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2007 October 25 Thursday
Oil Goes Over $91 Per Barrel

The world appears to be on an oil production plateau. This leads to a question of great moment: which way oil production will go when we leave the plateau? Peak Oil anyone?

Crude oil rose on an unexpected drop in U.S. stockpiles and concern that supply from the Middle East may be disrupted. Oil for December delivery gained as much as 0.7 percent to $91.10 a barrel in after-hours electronic trading on the New York Mercantile Exchange, the highest since trading began in 1983. The contract was recently at $90.95.

The idea that oil production is going to surge in response to rising prices is getting a little tattered at this point.

You can see the most recent prices for oil in different markets. The higher priced oil in that table is lighter and easier to refine.

Some OPEC members see no problem with high oil prices.

The Venezuelan and Algerian energy ministers defended the current oil output by OPEC members on Thursday and suggested there is no need for another production hike to help ease runaway prices.

Algeria and Venezuela don't have any idle oil production capacity. So they couldn't respond to rising demand even if they wanted to.

The Wall Street Journal reports that we should not expect additional oil supplies from OPEC.

Oil prices are hovering near historic highs, but consuming nations shouldn't expect quick relief from OPEC, the world's only source for big, quick supplies.

For several reasons, the Organization of Petroleum Exporting Countries has neither the clear leverage nor the inclination to open the spigots and drive down the price of crude, which jumped past $90 a barrel in intraday trading in New York last week for the first time.

They lack the capacity to increase production. Plus, they are making far more money and don't need to produce more oil.

Asian oil demand is driving up the price of oil as US and European demand growth is slowing and even stopping.

Asian demand for oil is on track to hit 25 million barrels a day this year, an increase of 2.5% from last year, according to the International Energy Agency in Paris. World demand is set to rise a more modest 1.5% and may even decline in Europe. (The U.S. -- which is on pace to consume 20.9 million barrels a day this year, up less than 1% from last year -- remains the world's single largest consumer.)

Chinese demand is squeezing us. We will use less oil as Chinese demand drives oil prices up so far that demand destruction causes a drop in US demand.

Crude-oil demand growth in China has cooled some, too, but not dramatically. In the past three years, crude-oil demand grew an average of about 9% a year, according to the IEA. This year, the IEA says China's oil demand is on target to grow 6% to about 7.6 million barrels of oil a day, followed by similar growth next year. But China's economy continues to grow faster than expected. GDP growth is now estimated to be on track to surpass 11% this year.

That economic growth rate means China increasingly competes with the United States for raw materials and agricultural products. Will China's net effect on the world economy become inflationary?

At this point our continued economic growth depends on our ability to produce more goods and services per unit of energy. Also, we need better technologies for using non-oil energy forms, primarily electricity. We face a liquid fuels shortage, not a general energy shortage. The high price of oil makes electricity a much more attractive form of energy. We can generate as much electricity as we need from nuclear power and cheap solar will come eventually.

Share |      By Randall Parker at 2007 October 25 10:10 PM  Economics Energy


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Comments
daveg said at October 26, 2007 1:38 AM:

Someone should graph the price in Euros (and maybe gold) to see just how much of this is dollar inflation.

For example, today price of oil in Euros is 63.

-b

Kenelm Digby said at October 26, 2007 3:17 AM:

I seem to remember a few years back when the biologist Paul Ehrlich (author of 1968's Population Bomb) and the economist Julian Simon (who was strongly opposed to Ehrlich's Malthusian theorizing), made a famousbet on whether the prices of certain vital commodities would reach an agreed ridiculously high level by a certain date.
Ehrlich wagered that they would - to buttress his Malthusian argument that too many people chasing tooi few goods will raise the price.Simon bet the price would massively undershoot - to support his left-wing 'utopian' vision.
Well the bet matured sometime in the 1980s, and contrary to all informed opinion made in the 1970s when commodity shortages raged, Simon won decisively, leaving Ehrlich severly embarrassed.
- Why do I mention this?, it's my contention that since the early 1970s the western economies of Europe and north America have been mired in stagnation -despite all the guff you read, with sclerotic growth rates and high unemployment in Europe.
The only thing that has really elevated demand and growth since about the mid 1990s is China's emergence as a serious player.Basically the rest of the world is dancinfg around China.

daveg said at October 26, 2007 12:52 PM:

We are boycotting Iran. Does Iran give a Rat's ass? I doubt it. They can get everything they need from China and other neighbors nearby. They can even buy our military technology from Israel, which seems perfectly willing to sell it to them.

Randall Parker said at October 26, 2007 7:03 PM:

daveg,

Most of the oil price increase is not due to the declining dollar. Think about it intuitively. We had $20 per barrel oil 7 or 8 years ago. Even this year the dollar decline is a small cause of the oil price increase.

Japan and China (or China and Japan?) are the second and third biggest users of oil after the US and the dollar hasn't declined much against East Asian currencies.

Randall Parker said at October 26, 2007 7:49 PM:

Kenelm,

Julian Simon won that bet because of the time period of the bet. Paul Ehrlich's side of the bet would have won in the last 10 years.

Kenelm Digby said at October 27, 2007 4:36 AM:

"There's no such thing as a free-lunch."

I believe that this aphorism is usually attributed to Milton Friedman, but the fact is that american consumers, by million purchase every day lap-top computers, 60" flat-screen HD TVs, digital cameras, playstation3s, nike sneakers, satnav systems, cell-phones, and untold other assorted geegaws and goodies from China.
Perhaps its a difficult point for some to grasp, but ultimately these goods must be paid for.

Wolf-Dog said at October 27, 2007 12:48 PM:

Electricity from nuclear reactors are only slightly more expensive than coal, and with some more work we can make nukes even cheaper than coal in a few years.

It costs about $1.5 billion to build a 1000 Megawatt reactor, and so building 200 such 1000 Megawatt reactors would be enough to charge 300 million electric cars every day. Building only 20 reactors per year would cost only $30 billion per year, which is a fraction of what we spend annually on the Iraq war. Then within 10 years we can complete the necessary 200 reactors, and by then the battery technology will be good enough to have cheap electric cars with 400 mile range per charge (of if you don't believe it will happen, you should believe that plug-in hybrids with 40 mile electric range will be ready in 10 years, which it is already.)

If Hillary comes to power, she might be able to start a national nuclear energy program with only $30 billion per year, which is nothing. And since some terrorists will try to sabotage nuclear reactors in order to scare us into NOT building them to keep us dependent on oil, I recommend the pebble bed reactors which are inherently safe against sabotage.


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