2011 December 28 Wednesday
$100+ Per Barrel Oil Expected For 2012

The New York Times reports on predictions for continued high oil prices.

With Iran threatening to cut off about a fifth of the world’s oil supply by closing the Strait of Hormuz and unrest in Iraq endangering the ability to increase production there, financial analysts say prices for two important oil benchmarks will average from $100 a barrel to $120 a barrel in 2012.

These prices are high enough to prevent a substantial economic recovery in Western nations. Even if the Iranians do not close the Strait of Hormuz and Iraqi oil field bombs do not get out of hand we could see sharply higher oil prices due to some other political or technical problem in other oil producers. We are one price spike away from another global recession.

In related news, Saudi Arabia canceled plans to raise production to 15 million barrels per day by 2020. I am skeptical that they could have achieved that goal. Their oil fields are old and most are very depleted. Note that with rising internal demand if the Saudis just manage to keep their production even their exports will decline. In fact, Saudi

Saudi Arabia's rate of oil export has probably already peaked back in 2006. In recent years Saudi domestic consumption has grown at over 5% per year. That trend looks set to continue and therefore the Saudis will export progressively less oil.

Jadwa said oil consumption is rising rapidly in Saudi Arabia, with domestic oil use averaging 2.4 million b/d in 2010, up from 1.9 million b/d in 2007 and 1.6 million b/d in 2003.

Occupy Wall Street folks probably don't know it but high oil prices are a bigger cause of their declining living standards than are bankers. Other natural resource constraints are pulling down living standards as well. As Asia industrializes the Western countries are going to get even more outbid for natural resources whose availability they used to take for granted.

Share |      By Randall Parker at 2011 December 28 09:33 PM  Economics Energy


Comments
Black Death said at December 29, 2011 6:42 AM:

$100/bbl oil is already here. I checked the prices this morning - Brent crude is about $108 and WTI Cushing is about $100. As you say, high oil prices alone may be sufficient to torpedo any recovery, which looks pretty shaky even without it. Obama may be doubly vulnerable here, first, because the president always pays the price for a rotten economy, and second, because this administration has been particularly unfriendly to developing new petroleum resources such as the Keystone Project. What we really need is green energy - a la Solyndra!

Pat Anderson said at December 29, 2011 2:25 PM:

More than cheap oil, people should worry about getting enough oxigen in their brains, specially for kids' developing intelligence.

Nowadays it's amazing how little fresh outside air gets into our insulated houses, rolled-up window cars, sealed work places, etc.

We live with recycled "filtered" carbon monoxide and carbon dioxide. When was the last time you got some daily-needed fresh air blow inside your house?

But we worry more about high oil prices.

bob sykes said at December 30, 2011 7:22 AM:

So, cheap oil is running out. So did cheap charcoal a couple of hundred years ago. However, expensive oil means that the Canadian tar sands and Bakken shale deposits are profitable. So are coal-derived synfuels. So, oil won't disappear anytime soon. The real questions are whether engineers can increase fuel usage efficiencies and whether productivity can increase sufficiently to keep the fraction of income spent on fuel reasonably small.

Consider, in the 1960s, when I was allowed to drive my father's POS Nash Ambassador, gasoline was something like $0.35/gal, more or less. That's about $2 to $2.50/gal today.

But, the Nash got only about 10-12 mpg city and maybe 15-18 highway. Today's mileage is 50% or more higher, especially highway. This means that the cost of gasoline would have to be about $3 to $4/gal to match the out-of-pocket impact of gasoline cost during the 1960s.

However, there is one more correction that is needed. Incomes today, despite a decade or more of stagnation, are more than double in constant dollars than they were 40 to 50 years ago.

The result is that $4/gal gasoline today is cheaper and has less impact on disposable income than did $0.35/gal in 1965. And that's why we have so many SUVs. Expensive gas would be at least $6 to $8/gal, maybe more.

If incomes continue to stagnate or even fall, the relative impact of $100/bbl oil will increase, but we're not there yet.

eggwhite said at December 31, 2011 12:26 AM:

Any updates on the relative size of the Chinese economy to that of the US in coming years? I had heard that as early as 2016 they might catch us, but just today I heard other scholars saying it would be 2040 or later.

NYT said at December 31, 2011 11:26 AM:

Any updates on the relative size of the Chinese economy to that of the US in coming years? I had heard that as early as 2016 they might catch us, but just today I heard other scholars saying it would be 2040 or later."

They have their own set of problems. However, they do a pretty good job of hiding them and the media has little interest in it.

bbartlog said at December 31, 2011 3:22 PM:

Depends on how you interpret their numbers. They have misallocation problems even worse than we do. We might grow too much corn or have a few too many green energy companies thanks to government subsidies, but they have entire empty cities that need to be written off.

Engineer-Poet said at December 31, 2011 9:54 PM:

The naïve comparison of inflation-adjusted oil prices in the 1960's vs. today omits one huge factor:  only a small fraction of US oil was imported in 1965, while 2/3 is imported today.

Balance of trade matters.

Randall Parker said at January 1, 2012 12:56 PM:

Pat Anderson,

Speaking as someone who lives in a leaky place in a moderate climate: I don't have to worry about air-tight living. But even still I bought a HEPA filter floor unit and come home and open the front door for a while.

Home air quality is a problem that people can solve on a personal level. If you are concerned and own your home then get a heat exchanger installed that will bring in fresh air at a faster rate. Though if you rent it is a harder problem to solve.

eggwhite,

China's economic growth rate has slowed and will slow further. They were able to grow quite a bit just using world market price signals and mercantilist policies. But their ROI has declined dramatically and the countries that they export to are in trouble. Goldman Sachs in a recent report argued the BRICs can't maintain their last 10 years growth rate. Though Goldman still expects China's economy to become larger than the US and expects the BRICs to become larger than the G7 by 2032.

bob sykes,

We've built houses further from our jobs since the time you drove that old Nash Ambassador. We've got a cost structure built up based on cheaper oil prices. We've already used that efficiency increase you speak of. We used it to raise our living standards. We now will have to lower our living standards as oil prices rise further.

Also, I agree with E-P: When you drove that Nash you were burning US oil. We import millions of barrels per day and we are running a big trade deficit. We can't afford to sustain this. Our trade deficit is one of the measures of how far we are living beyond our means. The US government fiscal deficit is another measure of how far we are living beyond our means. Still another measure: the unfunded old age liabilities. Lots of people have retirements planned out in their minds that they aren't going to be able to afford.


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