Raise the Hammer
By Ryan McGreal
Published December 20, 2008
In a comment yesterday, a regular RTH reader pointed out that we haven't written much about peak oil since oil prices have been falling. I have been planning to write about this for some time, but a seemingly unending cascade of big news items keeps diverting my attention, including local political events (our principal mandate at RTH), the spiraling economic crisis, and harrowing federal politics.
However, the criticism is valid. Aside from an update in August, we haven't really covered oil prices. What are we to make of Peak Oil theory with oil trading below $40 per barrel? One commenter asked why oil prices were historically low during the 1990s, a period of rapid economic growth, including growth in the sales of fuel-inefficient SUVs and rapid growth in China.
There are a few reasons for the comparatively low oil prices of the mid-1990s, but the main reason is that the conventional oil producers still had room to grow their rates of production, i.e. how much oil they could produce within a given time period, or how quickly they could get the oil to market.
Daily oil production was considerably lower in the 1990s. For conventional crude only (excluding non-conventional oil), daily production increased from about 60 million barrels per day (mbpd) in 1990 to a plateau of about 73 mbpd that started in 2004 and has continued ever since.
When "swing producer" countries like Saudi Arabia could still ramp production by an additional 2 mbpd on short notice, confidence remained high among oil traders and futures speculators that supply would continue to be able to meet rising demand. This allowed prices to fall and remain low for several years after the first Gulf War.
Further, a higher proportion of total oil production was conventional, which is much cheaper to produce, per barrel, than non-conventional oil like deepsea, oilsands, and so on, so oil producers were able to pass their lower production costs on to customers.
Starting in 1999, however, oil prices rose steadily until a peak of $147 per barrel in mid-2008. This corresponds with a levelling-off and plateau in conventional oil production against contining demand growth.
Now, anyone who has taken first year economics can tell you what happens when the demand for something keeps growing while supply growth slows and then stalls: the price goes up.
One result of higher oil prices this decade is that it has created a market for non-conventional oil - and we see a corresponding growth in production in, e.g. the Alberta Oilsands.
As such, non-conventional oil has increased somewhat as a share of total production, as conventional oil has not been able to keep up with demand by itself.
However, the capacity for the rate of non-conventional oil production to keep increasing is limited. There's just no comparison between sticking a derrick in the ground, and shovelling millions of tonnes of greasy sand and injecting them with millions of gallons of steam to melt off the oily kerogen, then catching the kerogen and catalyzing it in a refinery to produce synthetic crude.
Meanwhile, steadily rising oil prices have been an increasing drag on the rest of the economy. Since oil is a component in the price of nearly everything else, the last few years have been characterized by rising materials and industrial inputs costs (look at the rise and fall of commodity futures over the past two years - it tracks closely with oil), widespread consumer price inflation, and building pressure to increase interest rates.
At the same time, a recklessly deregulated finance industry was busy setting up a multi-trillion dollar land mine in the form of millions of aggressive mortgages at very low - but variable - interest rates that would only represent a sound investment if house prices continued to increase.
The mortgage providers lowered the barrier to entry with zero money down mortgages, negative-amortization (paying less than the interest on the principal for the first two years), and "no-doc" deals for people with iffy credit.
Millions of those mortgages were made to people with poor credit and insecure incomes, who could barely afford them but didn't want to be left out of what seemed like a fool-proof scheme to make money from nothing.
This provided cover for an economic "boom" that did not translate into rising personal incomes. In fact, real (inflation adjusted) median household incomes fell and then stagnated starting in 2000, and consumer spending shifted from income to debt (at temporarily low rates), including home equity lines of credit (HELOCs) that allowed people with mortgages to trade their rising house value for cash.
This became a new economic bubble to replace the burst dot com bubble of the 1990s, but with the added dimension that the new bubble was in core consumer assets and essential public infrastructure rather than being confined to the stock market. Worse, the housing mania became the biggest financial bubble in history.
The new banking rules allowed finance companies to obfuscate and dilute the risk of these mortgages until it didn't seem like anyone was accountable for anything. Banks rolled up their mortgages and sold them to finance companies, which bundled them into securities and sold them to other finance companies, which sold them to investment funds.
At the same time, they hedged their bets by dealing in "Credit default swaps", which are a kind of bet on whether a mortgage will default.
And of course, all these transactions were highly leveraged, meaning most of the investment was with borrowed money.
Getting back to oil prices, they rose steadily during the 2000s but really took off at the start of 2008, rising from $100 per barrel to peak at $147 per barrel in the summer.
Many people at the time blamed futures speculators for driving up the cost, but this hypothesis isn't borne out by the evidence. A purely speculative price increase should have led to rising oil inventories, but that didn't happen.
Instead, it looks as though the dramatic price increase was due to the rapidly rising marginal cost to produce an additional barrel of oil when the global rate of production was maxed out at around 85 mbpd (total oil).
Unfortunately, the steadily rising price of oil, with its attendant price inflation, drag on the economy, and pressure on interest rates was the stomping foot that set off the land mine planted by the mortgage finance bubble.
Over the past year, the subprime crisis of 2007 gradually morphed into a more generalized global economic crisis, with economic failure across the board: the rapid and catastrophic deleveraging of shaky investments, major finance firms collapsing under the weight of worthless hedge funds and mortgage backed securities, banks tightening credit under a newfound perception of risk, personal assets dissolving, house prices falling, stock prices falling, consumer confidence collapsing, wholesale and retail sales declines, and rising unemployment.
It has become a vicious cycle, a self-reinforcing feedback loop of contracting economic activity. Itt will receive another big shudder in 2009 as the next wave of negative amortization mortgages resets to much higher monthly payments, driving still more people into foreclosure and dumping more unwanted houses onto an already devastated real estate market.
The result for the economy has been unfolding before our eyes: the finance industry on the verge of collapse, the Big Three automakers teering on the edge of bankruptcy, a steady tattoo of plant closure and layoff announcements, rising retail bankruptcies, stalled development projects, falling government revenues at all levels, and the return of deficit spending.
Now is anyone surprised that oil prices have collapsed in the past few months? Demand for oil is way down, since people can no longer afford to consume.
Far from contradicting the peak oil theory, falling oil prices are an expected result of the super-spikes caused by demand trying to grow against a flat rate of production.
On May 16, 2005, I wrote:
The next five or ten years will offer extreme price volatility for energy, particularly oil and natural gas, as demand bangs repeatedly off the production peak and then crashes under grueling price spikes.
On June 16, 2005, I wrote:
Nearly every reserve assessment not based on suspect USGS data puts the peak somewhere between now and 2010. In fact, there likely won't be a discrete peak per se. It will probably stretch over several years as volatile prices squash demand periodically. We appear to be entering that jagged plateau now, as described by analysts at Goldman-Sachs and CIBC World Markets. ...
[T]he global economy, powered as it is by cheap, abundant oil, will inevitably go haywire as the supply starts to contract.
On August 22, 2005, I wrote:
[I]f the oil infrastructure can continue bringing oil to market fast enough to meet market demand, then the economy will continue to tick along as it has. If, however, the rate of oil production maxes out but demand keeps growing, then the price of oil will keep rising until it gets high enough to push demand down to what the industry can provide. ...
So far, rising oil prices haven't brought on a recession in North America, but there are plenty of reasons to suspect that growth here must stall sooner or later.
Can there be any doubt that we are now in the thick of that "extreme price volatility" (the oil price increased from $100 to $147 in six months and then fell to less than $40 in the next six months), or that the economy has gone "haywire"?
As a final note, we should not discount the the non-trivial fact that accurate field-by-field reserve and production rate assessments are notoriously lacking, leading to a certain amount of guesswork regarding actual production capacity.
During the 1990s, when countries like Saudi Arabia could "turn on the taps" at short notice and production from the North Sea was still increasing, oil markets experienced a rosy, and even possibly over-confident, sense of oil's long-term prospects.
OPEC's quota rules encouraged member countries to overstate their reserves, which looked great on the books and seemed borne out by the industry's seemingly effortless ability to supply markets.
Further, the economy as a whole was taken up with an irrational sense of "weightlessness", a myopic sense that the old economic rules no longer applied - as evidenced in part by the dot com bubble that seemed like a magical money machine right until it collapsed overnight.
(I still remember a colleague snapping up Nortel shares at $120 each while loudly proclaiming, "It's going all the way to 200 bucks, baby!" Literally a few weeks later, he lost a bundle. Now, trading at the equivalent of about 2 cents per share - they did a 10:1 stock merge a few years ago - Nortel is finally crawling into bankruptcy.)
As oil prices started creeping up in the early 2000s, analysts started taking a closer, more rigorous look at just how much oil there really is, and just how fast producers can bring it to market.
The picture is still not entirely clear, since many of the biggest oil producers are state-run and keep their numbers to themselves, but the emerging picture - particularly Twilight in the Desert Matthew Simmons' landmark analysis of Saudi Arabia's future as a swing producer - has been an industry straining the limits of production.
Unfortunately, even to this day, many analysts and most of the public still doesn't understand the role that peak oil has played in this deepening global recession.
By A Smith (anonymous) | Posted December 20, 2008 at 12:26:40
Ryan, I guess only time will tell who is correct on this issue, but given the fact that sizable oil fields have recently been discovered in Brazil and Cuba, I tend to think there is more oil out there than the experts believe.
If you are correct and this is not the case, your call for alternative fuels and more efficient lifestyles will win the day. That's okay too, but I think the market would handle the job of this changeover from oil perfectly well, regardless of government policy.
Either way, the market will ultimately tell us who is correct. As it stands right now, you are losing and we are winning. As the economy starts to grow again and if oil prices jump back up, I will begin to give your theory more consideration.
Keep in mind, however, that in the last 8 quarters, U.S. GDP growth has averaged only 1.8% annualized. Therefore, even as the economy has been very slow, oil prices have risen from around $60 a barrel to over $140. This contradicts the idea that growth is the cause of higher energy prices. Since GDP growth is all about increasing productivity, there is every reason to believe that higher economic output will bring oil prices down.
By A Smith (anonymous) | Posted December 20, 2008 at 14:39:59
Ryan, I agree with your logic regarding increasing demand against flat supply, however, where I think you make your mistake is in assuming there is a fixed level of supply in the first place. Why are we to assume that oil supply is fixed?
However, assuming you are correct, if GDP in the U.S. picks up from the tepid 1.8% of the last two years, which according to your theory drove oil to $140 a barrel, we should see oil top $200 in short order. In fact, if GDP ever again hits the historical average of around 3%, oil might even hit $300 - $400 dollars a barrel, again, assuming your theory is correct.
I tend to think, however, that you will see U.S. growth rates top 3%, probably in the next few quarters and oil will likely stay around $30 - 40. If this scenario plays out, then the notion of peak oil will have to be viewed as being a "great theory" in theory, but definitely lacking in real world applicability.
By jb (anonymous) | Posted December 20, 2008 at 15:36:30
Ryan:
I believe you are 100% correct in your analysis. The fact that there have been discoveries in Brazil and elsewhere simply move the peak ahead a bit just as civil unrest in producer nations move it back.
Of further note is that the Brazilian oil field find is very expensive to produce (as are various existing field recovery technologies) making these finds and discoveries a factor only after prices have stabilized at a point where investments in theses areas pay off.
There are so many factors and unknowns that I seriously anyone can predict the size and shape of the upcoming oil price curve but I am convinced the rapid rise last summer and unbelievably rapid decline can only be explained by bumping up against supply limits of a very desirable commodity on which people are so dependent they will pay whatever they can to get it.
The futile attempts of OPEC to restrict supply when prices are down only strengthens my opinion that when prices were $145/bbl every last sellable drop of oil was put on the market.
By jb (anonymous) | Posted December 20, 2008 at 16:11:02
Adding another 2 cents worth to my previous post:
Just as consumer states have allowed themselves to become dependent on cheap oil, many producer states have allowed themselves to become reliant on the easy money provided by these resources to the point that political and civil stability cannot continue without it. So as we are willing to pay any price to obtain oil for survival, producer states desperate for income are willing to sell at any price for survival regardless of demand or future worth.
All this adds to the volatility in prices as we bump against the peak. We are in for a rocky road ahead.
By cjwirth1 (anonymous) | Posted December 20, 2008 at 22:04:28
Oil prices will soon skyrocket.
Independent studies conclude that Peak Oil production will occur (or has occurred) between 2005 to 2010 (projected year for peak in parentheses), as follows:
* Association for the Study of Peak Oil (2007)
* Rembrandt Koppelaar, Editor of “Oil Watch Monthly” (2008 to 2010)
* Tony Eriksen, Oil stock analyst (2008)
* Matthew Simmons, Energy investment banker, (2007)
* T. Boone Pickens, Oil and gas investor (2007)
* U.S. Army Corps of Engineers (2005)
* Kenneth S. Deffeyes, Princeton professor and retired shell Geologist (2005)
* Sam Sam Bakhtiari, Retired Iranian National Oil Company geologist (2005)
* Chris Skrebowski, Editor of “Petroleum Review” (2010)
* Sadad Al Husseini, former head of production and exploration, Saudi Aramco (2008)
* Energy Watch Group in Germany (2006)
Independent studies indicate that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.
Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”
"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."
With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.
This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed peak oil associates
I used to live in NH-USA, but moved to a sustainable place. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil? Email: clifford dot wirth at yahoo dot com or give me a phone call which operates here as my old USA-NH number 603-668-4207. surviving peak oil blogspot
By Mr. Meister (anonymous) | Posted December 20, 2008 at 23:09:46
What I've always found perplexing about the oil prices is: Who is setting the prices and who is making the money?
The opec countries are not raising the price in fact when the price was skyrocketing they increased production in an effort to stabilize prices. How much of this is being caused by speculators? Look at the collapse and near collapse of some of the huge banks. Most people lost money but who made money? Hedge funds, speculators.
There is no evidence to show we are not producing enough oil just a lot of evidence to show the price can go up.
The oil prices are not solely the result of supply and demand, many other forces are at work.
The price for gold toilet seats was never as high as when gold flirted with $1000.00 an ounce.
I don't know what is going to happen with oil prices but it is not just about peak production and demand.
By RstJ (anonymous) | Posted December 21, 2008 at 00:57:38
Don't think so. No supply/demand curve could possibly have accounted for the rise and fall of oil prices in 2008. This is a speculative bubble, same as in real estate. But that one only knocked out some poorly run companies like Countrywide. The oil future crisis took out most of Wall Street.
Prices aren't going to soar again because the speculators who ran them up in the first place have all gone bust. Anyone foolish enough to listen to oil "experts" deserved to lose their cash.
RstJ
By ruckrover (anonymous) | Posted December 21, 2008 at 04:25:19
Ryan's post makes sense. RstJ, Meister and Smith don't seem to quite get it. The peak in oil price was a combination of speculative bubble and supply problems. The price will keep going up and down and affect the economy in way Ryan says.
Smith points to Brazil - there's no way the Brazilians are going to extract the new oil they've found until the price is way higher again. These are no old fashioned Texan or Saudi gushers - the Brazilian deep sea fields are under 7 kilometres of water, rock and salt and at super barometric and thermal temperatures that will boil/melt/squash/corrode etc the pipes and drill bits. Sure it can be extracted - but it is far from cheap. It won't keep Hummers on the road.
By Ted Mitchell (registered) | Posted December 21, 2008 at 11:16:51
I think few people realize the degree of 'stiffness' in the fuel market (is there a conventional term for this concept?). I mean the change in total fuel consumption in response to rising prices. Theoretically, if nobody curtails their driving in the face of rising costs, then the price can go to infinity. People do reduce driving, but not by much, therefore the price response is steep.
If the response were stronger (less 'stiff' i.e. widespread carpooling sufficient for 401 congestion to disappear), repeated everywhere in the world, prices would stop climbing.
You don't need any conspiracy theory about speculators to drive up the price, just a world 'addicted' to oil in their inability to reduce consumption in the face of rising prices.
Oil prices used to be fairly independent of natural gas, coal, nuclear, and food prices. This is changing, especially w.r.t coal and food.
Put this together with peak oil and there are two scenarios for the next decade.
Peak oil is false: this is a run of the mill correction and steady growth will follow later in 2009, continuing for many years.
Peak oil is real: economic recovery will be yoked to spikes in oil, energy and food prices which will lead to a sputtering economy and no quick recovery. Likely accompanied by food crises and mass social unrest.
Even an extended global depression will just delay this test.
Since the whole western economy is driven by energy consumption, I see the likely outcome of this as a widespread move to coal.
Why? Hydro and nuclear are maxed out like oil. Wind and solar will help but not very much in the next decade. So that leaves coal, and this seems to be the discussion that peak oil authors ignore or gloss over. Their mindset doesn't consider something so polluting.
Right now, efficiency is at the greenwashing stage. Real results require a thermodynamic efficiency motivated shift to electricity for transportation and massive retrofits of existing infrastructure, less dependence on long distance transport for goods and less wasteful commuting.
This will not happen, other than token examples, without government lead -maybe even requiring multinational govt cooperation- because private capital has little idea how to invest for the long term in good times, nevermind uncertain ones. In many cases that capital doesn't even exist.
The easiest way to do this is a gas tax!
Even with that, environmentalists will not be able to stop economic forces demanding more energy - lots of coal left compared to oil, and the price per energy unit reflects this excess supply.
Sorry if this makes climate changers cringe, but I don't see the world being able to rein in a growing demand for coal. Hope I'm wrong.
By Chuck T (anonymous) | Posted December 21, 2008 at 14:48:55
I don't know what the price of oil will be in 2009 but I do this, the world: will burn about 30 billion barrels ; find maybe 5 billion; see current fields deplete at a rate of 5 to 9%; cut back on exploration and development in all areas; reduce and scale back maintenance and equipment upgrades further weakening an already stressed supply chain; and probably not make any real progress toward reducing dependence on cheap oil. Also, I know the oil industry will not survive in its current form with oil at $30 - $40 a barrel.
By volterwd (anonymous) | Posted December 21, 2008 at 22:19:02
Prices collapsed because the economy is collapsing. Plain and simple. This is a bad thing.
Regarding the 'huge' finds in Brazil, A Smith perhaps you should actually read the articles instead of just the headlines.
If your referring to the 700 million barrels they found recently your looking at about 10 days of world demand.
If your referring to their multi billion barrel find, thats under several miles are unrecoverable (at least for say the next 20 years) as it's over 7km under the ocean surface. You could have a trillion barrels there and it would do you no good until you have them out.
Even when you do get it out- it will be expensive oil (i.e., more expensive than oil from S.A.'s near surface wells).
Yes finds are made, but they are getting smaller while the economy is requiring more and more to run. Oil will not run out but the economy that requires it will eventually either move onto something else quickly (VERY unlikely) or it will collapse in a devastating way.
Crap happens but don't let low current oil prices fool you, even in the Ice age I'm sure there were sunny days.
By jb (anonymous) | Posted December 22, 2008 at 00:03:24
If the price fixing theories are correct then I say we have nothing to worry about because the manipulators obviously aren't very good at it considering they let the price fall from $145/bbl to $33/bbl in 6 months.
If I actually believed it was that simple I would give a big yawn and buy a Hummer knowing that these amateur bumblers are no threat given their recent performance.
The reality of Peak Oil I fear, is far harsher and less forgiving. It will not yield to popular opinion, political parties or misdirected efforts to marginalize it.
There have been several cases of crying wolf about oil supplies in previous decades, often presented as “proof” that peak oil is irreverent and has understandably minimized the tendency for people to take it seriously. However, there are 2 morals about the wolf fable, the latter (often forgotten) being that in the end the wolf did get the boy.
By A Smith (anonymous) | Posted December 22, 2008 at 03:15:35
Volterwd, I never said the recent Cuban and Brazilian oil discoveries were huge, just that they were sizable. Furthermore, I am not arguing that they will double reserves, just that they will help on the margins, where Ryan tells us oil prices are determined.
Ryan, I think peak oil is a rational take on current conditions, but I just don't accept that humans will be restricted by external circumstances. If as you say, we are already hitting the ceiling on production, then save some huge increase in energy efficiency, increasing economic output should drive oil prices above $100 in short order. You have also mentioned that high oil prices are a major reason why the economy has faltered in recent months, therefore your argument implies that we will never grow our economies more than 1.5% again, at least until we switch off of oil.
That is the reason I don't believe in peak oil, because I know that the U.S. economy will grow at rates above 3% again. If the U.S. government can just stop running ever larger deficits (which is a choice and not an inevitable consequence of running out of oil), I guarantee you will see a return to good economic times. When this happens, peak oil will have to explain this.
As to your question about where I think the new oil will come from, I have absolutely no idea. I only know that we will likely hear about some new discovery, or some new technology that makes it easier to extract current fields, thereby once again pushing up the available capacity to keep prices at reasonable levels. If my argument sounds more a matter of faith than reason, then I can understand your opposition. But perhaps we can discuss this topic again when the scenario I have described takes place, since it will allow you to confront your rational/pessimistic view of the world and will maybe bring you around to a more optimistic outlook on life.
By jason (registered) | Posted December 22, 2008 at 09:34:03
ASmith - "don't believe in peak oil"?? This isn't some sort of controversy with conflicting science like global warming. Peak Oil happened in the US exactly as predicted and is now happening on a global scale. It's like saying you don't believe the sun comes up in the east.
By mark2 (anonymous) | Posted December 22, 2008 at 14:30:44
Ryan wrote: >I'm saying that when economic growth pushes demand for oil back over around 85 million barrels per day (mbpd), we'll see oil prices start to spike again.
Thing is, oil demand isn't below 85 million barrels per day. According to the International Energy Agency's December 11 report, consumption for 2008 has declined by 350,000 barrels per day over the 2007 consumption levels. However, that still leaves consuption at 85.8 mbpd, with the price per barrel continuing its declining trend with no spike in sight. IEA predicts 2009 consumption to be at 86.3 mbpd.
By Mr.Meister (anonymous) | Posted December 23, 2008 at 00:44:11
If oil really was just another commodity then why did the price spike with the mere possibility of a storm hitting the gulf? I have never seen gold or wheat or anything else be this volatile. I find it incredibly hard to believe speculators have smoothed out the price of oil. What would it be like if they helped to make it more volatile? Assuming of course that it could be more volatile. The recent prices of $1.40 a liter just proved that we will pay that much for gas if we have to because that's what all the stations charge, not that there is or was a shortage.
Pardon me for taking the impending doom from peak oil with a grain of salt. I'm old enough to remember all the experts telling us that we were all going to starve to death because we couldn't possibly grow enough food. Another group of experts told me we were all going to die because of the hole in the ozone layer. Just how did we manage to fix that one? Those are just the ones that come to mind now, but there have been others. If the experts really knew what was going to happen wouldn't they be filthy rich and sunning in some paradise?
Climate change is my favorite one. Yes it's getting warmer no doubt. But do we know why? The Earth has gone thru several ice age cycles: Is this just another one? Some very knowledgeable people seem to think so. Were is all this CO2 coming from are we really making any new or just releasing the gas that was there before? Our accurate weather records are about 100 years old. Not even a blip on the earth's timeline. The sheer arrogance of the people who claim to "KNOW" all that is happening is a little overwhelming.
Mankind has proven to be incredibly resourceful and adaptable over the years. I really believe that once again we will overcome the hurdles and survive. (I can't wait for my electric car)
By A Smith (anonymous) | Posted December 23, 2008 at 10:32:01
Ryan, at its core, peak oil relies on the assumption that oil production has "peaked", or at least is unable to keep up with demand in such a way as to keep prices at moderate levels.
However, why should anyone assume that oil production has peaked? As far as I can tell, oil production has continued to grow to match world demand, but has done so with long periods of flat production levels. For example, in 1979, the world produced about 62 mbpd and then only reached that level again in 1995. However, during this time period oil prices came down, even though the U.S. economy grew at rates averaging above 3%.
Therefore, if history is any guide, we could have another 16 years of excellent GDP growth ahead of us, where oil production stays essentially flat and oil prices average around $30 a barrel.
By jason (registered) | Posted December 23, 2008 at 12:30:16
I think it's important to remind everyone that the cost of extracting oil today is higher than it was in the early days when one could stick a drill into the ground in the middle east and watch the oil shoot skyward. Refining costs also rise as lower quality product is extracted from harder-to-reach sources and 'bottoms' of fields that are slowly running dry. In other words, the cost to produce 62mbpd today is much higher than it was to produce 62 mbpd 20 years ago.
As an oil expert once said "when we start schlepping around a ton of sand just to find a barrel of oil, we'll know we're in the bottom of the ninth".
By A Smith (anonymous) | Posted December 23, 2008 at 13:27:38
Jason, you have a point, but once again this does not prove that the world is running out of oil, nor does it indicate that world GDP will be negatively influenced over the long term. The fact is, GDP can grow very well with stagnant and even declining oil production levels and therefore any attempt to draw a direct correlation between living standards and temporary flat lines in oil production is simply not based on reality.
By Ted (anonymous) | Posted December 24, 2008 at 13:37:45
Just to be clear here, are we agreed on definitions?
Peak oil is maxing out the rate of production (barrels / day). If the demand rate is lower than production capacity, as it is now due to economic contraction, prices are low.
If the demand rate exceeds production capability, prices skyrocket. Because of course actual consumption can't exceed production, which is really not capable of significant storage or brief spikes in output.
SO the price is really determined by the difference in supply and demand, or a comparison of the rate of rates (acceleration?).
***
Because of the inflexibility (or stiffness) of demand (addiction) this means there will be steep price spikes whenever the economy decides to try growing again.
If the world doesn't do something to mitigate this, the global economy will continue sputtering in an endless recession.
Historically, technology has NEVER dealt with an energy problem like this - all sources maxing out near simultaneously. We've seen how the auto industry responded with engine efficiency gains- much larger and faster, but only a tiny bit more efficient.
If we continue to kneel at the free market altar I predict more of the same non-progress.
By mark2 (anonymous) | Posted December 24, 2008 at 18:42:17
Since definitions are being reviewed, let's properly identify what is being referred to as 'stiffness' or 'flexibility' of demand. The proper economic term for the concept is price elasticity of demand. Price elasticity is the measurement of consumer responsiveness to changes in price of a consumer good. A product like petroleum is known as relatively inelastic, meaning that consumption of the product is not significantly impacted by changes in price. If we look back over the past year, the demand for petroleum products remained relatively unchanged from its September high of $147 per barrel to its current low of $40. The change in consumption of petroleum has been less than 1% during a period where its price has fluctuated by more than 40% over the past year.
It is also important to note that demand for oil has not yet exceeded supply. Consequently it cannot be used to explain the spike in price this past July. At best, it was speculation about approaching peak oil which fuelled the spike.
By A Smith (anonymous) | Posted December 25, 2008 at 06:45:48
Ryan, real GDP in the U.S. averaged 3.14% from 1978 to 1998, a time period where U.S. oil consumption was stagnant. In 1978, U.S. oil consumption was about 18.9 mbpd and it didn't hit that mark again until 1998. Therefore, the numbers show that real economic output can grow quite nicely, even though basic inputs like oil are reduced. Therefore, even if one assumes your prediction that oil production is maxed out, based on an extremely short three year trend in production, this still does not mean that real growth in the economy will be markedly affected.
The reason that this is the case, is because of human ingenuity and the resulting gains in productivity smart businesses are able to produce. Humans have a long history of creating more goods and services in ever more efficient ways, but this usually comes about through private entities, who seek to maximize the return on their investment. This is in contrast to government spending, which is not disciplined by market forces and therefore does not concern itself with producing more output with less inputs. Since it can always borrow money to fund its projects, the government is more likely to waste resources on highly visible and politically popular programs, but which do nothing to increase real output in the economy.
By reducing government spending as a percentage of the economy to around 10% and then leaving it there, private sector businesses could ensure that capital was used in a much more efficient way then is currently the case, driving productivity and therefore real wealth creation.
By jason (registered) | Posted December 25, 2008 at 22:25:43
mark2 - I think the surging price of last year was related to surging demand vs. supply. Perhaps demand didn't exceed supply, but the oil companies saw that their margins were smaller than they've ever been. Quite likely, the price spike was the only reason that demand didn't exceed supply.
ASmith - private companies have done a good amount of their spending in recent decades closing up shop in N.America in order to move overseas and operate sweat-shops. I'm not sure what 'more efficient' way you're thinking they could spend money? They've made it clear that whenever they can, they'll use excess capital or government bailouts (which we've been doing for many years, not just recently when it's finally made it into the mainstream media jargon) to close N.American plants.
Government spending needs to be doled out with strict regulations on how it's spent. I'm tired of paying tax dollars to these guys so they can put another 600 people out of work.
Ted - I'm working on a rare piece about this whole peak oil thing, and my working title is 'Forget Peak Oil, it's Peak Economy'. I think you're right - the economy will simply settle into this bump and grind with recession for the long term, especially in countries like ours and the US who refuse to break the addiction and continue to allow oil companies to constantly form governments and wield power.
By A Smith (anonymous) | Posted December 27, 2008 at 07:28:26
Jason, if you're angry at anyone over corporate bailouts, why not look to the people who give out the money. Furthermore, why would you not expect corporations to try and get their fair share of the loot, since Ryan, yourself and most everyone else on this site constantly talk about doing the same thing.
If it is alright for Hamilton to take other people's money, under the notion that democracy encourages transfers of wealth from one group to another, what is different about struggling corporations doing the same thing?
However, if you truly think that governments waste tax dollars on politically based spending initiatives, why not sign up for smaller government. By capping government spending at 10% of GDP, government waste would also be limited to 10% of GDP. The other 90% of spending decisions, made by individuals, would be based on rational self interest and therefore would be far less wasteful. By removing the middleman (government) between individuals wants and their purchases, you decrease the chances of people receiving things they don't want, don't need, or otherwise feel are a waste of money.
A perfect example of this middleman effect can be seen with Christmas shopping. Apparently 40% of people in Canada will return at least one item bought as a gift, ensuring that both individuals and businesses will waste resources sorting out inefficient purchases that likely would have been better had they been gifts of cash.
By jason (registered) | Posted December 27, 2008 at 10:09:48
ASmith...you seem to have forgotten that corporations are the government. Paulson screws up his Wall St firm and then gets appointed US treasurer responsible for dolling out bailouts to his firm and his Wall St buddies. That's just as most recent example...the list goes on and on and on.........
By jason (registered) | Posted December 27, 2008 at 10:10:39
that last sentence should say "the most recent example".
ryan, we seriously need a feature on here that allows one to edit his/her own comments. LOL.
By A Smith (anonymous) | Posted December 27, 2008 at 10:27:28
Jason, all the more reason not to vote. If you believe that corporations run the government and that voting is meaningless, why not join my call for less government? That way, at least if someone tries to steal your money, you will not be under any illusions that they are trying to help you in the process.
By seancb (registered) - website | Posted December 28, 2008 at 20:19:04
I am all for slimming down the gov't but "not voting" is not going to achieve that...
By SelfGov.us (anonymous) | Posted February 26, 2011 at 01:21:06
Here's another bump in the plateau!
WEEEEEEEEEEEEEEEEEEEEeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee!
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