Did Russian oil production peak in 2007?
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 oil production has started declining.
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.
Also consider the economics of diesel and hybrid cars.
“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.
Price controls caused cascading shortages in China.
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.
The Chinese government even imposed export tariffs on agricultural products.
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.
The Chinese government imposed an outright ban on coal exports.
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.
In the future Turkey will also be able to hold back Iraqi natural gas from Europe.
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.
Russia is not alone in placing restrictions on food exports.
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.
Argentina is restricting energy exports.
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 is also restricting food exports.
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.
OPEC can't increase oil production in line with expected economic growth.
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.
Oil prices are approaching a point where total demand might start dropping.
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.
Yet the US economy is still growing strongly.
The 3.9 percent annual growth rate compared with 3.8 percent in the second quarter and 0.6 percent in the first quarter. The report from the Commerce Department is a preliminary estimate of gross domestic product in July through September, a volatile period that included the bleakest moments of the summer’s subprime mortgage collapse.
That economic growth will come to an end if we hit higher inflation.
"As such, there is likely to be some doubt in the minds of one or two Fed officials regarding whether they should be cutting rate later today - especially with higher food and energy costs expected to push headline CPI above 4% in the next couple of months. Nonetheless, with the outlook for 2008 deteriorating a 25bp cut remains the most likely scenario," said James Knightley, economist at ING Financial Markets.
High general inflation would force interest rate rises and probably push the US economy into a recession. That would reduce oil demand in the United States. But China's demand might not slacken and oil prices might even rise during a US recession.
The world oil production plateau combined with surging demand are driving prices higher and higher. Will the production plateau continue through 2008? Maybe there's a big lag time between price surge and huge production increase. But every year that goes by with higher oil prices makes that less likely. If we get through 2008 without a big production increase then this is it. The world has peaked.
What I want to know: As oil prices rise how fast will the economy adopt methods to do oil demand destruction that do not reduce economic growth by much? Can we find lots of ways to grow within increased oil consumption?
Some argue that the price of oil has been run up by speculators. and says 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.
The world appears to be on an oil production plateau. This leads to a question of great moment: which way oil production will go when we leave the plateau? Peak Oil anyone?
Crude oil rose on an unexpected drop in U.S. stockpiles and concern that supply from the Middle East may be disrupted. Oil for December delivery gained as much as 0.7 percent to $91.10 a barrel in after-hours electronic trading on the New York Mercantile Exchange, the highest since trading began in 1983. The contract was recently at $90.95.
The idea that oil production is going to surge in response to rising prices is getting a little tattered at this point.
You can see the most recent prices for oil in different markets. The higher priced oil in that table is lighter and easier to refine.
Some OPEC members see no problem with high oil prices.
The Venezuelan and Algerian energy ministers defended the current oil output by OPEC members on Thursday and suggested there is no need for another production hike to help ease runaway prices.
Algeria and Venezuela don't have any idle oil production capacity. So they couldn't respond to rising demand even if they wanted to.
The Wall Street Journal reports that we should not expect additional oil supplies from OPEC.
Oil prices are hovering near historic highs, but consuming nations shouldn't expect quick relief from OPEC, the world's only source for big, quick supplies.
For several reasons, the Organization of Petroleum Exporting Countries has neither the clear leverage nor the inclination to open the spigots and drive down the price of crude, which jumped past $90 a barrel in intraday trading in New York last week for the first time.
They lack the capacity to increase production. Plus, they are making far more money and don't need to produce more oil.
Asian 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.
The market keeps driving up the price of oil.
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.
T. Boone Pickens expect the price of oil to hit $100 within a year.
"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.
Rising demand from China is driving up prices and squeezing out some US demand.
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 rising price of oil is a drag on economic growth.
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?
Goldman Sachs expects an average price for oil in 2008 that is higher than it is now.
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."
The Russians say the Lomonosov Ridge is obviously an extension of Russia.
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.
Sam Bodman needs to get on the clue train.
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.
Here's an example of a guy wo doesn't know what he's talking about.
"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?
Goldman Sachs Group analyst sees $100 per barrel oil as possible this year.
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.
Rising capital costs suggest higher oil prices may continue for years to come.
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.
Danna Harman of The Christian Science Monitor reports that Venezuela's oil production is probably declining.
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.
High gasoline prices hit lower income folks the hardest.
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
It is worth thinking about the components of the cost of a gallon of gasoline.
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 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.
While the economy grows rapidly wages and benefits are declining in inflation-adjusted terms.
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.
The recent fast economic growth might be rebound from Hurricane Katrina.
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.
Iran might use a cut in oil production as a bargaining chip.
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 inflation-adjusted terms oil was more expensive at its peak in 1980.
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.
