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.
At The Atlantic Daniel Indiviglio argues jobs growth brings higher oil prices which brings an end to jobs growth.
Since May, the U.S. economy has struggled. From May through July, just 72,000 new jobs per month were created on average. Yet February through April averaged 215,000 per month. What killed the promising progress we were seeing earlier this year? A couple of factors are often blamed, but the biggest problem was rising gas prices. Even though they have been declining lately, this might not be the last time that this recovery is plagued by consumer sentiment plummeting due to the price at the pump. We could see gas prices create a sort of catch-22 that makes it difficult for the U.S. economy to stay on its feet.
It is good to see articles like this one on a mainstream media site. Though Indiviglio's suggestion of a gasoline tax that varies inversely with the price of oil shows he doesn't get the scale of the change needed to deal with Peak Oil. One can find long time writers on Peak Oil who tie the depth of the current recession to oil supply problems and who propose solutions aimed at the root cause. For example, Gregor Macdonald says what Keynesian stimulation we do should be solely aimed at cutting energy input costs. Note that encompasses both efficiency and supply measures. Peak Oil writer (and former oil industry engineer) Robert Rapier expects the US economy won't be able to grow. Then when the US inevitably slips back into recession its oil demand will free up supply that China can buy. So every recession will shift oil away from the US toward China, India, and other industrializing countries. I see the same pattern. At some point China's own bubble will burst and dampen their oil demand. But we'll be poorer by the time that happens and will continue to be poorer afterward.
UCSD economist James Hamilton, who does a lot of modeling research on oil price shocks, believes believes that even though the price of oil has dropped (to a still high level in historical terms) the biggest effects of the previous price spike are still to come.
It is interesting that the biggest effects on GDP come 3 or 4 quarters after oil prices have gone up. This is not a result unique to this specification, but is something one finds whether one uses linear or a variety of nonlinear specifications and regardless of the data set. We often see some economic responses right away, such as a drop in consumer sentiment, fall in sales of less energy-efficient vehicles, or build up of inventories. But it usually takes some time for the effects of these to be multiplied as they ripple through the rest of the economy.
Fund manager Jeremy Grantham thinks Peak Oil is just the tip the iceberg for a much bigger natural resources limitation problem.
It has taken an insanely irresponsible level of federal deficit spending with deficits projected out for decades to get the US Senate to oppose a wasteful subsidy.
WASHINGTON, D.C.– A bipartisan group of 12 Senators, led by Senators Jim Webb (D-VA) and Tom Coburn (R-OK), today sent a letter to Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY) urging them to make full elimination of costly ethanol subsidies and tariffs a priority. In June, a measure offered by Senator Dianne Feinstein (D-CA) and co-sponsored by Senator Webb that would have terminated the Volumetric Ethanol Excise Tax Credit (VEETC) and tariffs on imported ethanol, passed with bipartisan support in a 73-27 vote and would have saved taxpayers $6 billion annually.
Earlier this month, a compromise on ethanol subsidies was reportedly reached in the Senate. Although the deal would have ended the blender credit subsidies, it proposed to create new subsidy programs to support ethanol infrastructure.
“The Senate recently voted overwhelmingly to adopt an amendment offered by Senator Feinstein to terminate the Volumetric Ethanol Excise Tax Credit (VEETC) and tariff on imported ethanol by July 1, 2011,” the Senators said in their letter. “In keeping with the results of the recent vote, we should ensure that both the VEETC and import tariff are ended as soon as possible.”
Corn ethanol has a low Energy Return On Energy Invested. The fossil fuels required to create fertilizer and pesticides, to power tractors to plow and harvest, to power trucks to haul the corn to ethanol plants, and for other steps in the process has to be deducted from the energy in the ethanol. Some estimates put the EROEI at 1.3 and others at below 1 (more energy used as inputs than returned as ethanol). My guess: the corn ethanol EROEI is above 1 but below 2. Given the limited amount of high quality farm land available corn ethanol does not scale and is a bad idea.
Another source puts the subsidy at $5 billion per year. We can't grow our corn ethanol use without growing the subsidy. Well, we can't afford the subsidy now (and we can't afford about another $1 trillion per year of US government deficit spending). We've got to start cutting out the stuff with low or no value. Corn ethanol fits the bill for things to cut.
An end to the subsidy would also lower the price of food, especially meat. Corn prices would drop and since corn is used as animal feed beef, turkey, chicken, and pork prices would drop.
Grover Norquist is so dedicated to preventing tax revenue increases that Norquist sees opponents to ethanol subsidies as enemies. The man has become unhinged.
The conservative power broker Grover Norquist has battled Coburn, arguing that ending the handouts is equivalent to increasing taxes, meaning that candidates who signed a no-new-taxes pledge would be breaking their word. He has charged that Coburn "lied his way into office."
The subsidy for ethanol is akin to subsidies for medical care. The government pays. Therefore things get done that would otherwise not get done. The fact that the subsidy is distributed by the IRS is really irrelevant.
The percentage of household income going to gasoline is near record highs. Not coincidentally, economic growth is much slower than the 4% that economists were predicting 6 months ago.
For the year, the figure is 7.9 percent.
Only twice before have Americans spent this much of their income on gas. In 1981, after the last oil crisis, Americans spent 8.8 percent of household income on gas. In July 2008, when oil price spiked, they spent 10.2 percent.
The figure was 8.9% in April. So consumers are paying more for gasoline than they can sustain. The high oil prices cut consumer spending on other products while also increasing costs to industry. This cuts into economic growth. The US economy currently can't grow at more than a 2% rate. We would need either lower oil prices or a big jump in energy effciency to grow faster than that. Since available net exports of oil are at best flat we need to shift away from oil in order to resume economic growth. I expect that shift to take years and it will come only with deep recessions.
Update: Check out this cool interactive graph of job losses and job growth by sector. Once it comes up (and you probably need Flash enabled to see it) then click on the red line for overall jobs. That will cause a splitting up in many other lines you can hover over to see the details of each sector of the economy. Education and health care have been immune to the recession. Mining and logging recovered quickly and are going gang-busters. There are not enough natural resources in the world with China buying them up and oil companies drilling like mad. Everything else is doing not so good.
As the price of oil approaches levels guaranteed to bring on a recession the Obama Administration has decided to block approval of drilling for oil in the Arctic Ocean.
Shell Oil Company has announced it must scrap efforts to drill for oil this summer in the Arctic Ocean off the northern coast of Alaska. The decision comes following a ruling by the EPA’s Environmental Appeals Board to withhold critical air permits. The move has angered some in Congress and triggered a flurry of legislation aimed at stripping the EPA of its oil drilling oversight.
Shell has spent five years and nearly $4 billion dollars on plans to explore for oil in the Beaufort and Chukchi Seas. The leases alone cost $2.2 billion.
This decision won't affect Peak Oil Recession #2 (coming soon), or #3, or even #4 or #5. Exploration and creation of oil production infrastructure will takes years. Even if the the Obama administration didn't use air quality permits as a convenient excuse (the drilling site is 70 miles from closest human village of Kaktovik) we probably can't expect a substantial amount of oil from Arctic offshore for 10 years. Well, in 2021, definitely after world oil production peaks, exports from oil-producing nations will go down so much that oil from Alaska will be worth far more than it is today and it will make a big difference in our (lower) living standards.
Obama's opposition to Arctic oil development will only delay the inevitable. Once the price of oil goes above $150 per barrel and stays there the public will swing much more strongly in favor of oil drilling. This delay might even turn out to benefit us if we still haven't developed much better substitutes for oil by 2030.
While Hillary Clinton refrains from calling for the ouster of Syrian President Bashar al-Assad the US government is clearly working to support opponents to the Syrian regime. Will this strategy lead to another recession?
The State Department has secretly financed Syrian political opposition groups and related projects, including a satellite TV channel that beams anti-government programming into the country, according to previously undisclosed diplomatic cables.
The recent revolutions in northern Africa and the US support for the rebels in Libya have encouraged anti-government protests in Yemen, Syria, Bahrain, Morocco, and even Saudi Arabia. Since American promotion of democracy leads to outcomes that provide examples of successful regime change this policy is an existential threat to the Saudi royal government. The Princes in Saudi Arabia have got to be wondering whether the Obama Administration will turn its regime destabilization machine toward them or will a substantial number of Saudi citizens decide to copy the Egyptian, Tunisian, and Libyan examples even without further US prodding?
What can the Saudis do about it? They are not without cards to play. Notably, (as suggested by Greg Cochran) the Saudi decision to cut oil production could be tied to a (quite understandable) desire on their part to see regime change in Washington DC rather than in Riyadh. The party in power always loses in a recession. A US recession therefore could help protect the Saudi royal family's hold on power.
Can will the Saudi princes survive in power long enough to drive Obama from office? Depends on how big an oil weapon they can wield. The connection between oil prices and recessions seems strong, especially when you view it from the perspective of percentage changes in oil prices as compared to a preceding period. Robert Rapier believes a double dip recession is a best case scenario with a "Long Recession" as a more likely future.
So double dip or long recession? Richard Batty of Standard Life Investments says a 100% increase in oil prices in a year is needed to cause a recession and so we will only hit an economic downturn above $150 per barrel. Not sure if that is true. The economic recovery so far has been very weak. So the amount of decrease in economic activity needed to put the US economy back into recession is not large.
Before you rush to criticize the Saudi strategy (which also provides them with more money in the short term to buy off a restive population) consider what would happen to the US and world economy if the Saudi government was overthrown. The price of oil would skyrocket. $200 a barrel is within the realm of what might happen with oil prices as Saudi oil fields shut down as they have in Libya. The result would be economic depression as unemployment would soar far above a starting level that is already 8.8% (with a large shadow group of unemployed who have given up job searching). An overthrow of the Saudi royal family runs the high risk of putting you, your family, friends, and neighbors out of jobs and out of the homes you all live in.
We have too much $105 per barrel oil? (funny, I know) What to do? Cut supply. Make a virtue out of a necessity. Saudi Arabia’s Oil Minister Ali al- Naimi demonstrates his keen sense of wit.
“Our production in February was 9,125,100 barrels a day,” al-Naimi said, as he arrived in Kuwait for a conference. “In March, it was 8,292,100 barrels. It will probably go a little higher in April. The reason I mention these numbers is to show you the market is oversupplied.”
The US economy is at risk of falling back into a recession due to rapidly rising oil prices draining off so much consumer cash. Why isn't the claimed swing supplier (hint, it sits on a big peninsula next to a gulf) boosting oil production to prevent Peak Oil Recession #2? Recall that less than 2 months ago Saudi Arabia was dropping strong hints it would compensate for lost Libyan oil production by exporting more oil. Yet as Stuart Staniford points out, Saudi Arabia did not make up for lost Libyan oil and now the Saudis admit they actually cut production in March. Give that rapidly rising Saudi internal consumption is leaving less oil for exports and Saudi oil exports peaked in 2005 we can not expect Saudi Arabia to provide relief for high oil prices.
Robert Rapier actually sees a double dip recession as the optimistic scenario. He expects what he calls a Long Recession where the economy stagnates for several year. I think it is going to be more like the Long Depression. My advice: Lower your living standard before the lowering becomes unavoidable. Adjust to less oil before circumstances force that adjustment. If you make changes on your own schedule the changing will be much easier to do. Prepare for what's to come. The warning lights are flashing brighter. Change jobs, change dwellings, change your lifestyle before you have to.
Imagine the next recession happens before we are even half way recovered from the most recent recession. The US government will go into the next recession already running big deficits. The USG is currently running a fiscal deficit of about 10% of GDP. Tax revenues will plunge. The US government will be unable to use fiscal spending as a compensating stimulus. In fact, the US government will cut spending in the next recession if it comes at any time in the next few years. States and cities will go into the next recession with huge unfunded pensions for their employees and big debts on their underfunded unemployment programs.
With all this in mind let us take a look at the latest oil price spike. Jeff Rubin points out that prices had already spiked before protesters took to the streets in Cairo.
What’s easy to lose sight of in the chaos sweeping through the Middle East is where oil prices were trading before it began. The Brent futures contract, the world’s new benchmark oil price, had already broken $100 (U.S.) a barrel before protesters in Cairo started sweeping into Tahrir Square and demanding Hosni Mubarak’s head.
Rubin, author of Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization (which I've read and recommend), sees these prices as noteworthy because of when they are happening versus the economic cycle. Says Rubin "These are the kind of prices that one might expect to encounter at the end of an economic cycle, not at the beginning of one." For some context see this graph of oil price spikes and recessions starting from the early 1970s. The only exception to the pattern of price spikes and recessions was the early 1980s recession caused by then Fed chairman Paul Volcker as he tightened credit to squeeze inflation out of the US economy. But that inflation was in part due to earlier oil price spikes.
UCSD economics professor James Hamilton, who has done a lot of work modeling the effects of oil prices on economies, thinks we are okay for avoiding a recession as long as oil prices stay below $130 per barrel.
The particular dynamic model from which the above Brookings figure came builds in quite strong nonlinearities and threshold effects. Interestingly, according to that specification, one wouldn't begin to anticipate significant effects on U.S. GDP until the price of oil got above about $130 a barrel, or until the second half of this year. Prior to that, according to that specification, we're still ok.
So, hey, we might still have 6 more months of economic expansion ahead of us barring another revolution in the Middle East. Such is life during the Peak Oil period. It gets even worse once world oil production starts declining every year.
So what about another revolution in the Middle East? On the Foreign Policy blog The Oil And The Glory Steve LeVine points to a Cameron Hanover note on the speed ot the spread of protests against Middle Eastern governments.
OPEC, namely Saudi Arabia, pledged to make up any oil lost from Libya, which exports around 1.6 million barrels of oil per day. Of course, that only works as long as Saudi Arabia avoids contagion. And we have not read of contagion ever spreading with greater speed than has been seen these last few weeks. The spread has rivaled the spread of the Black Plague 650 years ago. That very speed may be the factor that has oil markets most on edge.
My guess is that the violence in Libya is cooling some of the revolutionary ardor of the Arab middle classes for regime overthrow. But if the Saudi Shiites take to the streets then you better radically cut your living standard and prepare for a full blown economic depression. An even partial halt of Saudi oil flow would cause a world depression with banks failing left and right, sovereign debt crises, bankrupt states, massive layoffs, and governments powerless to lessen the blow.
The "Export Land Model" (more below) rears its ugly head as major media reporters notice the rapid growth in Saudi domestic oil consumption. Zero growth in Saudi production means declining exports as more oil gets consumed internally that used to be available for export.
The world currently is awash in oil, and Libya's missing volumes won't halt anyone's factory or vehicle. But if the oil flow becomes cut off from additional petro-states, what will happen? At Fortune, Colin Barr points out that Saudi's long-term rising consumption raises questions about its capacity for rescuing the world economy down the road.
According to the Export Land Model our problem with oil is made far worse by rapidly rising consumption inside of oil exporting states. So, for example, on flat production Saudi oil exports declined in December 2010.
Rising costs of oil production have become the bottleneck for Western economic growth. Rising Asian demand and rising Export Land demand make this problem much worse. The world is starting to look more like a zero sum game. We must prepare for this in our personal decision-making. Due to flat and eventually declining oil production the recessions of the 2010s will be much more painful than what we've seen so far. My advice: make career and lifestyle decisions to insulate you from what's coming. Want to buy a car? Make it a hybrid and make it small. Want to move? Move closer to work. Or switch to a job that is both closer to home and more likely to survive oil price spikes.
Update: Nomura analysts project that if all oil production in Libya and Algeria go offline then oil will spike to $220 per barrel. Our livelihoods and living standards depend on political stability in Arab dictatorships. Political stability would give us more time to prepare for Peak Oil. But I do not expect most people or governments prepare.
Purchases increased 11 percent to 23.29 million metric tons, or 5.52 million barrels a day, compared with a month earlier, according to preliminary data released today by the Beijing- based General Administration of Customs. That beat a previous record of 22.27 million tons in June.
Since world oil production is still well below 2005 production levels (and 2005 remains the oil peak period at the yearly level of granularity) China's growing oil demand means less oil consumption by the OECD countries. China will bid up the price of oil and Western economies will reel in response. China now makes more cars per year than the United States. So China's small existing car fleet is going to double and double and double again.
My advice: make your next car a hybrid or a small car. The approaching world decline in oil production is going to make gasoline very pricey.
Also, choose jobs and housing to minimize your energy demand, especially your demand for petroleum distillates.
Jed Graham of Investor's Business Daily's Capital Hill blog suggests the anticipated Quantitative Easing 2 (QE2) from the US Federal Reserve could cause such a large oil price spike that the economy will derive no benefit from QE2.
The voyage might have to be aborted — or at least diverted — soon after QE2 leaves the dock because the Fed may be sailing into a political hurricane.
Even before the anticipated launch of the next round of Treasury purchases — it’s expected to be made official on Nov. 3 — the Fed’s unmistakable signals have fueled commodity price gains as the dollar has sagged.
Since the Fed’s Sept. 21 policy statement, crude oil had surged more than 9% to above $83 a barrel on Wednesday, approaching its highest levels since October 2008. (Oil prices did retreat on Thursday.)
If QE2 is enough to cause a large oil price spike then a real economic recovery will cause an even larger price spike. When I look at trends in global production and Asian consumption growth I do not see where the US can get the oil needed for economic growth. US oil consumption may already have peaked several years ahead of the global oil production peak (which Charley Maxwell expects in the 2015-2020 time frame with a slowing in production growth leading up to the final peak plateau). Well, economic growth with highly expensive oil and flat or declining consumption is going to be very hard and slow at best. Quite possibly economic growth might not be possible for a couple of decades.
I find the bigger context of sustained economic stagnation very important. Tyler Cowen argues that America needs continuing economic growth in order to buy off interest groups. Take away that economic growth and the social fabric will tear apart. Just what will that look like?
Japanese politics is less competitive and Japanese rent-seeking is less competitive than in the United States. Sustained near-zero growth in the United States would mean that interest groups tear apart the social fabric and grab too lustily at the social surplus. Whether we like it or not, we are "built to grow" and we use the fruits of that growth to buy off interest groups as we go along. Japan in contrast has greater capacity to stifle these grabs for new redistributions because their politics is more of an insider's game.
Suppose economic stagnation continues. The US is already in the biggest economic downturn since the Great Depression. Buy off interest groups? Revenue collapses at local governments are so severe that many cities are in the process of un-buying off interest groups. These revenue collapses mean most of the big state spending cuts still lie in the future. After pretending to produce a balanced budget the California legislature just passed a budget with a 11% deficit. Lots of states are at risk of default with California and Illinois the biggest fiscal basket cases. With huge unfunded retirement liabilities their problems are going to grow much larger even if the economy eventually recovers for a few years.
Even without considering the effects of Peak Oil Northwestern U economist Robert Gordon is already predicting very slow growth thru 2027.
Robert J. Gordon of Northwestern University belongs to the committee of distinguished economists who officially declared on Sept. 20 that the U.S. recession ended way back in June 2009. Don't mistake that pronouncement for optimism. According to Gordon's research into the long-term determinants of growth, America's next two decades are going to be disappointing. He predicts that between 2007 and 2027, gross domestic product per capita will grow at the slowest pace of any 20-year period in U.S. history going back to George Washington's Presidency. Although the data he examined closely go back only to 1891, he says that based on his knowledge of early American economic history, he thinks it is fairly safe to predict that the period will witness the slowest growth ever in GDP per capita and, therefore, American living standards.
The inflation-adjusted income of the median household—smack in the middle of the populace—fell 4.8% between 2000 and 2009, even worse than the 1970s, when median income rose 1.9% despite high unemployment and inflation. Between 2007 and 2009, incomes fell 4.2%.
Also, take a look at the declining returns per dollar spent on a college education. Higher costs and declining incomes. For someone in their 20s this means declining living standards as compared to previous generations. This reminds me of Jim Chanos' comments about declining returns on physical resources consumed in China.
American demographic problems with declining worker skill sets will contribute to slow growth or even extended economic contraction. Peak Oil will come on top of worker skill problems and also the big unfunded old age retirement benefits.
National debt above a threshold retards economic growth. The US is on course to cross that theshold
Researchers from North Carolina State University have identified a “tipping point” for national debt – the point at which national debt levels begin to have an adverse effect on economic growth. The findings could influence economic policy discussions globally, and will be distributed at the upcoming meeting of the International Monetary Fund (IMF) and World Bank Group.
“If a country’s public debt reaches 77 percent of its gross domestic product (GDP), bad things start to happen,” says Dr. Mehmet Caner, professor of economics at NC State and co-author of the study. “There is a tipping point for national debt, and if you exceed that point the amount of debt will have a linear relationship to declines in economic growth. The more debt you have, the slower your GDP will grow.
While the US national debt trajectory is on course to hit 90% by 2020 that date is just one point on a bad trend line toward even higher debt levels. But reality is even worse. I expect Peak Oil to cause that to happen much sooner. Then both the high national debt and Peak Oil will weigh on the economy much sooner. The pressure on the Federal Reserve to inflate away the debt will become severe. Living standards will decline.
Bottom line: the financial crisis of state and local governments will continue and worsen. US federal debt will rise to a level that will impede economic growth. The aging of the population and decline in worker skill levels will prevent productivity growth. Peak Oil will stall economic recoveries. The next 20 years look like really rough sledding.
My advice: prepare for harder times.
Talking with Kate Mackenzie of the Financial Times Francisco Blanch, head of global commodities research for Banc of America-Merrill Lynch, says developing countries are less sensitive to the price of oil than developed countries. Developing countries get more utility and economic growth from an additional barrel of oil.
What kind of price level do you see being too high?
I would think that any number above $100 a barrel is going to be difficult to manage [for the western economies].
The emerging economies have a higher threshold.
Can you explain the difference between the emerging and developed countries’ thresholds?
The marginal productivity of oil is higher in emerging markets. If Europe consumes an extra barrel a day, Europe will not generate much extra GDP on the back of that, whereas an emerging economy will be able to generate much more on the back of that.
I agree with this analysis. The demand for oil in China grew thru the recession. China and India continue to displace European and American demand for oil by bidding it up so high that the high prices cause demand destruction in the West. This trend will continue.
Growing emerging market demand is one of the reasons why availability of oil in the West will drop faster than world production once world oil production goes into decline. Prepare yourself to get out of the way of the oil demand building up among a few billion people in Asia and the Middle East. Reduce your dependence on oil while doing so is still a voluntary act on your part and you can adjust less painfully.
Reading retired Princeton U geologist Kenneth Deffeyes makes me think world oil production has already peaked. What matters at this point is the slope of the downhill production curve.
Saudi Oil Minister Ali al-Naimi says oil extraction costs in Saudi Arabia have gone up sharply.
Costs of keeping that spare capacity have been rising, Naimi said. To develop a barrel of spare capacity at the Kingdom’s Khurais oilfield costs approximately $10,000, Naimi estimated, or double the cost of developing capacity in Saudi Arabia’s Empty Quarter a decade ago.
Meanwhile, costs of developing spare capacity at the offshore field of Manifa are about triple the levels of a decade ago, the oil minister said.
At the same time al-Naimi warns against countries trying to take measures to cut oil imports. Does he want all countries to go down together?
Thomas Friedman thinks Mexico's version of Peak Oil will lead to healthy political reforms that will strengthen the middle class. ParaPundit thinks Mexico's version of Peak Oil along with the world's Peak Oil will impoverish Mexico's middle class. Whether it also leads to a more accountable government and more market forces I can not say.
So here’s my prediction: When Mexico’s steadily falling oil production meets its rising meritocratic middle class, you will see real political/economic reform here. That is when the No’s will no longer have the resources to maintain the status quo, and that is when the Naftas from the Instituto Wisdom will demand the reforms that will enable them to realize their full potential.
The world oil decline might start as early as 2011. I'm hoping it doesn't start until 2015. I want more time to get ready and more time for car companies to bring out electric cars. But reading retired Princeton U geologist Kenneth Deffeyes makes me think we've already peaked.
When Peak Oil slashes government tax revenues severe austerity measures will become inescapable will Mexicans or Americans riot against their government in protest? If so, which cities will see the most severe riots? Which ethnic groups will be the rioters?
ATHENS — Hundreds rioted in Athens yesterday, throwing Molotov cocktails and stones at police, who responded with tear gas at a May Day rally against austerity measures being enacted by the cash-strapped government to secure foreign loans to stave off bankruptcy.
Which societies will respond most adaptively? America's depleted social capital will become a lot more problematic.
While the Democrats block offshore oil drilling off most US coastlines the Obama Administration is going to lend money to Petrobras to drill deep offshore.
The U.S. is going to lend billions of dollars to Brazil's state-owned oil company, Petrobras, to finance exploration of the huge offshore discovery in Brazil's Tupi oil field in the Santos Basin near Rio de Janeiro. Brazil's planning minister confirmed that White House National Security Adviser James Jones met this month with Brazilian officials to talk about the loan.
Does this mean that Barack has become a Peak Oiler? Why would Petrobras need to borrow money from the US to develop Tupi? In a recession with 10% unemployment oil is going for $75 per barrel. Prices will go higher even if US growth does not resume as rising Asian demand hits up against flat production. US government loans for drilling make no sense to me.
Jan. 28 (Bloomberg) -- Saudi Arabian Oil Co., the world’s biggest crude producer, is exporting about 1 million barrels a day to China, more than to the U.S., Chief Executive Officer Khalid al-Falih said.
“We are already exporting more to China than to the U.S.,” he said today in an interview in Davos, Switzerland. “We are prudent and careful about where to invest but our eyes are focused on China and we will continue to look for all opportunities.”
China's growing buying power means it is displacing the United States as oil buyer on the international market. The day will come when China becomes top oil importer. US oil imports will decline sharply because we won't be able to afford to buy at the prices China will be able to afford. The US runs a big trade deficit. China runs a trade surplus. The Chinese economy has been growing faster than the US economy for decades and will continue to do so (leaving aside periods of possible deep recessions in China).
US energy policy ought to be aimed at reducing our need for oil. We ought to shift to pluggable hybrids and pure electric cars for most transportation uses. We can afford to generate as much electricity as we need at prices not much higher than we are paying today. Electric power from nukes and wind can keep our cars and trains moving.
The world spent the last 5 years on a bumpy oil production plateau. Was that the peak in world oil production? Nate Hagens thinks so and he thinks most still (incorrectly) imagine this recession is just another normal recession where normality will soon resume.
Everything did in fact start to change in the 1970s, as US energy per capita consumption peaked, real wages peaked, US oil production peaked, and we started to use debt (spatial and temporal reallocation of real wealth) to increasingly supplement energy's role in current growth. Urged on by socially acceptable excess consumption via advertising, borrowing from the future also became socially acceptable, and the linkages between real capital (natural, built, human and social) and financial markers for this real wealth became blurred. I should clarify: I think we have plenty of energy, resources, technology and materials for this many or more humans for a generation or so to come, just not at current levels of consumption, aspiration, and the perceived extant (digital) wealth.
Source: GDP -Bureau Labor Statistics, Debt - Aggregate household, financial, corporate and government. Source: Fed Reserve Standards Board 2009
If we lived in a society of 100% reserve requirements, then peak oil would have been later, and implied higher oil prices pretty much right after the peak. As it stands, though, debt pulled forward allocations of energy and other resources and the 'peak affordability' engendered by credit collapse will run its course first. It is important to understand we are not close to running out of available energy or resources, even for this many billions. But it is very clear (to me at least) that the amount of energy flow rates (and accompanying non-energy inputs like water) are not enough to service/maintain the accumulated financial claims in this system, especially given that a large % of energy inputs have been spent long ago. It is likely if not inevitable that the claims extant in current system will cause currency reform which in turn has implications for all sorts of interdependent systems based on just-in-time inventories and global trade.
We are roughly where I thought we’d be 5 years past peak (technically just 1 year off the plateau) – still trying to maintain the façade that everything is normal, shorter attention spans, shorter interest in things academic and more interest in things practical. And a concerted effort among the icons of society to borrow and legislate our way back to just before the social precipice. I, like many people, misjudged government and central bank efforts to keep things afloat in the near term, and this could well continue for a while. Ignorance is bliss and all that.
The big debt run-up alone is reason enough to believe we can't easily get back to business as usual (BAU). But if we are past world oil peak production then consider this graph:
The liquids line up top might be about to go into a 5+% per year decline that'll play out for a couple of decades. The bulk of those liquids comes from oil. Natural gas liquids and biomass contribute smaller portions.
How do we get whacked when oil production starts going down, down, down? In a word: transportation.
1Does not include the fuel ethanol portion of motor gasoline—fuel ethanol is included in "Renewable Energy."
2Excludes supplemental gaseous fuels.
3Includes less than 0.1 quadrillion Btu of coal coke net imports.
4Conventional hydroelectric power, geothermal, solar/PV, wind, and biomass.
5Includes industrial combined-heat-and-power (CHP) and industrial electricity-only plants.
6 Includes commercial combined-heat-and-power (CHP) and commercial electricity-only plants.
7Electricity-only and combined-heat-and-power (CHP) plants whose primary business is to sell electricity, or electricity and heat, to the public.
All that oil flowing into transportation is our Achilles' Heel. It is not cheap or easy to shift that demand into other sources of energy. My advice: make your next car a conventional hybrid or pluggable hybrid. Do anything else you can practically do to lessen your reliance on oil. The biggest challenge: finding a job that'll survive the multi-decade decline in world oil production.
As I've pointed out in FuturePundit post just looking at oil consumption trends it is easy to see American economic stagnation as India and China outcompete Americans in oil buying power.
Rembrandt Koppelaar, President of ASPO Netherlands, captures this shift of oil consumption from the developed to the developing countries in his Oil Watch Monthly reports (PDF). See pages 8-12 for OECD (developed countries of Europe, US, Japan, Canada, etc) and then compare their oil consumption usage trends (all down including the US) with the trends for India and China on page 13. US oil consumption has already peaked. China and India can afford to drive up oil prices to levels that cause Americans and Europeans to drive less and to switch to more fuel efficient vehicles. This trend will continue.
Our economy will contract as our oil consumption contracts. If we are collectively wise we will make decisions that in the aggregate will cause the rate of economic decline to be slower than the rate of oil consumption decline.
Update: To clarify: I do not agree with Nate Hagens about investment strategy during a period of declining oil production. One can still find investments worth making during an economic contraction. Some assets will become worth more while others become worth less.
One of the biggest issues (unresolved in my own mind) is whether an economic contraction caused by Peak Oil will be deflationary or inflationary. The question hinges on politics. Which central banks will pursue an aggressively expansionary monetary policy? Some will. Faced with a sovereign debt crisis some central banks will buy up sovereign debt and cause inflation in order to inflate away some of the unpayable debt. I would like to read a good argument for which countries will go inflationary and which will allow deflation to occur.
Even though the Obama Administration has a physics Nobel Prize winner as Secretary of Energy there's an element of cluelessness to Obama's energy policies. America's government believes we invest too much in oil and natural gas.
The Obama administration opened a new front in its effort to impose $31.5 billion in taxes on oil and gas companies, saying that the nation puts too much emphasis on oil and gas at the expense of other industries.
The chief economist in the Obama administration's Treasury Department testified before a Senate panel that current subsidies "lead to overinvestment" in the oil and gas industry.
Alan Krueger believes what he's saying?
Picture this: We invest less in oil and natural gas. Production rapidly drops. We have to import more and our trade deficit gets much larger. Then the dollar drops in value and imports cost more. Our living standards drop.
We need to keep up investments in oil and natural gas to give us time to develop the replacements for these energy sources. Oil extraction in particular is becoming much more expensive as the remaining oil is harder to reach and more expensive to extract. The cheap oil is gone. We need to spend more, not less, to get what's remaining.
When world oil production starts declining every year and we enter one long recession lasting longer than a decade the current period's energy policy discussions will seem hopelessly naive.
The U.S. oil and natural gas industry supports more than 9 million American jobs and makes significant economic contributions as an employer and purchaser of American goods and services, a new study by PricewaterhouseCoopers (PwC) found.
The study entitled "The Economic Impacts of the Oil and Natural Gas Industry on the U.S. Economy: Employment, Labor Income and Value Added” notes that the industry's total value-added contribution to the national economy was more than $1 trillion, or 7.5 percent of the U.S. gross domestic product, in 2007, the most recent year for which data was available.
I would very much like replacements for oil since I expect world oil production to go into long term irreversible decline starting some time in the next 10 years. We need replacements. But we can't pretend today that we have good replacements for the oil that supplies 95% of current US transportation needs. The investment needed to replace oil will require tens of trillions of dollars and decades to make.
Output at state-owned oil monopoly Petroleos Mexicanos's offshore field Cantarell, once the world's second-largest oil field, has plunged to 500,000 barrels a day from its peak of 2.1 million in 2005.
"I don't recall seeing anything in the industry as dramatic as Cantarell," says Mark Thurber, assistant director for research at the Program on Energy and Sustainable Development at Stanford University.
If this happens to Saudi Arabia's Ghawar oil field then we'll enter an economic depression. As more countries hit their production peaks we become more dependent on the dwindling list remaining producers that are not yet in decline. I expect a series of oil price shocks as a result.
Mexico was America's 2nd biggest supplier in 2007 and will likely cease to supply us any oil within 5 years.
In 2007, Mexico was our second-biggest oil supplier, after Canada. Last year, with a 15% drop in daily barrels supplied, the country dropped to third place behind Saudi Arabia.
Both Saudi Arabia and Mexico are too secretive about the state of their oil fields to allow outside experts to estimate future production trends. Mexico is easier to call though since experts see deep offshore drilling as needed to slow Mexico's oil production decline. Since Mexico's government is spending Pemex revenue on government funding Pemex does not have enough money (or expertise) to do the needed deep offshore exploration and development. So we can count on continued Mexican oil production decline.
Mexico's Chicontepec field has been a disappointment. This decline in Mexican production is going to bring an end to Mexico's role as an oil exporter and therefore reduce funding for their government and depress the Mexican economy. Mexico might even become a net exporter in 5 years time. The United States needs to build a formidable physical border barrier to insulate ourselves from the economic troubles building up south of the border.
Question: What sort of decline rate to you anticipate, in 2012 or whenever it occurs?
Kopits: I don’t have an independent view on that. The IEA has pointed out that decline rates appear to have increased to 6-7%, and PFC has a very interesting chart on the increase in decline rates from offshore wells over time. By the way, these sorts of developments—secular increases in decline rates, for example—are one reason that I think peak oil is upon us already. Are they proof? No, but they are suggestive. And if you work in the industry, you keep running across similar charts, indicative of a system in trouble even if they are not conclusive. At the same time, you have to keep in mind that there are above-ground constraints on production which could influence aggregate decline rates. You have to consider, for example, whether the Saudis will increase production or if Iraq will get better at administrating its oil industry. There are a lot of things we don’t know at this point that will determine decline rates.
Question: Could you tell us about your views on the US oil price threshold for recessions?
Kopits: The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the US went into recession. Right now, 4% of GDP is $80 oil. So that’s my current view: If the oil price exceeds $80, then expect the US to fall back into recession.
Then we are within $10 per barrel of another recession. Bummer dudes.
I predict many recessions (or a few really long ones) in the next 15 years. Shrinking oil supplies will be the biggest cause.
Question: In the world of oil analytics, what rules does peak oil break?
Kopits: The primary thing that we have learned—or more precisely, re-learned—in the last year is that the global economy will not tolerate oil at any price. In the first half of last year, we had some prognostications of oil at $150, $200, even $500, and they were understandable because of the supply and demand dynamics at the time. But as we’ve seen since, once our oil consumption exceeds 4% of GDP in the US, we go into recession and we cut our oil consumption. The global economy cannot sustain oil at any price. Beyond a certain threshold, the result is likely to be stagflation or recession rather than perpetually increasing oil prices.
Kopits isn't the only oil industry analyst who thinks oil can't go above $100 per barrel for any length of time. The argument is that high prices will cause economic contraction down to a level that crushes enough demand to lower oil prices back below $100 once again.
But I think this line of thinking misses a fundamental change that high oil prices will cause: In industrialized countries oil consumption will shrink more than overall economic activity and oil's portion of total energy will shrink. As oil becomes a smaller portion of the total energy pie oil's price will be able to go higher without turning into 4% of GDP. Therefore as global oil production declines oil will eventually go above $100 per barrel on a sustained basis.
Economist James Hamilton has done a lot of analysis on the effects of oil price shocks on the US economy and concludes we would not have experienced the current sharp recession without the 2007-2009 oil price shock.
In a follow-up on my earlier post, I'd now like to discuss the second part of my paper, Causes and Consequences of the Oil Shock of 2007-08, which I presented today at a conference at the Brookings Institution. Here I'll review the role that the oil price shock may have played in causing the economic recession that began in 2007:Q4.
My paper uses a number of different models that had been fit to earlier historical episodes to see what they imply about the contribution that the oil shock of 2007-08 might have made to real GDP growth over the last year. The approaches surveyed include Edelstein and Kilian (2007), who examined the detailed response of various components of consumer spending, Blanchard and Gali (2007), who studied the extent to which the contribution of oil shocks has significantly decreased over time, my 2003 paper, which emphasized the role of nonlinearities, and a model-free data summary of the observed behavior of different economic magnitudes following this and previous oil shocks. Although the approaches are quite different, they all support a common conclusion: had there been no increase in oil prices between 2007:Q3 and 2008:Q2, the U.S. economy would not have been in a recession over the period 2007:Q4 through 2008:Q3.
If we experience a double dip recession another spike in oil prices will be the cause.
Aug. 21 (Bloomberg) -- Petroleos Mexicanos, the state-owned oil company, said oil output in July fell 7.8 percent to 2.561 million barrels a day as production from its Cantarell field kept sinking.
Mexico is a few years away from becoming a net oil importer. Currently Mexico is one of the United States' biggest oil suppliers. Not for long.
Falling oil production poses a big threat to the Mexican government's finances, which rely on oil taxes to fund nearly 40 percent of the federal budget.
Petroleum geologist Jeffrey "westexas" Brown says since 2004 Mexico's production has declined on average 4.7% per year but net exports have declined 13.5% per year. This fits with Brown's Export Land Model where internal consumption growth of oil exporters causes their exports to decline much more rapidly than their production.
Canada has a lot of oil in its tar sands in Alberta and will continue to export oil for many years to come. US oil production will decline. International oil prices will go up as high as needed to continue demand destruction. The cost of substitutes will determine how much our living standards decline.
Henry Waxman and Edward Markey have negotiated with their fellow House Democrats and predictably they all decided to tax fossil fuels and then spend that money as fast as it comes in. So the threat of climate change isn't going to harnessed used to close the massive budget deficit.
Here’s today’s news from the Congressional Budget Office on the recently passed Waxman-Markey legislation: It’s a big tax and spend bill. For the years 2010-2019 the tax increase is $872.8 billion. Ka-ching! (For the record, that’s pretty close [we’re talking government work here] to the $885 billion revenue estimate that Heritage calculated through 2019.)
The CBO estimates the spending increases in the bill add up to $863.8 billion. Wow! It didn’t take long to spend that money. The outlays amount to 98.9 percent of the expected revenue. More startling, perhaps, is that the bill authorizes expenditures of $875.2 billion. That is, they have authorized spending 100.3 percent of the amount taken in. Some of that spending is delayed, perhaps, so that there is no increase in the deficit up to 2019 from Waxman-Markey, but maybe later.
It isn't enough that the bill raises almost a trillion dollars in taxes. Oh no. It has to raise spending by even more. The Democrats could have used Global Warming as an excuse to fund their existing spending plans (which are already huge). But they are gluttons. There's no satisfying them.
We haven't had enough American industry go aboard yet. Uh uh. Still more to push off the shores. Big Oil knows it can use foreign refineries instead and avoid some of the taxes.
Under the Waxman-Markey climate bill that may be voted on today by the U.S. House, refiners would have to buy allowances for carbon dioxide spewed from their plants and from vehicles when motorists burn their fuel. Imports would need permits only for the latter, which ConocoPhillips Chief Executive Officer Jim Mulva said would create a competitive imbalance.
“It will lead to the opportunity for foreign sources to bring in transportation fuels at a lower cost, which will have an adverse impact to our industry, potential shutdown of refineries and investment and, ultimately, employment,” Mulva said in a June 16 interview in Detroit. Houston-based ConocoPhillips has the second-largest U.S. refining capacity.
With Peak Oil approaching the US refineries are going to get cut back with many closings anyhow. The oil taxes won't raise as much as the Democrats expect because less oil will get pumped and consumed. So their spending plans will make the deficit even bigger.
The corresponding Senate bill is a mixed bag. At least the Senate bill will start seismic surveys for some of the Outer Continental Shelf in areas now off-limits to drilling.
Oil and gas trade associations applauded the bill which emerged from the US Senate Energy and Natural Resources Committee on June 17 because it would open parts of the eastern Gulf of Mexico for leasing and development. But the measure contained several other elements which would directly affect the industry.
These included establishing a 30 million bbl refined products stockpile within the Strategic Petroleum Reserve; requiring an inventory of marine resources off the US coast, including seismic surveys on the Outer Continental Shelf; increasing federal guarantees for constructing a natural gas pipeline from Alaska to $30 billion; requiring Senate confirmation of nominees to be US Minerals Management Service director, and repealing offshore royalty and other incentives in the 2005 Energy Policy Act.
We need to get that OCS exploration (and Alaska National Wildlife Refuge - ANWR) exploration kicked off immediately because our available oil supply is going to start declining every year by 2016 at the outside.
Federal guarantees for a natural gas pipeline are a bad idea. The private sector should fund it if it is worth doing. I suspect that natural gas won't be needed for a while due to improvements (hydro-fracturing if anyone cares) that make the natural gas in shales accessible.
Steve Kopits of energy business analysts Douglas-Westwood argues that energy price surges cause many of our economic recessions. Watch out for oil prices that take oil's cost above 4% of GDP. That's around $80 per barrel. Does that mean we are close to a double dip recession?
In the last 37 years, the US has suffered six recessions. From the beginning, oil played a central role. As the period opened in 1972, Saudi Arabia was selling oil for about US$2.50/bbl – or about $13.50 in today’s prices. Oil had seen a decade of unprecedented growth. The US and Western Europe were finishing the process of motorization of their societies, and demand had soared from just over 20 MMbbl/d in 1960, to more than 50 MMbbl/d by 1972. At the same time, US oil production had peaked in 1970 and had begun to decline. The time was ripe for a shift of power to the up-and-coming OPEC producers, and it was not long in coming.
The price level at which oil hits 4% of GDP depends on how big is the GDP, how much oil we are using, and the price of oil. Our oil demand peaked in 2007. We are a few million barrels a day below that peak now. On the other hand, our economy is smaller too. When oil production starts shrinking after world oil production peaks will the economy contract as fast as oil production declines? Probably not. But it is not clear to me what percentage of the GDP we'll use per 1% of oil lost to declining production.
The US economy has tended to grow well when oil consumption expenditures were less than 2% of GDP. In the early 1970s, for example, oil ranged from 1% to 2% of GDP. By contrast, from 1973 through 1978, oil consumption’s share of the economy peaked as high as 6.3%, never fell below 4%, and averaged 5.3% of GDP. In other words, oil expenditures represented a drag of about 3% of the economy throughout the period.
He say once the economy goes above 4% of GDP going to energy it will go into a recession. Then it can't readjust oil consumption downward by an amount equal to more than 0.8% of GDP per year. I'm unclear on what he means by this point. So if the economy is spending 6% on GDP and prices stay even the economy can cut consumption down far enough to lower oil consumption costs to 5.2% of GDP? It is not clear.
He says the US economy needs to avoid 3 conditions in order to avoid an oil-caused recession.
1. Crude oil expenditures should not exceed 4% of GDP.
2. Oil prices should not increase by more than 50% year-on-year.
3. Oil price increases should not be so great that a potential demand adjustment should have to reach 0.8% of GDP on an annual basis, as shedding demand at this rate has generally been associated with recession.
This report reinforces my belief that we can't avoid an extended and deep economic downturn more akin to a Depression. Once Peak Oil hits and world production starts declining by 3-4-5% per year I see no way to avoid a continual oil shock with sustained prices larger than these numbers. Our decline in consumption over the last 2 years is nothing compared to what's coming. The US economy and that of most other nations will enter into an economic contraction that will continue for years.
You can also read the report as a PDF.
Update: What I worry about: eventual collapse. Parasitism keeps building up. The system can't get enough resources to feed all the burdens placed on it.
Peak Oil theorist Dave Cohen takes a look at the size of the decrease in oil consumption.
Oil demand strength can be viewed as following from economic conditions. However, due to its tight correlation with GDP, demand also serves as an indicator of those conditions. World oil demand is way down. Japan, where GDP shrank 15.2% in 2009:Q1, consumed 3.97 million barrels-per-day in April, down 1.02 million barrels compared with previous year. For the week ending May 22nd, demand in the United States was 18.292 million barrels-per-day, down 1.447 million barrels (-7.9%) compared with the same week in 2008. That’s almost 2 and a half million barrels-per-day right there, and I’ve only listed 2 countries.
According to Platts, China consumed 6.69 million barrels-per-day in the 2009:Q1, down 4.5% over the previous year. The lone “bright spot” was India, which was up 4.8% averaged over the entire year 2008-2009 ending March 31st (2.65 million barrels-per-day).
Note that the percentage decline for the US is larger than the percentage decline for China. India's consumption is still growing in spite of the world recession. The size of the US consumption decline is a lot bigger than I'd expected. That was a May figure. In June the consumption decline continues.
Fuel consumption fell 5.5 percent to 17.9 million barrels a day last week, the biggest drop since January, the report showed. Daily gasoline demand declined 2.4 percent, to 9.13 million barrels.
Look at these numbers in a larger context. US per capita oil consumption peaked in 2004. The reduction in per capita consumption so far probably takes us about a third of the way back to 1950 level of per capita oil consumption. We'll get back to 1950 eventually. Though some of us will be driving electric cars when we arrive. US total oil consumption peaked in 2007. My guess: due to Peak Oil we will probably never revisit that peak. If James Hamilton is right to argue that the oil price run-up was an economic shock and major cause of our current recession then it looks like the US economy does not have the buying power needed to push up our oil consumption any higher than it reached in 2007.
US peak per capita oil consumption comes before world oil production peaks for a few reasons. Exporters are using oil of their oil internally. Asian demand grows and drives up prices, basically competing American buyers out of the market. Also, US population growth means additional residents and citizens compete with existing ones. So your own oil consumption takes a bigger hit than world production declines would lead you to expect.
Mark Perry, an econ prof at U Mich Flint, says that adjusted for inflation the $2.12 national average gasoline price of last week is cheaper than any time before the 1960s.
The chart above displays real gas prices going back to 1919 ( data here), showing that the current national average price of $2.12 is below the price of gas during the entire decades of the 1920s, 1930s, 1940s, 1950s, about the same as the average price during the entire 1960s, below the average price during the 1970s, and below the average real price of gas during the entire 1919-2008 period ($2.36).
Click thru to see his inflation adjusted historical gasoline price graph. The most surprising thing about the graph: Gasoline was much cheaper during the 1990s (the hey day of the SUV) than in the 1960s. Back in the late 1990s the inflation-adjusted price of oil fell below the 1960s oil prices.
Gasoline shortages hit towns across the southeastern United States this week, sparking panic buying, long lines and high prices at stations from the small towns of northeast Alabama to Charlotte in the wake of Hurricanes Gustav and Ike.
In Atlanta, half of the gasoline stations were closed, according to AAA, which said the supply disruptions had taken place along two major petroleum product pipelines that have operated well below capacity since the hurricanes knocked offshore oil production and several refineries out of service along the Gulf of Mexico.
Drivers in Charlotte reported lines with as many as 60 cars waiting to fill up late Wednesday night, and a community college in Asheville, N.C., where most of the 25,000 students commute, canceled classes and closed down Wednesday afternoon for the rest of the week. Shortages also hit Nashville, Knoxville and Spartanburg, S.C., AAA said.
Are the oil companies keeping gasoline prices down in company-owned stations in order to avoid a political backlash? Might de facto price controls be causing the shortages?
LOS ANGELES, Aug. 23 -- Production from Mexico's Cantarell oil field fell 36% over the past year, reducing the country's overall oil production and creating a sharp decline in its exports.
"New fields aren't coming on line fast enough to replace Cantarell," said Jesus Reyes Heroles, general director of Petroleos Mexicanos (Pemex).
Reyes' remarks coincided with an announcement by Pemex that in the first 7 months of 2008 the state firm produced an average of 2.84 million b/d of oil, down 10% from the same period in 2007.
Exports declined at a 16.3% rate which is steeper than production. Total revenue surged on higher oil prices. But eventually exports will decline so far that higher prices won't compensate for lower exports. This spells big trouble for Mexico's government and economy. The Pemex oil company in Mexico is owned by the government. Mexico's government relies on oil for a third of its tax revenue.
The biggest vulnerability posed by declining oil production lies with government revenue. Total oil-related revenue equaled just over one-third of total government revenue in 2007. Fiscal revenues from the oil sector exceeded 8 percent of GDP in 2007, almost equaling the 9 percent of GDP that comes from income tax and value-added tax. Total tax revenues from the non-oil sectors of the economy were below 11 percent of GDP in 2007, low by regional standards. The failure to build a stronger non-oil tax base has led Mexican governments to depend heavily on Pemex's resources, thereby depleting the company's ability to modernize and undertake more exploration and production.
Mexico is going to be hit by much higher internal fuel prices, less government, revenue, and less export revenue. We need a barrier wall along the entire US-Mexico border to keep out the Mexicans who will experience declining living standards.
Petroleum geologist Jeffrey "westexas" Brown expects Mexico will stop exporting oil by 2014.
Venezuela is showing a long term net export decline, and Mexico is on track to approach zero net oil exports by 2014. In October, 2007 these two countries accounted for more than 20% of total US petroleum (crude + product) imports.
For other countries when their oil fields peaked oil exports declined more rapidly than oil production. Jeffrey Brown and other analysts who have looked at this pattern have found it so consistently that they expect Mexico, Russia, Venezuela, and other big producers of today to follow the same pattern.
"In May, June and July, people were just stunned" by $4 gas, says Jeremy Anwyl, CEO of Edmunds.com. Now, "It's kind of a return to rationality, where the singular fixation on fuel economy is gone. As people think things through clearly and a little more calmly, they'll make different decisions."
In June, 31.4% of recent new car buyers surveyed said the purchase was motivated by a desire for better gas mileage, Acxiom says. That's up from 21.1% in February, but still less than a third of buyers. There is "not this huge flood to one segment in the auto industry," says Tim Longnecker of Acxiom's automotive practice. "There's still going to be this huge desire for utility."
People need to learn the hard way. There will be corrections in oil prices during the big march to higher prices. But future rallies will take oil to much higher price points and future spikes will force a larger fraction of the driving population toward the most efficient vehicles.
“I look at the data a lot and it's very rare -- I've almost never seen this -- to see the transaction price of a new vehicle rise after it has been sold," says Tom Libby of J.D. Power & Associates. "It speaks to the huge imbalance between supply and demand of the Prius."Libby says the average price of a new 2008 Prius sold last month -- to those relative few who could get their hands on one -- was $26,672. With Toyota unable to meet demand, the price of used 2008 models with about 8,000 miles on them was almost $1,300 more than retail at $27,945. Even more impressive, used 2007 models have been fetching an average of $26,396. That's just $276 less than new 2008 vehicles.
Toyota will bring a new Prius factory online in 2010.
I've been watching used car prices for over a year on AutoTrader.com and watched various used small cars go up in price. Used Ford Focuses have definitely gone up for example. These high prices will ease as a lot of factories get shifted over toward making smaller cars. Also the smaller cars will become more fuel efficient. You can already see this trend in the last few years. Go to FuelEconomy.gov and compare a 2006 Ford Focus with a 2008 Focus. Ford found ways to boost its fuel efficiency a few miles per gallon. Ford did the same with the Ford 500 when they renamed it the Taurus (while improving acceleration at the same time). Better transmissions with dual clutch and more gears, direct injection, and other techniques can boost fuel efficiency.
More coming improvements in fuel efficiency will eventually cut down the value of the used small cars that do not possess these advantages.
"Two-hundred dollar oil would break the back of the global economy," Deutsche Bank AG's chief energy economist Adam Sieminski said in an interview on Wednesday in Tokyo. "Next step after US$200 would be global recession and bad news for everybody."
This is why I think our current mild recession will be longer lasting and deeper. I wonder if this is one of the reasons Warren Buffett has commented that he expects a longer recession.
“What we’re seeing is a very painful experiment to see what price will get demand to slow down,” said Adam E. Sieminski, chief energy economist at Deutsche Bank. “Four dollars a gallon is slowing consumption in the United States. But there is an awful lot of people in the developing world and they all want a car and they all want a better diet. That is putting a lot of pressure on food and energy prices.”
Goldman Sachs analyst Arjun Muri was not taken seriously when crude oil was only $40 and he foresaw a big upward spike in oil prices to over $100. Now we look nostalgically back on those good old days. Well, Murti sees oil hitting $200 within a couple of years. I do not think it will take that long.
IN 2004, ARJUN N. MURTI, A TOP ENERGY ANALYST AT GOLDMAN SACHS , published a report predicting "a potentially large upward spike in crude oil, natural gas and refining margins at some point this decade." It was a controversial call, with crude around $40 a barrel at the time. But it was right on the money. Four years later, crude is trading around 139. Murti sees energy in the later stages of a "super spike," in which prices rise to a point where demand drops off. In a note last month, he wrote that "the possibility of $150-to-$200-per-barrel oil seems increasingly likely over the next six to 24 months."
Murti says we are getting close to the end game. But a game implies a competition where we can win or lose. Well, we definitely lose on this one.
We are getting closer to the end game here, where despite eight years of rising energy prices, supply looks like it is going to barely grow this year. We have been bullish, but we didn't expect such a slow growth rate of supply. And demand outside the U.S., Europe and Japan has been more resilient than we expected.
But if the whole world goes into a deep recession next year then we could probably delay the $200 per barrel oil since the recession would dampen demand.
A senior adviser to Mr. Obama's campaign told reporters it's an "open question" whether oil produced from northern Alberta's oilsands fits with the Democratic candidate's plan to shift the U.S. sharply away from consumption of carbon-intensive fossil fuels.
"If it turns out that those technologies don't advance . . . and the only way to produce those resources would be at a significant penalty to climate change, then we don't believe that those resources are going to be part of the long-term, are going to play a growing role in the long-term future," said Jason Grumet, Mr. Obama's senior energy adviser.
Hopefully more rational heads will prevail once Obama gets elected. But I expected more mature and reasonable people would surround George W. Bush and we all know how that turned out. Other governments are making the world energy problem worse by subsidizing internal consumption. It is not that big of a stretch to expect the US government under Obama will continue to block offshore oil development and Alaska oil development and even to put obstacles in the way of Alberta oil development.
The disparity between rural America and the rest of the country is a matter of simple home economics. Nationwide, Americans are now spending about 4 percent of their take-home income on gasoline. By contrast, in some counties in the Mississippi Delta, that figure has surpassed 13 percent.
As a result, gasoline expenses are rivaling what families spend on food and housing.
“This crisis really impacts those who are at the economic margins of society, mostly in the rural areas and particularly parts of the Southeast,” said Fred Rozell, retail pricing director at the Oil Price Information Service, a fuel analysis firm. “These are people who have to decide between food and transportation.”
A survey by Mr. Rozell’s firm late last month found that the gasoline crisis is taking the highest toll, as a percentage of income, on people in rural areas of the South, New Mexico, Montana, Wyoming and North and South Dakota.
To a certain liberal reader who debates with me a lot in the comments: Instead of a simple minded welfare state that simply hands out money to poor people wouldn't it make more sense to offer poor people funding for moves that would put them closer to their jobs? Basically evacuate the poor people out of rural areas to put them nearer factories, slaughterhouses, and other places where they can work. Lower their cost of living.
For poor people in rural areas of colder northern states what would help is moves to apartment buildings in small sized cities. Heating would be a lot cheaper if they shared walls since shared walls reduce heat loss. Also, higher density living would reduce their need to drive to stores.
Americans on average now spend about 4 percent of their after-tax income on transportation fuels, according to Brian A. Bethune, an economist at Global Insight, a forecasting firm. That compares with 4.5 percent in early 1981, the highest point since World War II. At its lowest point, in 1998, that share dropped to 1.9 percent.
The early 1981 peak was very sharp and short-lived as compared to the rise in oil prices we are currently experiencing. Also, oil prices today haven't peaked yet and won't peak for some years to come.
Check out this interactive map of percentage income going to transportation fuel. Those areas with high percentages are going to hollow out as world oil production declines.
"Some Americans have the luxury of an elastic expenditure -- they'll switch to hamburger when the price of higher quality meat goes up," said Kinsey, a professor and co-director of CFANS Food Industry Center. "But, if you're living in poverty to start with, a rise in food cost can be devastating to your lifestyle."
Kinsey found that Americans in the lowest income class (those who earn a household income of less than $10,579) spent an average of 31.5 percent of their income on food in 2005 and 33 percent in 2008, a 1.63 percentage point increase. At the other end of the spectrum, those in the highest income class (those who earn a household income of over $167,525) spent an average of 6.8 percent of their income on food in 2005 and 7.2 percent in 2008, a 0.4 percentage point increase.
Note that food production costs rise with higher energy costs. Peak Oil will make both energy and food less affordable for the poor especially.
From the end of the 2001 recession through last year, median household income fell almost every year even as the economy expanded and individual workers became more productive. The most recent official data indicate that in 2006, half of all families made more than $58,407 and half made less. That compares with an inflation-adjusted peak of $59,398 in 2000.
This financial stall marked the first time since World War II that the typical family was worse off at the end of an economic expansion than at the start, according to the Economic Policy Institute (EPI), a left-of-center think tank in Washington, D.C.
"This is the first business cycle on record where the median family income failed to recover its previous peak," EPI economist Jared Bernstein says. "It's been a uniquely disappointing cycle from the perspective of the median-income family."
But rising transportation costs combined with a declining dollar will reduce competition from workers in developing Asian countries. So the big rise in incomes at the top end might moderate as they become less able to shift their labor demand abroad.
Leonid Fedun, the 52-year-old vice-president of Lukoil, Russia’s largest independent oil company, told the Financial Times he believed last year’s Russian oil production of about 10m barrels a day was the highest he would see “in his lifetime”. Russia is the world’s second biggest oil producer.
In 2007 Russia showed the 3rd largest oil increase in the world (see context here). If Russia is going to join Mexico, Iran, Kuwait, and the lengthening list of other countries with declining oil production then the unfun times are just around the corner.
The Russian government hopes a tax cut on oil can help boost oil production. But with oil prices already very high the prospects of a tax cut making a difference seems remote.
April 10 (Bloomberg) -- Russia will cut taxes on oil companies to overcome production ``stagnation'' after a decade of growth, Energy and Industry Minister Viktor Khristenko said.
Russian output fell for the first time in a decade in the first three months of this year, according to the International Energy Agency, which represents industrialized oil-consuming countries. It said Russian production averaged about 10 million barrels a day, a 1% drop from the first-quarter of 2007.
My advice: When you move or take a job choose locations that reduce your commute distance. Also, work more hours and save your money. Also, insulate. Also, next time you buy a car buy a smaller one. If you can get a hybrid or a diesel then all the better.
U.S. crude ended up 74 cents at $100.74 barrel, the top settlement on record, after hitting an all-time high of $101.32 a barrel earlier in the day. The gains sent crude near the all-time inflation adjusted high of $101.70 hit in April 1980, a year after the Iranian revolution, according to the International Energy Agency.
Think about better insulating your home. Or maybe cut your commute by living closer to where you work. Figure out how you can adapt to the coming decline in world oil production.
“We’re looking at retail prices for regular unleaded of $3.50 to $3.75 in April and May,” said Tom Kloza, an analyst with Oil Price Information Service. “Those will be records.” The record of $3.22 a gallon was set last May.
Mr. Kloza also predicted record highs for diesel and jet fuel “within the next 90 days.”
While the oil price rise gets the most press, the huge increases in grain prices suggest the presence of wider inflationary pressures.
Wheat for May delivery shed 14 cents to settle at $10.325 a bushel on the Chicago Board of Trade, after earlier falling as low as $10.22 a bushel. Wheat hit an all-time high of $11.6975 a bushel earlier this month.
Other agriculture futures traded mixed. Soybeans for March delivery fell 0.75 cent to settle at $14.17 a bushel on the CBOT, while March corn gained 3.5 cents to settle at $5.235 a bushel.
Price controls around the world are becoming much more noticeable as a result of the run-up in oil prices and coal prices. Countries with energy price controls are getting hit by power outages rather than just simply higher energy prices. These price controls in more socialist countries (e.g. South Africa, China) could limit their usage of energy and therefore leave more fossil fuels for the rest of us. However, in big oil exporting countries (e.g. Venezuela, Saudi Arabia, Russia) the internal price controls cause big internal surges in oil consumption and hence less oil for the rest of us. So price controls cut both ways. Finally, I wonder whether the willingness of the Chinese leaders to use price controls will ultimately limit Chinese economic growth. First off, the mandarins in Beijing are using price controls on electricity and food to lower galloping inflation.
Beijing's resort to command economy decrees has not been confined to electricity alone. Beset by inflation galloping at a decade high of more than 6 percent, the government has steadily widened price controls, finally freezing all food prices last month as well as clamping limits on fertilizer prices and raising price supports for rice and wheat.
What do you suppose price controls on fertilizer will do to the supply of food? Will the Chinese government mismanage the Chinese economy into chaos? If the Chinese government is so afraid of mass discontent due to inflation that the mandarins feel the need to resort to price controls then the coming world decline in oil production is going to hit China much harder than it needs to. The Chinese will make a bad situation even worse if they try to mange through the crisis using price controls.
The controls are meant to shield China's poor and working classes, who spend up to half their incomes on food. But the inflation spike is blamed on shortages of pork and grain, and economists warn that putting a lid on prices just shifts the hardship to farmers, discouraging them from raising output, which would bring down high prices.
The inflation in China functions as an incentive for the Chinese leaders to let their currency appreciate. A stronger currency will lower their cost of imports for energy, food, and minerals. But a rise in Chinese currency will also increase the price of Chinese goods and therefore increase inflation in Western countries.
Power executives and government statements attributed the electricity shortfall this winter to a confluence of problems. Many of the problems appear to have their roots in the government’s imposition of a long list of price controls in recent months in an attempt to tamp down inflation, which reached 6.9 percent at the consumer level in November.
Trucks did not deliver adequate coal stockpiles to power plants before winter snows arrived in northern China, partly because of nationwide diesel shortages. Refiners had cut back on the production of diesel because price controls were forcing them to sell the diesel for slightly less than the cost of the crude oil needed to make it.
In January, the National Development and Reform Commission announced tightened supervision of prices for grain, edible oils, meat, poultry, eggs, feed and other items in both wholesale and retail markets.
This followed the announcement in late December that from January 1 the government would slap taxes ranging from 5-25 percent on exports of a range of products including wheat, corn, rice and soybeans to try and ensure stable food supplies at home.
The actions appeared to be stoked by memories of the widespread protests that resulted from the government's clumsy handling of food price controls that led to inflation of around 50 percent in the summer of 1988.
BEIJING, Jan. 26 -- China's Transport Ministry yesterday ordered ports to temporarily stop loading coal for exports as the country struggles to meet domestic needs amid mounting power shortages.
The availability of internationally tradeable fossil fuels energy will decline much more rapidly than the total extraction of fossil fuels from the ground. Governments won't hesitate to cut exports to supply domestic industry and populaces
Price controls and exports controls are signs of the times. Commodities prices are rising rapidly. The government of Pakistan has banned private sector flour exports.
ISLAMABAD, Jan 22: The Economic Coordination Committee (ECC) of the cabinet on Tuesday banned the export of flour to Afghanistan through private sector to stabilise flour price in the domestic market.
South Africa really takes the cake for sheer stupidity. Price controls combined with rising prices have created power shortages. Electric power was cut to coal mines that extract the coal that is needed to generate electric power.
Some of South Africa's coal mines have resumed production after being shut down on Friday because of power cuts.
Coal is used to generate about 90% of electricity supplies at state power company Eskom.
But the main gold, diamond and platinum mines remain closed. South Africa is one of the world's biggest producers of platinum and gold.
South Africa doesn't have much going for it aside from its mining industry. I already expected South Africa to decline before considering the effects of Peak Oil. White flight makes that a certainty. But a maladaptive response to Peak Oil could make the decline much faster. Industries that depend on South African platinum ought to start working hard on substitutes.
More generally, Peak Oil is going to widen economic differences in the world. The messed up places with low social capital will respond much less adaptively than the smarter places with high levels of trust and cooperation. Plan accordingly.
Currently the wholesale cost of natural gas in the United States is below $8 per million BTU. US natural gas production is in decline. Most natural gas in the world is used fairly near where it is produced or is only transported by pipeline. Matthew Simmons of Twilight In The Desert fame (arguing that the official Saudi oil reserves are greatly above the actual and that the Saudi oil production is near peak) says in an interview that cooled liquified natural gas transported by ship might never scale up as a replacement for domestic natural gas production declines.
BC: We’re probably in more serious a situation than most people would realize, and it’s no better with natural gas. Switching gears for a moment, do you think the rise of LNG will be enough to keep up with declines in natural gas discovery and subsequently in natural gas production?
MS: Well, first of all, the problem with LNG is that if we try to develop a spot market out of LNG, the odds of it ending in bankruptcy are about 90%.
BC: Who goes bankrupt?
MS: All the players. The cost to produce and distribute LNG is so high that to make LNG work in any sort of financial reality, you would need a 25- or 30-year guaranteed supply. And then you can amortize it over 25 or 30 years. If you’re going on a spot supply, you’ve got to write it off over 10 years and then you’ll need $40 per million BTU to make the economics work. The other thing is that about 35% of the hydrocarbon value gets chewed up in the process of cryogenically freezing natural gas, transporting it, and then re-gassing it.
BC: In your opinion then, LNG is not an economically viable solution. We won’t do it.
MS: We shouldn’t do it. But it turns out that high-quality natural gas – sweet, high-quality natural gas – is just like sweet oil. It’s basically in decline.
The more I learn about what is known about fossil fuels reserves the more pessimistic I become about the economy in the next 10 years.
To create LNG processing facilities requires capitalists at two different ends of a shipment path to agree to a massive investment in facilities which would take decades to pay back. So one needs to be very certain that a supply is going to exist at an originating end before plunking down big bucks at the receiving end. European OECD natural gas production might peak in 2008. Worse, Russia is the major external source of natural gas for Europe and Russian oil and natural gas fields look like they are approaching production peaks as well. LNG requires a large reservoir of natural gas at the originating end. Even if such a reserve or two exists in the Middle East the United States is not the only potential customer for that natural gas. China seems more likely to put together the capital needed to get it because the Chinese can make the investment as a political decision.
If natural gas can't replace oil then how about coal? In the United States the combined reserves of coal companies are less than a quarter of the coal reserves the US government thinks the US has. The Energy Watch Group expects world coal production to peak around 2025. Similarly, CalTech professor David Rutledge thinks coal production will come much sooner than official reserves numbers would lead one to expect. Well, coal is the cheapest fossil fuel source of electric generation energy and accounts for over half of US electricity while natural gas accounts for almost another 20%. Coal and natural gas production won't just collapse. Their production declines will happen gradually. But can we build up nuclear and wind as replacements at the rate at which coal and natural gas will decline? The answer is not clear to me.
I used to just be worried about Peak Oil. Now my worries extend across the entire range of fossil fuels.
Remember when the bigger obstacle to international trade was restrictions on imports? Here is a sign of the times. Countries are cutting off natural gas exports under various pretenses in response to a cold winter and rising demand.
Turkmenistan has halted daily deliveries of up to 23 million cubic meters to Iran since Dec. 31 because of ""technical problems"" and the need to undertake emergency repairs.
Turkmenistan cut off natural gas exports to Iran which cut off natural gas to Turkey which cut off natural gas exports to Greece. The last node in energy distribution networks is not the place to be.
On Jan. 8, Iran stopped all natural gas exports to Turkey as worsening weather boosted domestic demand, forcing Ankara to use as much as a third of its stored fuel. The following day, Turkey halted the flow of Azeri gas to Greece because of the suspension of gas supplies from Iran. Adding to Turkish anxieties, Russia, Turkey’s other main supplier of natural gas, also reduced exports, citing severe weather.
Turkish Energy and Natural Resources Minister Hilmi Guler says the natural gas produced in Iraq will be exported to Europe via Turkey.
Parenthetically, when Russian natural gas exports start declining Germany's opposition to the continued use of nuclear power is going to turn out as incredibly foolish. The big run-up in grain prices driven in part by demand for biomass energy already has Russia restricting grain exports.
The Russian government’s decree imposing a 40 percent export duty on wheat, meslin (wheat and rye mixed), and barley, but not less than EUR 0.105 per 1kg, will take effect on January 29, 2008. The document was signed by Prime Minister Viktor Zubkov on December 28. The measure, which almost quadruples Russia’s protective duties on grain exports, will apply until April 30, 2008.
On October 8, the Russian government decided to introduce export duties on wheat and barley, at the same time lowering import duties on milk, butter, cheese and sour cream. The export duty on grain was set at 10 percent of contract price but not less than EUR 22 per tonne, and at 30 percent for barley, but not less than EUR 70 per tonne.
All national governments are keenly aware of the possibility of civil unrest in the event of severe food shortages or famine, and many have taken minimal steps to ease the crisis in the short term, such as reducing import tariffs and erecting export restrictions. On December 20, China did away with food export rebates in an effort to stave off domestic shortfalls. Russia, Kazakhstan, and Argentina have also implemented export controls.
A threat this week from Argentina's top price controller to cut off fuel exports could further complicate Exxon Mobil's (XOM) widely reported bid to sell its Argentine assets.
Argentina's independent farm sector, famed as religiously laissez-faire and for bitter railing against U.S. and European Union subsidies and barriers, is no more.
Over the past year, the government has consolidated its hold on the sector, taking advantage of sky-high international commodity prices to raise export taxes on grains. While the rising grain values have been a boon to state coffers and flooded the Pampas with wealth, rising domestic food prices have challenged a government that has made controlling inflation a major element of its economic policy.
The government now opens and closes the grain export registries like a tap. Companies must register all grain exports before shipping the goods. When the government feels that domestic supply is close to being threatened, the nozzle is shut.
It also limits beef exports to 70% of 2005 levels. In addition, the export tax on soybeans was raised to 35% from 27.5%
What will go down faster? Food exports or oil exports or natural gas exports? Remember, crops have become sources of both food and energy. So as energy prices rise the demand for crops to make biomass energy rises and therefore so do grain prices and other food prices. Populations will respond to rising food prices by demanding restrictions on food exports. They'll do the same with energy exports.
Jim Kingsdale does not expect the coming recession to lower oil prices by much because oil producers will cut back production to maintain prices as part of their new hoarding mindset.
I would bet that if prices do fall sometime soon, maybe after the peak winter demand season, exporters will cut back fairly quickly to try to keep the price above $80 or so. Further, when prices eventually begin to rise again, perhaps in the Spring or Fall of 2008, exporters will then be slow to raise production, having just experienced lower prices. So I think a possible reduction in the oil price next year would be shallow and would likely be followed by a counter trend leg up that will probably bring the price well above $100.
My thesis is based in part on the hoarding mindset that now dominates the oil market and is hardly ever discussed. Exporters (read OPEC, particularly KSA, UAE, Kuwait, and Venezuela) are now addicted to high and rising oil prices. Their ever increasing cash flows from oil have led to their making huge future capital commitments; they are not willing to see falling oil prices endanger those commitments. They also know that due to tight global supplies relatively minor production cuts are sufficient to raise prices. Finally they now believe that oil in the out years will only get more expensive. Thus near term production cuts will also be rewarded because the oil not sold now can be sold later for more money. In summary, exporters today have their hands on a hair-trigger for raising the oil price and they will not hesitate to pull it if the price falls much below $85. I summarize this series of attitudes on the part of oil exporters as the “hoarding mindset.”
If oil producers respond in this way then the demand destruction in the United States will be greater. The recession won't take as much pressure off of inflation.
Continued high oil prices in a recession will speed the development of new energy technologies, both for increased efficiency and to produce energy from non-fossil fuels energy sources. Nuclear and wind power development should accelerate. Also, as the public comes to expect long term high energy prices they will make more lifestyle changes to lower their energy usage.
A lot of people have gotten hot in anticipation. We aren't $100 per barrel oil virgins any more.
NEW YORK - The price of oil on Wednesday hit 100 dollars a barrel for the first time in history, providing a new jolt to oil-dependent economies, particularly the United States, dealers said.
On the New York Mercantile Exchange (Nymex) at 1720 GMT, a barrel of "light sweet crude" for February jumped 3.48 dollars to 99.46 dollars. Shortly before it had reached the exact price of 100 dollars a barrel.
In inflation-adjusted terms you will find a range of estimates between $96 and $103 for what oil in the early 1980s peaked at. So it is not clear whether we have exceeded the record price in inflation-adjusted terms. We might need another $5 increase to surpass the earlier record.
A new report by the Organization of Petroleum Exporting Countries indicates the group will be more hard pressed than previously thought to meet the world's surging oil needs and could fail to supply its share of global oil markets by 2037.
The report in the December issue of the OPEC Review, published by the organization's Vienna-based Secretariat, also says Kuwait is likely to be an extremely inconsistent and unstable supplier and questions Saudi Arabia's assertion it is capable of meeting world oil demand for the next 50 years.
Do the Saudis lie about their oil reserves or are they deluded?
The report's author actually has what seems to me a very optimistic outlook on OPEC oil production increases.
The author of the report, Ayoub Kazim, the executive director of Dubai Knowledge Village, a government-run education center, writes that the "more realistic" scenario assumes OPEC's average oil production will grow annually by 5 percent to meet a "drastic increase in oil demand from industrializing countries, such as China and India in the next two decades."
Under that scenario, Indonesia, Algeria and Nigeria will fail to produce their share by 2009, 2022 and 2026, respectively, forcing other countries to make up the difference.
Most OPEC members are going to fail to keep up, let alone increase, their production sooner than that.
What I most want to know about: the rate of demand destruction. There's a big delay between an increase in oil prices and a resulting demand destruction. But rising prices do eventually curtail demand. Last time this happened in the late 1970s high prices caused a decline in world oil demand from 63 million barrels per day in 1979 to 55 million per day in 1983. The decline would have been steeper had prices not declined.
On the one hand, we have lots of technologies we can use to reduce our energy demand. On the other hand, Asian economic growth is increasing the number of oil users. So while higher prices will cut some sources of demand other sources of demand are popping up every day. As incomes rise in China and India so does buying power for gasoline and diesel fuel. So I think we need higher prices to achieve the same amount of demand destruction as we saw in the early 1980s.
Oil inflation and the rush to biomass energy is fueling food inflation. The 2007 price increases of palm oil and soybean oil are almost the same as that of petroleum oil in percentage terms.
Agricultural products have been among the best-performing commodities this year. Palm oil has gained 56 percent, soybeans 75 percent and soybean oil 62 percent. Goldman Sachs raised its 12-month forecast for soybeans by 61 percent to $14.50 a bushel from $9 a bushel in a Dec. 11 report.
The choice becomes between food or fuel. Fuel seems to be winning.
Société Générale's "Oil Burden" index, which measures oil price impact on global gross domestic product and has a base of 100 set in 1975, sat at just 75 at the end of last year - when average prices were $30 below current levels. While the company hasn't crunched the index numbers at current prices, "We have a feeling we are now approaching the 100 [index] level," he said. He noted that energy costs are now eating about 4 per cent of U.S. disposable income - similar to levels at the heights of the 1970s oil crises.
He suggested $120 a barrel could represent the level at which oil's damage would be on par with the 1970s. But others feel the threshold could be even higher - because the emerging-market economies that have been driving demand growth seem less bothered by high prices than their developed-world counterparts.
In the early 1980s world oil demand shrank as all the projects and changes in lifestyle made to reduce the burden of high oil prices began to take effect. Shifts toward more fuel efficient cars, changes in industrial processes, and the installation of more insulation all cut demand. At some point the collective decisions of many participants in the world economy will lead to demand reduction. But at what price of oil?
Developed countries (the United States especially) will cut back their oil demand sooner than the developing Asian countries will. Part of that difference is due to more rapid Asian economic development. Faster development means a faster rise in the demand for energy.
This means that US demand will start declining first. Yet in spite of that US demand decline total demand might not drop when US demand drops. So prices might keep going up. US demand destruction will just free up oil for use by China and India. Lifestyle changes and industrial restructuring in the US in the 1980s lowered the price of oil for the US and the US economy benefited from that price decline. But this time around the US restructuring and investment in energy saving capital equipment will not deliver an energy price decrease.
Just how far oil prices rise will depend on how soon and how rapidly demand destruction occurs. The price of oil has gotten high enough to wake up people. Car buying habits have shifted in the direction of smaller ones. Entrepreneurs, venture capitalists, and managers of big corporations are looking for ideas on how to save on energy costs and how to develop products that will let others cut costs.
The rising energy prices are going to cause a big burst of policy making in national governments. Corporations will line up for and against the many proposals. An interesting article in the Wall Street Journal about Dow Chemical's positions on energy policy highlight the many interests which drive corporate decisions on energy policy.
Sometimes, because Dow is so sprawling, its stake in an energy-policy fight isn't clear even to the company. Consider a pending House proposal to require electric utilities to generate 15% of their power from renewable sources by 2020.
It sounds good to Mr. Ellebracht, the R&D chief in the unit developing solar technology. In fact, it sounds doubly good: The proposal would let utilities meet the rule partly by raising energy efficiency -- and Mr. Ellebracht's unit makes insulation, too.
But the idea worries two other Dow fiefs. The people who operate power plants at Dow chemical factories fret that a mandate on use of energy from renewable sources might require Dow itself to buy costly renewable power. And the people who buy natural gas as a factory raw material worry that the mandate might actually raise gas prices.
All of this corporate calculation on which policy proposals to support will become largely irrelevant if we break out of the world oil production plateau with a downward turn in oil production. Government policies will have little effect as compared to declining oil production.
Which way oil production is going to break - up or down - is probably the biggest economic question we face right now. It is even more important than the rise of Asia or the retirement of the baby boomers. A downward break will throw us into something akin to an economic depression.
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.
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 summer’s subprime mortgage collapse.
"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.
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.
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 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.
Crude oil prices continued a months-long bullish run with another record-setting day: On Oct. 17, the price for a barrel of light sweet crude surged above $89 on the New York Mercantile Exchange, the highest mark recorded since contracts started trading on the exchange.
Given trends in world oil production I think the price of oil will go higher.
"Within a year you're going to see $100 oil," the Texas billionaire said. "It's going to get very dicey here in the fourth quarter."
But how about some demand destruction? In spite of economic growth and population growth the United States used less motor fuel in the last 4 weeks than in the same period last year.
Demand for the motor fuel over the four weeks ending Oct. 12 was 0.5 percent lower than a year earlier, averaging about 9.2 million barrels a day.
I'm expecting greater demand destruction as people shift toward more fuel efficient cars and make other changes that reduce their use of energy for travel.
China overtook Japan as the world's second-largest consumer of oil in 2003 and is closing in on the US, with demand for oil growing at about 15% a year.
The economic impact of the latest surge in oil prices, which started to soar only this month, could be substantial. The rise could reduce consumer enthusiasm, particularly for lower-income Americans. Some economists believe that if the oil price hits $90 a barrel and stays there for a few weeks, businesses could start passing on their higher costs. A rise in oil prices will also make the Federal Reserve's job more difficult as it tries to keep the economy going while maintaining price stability.
"If the price holds, it will be a real oil shock," says Don Norman, an economist at Manufacturers Alliance/MAPI in Arlington, Va. "But I'm not sure if it's enough to knock the economy into an outright recession."
The declining US dollar cuts the cost of oil to countries whose currencies rise against the dollar. The rising price of oil in dollars gets at least partially cancelled out in Europe, for example, by the rise in the Euro against the dollar. So some countries aren't seeing the same oil price rise that the United States is experiencing.
If the US dollar eventually gets hit by a big decline against East Asian currencies that will lower the cost of oil to China and therefore Chinese demand will rise even more rapidly and push up the price of oil in US dollars even more rapidly.
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?
The new price is still lower in inflation-adjusted terms than the peak during the Iranian revolution period in the late 1970s. But the high prices of today are looking less like a brief blip.
A barrel of crude surged to a new trading high of $81.90 on the New York Mercantile Exchange in the moments immediately after the Fed's decision. While light, sweet crude for October delivery settled at $81.51 a barrel, up 94 cents, prices continued to rise after the Nymex closed, hitting $82.38 in afternoon electronic trading.
When does the oil price rise trigger a recession? How high does the price of oil have to get to cause an economic downturn?
The Goldman Sachs analysts said they were raising their year-end 2007 price forecast to 85 dollars per barrel, from 72 dollars, "with a high risk of a spike above 90 dollars per barrel."
They unveiled a 2008 average price forecast of 85 dollars per barrel, with a year-end price target of 95 dollars.
The price could rise high enough to cause a decline in US demand even as demand in China continues to grow. US consumers will shift to much more fuel efficient vehicles while tens of millions more Chinese start driving.
Whoever said that governments are insensitive to market forces? Watch national governments chase after oil.
In the Arctic this week, researchers aboard the U.S. Coast Guard icebreaker Healy are mapping claims to the spoils of global warming.
North of Alaska, the 23 scientists of the Healy are gathering the data legally required to extend national territories across vast reaches of the mineral-rich seafloor usually blocked by Arctic ice. Fathom by fathom, multibeam sonar sensors mounted on the Healy's hull chart a submerged plateau called the Chukchi Cap, in a region that may contain 25% of the world's reserves of oil and natural gas.
Conflicting claims of different nations?
All told, the undersea territories being mapped by the U.S. encompass an area larger than France. "It holds potential riches beyond your imagination" through sea-floor mining and drilling, said UNH marine geologist James Gardner, who has mapped 347,000 square miles of ocean bottom as part of the U.S. Law of the Sea project. In all, maps are being prepared for eight major extensions of U.S. seafloor authority, including several areas in the Arctic also claimed by Russia and, perhaps, Canada.
Russia, the United States, Canada, Denmark (due to possession of Greenland), and Norway are all interested in expanding their territorial claims northward.
Last month Russia sparked a rush to claim territory by symbolically planting a rust-proof titanium flag on the sea bed, while seeking evidence that the Lomonosov Ridge, a 1,200-mile, underwater mountain range running close to the Pole, was a geographical extension of Siberia.
The mission followed a speech by President Vladimir Putin, urging greater efforts to secure Russia's "strategic, economic, scientific and defence interests" in the Arctic.
An international scramble for the Arctic's oil and gas resources accelerated yesterday when Canada responded to Russia's recent sovereignty claims with a plan to build two military bases in the region.
On a trip to the far north, the prime minister, Stephen Harper, said: "Canada's new government understands that the first principle of Arctic sovereignty is: use it or lose it. Today's announcements tell the world that Canada has a real, growing, long-term presence in the Arctic."
Russian deep-sea submersibles reached the seabed of the Arctic Ocean and scooped samples of the Lomonosov Ridge earlier in July and August. The effort is part of a unique scientific expedition carried out by Russian polar explorers in 2007. The preliminary results of a research into the samples obtained on August 2, 2007, indicate that the Lomonosov Ridge is “a geological extension of the Siberian continental platform, and therefore the region is a continuation of the Russian plateau,” said Viktor Posyolov, deputy director of the Institute of World Ocean Geology and Mineral Resources of Russia’s Ministry of Natural Resources.
Alexander Voronov of the Russian publication Kommersant says competing claims for extension of sovereign zones into the Arctic are unlikely to conflict.
Even if Russia is able to obtain proof acceptable to the UN, it will not receive the 1.2-million sq. km. ridge, as politicians are counting on. Under article 76 of the UN Convention on the Law of the Sea, which Russia ratified in 1997, the country can expect only 350 miles of the continental shelf from the northernmost point of dry land. That was confirmed for Kommersant by a source at VNIIOceangeology and by Lobkovsky. Considering that the Russian economic zone already extends 200 miles from the northern shores, even if the UN experts are favorably inclined, Russia will receive not all of the Arctic, but only 150 additional miles of it from its territory (about 277 km.). Canada, the U.S. and Denmark are claiming their 350-mile pieces of the Artic as well, which do not intersect with Russia's in any way. This makes the politicians' statements about a war for the Arctic heavily exaggerated.
With so many countries interested oil exploration in the Arctic Ocean seems inevitable.
Energy Secretary Sam Bodman said on Wednesday he wants OPEC to pump more oil as crude prices hover near record levels and he will push that message to the group's ministers ahead of their meeting next month.
"We're continuing to struggle with higher prices -- prices higher than either they or we would like -- so I think it's time for them to look at it," Bodman said to reporters. "That's all. I've encouraged them to do that."
Sam Bodman is making a fool of himself. The Middle East doesn't have anywhere near as much energy as he imagines it has. Kuwait's real oil reserves are a half to a quarter of their official reserves. The rest of OPEC tells similar tall tales about their oil reserves. Look at the pretty graphs of recent oil production history in an assortment of big producers.
US foreign policy toward the Middle East is shaped by two main influences: Israel and oil. Well, Nixon made Israel important to the US as a Cold War card to play against the Soviet Union. But the Soviet Union is a ex-parrot. Similarly, the Middle East is running out of oil. The biggest Saudi field, Ghawar, is probably post-peak. US foreign policy toward the Middle East is outdated, obsolete, lagging, trailing edge, and just plain dumb.
Since 1985, federal government forecasts on oil prices have missed the mark, on average, from 6 percent to 116 percent.
"I've done 120 short-term energy outlooks and I've probably gotten two of them right," said Mark Rodekohr, a veteran Department of Energy (DOE) economist.
Supposed experts on oil prices are legends in their own minds.
On average, private forecasters have undershot their target by 31 percent each year, according to a recent analysis by Deutsche Bank. In the past five years, the price of a barrel of oil has tripled. The fact is, few experts saw it coming.
"If this market can continue going lower without OPEC disrupting it, it's very possible that by 2010 we could be substantially lower than anyone is imagining," said Peter Beutel, an oil analyst at the consultancy Cameron Hanover. "Four to 8 years from now, we could come down and break $20 a barrel."
The Saudi Ghawar field is running out of oil. The world appears to be on a production plateau while demand rises. We could get to $20 oil if demand collapsed. But short of a depression how could that happen?
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?
I think Congress should stop messing around with the date Daylight Savings Time (DST) starts. The costs in applying software patches for it probably far exceeds any supposed benefits. It turns out there are no energy savings benefits from earlier DST - at least according electric utilities.
The move to turn the clocks forward by an hour on March 11 rather than the usual date in early April was mandated by the federal government as an energy-saving effort — but the move appears to have had little impact on power usage.
"We haven't seen any measurable impact," said Jason Cuevas, spokesman for Southern Co., one of the nation's largest power companies, echoing comments from several large utilities.
So morons in Washington DC put us all through a lot of convenience and for no benefit at all. The nation is in need of some old fashioned small-c conservatism of the "stop trying to social engineer us" variety. Governments know less than they act like they do. Remember that.
The costs of major oil and gas production projects have risen more than 53% in the past two years, and no significant slowing is in sight, according to a new benchmark index developed by IHS and Cambridge Energy Research Associates (CERA).
The IHS/CERA Upstream Capital Costs Index (UCCI), which tracks nine key cost areas for offshore and land-based projects, climbed 13% to 167 during the six months ending October 31, 2006, compared with an increase of more than 17% in the previous six months. Since 2000, the UCCI has risen 67% -- with most of the increase in the last two years -- while the Producer Price Index-Commodities for finished goods (excluding food and energy) moved up just 7.5% during the same period.
"This continuing cost surge is central to every energy company's strategic planning and to every energy user's expectations for supply security in the coming years," said CERA Chairman Daniel Yergin. "Rising capital costs rank right alongside more widely recognized issues such as world market trends, geopolitics, globalization and new technologies at the top of the agenda for the energy industry," he said. "And this will be a central issue at CERAWeek in Houston," referring to the CERA conference that opens in Houston on Tuesday.
The continued rapid growth of China seems set to continue strong growth in the world demand for oil. So the current upturn in oil exploration
In recent months the rapid rise in costs has continued.
"If current trends continue, 2007 is shaping up to be a year of further increases. Despite a slight slowing in the rate of increase during the six months to October 31, we expect project capital costs to continue reaching new record levels during 2007," said CERA senior director and UCCI project manager Richard Ward. "With high oil prices driving new development projects, capacity constraints continue to support increases in the cost of equipment and services."
Deeper water projects have experienced the largest cost increases, according to the UCCI data, rising 15% in the recent six month period, primarily due to drill rig rates, technology limits and skills requirements, and are expected to continue to rise due to tight industry capacity. Onshore facilities, including LNG, have seen the slowest rates of increase, 12%, but are still only slightly behind the overall averages.
A chart associated with the article shows the cost of offshore rigs tripling in the last year with the cost of steel up only 3.5%. Well, either rigs were previously going for less than their construction costs or now they are far above their construction costs. If the latter then rig makers will eventually make more rigs and that'll bring prices down. The article reports on 100 new rigs planned as a result of higher prices.
Higher oil and natural gas project development costs make alternatives more cost competitive.The shift toward drilling for oil offshore makes new oil production more expensive even before considering the rising costs of drilling equipment. If the Peak Oil pessimists are correct then the higher development costs are a sign of a longer term trend of rising oil prices.
"Record prices in 2005 triggered a tremendous response in drilling by gas producers, leading to nearly decade-high reserves additions of 26.4 tcf and added production of 14.7 bcf that year," Bodell said.
Yet production remained flat despite more rigs drilling during the past decade, he said. Meanwhile, the cost of new gas supply rose due to higher drilling and operating costs as well as declining average well productivity and initial production rates.
Sebastian has a piece in Vanity Fair on the threat that political instability poses to oil prices. If a rebel military organization in Nigeria called MEND knocked out all of Nigeria's oil production the price of oil could spike to $80 a barrel and go to $120 a barrel if this happened in combination with a terrorist attack on oil facilities in the Middle East.
Since Nigerian oil is classified as "light sweet crude," meaning that it requires very little refining, this makes it a particularly painful loss to the American market. Concurrently, in this scenario, a cold wave sweeping across the Northern Hemisphere boosts global demand by 800,000 barrels a day. Because global oil production is already functioning at close to maximum capacity (around 84 million barrels a day), small disruptions in supply shudder through the system very quickly. A net deficit of almost two million barrels a day is a significant shock to the market, and the price of a barrel of oil rapidly goes to more than $80.
The United States could absorb $80 oil almost indefinitely—people would drive less, for example, so demand would decline—but the country would find itself in an extremely vulnerable position. Not only does the American economy rely on access to vast amounts of cheap oil, but the American military—heavily mechanized and tactically dependent on air power—literally runs on oil. Eighty-dollar oil would mean that there was virtually no cushion in the world market and that any other disruption—a terrorist attack in Saudi Arabia, for example—would spike prices through the roof.
According to the Oil ShockWave panel, near-simultaneous terrorist attacks on oil infrastructure around the world could easily send prices to $120 a barrel, and those prices, if sustained for more than a few weeks, would cascade disastrously through the American economy.
Gasoline and heating oil would rise to nearly $5 a gallon, which would force the median American family to spend 16 percent of its income on gas and oil—more than double the current amount.
MEND has knocked out big pieces of Nigerian oil production running into the hundreds of thousands of barrels per day. This scenario is not out of the question. The article reports on how the US government might intervene militarily to get oil pumping again in event of big cuts in production due to rebel forces. I think the lesson we should take away from all this is that we should develop energy technologies that can replace oil and at low cost. Better batteries would let us use electric power for a substantial portion of all transportation. Cheap photovoltaics, cheaper nuclear power, wind, and geothermal could eliminate the need for fossil fuels for electric power generation. The sooner we start seriousy to end the era of fossil fuels the better off we'll be.
While the government denies it and high oil prices mask it, analysts say Venezuelan oil production is declining. Since Chávez took over in 1999, production in the state-run oil fields has fallen almost 50 percent, say analysts at PFC Energy, a global energy consulting firm based in Washington, D.C., who spoke on condition of anonymity rather than risk the wrath of the Venezuelan government.
The article reports that high oil prices mask the decline in production because the price rise has been so great that it swamps the effect of declining production. I do not expect Venezuela's government to allocate enough money to invest in their oil fields. Also, the nationalization is going to scare away private sector money.
Outside experts think the Venezuelan government is exaggerating national oil production.
That Venezuela, the world's fifth-largest oil exporter, is moving backwards is not clear to everyone.
The state oil company, PDVSA, reports production of 3.3 million barrels a day. There is no way to independently confirm this, and most outside analysts, including the International Energy Agency, say PDVSA's numbers are inflated and production is closer to 2.6 million barrels per day. The Financial Times reported this month that Venezuela's shortfall in production is such that it was actually forced to strike a $2 billion deal to buy about 100,000 barrels per day of crude oil from Russia to avoid defaulting on contracts - a claim the Chávez government says is false.
I look around the world and can't figure out where additional oil could come from that would allow world oil consumption to rise substantially. The number of countries experiencing declining oil production keeps getting longer.
Check out a recent report for the National Energy Technology Laboratory, Economic Impacts Of Liquid Fuel Mitigation Options (PDF) (and an associated interview of report co-author Roger Bedzek) which discusses alternatives to oil for liquid fuels. They claim that technologies to make vehicles radically more efficient are more expensive than coal-to-liquid (CTL) or oil shale extraction. My guess is that oil prices will remain high enough for long enough that we'll start seeing new CTL plants getting constructed in 2 or 3 years. But eventually the cost of hybrids will fall and so making cars more energy efficient will become cheaper as well.
Crude prices are approaching the true all-time high of close to $40 seen in the early 1980s, which translates to around $90 in today's dollars. Regular unleaded gasoline prices currently average above $2.91 per gallon at the pump, not far from the record of nearly $3.07 from September 2005. They would need to be above $3.12 in today's dollars to match the more than $1.41 price from 1981, according to U.S. government data.
The big difference between today and 1981 is that back then many oil producing nations excess production capacity and were capable of increasing supplies. Prices could drop dramatically from 1981 levels and do so fairly quickly. But today oil substitutes will take years to bring on line and China's demand for oil continues to grow. But on the supply side it is beginning to look like peak oil.
For many of the 39 million households making less than $30,000 a year, the difference between $2 gas and $3 gas is the difference between spending 10% of income on gas and 15%. In a word: Ouch!
The best bet for poor folks is to move to places closer to jobs and choose jobs closer to home.
Driving 65 instead of 75 mph reduces fuel costs 13 percent. Driving 55 mph would save 25 percent.
A dirty air filter and under-inflated tires can increase your fuel cost as much as 13 percent
The cost of crude oil represents 55 percent of what consumers pay at the pump, according to the U.S. Energy Information Administration. Another 22 percent comes from the cost of refining, 19 percent from taxes (on average, about 44 cents per gallon goes to state, federal and local taxes) and 4 percent from marketing and distribution, according to the administration.
Parenthetically, oil is a rising fraction of gasoline costs. In 2003 oil was only 44% of the cost of a gallon of gasoline.
With fuel costs at the time of this writiing at approximately $3 per gallon and $75 per barrel that suggests each increase of $25 per barrel translates into $0.55 per gallon of gasoline. So $100 per barrel would probably bring about $3.55 per gallon, $150 per barrel would probably bring us $4.65 per gallon, and $200 per barrel would hit us with $5.20 per gallon. This means that the more gloomy projections of "Peak Oil" pessimists would still only send American gasoline prices up to levels that Europeans have been paying for years. A shift toward diesels, smaller vehicles, and hybrids could make such fuel prices affordable.
My calculations above may underestimate the effects of oil price rises on gasoline prices. As oil costs go up the cost of energy used in refining and distribution rise as well. So some of the other costs of gasoline will rise as well when oil prices rise.
Bicycles, mopeds, and motorcycles would gradually become more popular at each step up in oil prices. People would choose jobs and home locations to reduce commuting and choose cars for higher gasoline efficiency. We could adjust to high fuel costs without severe drops in living standards.
Substitutes such as oil shale, coal-to-liquid (CTL) via variations on the Fischer-Tropsch process, and batteries in vehicles effectively put upper limits on the price of oil and gasoline. The biggest question I want answered: What are the real costs for oil shale extraction, CTL, and other oil substitutes?
What about the macroeconomic picture? US Federal Reserve chairman Ben Bernanke can not figure out whether the bigger threat from high oil prices is inflation or a cooling of the economy. Money spent on energy that therefore is no longer available to buy other goods and services.
Higher fuel costs potentially could push the rate of overall inflation higher, but Bernanke also noted an opposing risk: that the burden of new costs at the gas pump will take money out of consumer wallets and slow economic growth.
"Our current assessment is that the risks to inflation are perhaps the most significant at the moment," Bernanke said.
For more than a year, the US economy has absorbed the impact of rising oil prices. Consumer spending has not slowed. And the "core" rate of inflation, with food and energy stripped out, has been contained at an annual rate of about 2 percent.
Still, the core price level for consumers rose 0.3 percent in March, the most recent monthly inflation report. That was higher than expected.
The energy price increase is like a big tax hike on earnings. At some point energy price hikes have got to trigger a recession.
Shaking off the effects of Hurricane Katrina, the economy grew at an annual inflation-adjusted rate of 4.8% in the first quarter, the Commerce Department said. The burst offset a meager 1.7% growth rate in the last three months of last year after the hurricane struck the Gulf Coast.
Only once in George W. Bush's presidency — when the economy grew at a 7.2% rate in the third quarter of 2003 — has economic growth been more robust than in the first quarter.
In a separate report, the Labor Department said total compensation costs — salaries and benefits for all civilian workers — rose 0.6% in the first quarter. That was the slowest pace in seven years. Adjusted for inflation, employment costs fell 0.8% for the first quarter and 0.5% for the year ended in March.
Averaged out over the last two quarters, the economy grew somewhat less than the 3.5 percent rate clocked in 2005 and substantially less than the 4.2 percent pace of expansion in 2004.
And despite their spending spree in the first three months of 2006, American consumers are showing some signs of fatigue, as the University of Michigan reported yesterday that its index of consumer expectations declined in April. Wage gains, according to the government report, actually slowed during the first quarter rather than improving with the rising economy.
"A majority of households now expect an economic downturn and bad financial times by the end of this year," said Richard Curtin, the director of the University of Michigan's Surveys of Consumers.
The housing market shows signs of cooling. Demand for housing is shifting toward lower priced homes.
Sales of new homes nationwide shot up in March at the fastest pace in 13 years, reflecting a rebound from bad weather in February, but prices were lower, the Commerce Department reported Thursday.
Sales of new single-family homes rose 13.8 percent last month to a seasonally adjusted annual sales rate of 1.213 million units. The increase represented a recovery from a 10.9 percent plunge in sales in February.
But the median price of homes sold in March dropped to $224,200, down 2.2 percent from what homes were selling for in March 2005. It was the first time home prices dropped over a 12-month period since December 2003.
Higher oil prices will drive down the value of homes that are further away from work locations. The cheapest commute is a walk from the bedroom to a home office. The second cheapest is a walk across the street to an office or factory.
I just paid $3 a gallon to fill up my car and the price of oil has just hit $75 per barrel. I'm coming across all sorts of doomster survivalist writing in the effects of expensive oil:
John P. is heading for Idaho with his partner, Sultry Susuun, for some low-cost Snake River electricity and a more sustainable lifestyle, more walking, less driving. Says he: "Idaho is the place to be when the Night of the Long Knives comes. Guess you could call us energy refugees."
When the talking heads on TV prattle on about the meaning of Peak Oil, that is exactly what that term means: The cheap oil party is over, no more big fields are out there, economists of all stripes are beginning to agree. And that means $100-a-barrel oil, unemployment and the collapse of auto tourism.
The guy wants to move from sunny warmer Arizona to Idaho to survive declining oil production. Does that make sense? Maybe winds blow hard where he's moving and he expects to build a wind tower to get energy. Or maybe his imagination has taken off into full flight.
As for the writer's claim about a coming collapse in auto tourism: I do not buy it. There'll be a reduction in driving due to higher prices. But a collapse? Suppose the price of gasoline doubles to $6 a gallon. Imagine you want to drive across the United States and back again in a 6000 mile trip and you want to cruise in comfort in a large automobile. A 2006 Lincoln Town Car gets 17 mpg city and 25 mpg highway. Suppose you get only 20 mpg on the cross country highway trip. That's 300 gallons to do the 6000 mile trip. At $6 per gallon that's $1800. The car costs about $50k and depreciates each year by a lot more than $1800. Even the far more affordable but same mpg Mercury Grand Marquis depreciates by thousands of dollars in its first year of ownership. So I do not expect to see Lincoln drivers all abandon the open road should the price of oil rise to $150 or $200 per barrel.
If the Lincoln driver wanted to economize and still hit the open road in comfort then the Mercury Grand Marquis with same physical size as the Town Car comes at under $30,000 with the same mpg. The cost savings would pay for the gasoline for 10 trips back and forth across the United States.
Of course, given $6 per gallon gasoline people will respond by buying much more fuel efficient cars. A Jetta TDI diesel will get 36/41 mpg city/highway for about $22,000. Your fuel costs cross country with $6 per gallon diesel would probably fall below $1000. For a working couple with dual incomes that's quite affordable for a vacation. Hotel rooms and food during a few week trip will probably cost much more than the gasoline or diesel fuel.
You can go further up the scale in fuel efficiency with a Toyota Prius for about $22,000 and make an even cheaper cross country trip. So life lived on the open road will go on. Given $6 per gallon gasoline more car features that increase fuel efficiency will become cost justified. For example, Chrysler's Multi-Displacement System dynamically turns on and off the use of cylinders for a net gain of 10% to 20% more fuel efficiency and other car makers have similar technologies in the pipeline. So a doubling of gasoline prices will not double the cost of travel per mile at equivalent levels of comfort.
Noted oil prognosticator Jan Lundberg says expect panic buying and huge disruptions.
Global Public Media "When you say Petrocollapse, what do you mean?"
Jan Lundberg: "Petrocollapse is a term I coined to describe the effects of Peak Oil. Peak Oil in itself is a geological phenomenon that affects the market, and how we have depleted the stores of oil in the earth. But the actual process of coping with peak oil and its effects on the economy, on society -- that's a different matter than just a geological theory. So we have to look at the likely effect of the oil market on our supplies of energy and how people intend to keep living their normal lives as consumers and using so much energy.
"So if we have sudden shortage that is exacerbated by the market and people start hoarding -- which is our experience from the 1970s, when we only had a 9% shortfall in 1979 when my firm Lundberg Survey predicted the second oil shock -- I anticipate that we're going to see some very sudden, difficult times that will snowball rather rapidly. Because when prices skyrocket and it's very difficult to get fuel because everybody wants to get it right now so that it won't be more expensive or completely unavailable tomorrow, then the eventual effect of this after a few days is that people cannot get to work, and next we'll see the trucks not rolling into Walmart and Safeway.
"This is probably going to take down the whole economy, and that's because there is no Plan B, as Matthew Simmons has pointed out. When the alternative energies are not online and cannot even be implemented on the scale required, people are going to be without the usual means to get to work or attain food. And then we have to look at the other uses of oil and how we'll be impacted, and then by extension we can look at natural gas, which is a petroleum also. And the natural gas situation is comparable to oil, roughly, in terms of the supply pinch and our dependence on it."
I do not buy this argument. If the government does something stupid like in the 1970s and puts price controls on gasoline then, yes, we could have shortages and lines at pumps. But if prices are allowed to rise then any sudden spike in demand due to panic buying will be met with a spike in prices. People will learn to refrain from buying in a panic because prices will ultimately subside after panics. Panic, what panic? To really mess up our economy in response to "Peak Oil" we'd need to put Jimmy Carter back in the White House and regulate oil distribution through a federal agency. Barring such idiocy panic buying won't bring a collapse of civilization.
Matthew Simmons, a Houston oil investment banker and author of a pessimistic book about the size of Saudi oil reserves (Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy), told an Irish newspaper that peak oil production will not cause an economic collapse.
Global reserves expert Simmons also said expensive oil will not create economic collapse. He said his concern was that a shortage could be created by wasteful overuse of low-cost oil and that yesterday’s $74 a barrel high was good news.
Simmons sees high current oil prices as a needed signal that we need to get serious about increased energy efficiency and the development of alternatives. I agree.
High oil prices lower living standards. But high oil prices do not lower living standards by more than the amount of additional money we pay to buy the fuel. At 21 million barrels a day the United States would spend about $153 billion per year for oil. Quadruple that price to $80 per barrel (and we may be there soon) and the United States would spend about $613 billion per year. On an over $12 trillion per year economy the increase in fuel costs works out to about 5%. So our living standards drop by at most 5%. If the price of oil doubles again then our living standards drop by maybe 11%. But we will adjust to the high prices and gradually living standards will rise up again.
Granted that a 10% drop in living standards is not fun. But it does not rise to the level of "lets go live on a remote mountain in Idaho with lots of traps and gunshells for hunting and for keeping out Mad Max".
I doubt that a rise of oil prices to $160 per barrel is sustainable for long in any case. Such a high price would trigger the development of substitutes such as oil shale and coal-to-liquid (CTL) using variations on the Fischer-Tropsch process. The big question we face at this point is just what are the real costs for oil alternatives? For example, at what price of oil would CTL become cost competitive? What is the real cost today for CTL?
How high does oil have to go to throw the US and world economies into a recession? 500,000 barrels a day are off-line due to rebels in Nigeria and the Bush Administration might attack Iran.
U.S. oil climbed to within 10 cents of a record high on Tuesday, extending gains above $70 a barrel as fears grew of possible military action against Iran and a major Nigerian supply outage dragged into a third month.
Picture yourself laid off in a deep recession while gasoline costs $4 per gallon.
While officials in the Iranian oil ministry have said they will not use oil exports as a bargaining chip, other senior officials have said they may use their country's "oil weapon" in a confrontation with the West.
"The concern," Mr. Bremmer said, "is that we'll move from simple diplomacy to coercive diplomacy against Iran, and Iran will actually play the oil card instead of just mentioning it."
Meanwhile, with most OPEC members producing at full capacity, these producing nations say they are effectively powerless to bring prices down.
There isn't any spare production capacity.
Worries over supply from Iran, which pumps about 5 per cent of the world's oil, were compounded by African producer Chad, which demanded that a US-led oil consortium pay it at least $US100 million ($137 million) by Tuesday or else it would halt its output of up to 170,000 barrels a day.
Oil Minister Mahamat Nasser Hassan told Reuters in an interview at the weekend that Chad had asked Exxon Mobil Corp, Petronas and Chevron to put the funds into a state account, circumventing the World Bank's escrow account that was meant to ensure revenues benefit the poor.
In March 2006 Iran produced 3.86 million barrels of oil per day and Iraq produced 1.82 million barrels of oil per day. OPEC produced 160,000 barrels fewer in March than in February 2006. Imagine the world minus a few million barrels a day of Iranian oil. We may well find out what that is like. Now might be the time to switch to a job that has greater job security. Also, avoid taking in more debt. You might need the cash.
In 2005 dollars, the average price of crude in 1980 was just under $77 a barrel. Even that is somewhat misleading, though, because the economy is much more energy efficient these days, analysts said.
There are some big differences between 1980 and today. One difference is that we appear to be approaching the "Peak Oil" point of peak world oil production. (and I'd be curious to hear your views on those charts) What I want to know: How quickly can Coal-To-Liquid (CTL) technologies come on line to provide an alternative for liquid hydrocarbon fuel? To put it another way: How long do oil prices have to stay high and how long does production have to cease growing before capitalists become convinced the risks are low enough to justify building Fischer-Tropsch CTL plants?
Also, how high do prices have to get before we'll see a halt and even a reversal in demand growth? Can that happen without a recession? Seems unlikely.
General Motors (GM) sales were down 24% overall, and its SUV and truck sales fell 30%.
SUVs are going out of style.
Ford Motor (F) also took a hit, with sales down nearly 20% in September. Sales of Ford, Lincoln and Mercury cars were up 6%, but sales of trucks and SUVs fell nearly 28%.
Ford and GM are attributing part of the drop to the end of their price discounts where buyers could pay employee prices for vehicles. But the Ford sales with SUVs down 28% while cars are up 6% demonstrate that the market is shifting away from gas guzzlers big time. I'd love to see what is happening to their average fleet fuel economy.
Sales are up for Chrysler, Toyota, and Nissan.
The company sold 12,879 Ford Explorer SUVs, down 57.7 percent from 30,448 in September 2004. It sold 1,771 Mercury Mountaineers, down 54 percent from 3,846 in the same month last year.
Ford said overall sales of its sport utility vehicles were down 51 percent from last year, when it offered 0 percent financing for 72 months.
Ford recently announced a plan to make gas-electric hybrid engines available in half its Ford, Lincoln and Mercury lineup by 2010.
Given the large profit margins on SUVs it makes sense for the car makers to put hyrbid technology into SUVs first.
I'm expecting the big three to pour a lot more technology in the direction of raising fuel economy of SUVs because SUVs have much larger profit margins. GM and Ford especially need to revive their fortunes in higher profit margin markets.
I bet we will see more rapid development of GM's Displacement-On-Demand (DOD) technology that turns off some cylinders at cruising speeds and Chrysler's equivalent MDS (Multi-Displacement System) technology. GM and Chrysler already sell some vehicles with these technologies. GM sells the DOD technology with their optional Vortec engines. Perhaps GM will start offering the Vortec upgrade for no additional cost in some SUV promotions.
Consumer Reports claims that in their own testing they found that US Environmental Protection Agency measures of car fuel efficiency overestimate efficiency for most cars and especially for hybrids.
Automakers conduct the government fuel-economy tests on a laboratory dynamometer. They can use hand-built prototype vehicles, within the EPA rules, to maximize miles per gallon in simulated city and highway driving. “Anybody taking a test, you’re going to figure out what the rules are and figure how to optimize your chances of passing that test,” says Reg Modlin, director of environmental affairs for Daimler-Chrysler. “So in that sense, yes, everyone attempts to put their best face on for the test.”
By contrast, Consumer Reports testers check fuel economy on roads and on our test track. We buy models anonymously from dealers, as consumers do.
We gauge overall fuel economy from our city, highway, and mixed-driving tests. Overall, the gas-powered vehicles we studied delivered 9 percent fewer mpg on average than their EPA stickers claimed; diesels and hybrids, 18 percent fewer mpg than claimed. The numbers ranged from 21 percent better than the EPA sticker to 28 percent worse.
The discrepancy between our numbers and the EPA’s is increasing. For gas-powered vehicles, the shortfall was 6 percent for 2000-model-year cars that we tested, but about 12 percent for 2005- and 2006-model-year cars.
Big differences between claimed and actual city mpg were the main reason for the discrepancy in overall mpg. Our city mpg figures ranged from 13 percent better than the EPA sticker to 50 percent worse. On average, our highway mpg more closely reflected the EPA rating.
Ironically, six fuel-thrifty hybrids we tested had some of the largest discrepancies, mostly on city mpg, where real fuel economy ranged from 11 to 25 mpg below EPA ratings. City traffic is supposed to be the hybrids’ strong suit, but their shortfall amounted to a 40 percent deficit, on average. Still, hybrids won three of the best five spots in our tests for overall mpg, along with the diesel Volkswagen Golf and the all-gas Toyota Echo.
The Honda Civic hybrid has an EPA city rating of 48 miles per gallon but Consumer Reports found it achieved only 26 mpg on their tests. People who think they are going to save money overall by buying a hybrid are probably wrong even with today's gasoline prices.
Check out the Consumer Reports top 10 most fuel efficient cars tested. Also see their most and least fuel efficient cars by category. Note that the Volkwagen Passat GLS TDI (i.e. turbo diesel) beats the Honda Accord Hybrid. Also see their discussion on why their test results differ from EPA results.
Update: These results also make federal tax subsidies for hybrid purchases look more questionable. For the same number of dollars of federal expenditures I bet a far better way to spend money to reduce energy usage would be to make buildings better insulated.
On this note, let me quote from Stratfor.com about gasoline supplies, "The United States currently has commercial stockpiles of 194.4 million barrels of gasoline -- enough to substitute for the loss of Gulf Coast refineries for weeks even in the worst-case scenario. There will be supply disruptions in affected regions that are used to being net gasoline suppliers, not consumers, since adjusting will require a reversal of normal supply routes."
But as Dennis Gartman noted this week, there are 220,000,000 cars in the US. If everyone tops off their tank, and assuming that is an extra 10 gallons on average, that would be 2.2 billion gallons. Coupled with supply problems, this is a big hit. Of course, this sorts itself out in the medium run, but for a week or so it is a problem.
As long as gasoline prices are allowed to rise long lines at the pumps won't last.
Maudlin thinks high home heating prices will generate the votes in Congress to open up more of the continental shelf for natural gas and oil drilling.
As an aside, I hope President Bush's critics who roasted him for filling up the SPR will now admit he was right. It is in just such an unanticipated emergency that the need becomes apparent. Can you imagine what they would say now if he had not? I hope this also pushes Congress to act to open up the US oceans and coastlines and Alaska to drilling for oil and especially natural gas. There is enough gas in US waters and land to supply us for 20 years (400 trillion cubic feet of gas!). There will be the votes for it when it costs $500-$700 a month to heat the average home. And while they are at it, can they please make sure we have several pipelines and oil and gas ports on both coasts so one disaster like this does not threaten the bulk of American energy sources? The NIMBY forces (Not In My Back Yard) have got to be put under control for the sake of the country at large.
I suspect the Strategic Petroleum Reserve will end up paying back its cost since its oil will some day be sold at high prices after the world oil production peak has been reached. Though perhaps the government will hang on to the SPR until the economy has already mostly transitioned away from oil toward nuclear and solar power and oil prices have declined due to lack of demand.
Under the proposal, fuel economy for the popular class of vehicles known as light trucks would be based on size and broken into six categories, with smaller vehicles required to get better gas mileage. By 2011, that would mean the smallest SUVs — such as a Toyota Motor Corp. RAV-4 — must get at least 28.4 miles per gallon, while larger models such as a Chevrolet Silverado pickup have a target of 21.3 mpg.
Currently, automakers must maintain an average of 20.7 mpg for such vehicles, which account for about 60% of passenger-vehicle sales.
By imposing fuel efficiency standards on light trucks which are more like the standards on cars this proposal narrow the price gap between cars and trucks when new. That, in turn, might shift preferences back a bit toward cars.
The costs versus amount of fuel saved are interesting.
Mineta estimated that the new rules would save about 10 billion gallons of gasoline over the life of vehicles built from 2008 to 2011. That is equivalent to about 7% of current U.S. annual consumption.
The government estimates that the proposal would cost automakers $6.2 billion for 2008 to 2011 models.
Presumably the manufacturers will achieve these goals without lessening the perceived desirability of the vehicles. Some of the costs will come in the form of lighter weight materials. Some might come in the form of fancier electronics to do things like turn off engines and restart engines automatically at stop streets. This wears starters and batteries more rapidly and so adds additional costs in maintenance. But all these costs will probably decline with time as materials and electonics become cheaper.
If the manufacturers can achieve higher fuel efficiency without sacrificing desirability then think about this: $6.2 billion to save 10 billion gallons of gasoline. That works out to an expenditure of $0.62 per gallon of gasoline saved. Granted, the costs are taken up front and the benefits happen over the life of each vehicle. So you have to factor in interest costs on the money. Therefore I'd guess that the real cost is 10, 20, 30 cents higher per gallon saved. But that is still a low price per gallon of gasoline saved.
The curious thing to observe here is that if manufacturers can lower fuel usage at the cost of less than $1 per gallon saved then the market is not optimizing vehicle designs for fuel costs. Gasoline costs almost $3 per gallon. One might expect many existing designs, developed when gaoline cost $1.50 to $2 per gallon, to have marginal costs for increased fuel efficiency on the order of something closer to $1.50 per gallon. But that obviously is not the case. Buyers do not rationally figure in fuel costs when choosing vehicles.
John Tierney of the New York Times has accepted a bet with oil investment banker Matthew Simmons on whether the price of oil could triple in the next 5 years due to collapsing Saudi oil production.
I proposed to him a bet using what Julian considered the best measure of a resource's value: how it compares with the average worker's wage. I offered to bet that the price of oil would not rise faster than the average wage, meaning that future workers would be able to afford oil more easily than they could today.
Mr. Simmons said he favored a simpler wager, based on his expectation that the price of oil, now about $65 per barrel, would more than triple during the next five years. He said he'd bet that the price in 2010, when adjusted for inflation so it's stated in 2005 dollars, would be at least $200 per barrel.
Remembering a tip from Julian, I suggested that we use the average price for the whole year of 2010 instead of the price on any particular date - that way, neither of us would be vulnerable to a sudden short-term swing as the market reacted to some unexpected news. Mr. Simmons agreed, and we sealed the deal by e-mail.
Simmons argues that the real Saudi oil reserves are as much lower than their official claims and has developed this argument into a book: Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Even if Simmons is correct and even if production in the rest of world's old fields can't be expanded much to compensate for falling Saudi oil prduction I think Simmons made an obvious error: The demand curve for oil will not support such a high price per barrel.
Given very high oil prices three things will happen in response:
In the short run supply of other energy sources is pretty inelastic. But in the medium to long run oil prices can not rise above the cost of substitutes.
The inflation adjustment in their bet creates another distortion. If oil prices skyrocket then part of the inflation adjustment in the bet will be for the increase in oil prices. A nominal tripling in the price of oil will yield less than a real tripling in the value of the dollars received.
Oil has two big uses: Space heating and transportation. In each case nuclear or coal electricity can substitute for oil. Transportation is more problematic due to the cost and weight of batteries. But check out a site which has a calculator for electric versus oil space heating costs. At the $2.17 per gallon of heating oil in August 2005 in New England and $0.075 per kilowatt-hour (kwh) of electricity in 2003 (sorry, couldn't find a US national 2005 figure but the trend is downward - note the calculator appears to take dollars, not pennies) and assuming a heating pump in the US northeast oil at today's prices already costs 128% of electricity for heating and costs 97% of electricity for hot water heating. Therefore oil is already uncompetitive for space heating assuming that oil prices remain at least as high as currently.
Some electricity still gets generated from oil in a few areas (if memory serves: New York City) where environmental opposition to coal has kept oil burners in operation. But coal accounts for a little over half of all electricity production in the United States followed by nuclear as the second largest electric power source. The United States has a large supply of coal and could also build hundreds of nuclear reactors. Plus, wind power is declining in price. Therefore in a period of sustained rising oil prices electric power would displace oil for space heating.
Even if we add a few cents per kwh for new coal plants to sequester carbon dioxide and require scrubbers to reduce emissions coal electric plant costs put price ceilings on the use of oil for heating. Similarly even if we assume the nuclear power industry is being too optimistic on new nuclear power plant costs new nuclear electric power plants put price ceilings on the use of oil for heating.
Replacing oil with electric in transportation is more problematic. However oil demand for transportation will get more elastic with time. The market can adjust to higher gasoline prices in a number ways. While hybrids are not now cost effective in the United States hybrids would become cost effective at around $5 per gallon of gasoline and in 5 years Toyota predicts technological advances will make hybrids cost effective even at today's prices by 2010. Plus, people can shift to smaller cars, move to places closer to work, and take jobs closer to home. More expensive but lighter materials become cost justifiable in vehicle manufacture as prices rise as well.
In the medium term I expect battery technology advances to make electricity even more substitutable for oil in vehicles. Plus, coal conversion to liquid fuels would provide another way to put a price ceiling on oil for transportation. The Germans did it in World War II. Certainly we could do it today.
With bullish sentiment unabated and crude prices hitting consecutive highs this week, analysts expect front-month crude contracts to test the $70 a barrel threshold.
Light sweet crude for September delivery gained 60 cents to $66.40 in morning trade on the New York Mercantile Exchange. On Thursday, oil prices settled at $65.80 a barrel, the highest close since Nymex trading began in 1983.
The amazing thing about this is that so far the US economy and world economy have not slipped into a recession.
In inflation-adjusted terms oil prices still fall well short of the 1980 price peak.
Oil prices are 46 percent higher than a year ago, but they would need to surpass $90 a barrel to exceed the inflation-adjusted peak set in 1980.
But oil probably doesn't need to hit $90 per barrel to cause a global recession.
Oil investment banker Matthew Simmons argues that the Saudis have exaggerated the size of their oil reserves and can not increase production. He's fleshed this argument out into a book: Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Simmons says officially published reserves numbers for the Middle Eastern countries are obviously bogus.
"The proven reserves, which used to be reported on a detailed, field-by-field basis disappeared, rolled up into just country-by-country. Over the period of the first eight years of the 1980s, all of the Middle East oil producers tripled the amount of proven reserves they said they had. And then, effectively, country-by-country, the [proven reserves] number stayed still. It never changed from 1987-88 to 2005; and nobody ever said, What's going on? How do you basically keep producing 15-20 million barrels a day out of the Middle East and the proven reserves never change?"
Simmons doesn't see how oil production can grow from perhaps 86 to 88 million barrels per day in 2005 to 119 million barrels per day projected for 2025 by the US Energy Information Agency.
"The only way we could ever, ever [produce] 119 million barrels a day is if Saudi Arabia is producing somewhere between 20 and 30 million barrels a day, and my worry is that since Saudi Arabia gets 90 percent of its production from five fields that are very old, each of those five fields could easily, in the next 3 to 5 years, go into a significant production collapse.
Instead of nearly 120 million barrels of oil being consumed daily by 2025, Simmons thinks it's more likely the world will have to make due with half that much, just 60 million barrels a day.
Aside: If Simmons is right then the CO2 emissions increases projected for the 21st century are unrealistic and therefore the assumptions underlying the global warming debate are completely unrealistic.
What matters most about Simmons' argument are the short to medium term economic impacts. If he is right then economic growth will slow until new energy technologies are developed. That slower economic growth translates into less money to fund the retirement of baby boomers. That means (among other things) higher taxes for workers which, in turn, discourages work and causes further economic slowing.
America already faces two very big and growing economic problems. One is the aging of the population and the rise of the ratio of aged non-workers to workers. The aged non-workers get taxpayer subidies for medical care, living expenses, and nursing care. The other big demographic problem comes from the continued huge influx of low skilled immigrant groups whose descendants continue their pattern of poor school performance, low incomes, and higher crime rates. Our worthless elites in Washington DC continue to make these problems worse through the decisions they make. On top of these problems we may also be facing a long period of rising energy prices.
For a small fraction of the cost of the Iraq war debacle we could deport all the illegal aliens and put tough requirements on legal immigrants to ensure that all immigrants are a large net economic benefit to the citizens of the United States. But our corrupt elites oppose policies that are in the best interest of the nation as a whole. Also, for a small fraction of the cost of the Iraqi Debacle we could fund huge amounts of energy research. But again the lousy leaders of America will have none of that. And yet again for a small fraction of the cost of the iraq mess we could make a major effort toward rejuvenation therapies that would extend the working lives (and total lives) of our aging population and greatly improve the national financial balance sheet. But again, the morally and intellectually deficient fools in Washington DC have other wrong priorities.
The United States has real and big problems which have obvious solutions which attract little attention in the national media. Most of the blogosphere is no better. The taboos of the politically correct keep most silent about the massive immigration of low IQ ethnic groups. We can not afford the costs that these taboos are incurring. The demographic changes have gotten too large in scale. The lie that racial differences in cognitive differences are small supports the continuation of extremely harmful national policies. The enforces of this irrational secular faith are enemies of America, not its protectors.
On energy policy debate is wasted on distractions such as the supposed evils of SUVs or the supposed evils of the oil industry. Moral posturing and identification with in-groups just wastes time. We need a more rapid rate of technological advances and useful solutions, not preaching. Measures to raise energy efficiency are great but can only solve a small portion of the total problem. We need technology and lots of it. We need advances in photovoltaics, nuclear power, batteries, and perhaps hydrogen as well.
Then there is the aging population problem. We need a big shift in thinking away from arguing whether more taxes or more market forces with private accounts are the solution to the financial problem. Time to think out of box. The way to solve the problem of old people who are net burdens is to turn them young again so they can work and pay taxes rather than collect benefits. We need huge pushes in stem cell research, gene therapy research, and along other avenues to bring about full rejuvenation and a more youthful and productive workforce.
If you are a blogger reading this I appeal to you: Write about what is important. Write about the real big problems and write about the problems honestly without fear of what the moral police have decided we are allowed to say or think. Our problems have grown too large to afford the irrelevancies, the dishonesty, and the suppression of important truths that characterize the national American political debate.
Update: Greg Cochran has coined a slogan to describe US Middle Eastern policy: " Blood for No Oil !" and he gets it exactly right. The US invasion effectively has done nothing to increase Iraqi oil production. I was watching some think tank presentation on C-SPAN a couple of nights ago about Iraqi oil and one guy was talking about declining oil production in the Kurdish region of Iraq due to the age of the oil fields. He was explaining how many billions of dollars of equipment and work it would take to temporarily turn around the production decline. Apparently a number of Iraqi oil fields are old and production is declining due to gradual depletion. Enhanced recovery techniques can extend the production life some but not alter the fact that these fields are well past their productive peaks.
The guy on C-SPAN also had Iraqi oil reserves split out into categories of control by regional power brokers. His chart showed Ahmad Chalabi (who is now acting oil minister for Iraqi) as controller of the biggest chunk of reserves. But curiously the chart had other smaller chunks (e.g. some Kurdish and Sunni Triangle fields) listed under other controlling influences.
It was not the first time the August crude contract traded above $60 a barrel _ that happened back in April and again on Monday, when prices hit $60.02. But Thursday's milestone is significant because August is now the front month contract, meaning it is the next to expire and is generally the most actively traded. The July contract expired Tuesday.
Oil prices are 58 percent higher than a year ago, though still below the inflation-adjusted high above $90 a barrel set in 1980.
...so does demand:
These fears have been exacerbated by rising demand for gasoline and diesel fuel in spite of soaring prices. In the U.S., unleaded gasoline averages $2.16 a gallon at the pump, more than 40 percent above year ago levels, yet consumption has been up by 2.5 percent over the past month, compared with a year ago.
Where is this going? Is the decrease in demand just delayed? Is the demand for gasoline that inelastic? I'd love to see gasoline consumption by income. Are upper class people just buying even bigger vehicles while lower class people retrench? Or is the price of used SUVs dropping so that lower class people can compensate for higher gasoline prices by buying cheaper yet fuel inefficient vehicles?
I came across a post on another blog (Walter's Brain on Sustainable Mobility by car industry economist Walter McManus) with numbers on rebates offered by big car makers on SUVs. McManus argues that the car companies have been compensating buyers for higher gasoline prices by lowering prices enough to pay for a few years of higher gasoline prices.
The surprisingly rapid decline in SUV sales appears to be a real portent of more concern about fuel economy in the future. I have tracked average new vehicle fuel economy versus the price of fuel for several years. I saw very little movement over the last three years and I concluded that the people who buy new vehicles were not affected.
It turns out that what should be called the SUV Price War (that GM initiated in October 2001 and that lasted until about September of last year) more than offset the effects of rising fuel prices. During this period, the Detroit-based manufacturers lowered prices (through cash and cut rate financing to consumers) disproportionately on SUVs.
My examination of the sales and pricing data reveal that SUV sales would have fallen in 2002, 2003, and 2004 had prices not been reduced by the Price War.
In the graph the blue bars show the switch from SUVs (down 0.8 pp.) to passenger cars (up 0.9 pp.) that would have occurred between 2002 and 2004 had the increase in the price of gasoline from $1.54 to $1.96 not been offset by the Price War. The yellow bars show the Price War offset.
Did Detroit win the SUV Price War?
See his May 9, 2005 and May 11, 2005 posts at that link for the details.
The car companies can drop prices only so far to compensate for higher gasoline prices.
Demand for gasoline can be reduced in a number of ways. Why aren't people slowing down to raise their fuel efficiency? McManus also argues that lowering fuel economy by driving fast is cost effective for most people.
Driving 55 miles per hour means that each mile takes 1 minute and 6 seconds. If gasoline costs $2.00 per gallon, and I get the average 1997 fuel economy in the linked table(32.4 mpg), then I will burn just over 6 cents of gas in that 1 minute and 6 seconds. At 55 miles per hour, I would burn about $3.40 worth of fuel per hour.
Now, suppose I speed up to 70 miles per hour. How much more per hour does it cost me in fuel? A paltry $2.65 per hour. I earned $2.65 per hour (which was below the then minimum wage) in the summer of 1974 as a highway construction laborer. So, as long as an hour in a stationary state (at home or work, but NOT A TRAFFIC JAM, at least not until I get my in-car computer installed) is worth more to me than $2.65, it pays to speed.
Note: As someone pointed out in the comments the correct calculation is how much dollars in extra fuel do you have to spend per hour reduced from driving time. But even with that adjustment the cost per hour saved is still less than what a large fraction of the population earns per hour worked. Plus, for someone who is speeding while working the likely benefit is even larger to the employer.
The higher incomes rise and the more fuel efficients cars become the more inelastic demand becomes to price rises.
McManus writes some great posts. McManus also argues that the hybrid Prius is mostly a marketing and public relations gimmick.
Question: Toyota started advertising the Prius recently. Why advertise a car when many shoppers are going to be disappointed to discover they will have to wait for delivery? The wait was the number one complaint about the new Prius in its first year, so why advertise and give more shoppers a reason to complain?
Answer: The Prius has increased showroom traffic. With supply constrained, many Prius shoppers end up buying a Corolla, Camry, or other Toyota model. Some could even end up with a Tundra Pickup that is cheaper than the Prius but gets 16 mpg in the city and 18 on the highway. The equivalent Chevrolet Silverado gets 16/21, so you had better hope the frustrated Prius buyer goes to the Chevrolet store if he decides to go with a pickup. And if you are thinking, "Prius shoppers would never consider a Tundra," I feel your pain. The contra-positive is "Tundra shoppers would never consider a Prius," or, to generalize, "PICKUP shoppers would never consider SMALL CARS." Welcome to my world. People have different needs and wants they are trying to satisfy when they buy vehicles. And not everyone who shops at Toyota, not even everyone who visits the store because of the ads for the Prius, shares your values. Watch out when the Highlander is in the showroom drawing in SUV shoppers. They might just buy a 15 city/18 hwy Sequoia. Pray that they don’t but the 13/17 Land Cruiser. I leave it as an exercise for the reader to find the GM, Ford, and Chrysler equivalents with higher MPG that should make environmentalists wish they had never elevated Toyota to infallibility.
Question: If hybrids were not a good idea then why would the world’s most profitable automobile producer want to be the hybrid leader? Profit is a clear sign that they are smarter than the other companies, so anything they do has to be smart, doesn’t it?
Answer: By selling hybrids, Toyota is given a pass by environmentalists to reduce the fuel economy of their new vehicle fleet relative to GM, Ford, and DaimlerChrysler without protest. I posted data comparing Toyota and GM last week. Have the environmentalists become apologists for Toyota, overlooking their move into gas-hungry SUVs and pickups? Toyota sold twice as many Tundras as Priuses in 2004 and has been building pickups in America for years. Toyota will build hybrid Camrys in Kentucky soon, and some environmentalist should find out whether American taxpayers are being asked to subsidize investment by the world’s most profitable automobile producer to do what is supposed to be a smart thing. Are there grounds for concluding that environmentalists are acting toward Toyota like the mainstream media act toward the Democrat party?
Now, you might be thinking that McManus is too cynical. Well, hear it from the horse's mouth: Kazuo Okamoto, who is taking over as head of Toyota research and development, says that hybrids are just cost justifiable in the US car market.
“When you just use the argument of fuel efficiency, the purchase of a hybrid car is not justified. But this car has other interests, for instance environmental protection.”
Another Toyota executive was more blunt in his analysis: “Buying a hybrid is about political correctness, it is not about the money,” he said.
Hybrids are projected to be about 2% of all the cars on the road in the United States in the year 2011. So don't look to hybrids to have a big impact on total gasoline fuel demand any time soon.
Will a continued rise in oil prices eventually bring on a global recession? How is the rise in oil prices going to play out on the macroeconomic level?
China’s oil imports declined by 1.2% YoY in the first five months of 2005. US oil inventory increased by 6.4% in the first quarter of 2005. However, oil prices averaged 46% higher in these five months of the year and 50% higher in the first quarter, on a YoY basis. How to bridge the gap between rising prices and weakening demand? The answer, I believe, is that there are too many oil traders engaging in oil price speculation. They will likely keep prices up until an oil market collapse. That day is not too far away, I believe.
The global economic cycle looks to have peaked out, but the deceleration has been modest so far. This is why financial speculation can still bolster the oil price. I expect economic deceleration to deepen in the fourth quarter of this year, such that the oil bubble may then burst. The trigger could be a sharp drop in China’s crude imports.
Xie sees China's oil import surge due in part to a shortage of coal electric generating capacity. As more coal-fired generators come on line oil will become uncompetitive for electric power generation in China (as it already is in America).
As substitutes come on line Xie expects a bear market for oil that will last for many years.
The high oil prices have triggered an investment boom in oil exploration and the production of substitutes. Oil sands, LNG, coal liquification and gasification are competitive against oil at US$20-25/bbl. As fixed investment piles into such alternatives, the energy supply curve has been permanently shifted outward, in my view. The current investment boom and the production capacity to follow may keep a lid on oil prices for many years to come.
Xie also sees businesses around the world responding to the current high oil prices by investing in equipment that raises energy efficiency.
Advances in battery technology would increase the extent to which different energy sources could substitute for each other. With sufficiently cheap and light batteries liquid hydrocarbons would cease to be the only practical energy choice for ground transportation. Nuclear, coal, wind, solar, and natural gas could all power cars by being converted into electricity. Also, the unreliability of wind and solar would pose much less of an obstacle to their use. Therefore in my view the biggest flaw in the US government's energy policy is insufficient money for battery research.
Oil exports from Iraq have plummeted since the start of the year, despite the $2billion (£1.1billion) of reconstruction money allocated by the United States.
Last week, the Iraqi state oil marketing organisation (SOMO) cut its export contracts to just over 1.45m barrels a day for the next six months. At the end of last year, SOMO said it hoped it would ramp up exports to 1.9m barrels a day.
Some advocates of the Iraq invasion argued that once Saddam Hussein was overthrown and sanctions lifted that rapid increases in Iraqi oil production could pay for all reconstruction and so lower the world price of oil that the invasion would become a net benefit for the US economy in spite of the military costs. Well, no!
Iraq oil production has declined due to the insurgency. In March 2004 Iraq was producing 2.3 to 2.5 million barrels of oil per day and prewar production was even higher.
A month before the April 1 deadline set by Iraq and American officials for restoring the industry to prewar levels, the country is producing 2.3 million to 2.5 million barrels a day, compared with 2.8 million barrels a day before the war.
Though the CIA puts Iraq's 2002 production at only 2.03 million barrels. So who to believe? The CIA or the New York Times?
The first article also refers to the claim by Houston investment banker Matthew Simmons that Saudi Arabia does not have as much reserves as it claims. Simmons goes so far to argue that Saudi Arabian production has already peaked. (and see the bottom of this post for more on Simmons' argument). Well, this becomes more plausible as the price of oil continues to stay above $50 and Saudi Arabia continues to fail to increase output.
Leading oil producer Saudi Arabia on Tuesday highlighted OPEC's inability to cut crude prices, saying its supplies would not rise despite plans to increase official output limits.
Saudi Oil Minister Ali al-Naimi said Riyadh had informed its customers of export allocations for July that mean keeping output steady at 9.5 million barrels a day.
For a small fraction of the cost of the Iraq invasion the United States could have funded most of the academic chemists in America to investigate either photochemistry to look for better and cheaper photovoltaic materials or electrochemistry to look for lighter and cheaper battery technologies to enable cars to run on electricity. For another small fraction of the cost of the Iraq invasion we could have funded very rapid development of fourth generation nuclear power technologies such as the pebble bed modular reactor. The Iraq invasion has been a colossal waste of money.
The Saudis claim oil prices are high due to refinery capacity shortages. This is disingenuous. The only spare oil production capacity in the world happens to be for heavy oil that requires special refining capability.
OPEC is at full capacity bar some Saudi volume of heavy, high-sulphur crude that needs advanced refinery technology to meet Western environmental regulations.
But for more conventional oil the world's capacity is maxed out.
Eventually the United States will withdraw from Iraq and some faction will come out on top and ruthlessly suppress all opposition. At that point oil field investments can boost Iraqi oil production. The general director of Iraq's oil ministry, NK Al-Bayati, claims Iraq will be pumping 6 million barrels of oil by 2015. Even if they pull that off oil prices will stay high as world oil demand growth outstrips that increase. Only development of non-oil energy sources can bring about a sustained substantial decrease in oil prices.
Robert Samuelson of Newsweek asks will oil prices stay high as a consequence of rising demand in China?
Americans consume almost 21 million barrels of oil a day, a quarter of the world total of 84 million barrels a day, reports the International Energy Agency. But China is now second at 6.4 million barrels a day, and its demand could double by 2020, various analysts told a conference held last week by the Center for Strategic & International Studies (CSIS) in Washington.
China currently produces 3.5 million barrels of oil per day. That production probably will not rise. So all of China's increase in demand is likely to come from imports.
In 15 years China may have 6 times as many cars and trucks as it has now.
China now has about 20 million cars and trucks, energy consultant James Dorian said; by 2020, it could have 120 million. (In 2001, the United States had about 230 million cars, vans and trucks.)
Demand from America will rise. Demand from many other parts of the world will rise. At the same time, production will decline in most countries that produce oil as their oil fields become more depleted.
You can read texts from the CSIS conference (PDF format) that inspired Robert Samuelson's column.
From the conference James Dorian's speech on China's present and future energy usage is particularly interesting. Coal is currently China's biggest source of energy and in part due to expected growth in coal consumption China may surpass the United States in carbon dioxide emissions by 2020. (PDF format)
Coal makes up roughly 70 percent of China’s energy mix and will remain the most dominant energy source over the next few decades. Coal accounts for about 70 percent of China’s power production as well, in addition to hydro and nuclear. This is very important as much of the attention paid to China by the international media seems to focus on oil and gas—yet coal represents the backbone of the nation’s economy. At least 6 million persons are employed in China’s huge coal industry, and thousands of mines of all sizes dot the countryside. Coal provides a significant 7 percent of urban industrial jobs, in a country with rising urban unemployment. In recent years, however, numerous coal mining accidents, transportation bottlenecks, and inefficient pricing mechanisms have plagued the sector, putting additional stress on an already highly strained electric power generation system. China’s future economy may indeed be affected by coal industry bottlenecks—assuming that they are not adequately dealt with by the Chinese leadership.
A huge majority of Chinese power plants are in fact coal-based or coal-fired--reflecting coal’s overwhelming importance to the country’s economy—and since coal will likely remain the primary power source for decades to come, there is some likelihood that air quality will not improve noticeably in the immediate years ahead. With regard to China’s air pollution problems, on its present course, China may overtake the US in emissions of carbon dioxide by 2020, which poses some difficulty for the world community considering that China—as a developing country—is exempt from cutting greenhouse gas emissions under the Kyoto Protocol.
Dorian sees increasing competition for oil.
Clearly, rapid energy growth in China is leading to dramatic impacts throughout the world in terms of commodity markets and prices, and within China, growing thirst for energy is creating a new sense of urgency and energy insecurity. Indeed, the means by which Beijing chooses to deal with its energy security will not only affect the Chinese economy, but the global economy as well. China’s energy needs have global implications today, as was witnessed last year through competition with Japan for imported oil from Russia. Ultimately the US, China, and Japan will be vying for the same Middle Eastern crude oil. Over the next two decades, China will play a larger and larger role in the Middle East since the country is so dependent on foreign oil imports, as well as Central Asia, West Africa, and other parts of the world which could help meet China’s growing energy requirements.
At an earlier January 11, 2005 CSIS presentation Herman Franssen argued that independent oil companies (IOCs - not government owned) expect long term oil prices to be well above previous expectations of $20 per barrel.
First and foremost is the tightening of the entire oil supply chain from the upstream to the mid and downstream. One does not have to be a convert to the “Peak Oil” concept to be aware that outside the FSU oil production appears to be very near peaking, with output from new discoveries just barely offsetting depletion in mature producing conventional oilfields. Several recent well-documented technical assessments of FSU production capacity point in the direction of output peaking in the FSU sometime by the middle of the next decade. Within OPEC perhaps one third of the countries have either reached or are likely to reach peak capacity sometime in this decade. As for the other, high oil reserve OPEC countries, the pre-2000 prevalent perception of ever expanding OPEC conventional oil production capacity to meet ever growing future oil demand, has been gradually been abandoned in favor of more constrained scenarios.
Up until recently IOCs used $18-20 ($16-20 prior to 2000) as a benchmark/hurdle rate price to test the economic viability of upstream projects. While they are still cautious, most IOCs now use a price level closer to $25 for this purpose and several CEOs of major IOCs have publicly stated that we are now in a $30-plus oil market. The $18-20/B long term equilibrium price has disappeared from the literature.
For the United States 21 million barrels per day times 365 days per year is 7,665 million barrels per year. Therefore each 1 dollar increase in oil prices costs $7.665 billion dollars to the US economy. Since the United States imports almost 60 percent of its oil each dollar increase in oil prices worsens the yearly US trade deficit by about $4.6 billion. The percentage of oil which is imported will continue to rise as US production declines and demand increases.
Currently oil prices are bouncing around north of $50 per barrel. A recession in China and the United States may eventually temporarily dampen demand. But I think we have entered a period of sustained high energy prices that will last until cheaper non-oil energy sources are developed. We could hasten that day with an aggressive and wide-ranging program of energy research to the tune of about $10 billion per year. The cost would be equivalent to less than $2 per barrel of oil consumed in the United States. The future benefits would include much lower energy prices, higher living standards, a cleaner environment, a more favorable trade balance, and a lessened need for the United States to involve itself militarily and diplomatically in the Middle East.
The Washington Post has a pretty good article on the problems with the US electricity transmission grid. (my bold emphasis added)
The Federal Energy Regulatory Commission, the agency that oversees transmission, has been trying for years to prod power companies into forming new, multi-state regional grids with authority over planning and system reliability measures. But utilities in the Southeast and Northwest fear that a more wide-open system would allow their cheaper power to be siphoned away from their customers. They have made war on FERC's plans and some members of Congress are trying to block the commission's transmission initiative from going forward until 2005 or 2007.
...As deregulation flourished, investment dwindled in transmission lines, whose profits are limited by regulation.
As California learned with its own energy crisis, if parts of a system are deregulated and there is still lack of a market mechanism in other parts the result can be disastrous. There is not enough economic incentive for building transmission lines. As a result there are not enough transmission lines. Worse yet, deregulation of other parts of the electrical energy industry has actually increased the incentive for sending electricity longer distances from suppliers to buyers and hence the demand for transmission lines has been further increased by deregulation in other parts of the electric power industry.
Update: The political gridlock about whether and how to change the regulation of transmission lines has made investors reluctant to invest in transmission grid upgrades.
Christine Tezak, an electricity-energy analyst with Charles Schwab & Co., said that a lack of a political consensus on how to upgrade the transmission system has dampened the willingness of investors to put up the tens of millions of dollars necessary to improve the system.
Update II: Selective deregulation combined with regulatory obstacles for building new power lines has created a shortage of transmission line capacity.
Under deregulation, the plants have been sold to other companies that often sell their power to utilities hundreds of miles away, increasing traffic on the grid. To meet rising demand for power, new plants have been built, in some cases further straining the transmission system. Meanwhile, obtaining environmental permits to build power lines has gotten harder.
The blame game on this fiasco will become pretty intense. Don't expect the politicians to be willing to blame themselves even though they are at least partially to blame for what happened.
Update III: Lynne Kiesling, who runs the Knowledge Problem blog, is an energy policy analyst and her entire archives for August 2003 has more than you ever wanted to know about electrical energy policy and how it contributed to the biggest power outage in US history. (and perhaps in world history for that matter?) She has many posts and many links to relevant articles and web sites with great information. If you want to follow electrical power as a political and economic issue then her blog is a must read.
Lynne Kiesling also has a nice summary article on Tech Central Station about how partial deregulation has caused a shortage of electricity transmission capacity.
The numbers offered this weekend suggest that electricity volume has increased 30 percent while transmission carrying capacity has increased only 15 percent. This fact illustrates the mismatch between the dynamic markets for wholesale power and the rigid, maladaptive set of state-level regulations and incentives that govern transmission investment decisions.
Markets adapt to changing conditions. The existing electricity regulations do not, and because of that, the transmission infrastructure has not adapted to the increased demand on it from the increasing vibrancy of wholesale electricity markets.
Lynne points out that NIMBY (Not In My BackYard) an obstacle to both new electrical generator construction near heavily populated areas and to construction of new electric transmission towers. She argues more dynamic changes in retail electricity prices in response to limits of transmission and generation capacity could allow large customers to cut back on electricity usage during peak periods. I'd be curious to know whether dynamic pricing of transmission capacity allocation could also be done.