2007 October 15 Monday
Oil Prices Go Over $86 Per Barrel

Are we near Peak Oil?

Oil prices soared past $86 a barrel yesterday as tension in the Middle East and uncertainty about the direction of the American economy pushed prices to record levels.

Crude oil for November delivery settled at $86.13 a barrel, up $2.44, or 2.9 percent, and the highest price since oil contracts began trading on the New York Mercantile Exchange in 1983. (In the late 1970s and early ’80s, small quantities of oil traded on the then-new spot market for $40 a barrel, or about $100 in today’s money.)

I want to know how rapidly demand destruction will occur as prices rise. People will shift toward smaller cars, take fewer trips, choose jobs closer to home, move closer to jobs, better insulate their houses, and make many other adjustments to reduce their energy usage. How rapidly will they make these adjustments when oil prices hit $100 per barrel and up? How high will prices have to go to cut demand for oil?

Share |      By Randall Parker at 2007 October 15 09:45 PM  Economics Energy


Comments
Kenelm Digby said at October 16, 2007 4:32 AM:

The fly in the ointment as far as 'demand destruction' goes these days is, of course, China.
Sky-rocketing prices for other commodities seem to have little effect dampening Chinese demand (after all they've got the cash to pay for it).
I expect the same pattern to hold with oil, but in this case it will be a Darwinian struggle of the fittest between many competitors for the right to this 'lifeblood'.

Doug M said at October 16, 2007 6:26 AM:

I think that demand destruction will be very slow for a long time, until it accelerates rapidly once oil goes well beyond $100. As far as China goes, Mr. Digby has a good point, although it is more a case of gasoline being heavily subsidized, rather than China "having the cash."

Dennis Mangan said at October 16, 2007 6:09 PM:

The price of oil is still below its inflation-adjusted 1980 price, and lower yet as a fraction of per capita GDP. It will be awhile before demand destruction kicks in.

Stephen said at October 16, 2007 10:17 PM:

Compare the price of one bottle of coke to the same quantity of oil, and then think about the infrastructure and manufacturing costs built in to the cost of each product.

Oil is dirt cheap and will be for several years.

Kenelm Digby said at October 17, 2007 4:06 AM:

No, Stephen the point isn't that oil is 'dirt cheap' as compared to Coca-Cola (but perhaps not to proprietary brands of soda), the point is that Coca-Cola is an unashamed, massive confidence trick on the public - and has been for a century.

mike said at October 23, 2007 1:41 PM:

Most cars have a pretty long life cycle, unless oil gets really expensive, very soon, today's gas guzzlers will still be on the road for a long time. New car buyers can pick and chose what they buy, but second-hand buyers are to make do with whatever is already in circulation.

Hence, it seems unlikely there will be a dramatic reduction for at least another decade.

Randall Parker said at October 23, 2007 7:00 PM:

mike,

Regarding cars already in circulation: There's a much larger potential to save energy because cars can change hands with the longer distance drivers buying small cars from shorter distance drivers. Also, smaller cars can get more maintenance to stay on the road longer as compared to larger cars. Also, if you follow the comments section in this FuturePundit post you will see we are discussing the conversion of gasoline cars to electric. I still don't have a good handle on the cost. But I'm looking for info about it.


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