2007 October 31 Wednesday
Oil Goes Over $94 Per Barrel

Looks like Peak Oil to me.

U.S. light crude for December delivery jumped $4.15 to settle at a new record of $94.53 a barrel on the New York Mercantile Exchange, topping Monday's record close of $93.80 a barrel. Prices rose as high as $94.74 in intraday trade, surpassing crude's all-time record trading high of $93.80 a barrel, also set Monday.

This price surge isn't bringing huge amounts of production to market. This price surge has built up over a larger number of years than the Iranian revolution price surge. The lasting nature of this surge argues for deeper fundamentals at work this time around. The higher prices haven't caused big spigots to get turned on or easy exploration to fill the gap.

Yet the US economy is still growing strongly.

The 3.9 percent annual growth rate compared with 3.8 percent in the second quarter and 0.6 percent in the first quarter. The report from the Commerce Department is a preliminary estimate of gross domestic product in July through September, a volatile period that included the bleakest moments of the summerís subprime mortgage collapse.

That economic growth will come to an end if we hit higher inflation.

"As such, there is likely to be some doubt in the minds of one or two Fed officials regarding whether they should be cutting rate later today - especially with higher food and energy costs expected to push headline CPI above 4% in the next couple of months. Nonetheless, with the outlook for 2008 deteriorating a 25bp cut remains the most likely scenario," said James Knightley, economist at ING Financial Markets.

High general inflation would force interest rate rises and probably push the US economy into a recession. That would reduce oil demand in the United States. But China's demand might not slacken and oil prices might even rise during a US recession.

The world oil production plateau combined with surging demand are driving prices higher and higher. Will the production plateau continue through 2008? Maybe there's a big lag time between price surge and huge production increase. But every year that goes by with higher oil prices makes that less likely. If we get through 2008 without a big production increase then this is it. The world has peaked.

What I want to know: As oil prices rise how fast will the economy adopt methods to do oil demand destruction that do not reduce economic growth by much? Can we find lots of ways to grow without increased oil consumption?

Some argue that the price of oil has been run up by speculators. Khebab looks at patterns in the oil market and finds this argument unconvincing. My own take: A sustained overpricing of oil should cause a build up of reserves as the price goes above the price needed to make supply meet demand. But reserves haven't been going up. At best the speculation argument could account for a small portion of the current price.

Share |      By Randall Parker at 2007 October 31 06:45 PM  Economics Energy


Comments
kurt9 said at October 31, 2007 8:16 PM:

Check out the following website: http://www.gasresources.net/index.htm

Kenelm Digby said at November 1, 2007 4:02 AM:

The funny thing is that we had since 1973 to prepare for this when all sorts of prophecies of doom were made, and many alternatives to oil were touted.
In the event nothing was done, with the possible exception of the admirable French nuclear program.

I seriously doubt anything will change - there are just too many extremely powerful vested interests putting a block on any ambitious schemes.

kurt9 said at November 1, 2007 8:36 AM:

The key phrase in explaining the recent rise in oil prices is:

"Oil futures have been driven to record levels in recent months partly because they offer a hedge against a weak dollar."


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