less.

Of course, implicit in this is a Darwinian struggle for the scarce natural resources, a contest only the fittest (in this case best exporters) will win - the losers will wither away in misery.
The upshot is that the Saudis are gonna get a whole lot richer, just for sitting on their butts.

rps said at July 24, 2007 5:17 AM:

Gas really isn't that expensive yet. It's higher than it used to be, but my family spends less than $300/month on it, which is manageable. At this point, the only influence rising prices have had on my decisions is that I would take fuel economy more seriously if I were to buy a car now (which I haven't since gas was much cheaper). If it becomes more expensive, there are scooters that get nearly 100 mpg, and there's the bus. Right now the scooter would take too long to pay itself off and I just want to take the bus and really don't have to, but if gas becomes insanely expensive, the options are there. I'm not worried.

Randall Parker said at July 24, 2007 6:29 PM:

Jerry,

Necessity is a mother. Make the cost of energy really high and people can reorganize a lot faster. If the price of oil doubles again then I expect we'll see a very accelerated reorganization of society.

I think rapid reorganization of society to lower transportation energy needs is possible. The US Census Bureau says 16% of the American population move each year (PDF format). So people can move to get closer to jobs.

Migration is a basic component of population growth and decline.

People move into better housing and away from high crime neighborhoods. Some seek greater economic opportunity and others want to start a whole new life.

The U.S. Census Bureau studies the patterns of relocation in hopes of finding clues about future population growth and decline.

Forty-three million people or 16 percent of the population aged 1 and older living in the United States moved between March 1999 and March 2000.

Recent moving rates have changed only moderately from one year to the next, but there has been an overall drop of about 4 percentage points since the 1950s and 1960s, according to the Current Population Survey (CPS).1

Fifty-six percent of the 43 million people who moved between March 1999 and March 2000 moved from one residence to a different residence in that same county. The next largest share of movers (20 percent) stayed within a state, but moved to a different county. An additional 19 percent moved between states and 4 percent moved into the United States from abroad.

Young adults, with their relatively higher rates of marriage, childbirth, and job changes, were more likely to move than older adults. Between March 1999 and March 2000, one-third of 20- to- 29-year-olds moved, a little more than twice the rate for all movers. Among those aged 65 to 84, only 4 percent relocated.

Randall Parker said at July 24, 2007 6:32 PM:

Kenelm,

Yes, China is driving up the costs of oil and other natural resources. The economic theorists who argue that larger markets will raise living standards are wrong when the expansion of those in industrialized economies is so huge that it pushes up world prices of oil, minerals, and foods.

Randall Parker said at July 24, 2007 7:15 PM:

rps,

To lower income people $300 per month is a lot of money. More generally, the higher the income the easier to ignore the rising price of gasoline.

How expensive would gasoline have to get for you to want to switch to a car that is twice as fuel efficient? Everyone has their switching point where they'll move, switch to closer jobs, change cars, ride a motorcycle, ride a bicycle.

Demand destruction is probably happening most rapidly in very poor countries such as the ones in most of Africa.

Kenelm Digby said at July 25, 2007 3:14 AM:

The 'crisis' is just a 'crisis' in the way that it is caused by a sheer lack of will and ingenuity.
The point is that mankind has the answer to thos conundrum in the palm of its hand, namely the development of atomic energy and in particular the very promising HTGR type reactor - that cannot meltdown, is intrinscly 'safe' and operates at high thermal efficiency.
The HTGR reactor is based on (what else?) an 'old' German design, but it is being strongly researched and developed in China.
If China can manage to roll-out and implement an HTGR program, then, without a doubt she shall rule the World.

Mark Plus said at July 25, 2007 10:37 AM:
The point is that mankind has the answer to thos conundrum in the palm of its hand, namely the development of atomic energy and in particular the very promising HTGR type reactor - that cannot meltdown, is intrinscly 'safe' and operates at high thermal efficiency.

Nuclear power needs a massive energy subsidy from fossil fuels to work. Uranium mining takes diesel or gasoline powered equipment, for example, not to mention that the ships which haul uranium from Australia and African countries to other parts of the world require bunker fuel. When we get to $100-$150 a barrel oil and accompanying disruptions in fuel supplies around the world, uranium mines will have trouble staying in business.


Buckaroo said at July 25, 2007 10:58 AM:

Mark Plus,
Perhaps you know something I don't but isn't oil itself etxracted using, um, gasoline-powered equipment and isn't it transported on, like, ships fueled by bunker fuel ? And yet it seems quite economical to do all that extracting and transporting. As far as I can see, the situation with uranium would be different only if uranium ore was a) prohibitively energy-intensive to mine and/or b) so uranium-poor that massive amounts of it had to be transported before being "refined" (or enriched, I suppose) to the substance that actually gets used in a power plant. AFAIK, neither condition is true. Perhaps I'm just wrong.

As for Randall's original posting, it's very hard to know what OPEC can actually produce because they keep the technical data pretty close to the vest [a smart move from a geopolitical standpoint]. It seems that there are two schools of thought. Either 1) they (especially the Saudis) are really getting close to the limit and are, in fact, pretty much at a production plateau, or 2) they have plenty of spare capacity but have observed that their customers (that would be us) are perfectly willing and able to pay $75 a barrel without doing much of significance to reduce consumption so are doing their best to keep the prices high(ish) since that maximizes their windfall.

I am not expert enough to say which of the theories is correct. It does really grind my gears, though, that we are stuffing the pockets of some of the most objectionable people in the world (not just the Arabs either but they are high on the list) whose only "contribution" is that they lucked into squatting on the right piece of real estate when others invented both the means of extracting the oil and the uses for it. To echo what Jerry Martinson wrote: if over the last 30 years we had devoted a fraction of the money and effort we have spent on reforming, cajoling, bribing, invading, "democratizing", and otherwise massaging the Middle East to developing oil alternatives by now we'd be getting our heat and propulsion from freakin' pixie dust. Then we could simply ignore that whole wretched rock-strewn desert which hasn't produced anything of value for a couple of milennia.

Reality Czech said at July 25, 2007 1:34 PM:

Mark Plus should go back to where he found the claims about uranium and examine the premises.  For instance, the Storm and Smith study assumed that 50% of all uranium enrichment would be done with gaseous diffusion (nobody in the world is building anything but gas centrifuges) and that the process is powered by coal-fired plants (assuming no credit for displacing coal power).

Every one of the "nuclear is bad" studies I've looked at has turned out to be a propaganda piece masquerading as analysis.

Albert Gadbois said at July 25, 2007 1:47 PM:

Weren't those same analysts saying the same thing 12, 18 or 24 months ago? How much $ does Goldman Sachs has riding in the oil futures market?

Randall Parker said at July 25, 2007 2:02 PM:

Mark Plus,

I've read that nuclear power plants have a very favorable energy return on energy invested (EROEI). I've read that the first 3 to 6 months of operation is enough to pay back the energy that was used to create materials, haul materials, refine materials, and build the reactor.

Mind you, I do not have a good reference for that claim. I'd be curious to know more. But I'd be very surprised if nukes didn't have a great EROEI.

Buckaroo,

I do not see the OPEC countries scaling up enough production to even keep prices down to $75 per barrel.

Mirco said at July 26, 2007 4:21 AM:

Randal, the economics theorists are not wrong. The larger market enable more specialization and more efficiency.
What you see is some of your (mine too) costs soar (so your / mine living standards are someway reduced).
But Chineses living standards are increased. And the statistic is better.
And the Wal-Mart effect say that people in USA and abroad are better too from the production of cheap Chinese goods.
But it never promised that all, always, would be better of.
They call it "creative destruction" on purpose.

Rick Darby said at July 26, 2007 2:45 PM:

Among the bad effects we can expect once triple-digit oil settles in is that only the rich will be able to live far from their jobs. I realize that many "greens" would argue that this is a good thing, because it will reduce sprawl. But the sprawl is caused, first and foremost, by population growth.

Sure, developers latch onto that to make a buck, but they aren't the cause of the suburban metastasis. More people have to go somewhere, and the only alternative to moving out is moving up (into high rises with apartments of Tokyo-like dimensions), or else moving back into the city center or inner suburbs adjacent to the Third World colonies that they moved away from.

Our corporate overlords don't care; in fact, they'd prefer it if those tiresome clock-punchers and white collar servants couldn't afford commuting to the nice leafy exurbs. Less traffic on the way to the country club.

Hey, it works in China and India, doesn't it? Bring on luxury gasoline!

Randall Parker said at July 26, 2007 5:38 PM:

Rick Darby,

We need densely populated cities that are ethnically homogeneous for safety's sake. Can we find a way to do that? Or just lock up criminals for very long periods of time?

Randall Parker said at July 26, 2007 7:35 PM:

Rick Darby,

Second thought: You just made a great argument for getting rich. Once Peak Oil hits anyone who manages to get rich will be able to live in much nicer exurbs.


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